The Sales Tax in the American States 9780231897204

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T H E SALES TAX IN T H E AMERICAN

STATES

THE IN T H E

A

STUDY

SALES

TAX

AMERICAN

MADE

UNDER

THE

STATES

DIRECTION

OF

ROBERT M U R R A Y HAIG MC VICKAR

PROFESSOR

OF

COLUMBIA

POLITICAL

ECONOMY

UNIVERSITY

BY

CARL ASSISTANT

PROFESSOR

SHOUP IN

COLUMBIA

W I T H

REAVIS

COX

.

T H E

LOUIS A N D

NEW

YORK:

COLUMBIA

THE

SCHOOL

OF

A S S I S T A N C E

SHERE STAFF

BUSINESS

UNIVERSITY

OF

• EDWIN

H.

SPENGLER

MEMBERS

MORNINGSIDE

HEIGHTS

UNIVERSITY M • CM« X X X I V

PRESS

STAFF

MEMBERS

J . ROY BLOTCH

WHO

ASSISTED

IN

THIS

LOUIS HAIMOFF

WYLIE KILPATRICK

RICHARD BREITHUT

CHARLES HESSION

L. LASZLO ECKER-R.

KATHLEEN JACKSON

COPYRIGHT

RAYMOND E. MANNING JAMES P. RADIGAN

1934

COLUMBIA UNIVERSITY PUBLISHED

STUDY

PRESS

1934

PRINTED I N T H E UNITED STATES OF AMERICA GEORCE BANTA P U B L I S H I N G C O M P A N Y

•

M E N A S H A , WISCONSIN

PREFACE The state legislation of 1 9 3 3 created an unusual opportunity for a realistic study of sales taxes. In financial distress at the depth of the business depression, state after state resorted to this new form of taxation. The merits of this tax had been the subject of controversy. In general, professional opinion regarded it with serious misgivings. Its mechanical difficulties and its probable incidence and effects seemed to stamp it an undesirable form of levy, particularly as a measure of state finance under the economic and legal conditions obtaining in this country. Within a few months there were offered for study and analysis an elaborate series of financial experiments. Sales taxes of low, and of high, rates, of broad, and of restricted, application were imposed by states large and small, rich and poor, states varying widely in economic characteristics and development and in administrative resources and capacity. Moreover, these experiments were being observed with eager interest by many other states, also in financial straits, with a view to adopting this tax as a remedy, if experience proved its efficacy. Finally the Federal government, in grappling with the problem of the depression, was considering a course of action which might easily develop into a policy of inflation. Abroad, in country after country, inflation was known to have impaired the effectiveness of revenue systems which, like our own, depended heavily on direct taxes, making national sales taxes almost inevitable. What were the precise circumstances which seemed to justify the adoption of sales taxes in so many of the American states? How did the various statutes meet the problems set by the widespread territorial scope of modern business enterprise in America under the limitations imposed by the Federal Constitution upon the power of a state to tax interstate commerce? How were the new taxes expected to work and how did they actually work? What administrative problems were encountered and what types of administrative organization were evolved to meet these problems? What was the behavior of business men under the impact of the tax? B y what adjustments did they carry the new burden? T o what extent were they able to shift the tax

vi

PREFACE

through increased prices and what was the character of the price adjustments? What costs in time and money, over and above the tax itself, were placed upon the community in conforming to the new laws? In general, from the experience during the period of initial impact, what conclusions may be drawn regarding the merits and shortcomings of state sales taxes, their special problems, and the most efficacious methods of meeting them? The importance of observing the impact of these new taxes and of appraising the record seemed sufficiently great and the possibility of securing valuable results seemed sufficiently promising to persuade the Rockefeller Foundation, when approached through the good offices of Meredith B. Givens, in charge of the Division of Industry and Trade of the Social Science Research Council, to make a grant of $28,000 to Columbia University to meet the expenses of a staff to undertake the investigation. In accordance with the usual practice in such cases, the money was made available without restriction and the results as presented in this volume are published without review or revision by anyone except the members of the staff entrusted with the investigation by the University. The task has been carried through within very severe limitations of time. Although it is hoped that the results will prove to be of permanent worth as a record of an interesting series of experiments with this form of taxation, it was clear that speed in gathering and organizing the data and making generally available the conclusions would greatly increase the possible usefulness of the study. Consequently it was decided to schedule the work with a view to issuing the printed volume early in 1934. The funds were made available June 14, 1933. In anticipation of the grant, the investigation had been outlined in considerable detail and the staff recruited in part prior to that date, and the field work was begun almost immediately, continuing until early September. The credit for the volume here presented belongs primarily to my colleague, Professor Carl Shoup, who through his authoritative work on The Sales Tax in France and other research, had established himself as an authority in this field and as the obvious choice as chief of staff. M y own activity, aside from the original formulation of the project and the organization of the staff, has been confined largely to

PREFACE

vn

consultation, suggestion, and criticism. I desire to accept full responsibility for the general scope of the study and the general method of attack. The conclusions and expressions of judgment meet with my complete approval. I have edited the manuscript for publication, and, consequently, faults of form are mine. The task of visiting the various states was shared by Mr. Shoup, Mr. Cox, and Mr. Breithut, with some assistance from Mr. Blough, before he was released to perform a special service for the Federal Emergency Relief Administration. The field work in New York State was in charge of Mr. Spengler, while that in Illinois and Michigan was directed by Mr. Shere. Miss Jackson, Mr. Ecker-R., and, for a brief period, Mr. Kilpatrick, collaborated in the analysis of the finances of the states studied. The section devoted to legal problems is primarily the work of Mr. Haimoff, but Professor Roswell Magill kindly contributed his counsel and detailed criticism. T o all the members of the staff who worked under great pressure and under trying conditions during the hot summer of 1933, I desire to record my gratitude and appreciation. Each of the sections in this volume was edited, and in some cases considerably recast, by members of the staff other than the one who made the original draft. However, approximate allocation of the work on the various sections may be made as follows—Part One: Shoup; Part Two, Summary of Fiscal Developments: Shoup; Part Two, Development of Sales Tax Issue: Blough and Cox (Kentucky), Breithut (Arkansas, Indiana, Iowa, Missouri, Pennsylvania, and South Dakota), Breithut and Cox (Massachusetts, New Jersey, North Dakota, and Wisconsin), Cox (Arizona, California, Ohio, Oklahoma, Oregon, Texas, Utah, and Washington), Shere (Michigan, and Illinois), and Shoup (Georgia, Mississippi, New York, North Carolina, Virginia, and West Virginia); Part Two, Administration of the Sales T a x : Breithut and Shoup (South Dakota), Cox (Arizona, California, Oklahoma, Utah, and Washington), Spengler (New Y o r k ) , and Shoup (Georgia, Illinois, Indiana, Michigan, Mississippi, North Carolina, Pennsylvania, and West Virginia); Part Two, Efforts of Taxpayers to Shift the Tax, and Statistics of Tax Yield: Cox and Shoup (by states as indicated above); Part Three: Shere (Illinois and Michigan), and Spengler (New Y o r k ) ; Part Four: Haimoff; Appendix

PREFACE

viii

A : Shere and Spengler; Appendix B : Shere; Appendix C : Spengler; Appendix D : Ecker-R. (Arkansas, California, Iowa, Kentucky, Michigan, Missouri, N e w Y o r k , North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, West Virginia, and Wisconsin), Kilpatrick (Illinois, Indiana, Massachusetts, New Jersey, Oklahoma, Pennsylvania, and Washington), and Shoup (Georgia, Mississippi, North Carolina, Virginia, and West Virginia); chart of provisions of sales tax laws: Cox. Mr. Shoup desires to accept responsibility for severe abridgments in many cases, found necessary owing to space requirements. Miss Jackson assisted materially in many of the preliminary drafts of Appendix D, until called to a position with the Federal government at Washington. Mr. Manning and Mr. Radigan contributed data on the sales tax movement gleaned from newspaper files. Mention should also be made of the intelligent service faithfully rendered by Miss Irene Stupp as chief secretarial assistant. T o state officials, officers of trade associations, and many other individuals we are deeply indebted for the time and effort they so freely gave in furnishing information and commenting upon the manuscript. So many persons assisted in this manner that it is not feasible here to make specific acknowledgment, but there can be no doubt that whatever usefulness this study may possess would have been lacking had it not been for the generous cooperation thus furnished. Any attempt to analyze the results of the imposition of a tax is necessarily a difficult and hazardous undertaking. Few adequate studies have been made, and the technique is consequently unstandardized. It is, however, upon such studies that we must increasingly depend, if our choice of taxes is to be intelligent. Not only must we know what we want, but we must also know what we can expect to get, by selection of a particular type of tax. It is hoped that this effort may be one of many designed to strengthen the lamentably weak foundation of knowledge upon which the structure of our financial policy is being constructed. NEW

YORK

CITY

March 15, 1934

ROBERT M U R R A Y HAIG

CONTENTS PART

ONE:

SUMMARY

OF

FINDINGS

I . T H E SALES TAX MOVEMENT OF 1 9 2 9 - 3 3

Sales Taxation in the Financial Systems of the World Fiscal Developments Influencing the Sales Tax Movement . . . . Income and death taxes; State property tax; Other taxes; Expenditures; Local property taxes; New revenue sources other than the sales tax; Conclusions. The Influence of Various Groups within the Community on the Development of the Sales Tax Movement Opponents of the tax; Proponents of the tax; Conclusion. Prospects for the Sales Tax Administration of the Sales Tax Efforts of the Taxpayers to Shift the Tax Yield of the Sales Tax Provisions of the Sales Tax Laws I I . REACTION OF TAXPAYERS TO T H E SALES TAX

New York State Survey Firms subject to the tax; Reaction of taxpayers to the tax. Chicago and Moline-Rock Island Survey Detroit and Monroe Survey Comparison of New York City, Chicago, and Detroit I I I . LEGAL PROBLEMS IN STATE SALES TAXATION

Difficulties Imposed by Constitutional Limitations Interstate commerce; Jurisdiction; Federal instrumentalities; State constitutional restrictions. Difficulties Imposed at the Option of the Legislature Exemptions; Special rates applicable to manufacturers, and mining, logging, and fishing enterprises, etc.; Treatment of integrated concerns. Difficulties Inherent in the Sales Tax Distinguishing retail sales from other sales; Definition of "sale"; Definition of "property"; Definition of "business"; Measure of the tax. IV. EVALUATION OF T H E SALES TAX AS A STATE FISCAL MEASURE . . . .

The sales tax as a source of emergency revenue; Distribution of the sales tax burden; The sales tax as an instrument of tax-

3

5 8

16 24 26 29 37 39 61

62 70 74 76 81

82

86

91

100

CONTENTS consciousness; Administrative burdens of the sales tax; Influence of the sales tax on methods of doing business; Conclusion. PART

t w o :

t h e

s a l e s

t a x

in

t h e

s e v e r a l

s t a t e s

V. REPRESENTATIVE EASTERN STATES

Massachusetts Development of the fiscal situation since 1929; Development of the sales tax issue. New Jersey Development of the fiscal situation since 1929; Development of the sales tax issue. New York Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; Efforts of the taxpayers to shift the tax; T a x statistics. Pennsylvania Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; Administration of the mercantile license tax; Efforts of the taxpayers to shift the tax; Tax statistics. VI. REPRESENTATIVE SOUTHERN STATES

Arkansas Development of the fiscal situation since 1929; Development of the sales tax issue. Georgia Development of the fiscal situation since 1929; development of the sales tax issue; Administration of the tax; Efforts of the taxpayers to shift the tax; Tax statistics. Kentucky Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the graduated sales tax; T a x statistics. Mississippi Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; Efforts of the taxpayers to shift the tax; T a x statistics. Missouri Development of the fiscal situation since 1929; Development of the sales tax issue.

II

11

11

12

13

14

14

141

15

16

181

CONTENTS

xi

North Carolina Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; Efforts of the taxpayers to shift the tax; T a x statistics.

186

Oklahoma Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax. Texas Development of the fiscal situation since 1929; Development of the sales tax issue. Virginia Development of the fiscal situation since 1929; Development of the sales tax issue. West Virginia Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; T a x statistics.

199

VII. REPRESENTATIVE MID-WESTERN STATES

Illinois Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; Efforts of the taxpayers to shift the tax; Tax statistics. Indiana Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; T a x statistics. Iowa Development of the fiscal situation since 1929; Development of the sales tax issue. Michigan Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; Efforts of the taxpayers to shift the tax. North Dakota Development of the fiscal situation since 1929; Development of the sales tax issue. Ohio Development of the fiscal situation since 1929; Development of the sales tax issue. South Dakota Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax.

205

209

211

225

225

237

246

251

259

264

270

«i

CONTENTS Wisconsin

2 78

Development of the fiscal situation since 1929; Development of the sales tax issue. VIII. REPRESENTATIVE FAR-WESTERN STATES

282

Arizona Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; Efforts of the taxpayers to shift the tax.

282

California Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; Efforts of the taxpayers to shift the tax; T a x statistics.

288

Oregon Development of the fiscal situation since 1929; Development of the sales tax issue.

298

Utah Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; Efforts of the taxpayers to shift the tax; T a x statistics. Washington Development of the fiscal situation since 1929; Development of the sales tax issue; Administration of the tax; Tax statistics.

303

PART

THREE: THE

SALES

THE

REACTION

TAX:

A

OF

TAXPAYERS

STATISTICAL

309

TO

STUDY

IX. REACTION OF TAXPAYERS IN NEW YORK STATE

Summary of Findings of Field Study in New Y o r k State Firms Subject to the T a x Establishments which sell at retail; Retailers who are exempt; Bases of retail exemption; Manufacturers and wholesalers who are exempt ; Bases for exemption of manufacturers and wholesalers; Taxable establishments; Taxable status according to size of business; Taxable status by location; Partial exemptions; Summary. Policy with Respect to T a x Shifting, and Some Resultant Effects. Impact versus incidence; Variations in ability to shift the tax; Difficulties encountered and overcome in shifting the tax; Methods employed in attempting to shift the tax; Other methods of reducing the tax burden; Other burdens associated with the tax; T a x shifting reported by consumers; Attitude toward the sales tax.

32 I

325 330

358

CONTENTS Central Offices of Chain Stores New York City Department Stores

xiii 415 418

X . REACTION OF TAXPAYERS IN CHICAGO, AND ROCK ISLAND AND MOLINE, ILLINOIS

424

Character of the Sample Types and size of firms; Status of firms with reference to exemption. Policy with Reference to Tax Shifting Use of schedules; Variations in policy with reference to shifting, among firms of various sizes and types; Variations in policy over a period of time; Estimated results of policies with respect to shifting; Tax shifting reported by business men as consumers. Some Effects upon Business Firms and Consumers Degree of tax cdnsciousness among consumers; Difficulties encountered in attempting to shift the tax; Loss of business ascribed to the sales tax; Attempts to transform intrastate sales into interstate sales; Other methods of reducing the tax burden; Disposition of the money collected under the 3 per cent act; Other burdens associated with the tax; Difficulty in determining taxable status of receipts; Time at which, and manner in which, business men became aware of sales tax; Attitude toward the sales tax; Field workers' remarks on the sample.

424

430

473

XI. REACTION OF TAXPAYERS IN DETROIT AND MONROE, MICHIGAN . .

5OO

Character of the Sample Type and size of firm; Status of firms with reference to exemption. Policy with Reference to Tax Shifting Use of schedules; Variations in policy with reference to shifting among firms of various sizes and types; Variations in policy over a period of time; Estimated results of policies with respect to shifting; T a x shifting reported by business men as consumers.

500

Some Effects upon Business Firms and Consumers Degree of tax consciousness among consumers; Difficulties encountered in attempting to shift the tax; Loss of business ascribed to the sales tax; Attempts to transform intrastate sales into interstate sales; Other methods of reducing the tax burden; Other burdens associated with the tax; Difficulty in determining taxable status of receipts; Xime at which, and

524

506

CONTENTS manner in which, business men became aware of tax; Attitude toward the sales tax; Field workers' remarks on the sample. PART

FOUR:

LEGAL

ISSUES

IN

STATE

SALES

TAXATION

XII. PERSONS TAXABLE

Objects of the study; Contents of the study. Status of Non-Business Activity and Significance of Business . . Provisions of the statutes; Possible "non-business" activities. Sales Sources of difficulty; General provisions in the statutes and regulations; Distinction between sales and other transfers; Point of time at which a taxable transfer is consummated; Distinction between a "sale" and a contract for labor and materials. Property , Real versus personal property; Tangible versus intangible personalty; "Goods, wares, merchandise," etc. Distinction between Wholesalers and Retailers Provisions of the statutes; Disposition test; Test by character of vendor's or vendee's business. Manufacturers Provisions of the statutes; Examples of "manufacturing" as shown by court decisions; Provisions of the regulations. Mining, Logging, and Fishing Provisions of the statutes ; Treatment of unspecified minerals, etc. ; Extracting versus manufacturing. Agriculture, Horticulture, and Stock-Raising Provisions of the statutes; "Agricultural products" versus "farm products," etc. Overlapping Classifications Treatment of single taxpayer clearly included in two or more groups; Taxpayers who may or may not be considered as falling in two or more groups. Those Engaged in Rendering Service Transportation; Telephone and telegraph; Advertising and publishing; Radio broadcasting; Amusements; Financial; Contracting; Other services, including those rendered by professional men and employees. Those Receiving Investment Income Rentals; Interest and dividends. Those Receiving Miscellaneous Receipts

549

552 559

576

581

595

599

603

606

610

618 621

CONTENTS Those Engaged in Barter XIII. MEASURE OF THE TAX

*v 623 626

Credits Trade and Cash Discounts Freight and Delivery Costs Refunds and Price Adjustments Inclusion of the Amount of the Tax in Taxable Receipts Market Value XIV. EXEMPTIONS

626 629 630 632 633 635 638

Receipts Tax-Exempt Under the Federal Constitution Interstate commerce; Jurisdiction; Federal instrumentalities. Other Exemptions Exemption of a stated sum; Exemption of speciñed business activities; Exemption of sales by or to the state or its departments; Exemption of sales by non-proñt organizations; Exemption of the receipt of other state or Federal taxes; Exemption of miscellaneous receipts; Reduction in tax contingent upon Federal tax. Some Questions Arising under the Various State Constitutions.

638 650

661

APPENDICES

A. Methods Used in the Study Limitations of the sample; Selection of the areas to be studied; Representativeness and adequacy of the sample; Preparation of the questionnaire; Field-work layout; The field staff; Tabulation; Comments and criticisms; The business man and the questionnaire. B. Critique of the Questionnaires C. The Weighting Factor in the New York Study D. Details of Fiscal Developments since 1929 Arkansas California Georgia Illinois Indiana Iowa Kentucky Massachusetts Michigan Mississippi

667

682 688 692 692 696 699 703 706 710 714 717 722 726

xvi

CONTENTS

Missouri New Jersey New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania South Dakota . Texas Utah Virginia Washington West Virginia Wisconsin E. Samples of Questionnaires Used in Study Questionnaire used in interviewing retailers in New York State; Questionnaire used in interviewing manufacturers and wholesalers in New York State; Questionnaire used in interviewing retailers in Illinois; Questionnaire used in interviewing retailers in Davenport, Iowa; Questionnaire used in interviewing retailers in Toledo, Ohio.

729 733 738 742 746 750 754 758 762 766 770 774 777 780 783 788 794

TABLES

AND

TABLES:

PART

CHARTS ONE

Provisions of Sales Tax Laws TABLES:

40 PART

TWO

I. Total Revenue Collected under Georgia Gross Sales Tax . . . . II. Examples of Tax Payable under Georgia Gross Sales Tax . . . . III. Revenue Segregated by Classes of Taxpayers, Georgia Gross Sales Tax, 1930 IV. Returns and Revenue, Segregated by Counties, Georgia Gross Sales Tax, 1929 and 1930 V. Tax Rates, Mississippi Sales Taxes, 1930 and 1932 VI. Taxpayers Reporting under, and Revenue Received from, Mississippi Sales Tax (May, 1932 to July, 1933) VII. Sales Tax Revenue Originated January 1 to July 31, 1933, Inclusive: Mississippi (Segregated by Type of Business) . . VIII. Revenue Received and Returns Filed, North Carolina Sales Tax, July-November, 1933 IX. Rates of West Virginia Gross Sales Tax, Acts of 1921 and 1925 X . Examples of Rate Changes in West Virginia Gross Sales Tax XI. Tax Rates, West Virginia Gross Sales and Income Tax Law. Revenue Law, 1933 XII. Collections under West Virginia Gross Sales Tax, Fiscal Years 1922-33 XIII. Tax Rates, Washington General Sales Tax Bill, as Passed by Legislature TABLES :

PART

157 157 158 158 167 179 180 198 214 216 217 224 314

THREE

1. Exempt and Taxable Retailers, New York State; by Type of Business 2. Bases of Complete Exemption—Retailers, New York State; by Type of Business 3. Exempt and Taxable Manufacturers and Wholesalers, New York State; by Type of Business 4. Bases of Complete Exemption—Manufacturers and Wholesalers, New York State; by Type of Business

333 336 338 340

xviii

TABLES

5. Exempt and Taxable Retailers, New Y o r k State; by Size of Business 6. Annual Sales Volume of Taxable Retailers, New York State; by T y p e of Business 7. Exempt and Taxable Manufacturers and Wholesalers, New Y o r k State; by Size of Business 8. Annual Sales Volume of Taxable Manufacturers and Wholesalers, New Y o r k State; by T y p e of Business 9. Exempt and Taxable Retailers, New Y o r k State; by Location 10. Location of Exempt Retailers, New Y o r k State; by T y p e of Business 11. Location of Taxable Retailers in Sample, New Y o r k State; by T y p e of Business 12. Location of All Retailers, N e w Y o r k State; by Size of Business 13. Exempt and Taxable Manufacturers and Wholesalers, New Y o r k State; by Location 14. Bases of Partial Exemption—Retailers, New Y o r k State; by T y p e of Business 15. Bases of Partial Exemption—Manufacturers and Wholesalers, New Y o r k State; by T y p e of Business 16. Policy with Respect to T a x Shifting—Taxable Retailers, New Y o r k State; by T y p e of Business 17. Policy with Respect to T a x Shifting—Taxable Manufacturers and Wholesalers, New Y o r k State; by T y p e of Business . . . . 18. Reliability of Replies as to T a x Shifting (As Estimated by Field Workers)—Taxable Retailers, New Y o r k State 19. Policy with Respect to Methods of T a x Shifting—Taxable Retailers, New Y o r k State; by Size of Business 20. Certain Retail Groups, in Which Less Than 15 Per Cent Report Policy of Shifting Tax—Percentage Partially Exempt, and Percentage with Sales under $20,000 per Year, New Y o r k State 21. Policy with Respect to T a x Shifting—Taxable Retailers, New Y o r k State; by T y p e of Business and Location 22. Policy with Respect to T a x Shifting—Taxable Manufacturers and Wholesalers, New Y o r k State; by T y p e of Business and Location 23. Policy with Respect to T a x Shifting—Taxable Retailers, New Y o r k State; by Racial Groups 24. Policy with Respect to T a x Shifting—Taxable Retailers, and

342 343 344 345 347 348 350 353 354 355 356 360 362 365 367

369 370

376 379

TABLES

25. 26.

27.

28. 29.

30. 31. 32.

33.

34.

35. 36.

37. 38. 39.

Manufacturers and Wholesalers, New York State; by Time at Which Taxpayer First Learned of Tax Policy with Respect to Tax Shifting—Taxable Retailers, New York City; by Time at Which Interviewed Permanence of Policy with Respect to Tax Shifting—Taxable Retailers, and Manufacturers and Wholesalers, New York State Time at Which Taxpayers First Learned of Tax—Taxable and Exempt Retailers, and Manufacturers and Wholesalers, New York State; by Size of Business Extent of Non-Shifting of Tax, and Reasons—Taxable Retailers, New York State; by Type of Business Difficulties Encountered in Tax Shifting—Retailers Who Reported Shifting Part or All of Tax, New York State; by Type of Business Methods Employed in Shifting Entire Tax—Retailers, New York State; by Type of Business Methods Employed in Shifting Entire Tax—Manufacturers and Wholesalers, New York State; by Type of Business Methods Employed in Shifting Tax Where Exact Amount of Tax (to Nearest Cent) Is Not Added to Each Sale—Retailers, and Manufacturers and Wholesalers, New York State; by Type of Goods Increased Record-Keeping Costs Occasioned by Tax, and Difficulty in Distinguishing Taxable and Exempt Sales—Retailers, New York State; by Type of Business Increased Record-Keeping Costs Occasioned by Tax, and Difficulty in Distinguishing Taxable and Exempt Sales—Retailers, and Manufacturers and Wholesalers, New York State; by Size of Business Extent of Tax Shifting—Replies of Consumers Compared with Replies of Retailers, New York State; by Type of Business Policy with Respect to Tax Shifting Compared with Attitude Toward Sales Tax—Taxable Retailers, and Manufacturers and Wholesalers, New York State Preference among Taxes—Retailers, and Manufacturers and Wholesalers, New York State Type of Outlet Covered in Sample, Chicago and Rock IslandMoline Size of Businesses Covered in Sample—Retailers, and Manu-

six

380 381

383

385 386

392 394 396

399

402

406 410

413 414 425

XX

TABLES

facturers and Wholesalers, Chicago and Rock Island-Moline 40. Type of Business Covered in Sample, Chicago and Rock IslandMoline 41. Exempt and Taxable Retailers, and Manufacturers and Wholesalers, Chicago and Rock Island-Moline; by Degree of Exemption—2 Per Cent Tax 42. Bases of Exemption—Retailers, and Manufacturers and Wholesalers, Chicago and Rock Island-Moline: 2 Per Cent Tax . . 43. Sales in Interstate Commerce—Manufacturers and Wholesalers, Chicago and Rock Island-Moline: 2 Per Cent Tax 44. Use of Tax Schedules—Retailers, Chicago; by Size of Business—3 Per Cent and 2 Per Cent Taxes 45. Use of Tax Schedules—Retailers, Chicago; by Type of Business—3 Per Cent and 2 Per Cent Taxes 46. Policy with Respect to Tax Shifting—Taxable Retailers, Manufacturers and Wholesalers, Chicago; by Size of Business—3 Per Cent Tax 47. Policy with Respect to Methods of Tax Shifting—Retailers, Manufacturers, and Wholesalers, Chicago; by Size of Business—3 Per Cent Tax 48. Policy with Respect to Tax Shifting—Taxable Retailers, Manufacturers and Wholesalers, Chicago; by Size of Business—2 Per Cent Tax 49. Policy with Respect to Methods of Tax Shifting—Retailers, Manufacturers, and Wholesalers, Chicago; by Size of Business—2 Per Cent Tax 50. Policy with Respect to Tax Shifting—Taxable Retailers, Rock Island-Moline; by Size of Business—3 Per Cent Tax and 2 Per Cent Tax 51. Policy with Respect to Methods of Tax Shifting—Retailers, Rock Island-Moline; by Size of Business—3 Per Cent Tax and 2 Per Cent Tax 52. Policy with Respect to Tax Shifting—Taxable Retailers, Chicago; by Type of Business—3 Per Cent Tax 53. Policy with Respect to Methods of Tax Shifting—Retailers, Chicago; by Type of Business—3 Per Cent Tax 54. Policy with Respect to Tax Shifting—Taxable Retailers, Chicago; by Type of Business—2 Per Cent Tax 55. Policy with Respect to Methods of Tax Shifting—Retailers, Chicago; by Type of Business—2 Per Cent Tax

425 426

428 429 430 439 440

445

446

449

450

451

452 454 456 458 460

TABLES 56. Policy with Respect to Tax Shifting—Taxable Manufacturers and Wholesalers, Chicago; by Type of Business—3 Per Cent Tax 57. Policy with Respect to Methods of Tax Shifting—Manufacturers and Wholesalers, Chicago; by Type of Business—3 Per Cent Tax 58. Policy with Respect to Tax Shifting—Taxable Manufacturers and Wholesalers, Chicago; by Type of Business—2 Per Cent Tax 59. Policy with Respect to Methods of Tax Shifting—Manufacturers and Wholesalers, Chicago; by Type of Business—2 Per Cent Tax 60. Types of Goods on Which More than Tax Was Added—All Taxable Firms, Chicago and Rock Island-Moline: 2 Per Cent Tax 61. Permanence of Policy with Respect to Tax Shifting—Taxable Retailers, Manufacturers, and Wholesalers, Chicago and Rock Island-Moline: 2 Per Cent Tax 62. Change in Policy with Respect to Tax Shifting—Taxable Retailers, and Manufacturers and Wholesalers, Chicago and Rock Island-Moline: 2 Per Cent Tax 63. Extent of Tax Shifting—Replies of Consumers, Chicago and Rock Island-Moline: 2 Per Cent Tax 64. Extent of Charging Tax as Separate Item—Retailers, Manufacturers, and Wholesalers, Chicago: 2 Per Cent Tax 65. Difficulties Encountered in Attempting to Shift the T a x — R e tailers, Chicago and Rock Island-Moline: 2 Per Cent Tax . . 66. Difficulties Encountered in Attempting to Shift the Tax—Manufacturers and Wholesalers, Chicago and Rock Island-Moline: 2 Per Cent Tax 67. Loss of Business Ascribed to Tax—Retailers, and Manufacturers and Wholesalers, Chicago and Rock Island-Moline: 3 Per Cent Tax 68. Loss of Business Ascribed to Tax—Retailers, and Manufacturers and Wholesalers, Chicago and Rock Island-Moline: 2 Per Cent Tax 69. Gain in Business by Davenport, Iowa, Merchants, Ascribed to Illinois 3 Per Cent and 2 Per Cent Taxes—Retailers, and Manufacturers and Wholesalers; by Type of Business . . . . 70. Loss of Business Ascribed to Sales Tax—Retailers, Chicago; by Type of Business—3 Per Cent and 2 Per Cent Taxes

xxi

462

464

466

468 470

471

472 473 474 475

475

476

477

478 480

xxii

TABLES

71. Loss of Business Ascribed to Sales Tax—Manufacturers and Wholesalers, Chicago; by T y p e of Business—3 Per Cent and 2 Per Cent T a x e s

482

72. Loss of Business Ascribed to Sales Tax—Retailers, Rock IslandMoline; by T y p e of Business—3 Per Cent and 2 Per Cent Taxes

484

73. Attempts to Transform Intrastate Sales into Interstate S a l e s — Retailers, and Manufacturers and Wholesalers, Chicago and Rock Island-Moline: 2 Per Cent T a x . . .

487

74. Disposition of Funds Collected under 3 Per Cent Act, which was Declared Unconstitutional M a y 10, 1933—All Firms, Chicago and Rock Island-Moline 75. Extent to Which Bookkeepers Are Employed—Retailers, Taxable and Exempt, Chicago and Rock Island-Moline; by Size of Business

488

489

76. Increased Record-Keeping Costs Occasioned by Tax—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Chicago and Rock Island-Moline; by Size of Business—2 Per Cent T a x 77. Difficulty in Determining Taxable Status of Receipts—Retailers, and Manufacturers and Wholesalers, Chicago and Rock Island-Moline: 2 Per Cent T a x 78. Time at Which Firms First Learned of Tax—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Chicago and Rock Island-Moline: 2 Per cent T a x 79. Sources from Which Firms First Learned of Tax—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Chicago and Rock Island-Moline: 2 Per Cent T a x 80. Preference among Taxes—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Chicago: 2 Per Cent T a x 81. Preference among Taxes—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Rock Island-Moline: 2 Per Cent T a x 82. Continuity of Preference Among Taxes—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Chicago and Rock Island-Moline: 2 Per Cent T a x 83. Attitude

toward

Sales

Tax—Retailers,

Manufacturers,

490

491

492

493 494

496

497

and

Wholesalers, Taxable and Exempt, Chicago and Rock IslandMoline: 2 Per Cent T a x 84. T y p e of Outlet Covered in Sample, Detroit and Monroe . . . .

498 501

TABLES 85. Size of Businesses Covered in Sample—Retailers, and Manufacturers and Wholesalers, Detroit and Monroe 86. Type of Business Covered in Sample, Detroit and Monroe . . . 87. Exempt and Taxable Retailers, and Manufacturers and Wholesalers, Detroit and Monroe: by Degree of Exemption 88. Bases of Exemption—Manufacturers and Wholesalers, Detroit and Monroe 89. Sales in Interstate Commerce—Manufacturers and Wholesalers, Detroit and Monroe 90. Policy with Respect to Tax Shifting—Taxable Retailers, Manufacturers, and Wholesalers, Detroit; by Size of Business . . . 91. Policy with Respect to Methods of Tax Shifting—Retailers, Manufacturers, and Wholesalers, Detroit; by Size of Business 92. Policy with Respect to Tax Shifting—Taxable Retailers, Monroe: by Size of Business 93. Policy with Respect to Methods of Tax Shifting—Retailers, Monroe: by Size of Business 94. Policy with Respect to Tax Shifting—Taxable Retailers, Detroit; by Type of Business 95. Policy with Respect to Methods of Tax Shifting—Retailers, Detroit: by Type of Business 96. Policy with Respect to Tax Shifting—Taxable Manufacturers and Wholesalers, Detroit: by Type of Business 97. Policy with Respect to Methods of Tax Shifting—Manufacturers and Wholesalers, Detroit: by Type of Business 98. Types of Goods on Which More than Tax Was Added—All Taxable Firms, Detroit and Monroe 99. Permanence of Policy with Respect to Tax Shifting, Taxable Retailers, Manufacturers, and Wholesalers, Detroit and Monroe 100. Change in Policy with Respect to Tax Shifting—Taxable Retailers, and Manufacturers and Wholesalers, Detroit and Monroe . . . . , 101. Extent of Charging Tax as Separate Item—Retailers, and Manufacturers and Wholesalers, Detroit and Monroe 102. Difficulties Encountered in Attempting to Shift the Tax—Retailers, Detroit and Monroe 103. Difficulties Encountered in Attempting to Shift the Tax—Manufacturers and Wholesalers, Detroit and Monroe 104. Loss of Business Ascribed to Tax—Retailers, and Manufactur-

xxiii 501 502 504 505 505 508 509 510 511 514 516 518 520 522

523

524 526 527 528

xxiv

TABLES

ers and Wholesalers, Detroit and Monroe 105. Gain in Business by Toledo, Ohio, Merchants, Ascribed to Michigan Sales Tax—Retailers, and Manufacturers and Wholesalers; by Type of Business 106. Loss of Business Ascribed to Sales Tax—Retailers, Detroit; by Type of Business 107. Loss of Business Ascribed to Sales Tax—Retailers, Monroe; by Type of Business 108. Loss of Business Ascribed to Sales Tax—Manufacturers and Wholesalers, Detroit and Monroe; by Type of Business . . 109. Attempts to Transform Intrastate Sales into Interstate Sales— Retailers, and Manufacturers and Wholesalers, Detroit and Monroe 110. Extent to Which Bookkeepers Are Employed—Retailers, Taxable and Exempt, Detroit and Monroe; by Size of Business H I . Increased Record-Keeping Costs Occasioned by Tax—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Detroit and Monroe; by Size of Business 112. Time at Which Firms First Learned of Tax—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Detroit and Monroe 113. Sources from Which Firms First Learned of Tax—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Detroit and Monroe 114. Preference Among Taxes—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Detroit and Monroe 115. Continuity of Preference among Taxes—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Detroit and Monroe 116. Attitude toward Sales Tax—Retailers, Manufacturers, and Wholesalers, Taxable and Exempt, Detroit and Monroe . . . . TABLES:

529

530 532 534 536

538 539

540

542

543 544

S4S 545

APPENDICES

APPENDIX C

Distribution of Retail Stores in New York State by Geographic Areas

689

APPENDIX D

Yield of Important Sources of Tax Revenue, New York State, 1928-29 to 1932-33 Important Rate Changes in North Carolina Taxes; 1929-1933 . .

740 745

FIGURES General Fund Expenditures, State of Pennsylvania, from 1927-28 to 1932-33 Yield of Certain General Fund Taxes, State of Pennsylvania, from 1929-30 to i93 2 -33 Yield of Important Sources of Tax Revenue, State of Virginia, from 1928-29 to 1932-33

xzv 763 765 779

FIGURES

1. Status of Sales Taxation in the United States as of December 1, 1933 2. Poster. Displayed by Retailers in Illinois 3. Samples of Fractional-Cent Devices Used in Illinois and Michigan 4. Tokens Employed in Illinois Border Cities under the 3 Per Cent Tax

2 34 35 36

PART

ONE

SUMMARY OF F I N D I N G S

ï -s £ * 3 i-g O s S .iS oe- ». S £ ? «w >>. « « m 15 's jz a 3g g ü H o w t-> a c 4 « Px ¡¡ S i o S e B E U o" ali o Tt «K.52 B

CHAPTER

I

T H E SALES T A X M O V E M E N T OF 1929-33 In the last quarter of 1929, when the violent drop in security and commodity prices ushered in the great business depression, the sales tax formed an insignificant part of the state and local taxing system of the United States, viewed as a whole. At the close of 1933 it was an important element in fourteen states, and there are signs that before many months have passed it will have spread still further. It is the purpose of this study to outline the growth of the sales tax movement, to describe some of its results, to analyze the problems which it has introduced, and to evaluate the sales tax as a measure of state finance. To avoid confusion, certain matters of terminology must be considered. "Sales tax" as used in this study refers to any tax which includes within its scope all business sales of tangible personal property at either the retailing, wholesaling, or manufacturing stage, with the exceptions noted in the taxing law. In many instances, however, the tax also affects other types of transactions. The sale of professional services and other services, of real property, and of intangible personal property is sometimes subject to the tax. So, too, in some states, is the receipt of dividends, interest, rental payments, and wages and salaries. The sale of unmanufactured natural resource products, and indeed, their mere extraction or shipment is sometimes taxable by the same law. Nonbusiness transactions may be included. On the other hand, sales of food and of certain other general categories of commodities may be specifically exempted. The taxes seem to group themselves naturally into four categories, of which the first three include only "business" taxes. The most restricted type is that which is imposed only upon sales of tangible personal property at retail or for use or consumption. Such a tax is here termed a "retail sales tax." This phrase is also used, however, to include some taxes which in addition affect sales of services by public service corporations and of admissions.

4

THE

SALES TAX IN

1929-33

A somewhat broader tax is that which reaches sales of tangible personal property both at retail and for resale, and also the acts of extracting natural resources and of manufacturing. Such a tax is termed a "general sales tax," even though the taxation of sales for resale and of the acts noted above may be considerably restricted in some instances. This category also includes certain taxes which in addition reach sales of services by business enterprises (but not sales of personal or professional services by individuals), sales of admissions, and sales of real property. The broadest type of business tax has the essential elements of the general sales tax and in addition is levied upon sales of personal and/or professional services, and in some cases sales of intangibles. This is here called a "gross receipts" tax. Finally, there is at least one state which taxes gross income from all sources, including, in addition to the main elements noted above, gross income from isolated non-business activities. 1 It is of interest to note that none of the sales taxes in the United States excludes sales at retail. Thus there is no "manufacturers' sales tax" or "wholesalers' sales tax" to consider. The present study is not concerned with so-called "selective" sales taxes, limited in application to certain commodities specifically named, e.g., tobacco products, beer, malt. Nor does it treat of several state taxes which are levied on a sales or purchases basis but which are so low in rate as to be of virtually no fiscal significance, at least in the present sales tax movement. Such are the Connecticut tax on unincorporated manufacturing and mercantile establishments, the Pennsylvania mercantile license tax, the Delaware taxes on gross receipts of manufacturers and on purchases by merchants, the Virginia taxes on production by manufacturers and purchases by merchants, and the graded license taxes of North Carolina and Louisiana. The New Mexico and Vermont graduated sales taxes appear to be of very restricted fiscal significance, and are not treated in this volume. Furthermore, the present study does not, in general, cover taxes restricted to chain stores, even though they are based in some instances on gross sales. ' T w o of the retail sales taxes considered in this study reach non-business retail sales, but in effect appear to operate as "business" taxes. See infra, p. 552-

T H E SALES TAX IN

1929-33

5

SALES TAXATION I N T H E FINANCIAL SYSTEMS OF T H E WORLD

When the World War was nearing its end in the middle of 1 9 1 8 , the sales tax as an important fiscal instrument was to be found only in a few small countries and in Germany, where the rate was but 0.1 per cent. Today, fifteen years later, the tax has spread over four continents and is now an important element of national taxation in the larger part of Europe and South America, in Australia and Canada, and is rapidly assuming an important place as a state tax in the United States. In the history of public finance no other tax, save perhaps the one on gasoline, has spread so swiftly over the world. Most of the leading European nations adopted the sales tax during the years 1 9 1 8 - 2 3 . Here apparently it was called upon as aid to fiscal systems wrecked by the drain of war and post-war expenditures and by uncontrolled inflation. The morale of taxpayers was at a low ebb, and taxes "hidden" in prices, collected through relatively convenient business channels, and to be paid ultimately by the consumer in small bits day by day were apparently more attractive to governments than an increase in rates of already existing taxes. In addition, the rapid rise of governmental costs resulting from the inflated price level necessitated a tax whose yield would respond quickly to such price-level changes. The close connection between the sales tax and the World War is indicated by the fact that the tax has been adopted by none of the European countries2 which remained neutral, and by all of the European belligerents except Great Britain. Once adopted, the sales tax tends to remain; only three or four countries, all of them small, have abandoned it. In countries other than the United States the tax is usually general in form, falling on manufacturers, wholesalers, and retailers alike. Important exceptions are furnished by Australia, Austria, Canada, Czechoslovakia, and Italy. This is in sharp contrast to practice in the several states of the United States, where fear of driving manufacturing and wholesale business into adjoining states, and inability to tax sales in interstate commerce have restricted the tax to retail sales except where low rates are applied to the other two types of business, or where the immobile extractive industries and public service corporations have proved a convenient target for high rates. 3

The Spanish tax seems not to be a true sales tax.

6

T H E SALES TAX IN 1929-33

Some of the foreign sales taxes, notably the one in Germany, were extended to fees resulting from professional services, but none of them, so far as the writer is aware, has been so broad in scope as the present "gross income taxes" of Indiana and West Virginia, which tax salaries and wages, dividends, interest, and rentals. The foreign sales taxes are in general levied at rates high enough to make the resulting revenue an important budgetary item. In Germany the sales tax has supplied about 10 per cent of total national revenue in recent years, 3 and in France, about 15 per cent of the national government's "normal and permanent" revenue.4 The rate of tax in Germany has fluctuated, since 1918, between 0.5 and 2 per cent.5 In France the rate has been 2 per cent for some years.® Applied to sales at all stages, the French 2 per cent rate is the equivalent of a retail sales tax levy of 4 or 5 per cent. The tax has become an integral part of the tax systems of most of the countries which have retained it up to this time, and shows no indications of disappearing. In the United States the sales tax, in the sense used in this study, has never been employed as a source of national revenue, and only since 1931 has it become an important factor in state and local finance. However, it was the subject of heated discussion before Congress shortly after the war and again in 1931-32. Business interests as represented by the National Association of Manufacturers, the National Association of Real Estate Boards, and other organizations urged the sales tax as a means whereby special luxury taxes, individual income taxes, and corporation taxes could be greatly reduced. Opposition from the farm and the labor groups, as well as other groups, was sufficient to defeat attempts to write a sales tax into the Revenue Act of 1921 or into the soldier's bonus bill of 1922.7 In the first half of 1932 the Treasury recommended a series of taxes on selected articles, designed to help balance the Federal budget, which was seriously threatened by the great drop in the yield of the income taxes consequent upon the business depression. The Com3Buehler,

A l f r e d D . , General Sales Taxation, p. 113. * Journal des contributions indirectes, F e b . 8, 1933, p. 7 1 . ' B u e h l e r , op. tit., pp. 102, 104. 'Ibid., p. 76. ' Ibid., pp. 10-23; National Industrial Conference B o a r d , General Taxation, pp. 191-93.

Sales or

Turnover

THE SALES TAX IN 1929-33

7

mittee on Ways and Means, disturbed by the vigorous protests of those businesses which were thus singled out for taxation, turned hopefully toward a sales tax of the Canadian type, restricted to the sale of finished goods by manufacturers. Again the farm and labor interests, allied now with the merchants, were strong enough to kill such a proposal. The House deserted its own committee and decisively rejected the tax. Since then, to the end of 1933, the sales tax has not been in the foreground as a possible source of Federal revenue. In state and local finance there appears to have been no widespread movement for a sales tax until 1930. Although West Virginia enacted a sales tax in 1921, largely to replace a tax on corporate net income, the first state to follow its example was Georgia, in 1929. Neither the West Virginia nor Georgia experience furnished a basis for judgment of the possibilities of the sales tax; in the former state from one-third to nearly one-half the sales tax revenue had come from what were essentially severance taxes on coal, oil, and gas; in Georgia an exemption of $30,000 and rates which in no case exceeded 0.3 per cent deprived the tax of great significance. Therefore when the business depression came, there was virtually no accumulated experience to assist the states in their efforts to weigh the merits and demerits of this possible new source of revenue. Between the end of 1929 and the end of 1933, the introduction of sales taxes wrought a fundamental change in the revenue systems of several states.8 Eleven states9 enacted and put into operation such taxes for the first time in 1933. In two other states 10 sales taxes were enacted for the first time in 1933, only to be defeated by the electorate at referenda before collection started. Five states" passed sales tax laws before 1933, but in two 12 of them the tax has since lapsed. These eighteen states are scattered; five are in the Far West, five in the Middle West, six in the South, and two in the East. These For the sense in which the term "sales tax" is used in this study, see supra, pp. 3 , 4 . Arizona, California, Illinois, Indiana, Michigan, N e w Y o r k , North Carolina, Oklahoma, South Dakota, Utah, and Washington. A s to New Mexico and Vermont, see supra, p. 4. 10 Oregon and North Dakota. In December, 1933, the Oregon legislature again passed a sales tax, which will probably be submitted to referendum in 1934. " Georgia, Kentucky, Mississippi, Pennsylvania, and West Virginia. " Georgia and Pennsylvania. 8

9

8

THE

SALES

TAX

IN

1929-33

facts alone give warning that simple and easy generalizations frequently encountered concerning reasons for the spread of the sales tax cannot be of value. This is further indicated by the fact that of the nine states1® covered in this study, which to the end of 1933 had adopted no sales tax, the measure had been defeated in one state14 by a popular vote, in four others15 had been actively contested in the legislature, and in the remaining four 16 had not come to a legislative roll call. These nine states, too, are geographically scattered. A safe, if obvious, generalization is that in every state the business depression has had a marked influence upon state and local revenues and expenditures, suggesting, as one of several possible solutions to the problems, new revenue sources. Less obvious, but probably as valid, is the statement that, had it not been for the depression, very few states would have a sales tax today, for the tax is distinctly not a result of a movement toward tax reform accepted by most elements in the community as desirable. Its spread contrasts with that of the gasoline tax some years ago, and, to a lesser degree, with that of the income tax. In eight states17 the sales tax will lapse unless renewed by the legislature; in two of them18 the tax expires in 1934; in the others, in 1935. Furthermore, in at least seven of the states19 covered in this study the contest has been close and often bitter. Therefore, while a growing sense of injustice on the part of certain groups of taxpayers may have been the motivating force behind the agitation for the sales tax in many states, it was the business depression which either aroused this feeling or gave it the setting it needed to become effective. FISCAL DEVELOPMENTS

INFLUENCING

T H E SALES TAX

MOVEMENT

The details of the fiscal crises which have arisen largely because of the depression vary widely from state to state. It is not possible to trace the spread of the sales tax to any one factor in state finance, " A r k a n s a s , I o w a , Massachusetts, Missouri, New Jersey, Ohio, T e x a s , Virginia, and Wisconsin. A s to Wisconsin, see infra, p. 1 1 1 , note 5. I o w a and Missouri enacted a sales tax in 1934. " Arkansas. " I o w a , Missouri, Ohio, and Texas. " M a s s a c h u s e t t s , N e w Jersey, Virginia, and Wisconsin. " Arizona, Illinois, Mississippi, N e w Y o r k , North Carolina, O k l a h o m a , South D a kota, and Washington. " M i s s i s s i p p i and N e w Y o r k . " A r i z o n a , Illinois, K e n t u c k y , Mississippi, N o r t h Carolina, Ohio, and O k l a h o m a .

T H E SALES T A X I N 1 9 2 9 - 3 3

9

whether it be dependence upon the rapidly shrinking revenue of the income taxes or inheritance taxes, state use of the property tax, state or local expenditure for unemployment relief, additional state aid to localities, failure to balance budgets according to reasonable forecasts of revenue, or inability to borrow. In every sales-taxing state some one or more of these circumstances have been lacking, and in every one of the states covered in this study which do not have a sales tax, one or more have been present. It is useful, however, to note the states in which each circumstance has obtained, because this information facilitates an understanding of the setting. Within this setting, various personal forces, to be described below, played a very important role in the development of the sales tax issue. Income and Death Taxes.—A decline in the yield of the personal income tax has been an important factor in developing pressure for new revenue measures in New York and Mississippi, and to a lesser degree in Massachusetts, where virtually all the yield goes to the localities. In other states using the personal income tax, either ( i ) the yield has remained relatively steady, or (2) the tax has played such an unimportant role, even in prosperous periods, that a sharp decline on a percentage basis has apparently not been a major influence toward new tax legislation, or (3) the tax was not introduced until the depression was well advanced. Wisconsin and Georgia, and to a lesser degree Missouri, fall in the first group; such factors as the use of a three-year average, increased rates, improved administration, and a flat rate in place of a progressive rate have been influential in one or more of these states. In the second group may be placed Arkansas, North Carolina, North Dakota, Oklahoma, and Virginia; and in the third, Oregon and Utah. Fluctuations in the yield of the corporation income tax have in general been less than those of the personal income tax, and have had even less connection with the sales tax movement than the latter. The inheritance and estate taxes have shown on the whole a better resistance to the depression than has the personal income tax. Moreover, in 1929, the yield of the death taxes was usually so unimportant, compared with total state revenue, that whatever the violent fluctuations on a percentage basis, the result has not been an important factor in driving the state to seek other revenue. Possible exceptions to this statement are to be found in California, Illinois,

10

T H E S A L E S T A X IN 1929-33

Massachusetts, Michigan, New Jersey, New York, Pennsylvania, and perhaps Missouri and West Virginia, but in several of these states the yield for 1932-33 was about the same as that for 1928-29. State Property Tax.—The property tax has been an important source of revenue for the state government in most of the states under consideration, but in not more than nine or ten of them has there occurred a decline in yield great enough to bring heavy pressure for new revenues. In some states, legislatures have been willing to increase the tax rate, at least temporarily, since 1929, as in Iowa, North Dakota, South Dakota, Texas, and Utah. In others, until 1933, the level of total assessed valuations decreased little, if at all, as in Indiana, Iowa, and New Jersey. In several other states the property tax has supplied a relatively small part of the state government's total revenue, or none, as in California,20 New York, North Carolina, Pennsylvania, Virginia, and Wisconsin. Declines in assessed valuations, decreases in rates, and increases in delinquency, in some of the states noted in the preceding paragraph, and in several others, have made a search for new revenue sources seem imperative. Such has been the case, with respect to the state's share in the property tax, in Arizona, Arkansas, Indiana, Illinois, Michigan, South Dakota, and West Virginia, and to a somewhat lesser degree in Georgia, Mississippi, North Dakota, Texas, and Washington. In four of these states—Indiana, Michigan, West Virginia, and Washington—the adoption of measures limiting the total state and local property tax rate has been an important factor in decreasing the revenue available to the state government; in Texas a "homestead" exemption may soon play a similar role. It is not necessarily to be inferred that where the yield of the state property tax has decreased sharply the property tax burden has been relatively more burdensome than in other states; it can only be said that, whatever be the cause—extraordinary willingness to bear burdens, unusual economic or administrative conditions, etc. —the state property tax in many instances continued through 1932 to yield enough so that there occurred no drastic decrease in receipts from this source. Collapse of the property tax as a source of state revenue during depression years has been an important influ" Unless the "in lieu" tax on gross receipts of public service corporations be considered a property tax.

T H E SALES TAX IN 1929-33

11

ence in the advent of the sales tax in not more than two-thirds of the sales-tax states; however, of the nine states covered in this study which have not imposed a sales tax, only two—Arkansas and possibly Missouri—have been seriously handicapped by a decline in revenue from a state property tax. Dependence upon a state property tax seems to be more closely correlated with the spread of the sales tax than does dependence upon any other one source of revenue, even though it offers no explanation at all of the sales tax movement in several states. Other Taxes.—The revenue from gross receipts taxes on utilities, franchise taxes on corporations generally, insurance company taxes, and tobacco taxes has not decreased enough to offer any explanation of the development of the sales tax movement. In isolated instances certain other taxes have proved vulnerable to the effects of the depression—for instance, the stock transfer tax in New York, and the oil production taxes in Oklahoma and Texas. A remarkable resistance to the depression has been shown by the gasoline tax generally, and by the motor vehicle registration fees in most states. The general impression which the writer has gained is that the pressure for a sales tax is not explicable by a collapse of state revenue systems as a result of the depression, although such an explanation may be valid for Michigan, New York, and possibly West Virginia. The main impetus for the sales tax movement in most states must be sought elsewhere. Expenditures.—A more fruitful field of search is that of state expenditures. In many states whose revenue systems, as developed by 1929, proved capable of meeting the effects of the depression fairly well, new types of state expenditure imposed a severe strain upon the fiscal machinery. The most obvious new type of expenditure is that for unemployment relief; but this has been an important factor, directly, in only a few of the states here under consideration. In only six of the sales taxing states" has any part of the sales tax revenue been dedicated to unemployment relief, and in none of the others have appreciable amounts been spent from current revenue for this function. In general, aside from a few heavily industrialized states, the state govern" Arizona, Illinois, Michigan, Oregon (where the tax was defeated at referendum), Pennsylvania, and Utah. For details, see infra, pp. 40 ff., and Part T w o .

12

T H E S A L E S T A X IN 1 9 2 9 - 3 3

ments have not taken it upon themselves to finance unemployment relief either from current receipts or the proceeds of borrowings, and in many instances the localities have done little to meet the problem. Highway construction and repair work have in many states been coordinated with relief work, and it is noticeable that highway expenses generally seem to have been kept at a high level through 1930-31, partly as a result of a conscious effort to "make work." Thus the motor fuel tax and the motor vehicle registration taxes have borne a part of the relief load; for the rest, the chief dependence in most states has been on the Federal government. Loans from the Reconstruction Finance Corporation and grants from the Federal Emergency Relief Administration had, by December 31, 1933, supplied sizable amounts—in some instances, more than the annual yield to be expected from sales taxes now in operation. Another type of new, or expanded, expenditure by the state government is that for schools. The relation of this factor to the pressure for a sales tax is most clearly seen in North Carolina. There, a radical change involving state financing of an eight-months' school term brought on a high-rate sales tax even though existing taxes had been appreciably increased. Additional state support for schools is more or less closely linked with the sales tax in the case of California, Illinois, Indiana, Michigan, and West Virginia; and a definite connection has been established, by specific allocation of part of the sales tax proceeds, in Oklahoma, South Dakota, Utah, and Washington.22 Only in Arizona, Georgia, Kentucky, Mississippi, New York, and Pennsylvania has there been lacking a fairly close linkage of the sales tax with school finance. It is also of significance that of the nine states covered in this study which have not enacted a sales tax, only two—Ohio and Texas—have made an appreciable effort to increase state aid for schools since 1929. It would be of interest to compare the relative degrees of economy which have been effected in the several states, but without a far more detailed study than was possible for the present project, it would be unsafe to draw comparisons. In virtually every state, however, decided economies have, by now, been made. The enactment of the " A l s o in Arkansas and Oregon, where the sales tax w a s defeated b y the electorate. F o r details, see infra, pp. 40 ff., and Part T w o .

T H E S A L E S T A X I N 1929-33

13

sales tax was invariably preceded, or accompanied, by economy measures, as, for instance, appreciable salary decreases. Several states, however, did not take this step until 1932, and refusal to reduce expenses as fast as revenues declined resulted in the depletion of large reserves built up during prosperity, as in California, Illinois, Pennsylvania, and New York. Furthermore, in certain of these states, and in others, including Georgia, Michigan, Mississippi, Oklahoma, Texas, and West Virginia,23 a substantial deficit was created. There is no high correlation between the existence of state deficits and the adoption of a sales tax. In some states, Mississippi, for instance, the deficit has been funded, yet a sales tax has been enacted; in others, as in California and New York, the sales tax has been called upon to assist in making up the accumulated deficit. In others (Texas, for example), a'substantial deficit has accumulated, and has not been funded, yet no sales tax has been levied. The only connection between the funding of deficits and the sales tax which one might reasonably expect, a priori, is precisely the one not to be found in any of the states covered by this study—that is, in none of these states has a deficit arising from ordinary expenditures been funded and ("consequently," one would be tempted to say, if a case could be found) no sales tax enacted. Local Property Taxes.—Clearly, the amounts from the proceeds of sales taxes spent by the states for unemployment relief and for schools indicate some serious weakness in local finance. Since the chief source of local revenue is the property tax, it might seem that the sales tax movement is closely linked to a collapse of the property tax. This is no doubt true to a certain degree, but again one may not safely generalize. Several other factors must be recalled when such a statement is made. First, breakdown of the property tax offers virtually no explanation for the adoption of the sales tax in Kentucky, Georgia, Pennsylvania, Mississippi, and New York. Second, there are indications that the local property tax has "broken down" as seriously in several of the states which have not adopted sales taxes—notably Arkansas, Iowa, Missouri, Ohio, and Texas—as in many of those where property tax troubles seem to have been di" The deficits noted here were not caused by new items of expenditure, such as those for unemployment relief, or increased state aid.

T H E SALES TAX I N 1929-33

14

rectly linked with the passage of a sales tax. Third, the word "breakdown" covers a variety of occurrences: among others, the adoption of tax limit measures in Indiana and Washington, the adoption of the Riley-Stewart plan in California," and the radical shift in school finance in North Carolina. Without more data than the present writer has at hand, he cannot know whether these measures imply any more real distress resulting from the property tax than exists in many other states which have taken no such steps and have not adopted a sales tax. Instead, such measures may chiefly indicate the existence of ably organized groups of various types. The determination of taxpayers to reduce property taxes has taken many forms. Has it, however, been primarily an expression of a desire for tax reduction in general? Since the property tax supplies by far the larger part of total state and local revenues, an affirmative answer would be understandable. To what extent, on the other hand, has the determination been an expression of dislike for the property tax as such, and of preference for some other form of taxation? The writer is inclined to believe that the extent of such preference, if any, has not been marked. In most of those states where adoption of the sales tax can be closely linked to a decline in yield of the property tax, it is noticeable that property tax collections have been reduced by direct action of the people themselves, through popular votes on tax limit measures, through semi-organized "strikes," and through approval of shifts in state and local functions; whereas the sales tax has always been voted, not by the people themselves, but by their elected representatives. No doubt one may argue that when the voters approved the tax limit measures in Michigan, Washington, and West Virginia, and the Riley-Stewart Amendment in California, they must have known that they were thereby voting themselves into great danger of a sales tax; yet it is, to say the least, doubtful whether the sales tax could win approval in any of those states today if it were put to a popular vote. Certainly the experience in the three states where a test of popular sentiment has been m a d e Arkansas, North Dakota, and Oregon—offers no hope that sales taxes could escape defeat in the states mentioned above. New Revenue Sources Other Than the Sales Tax.—The extent to 54

Infra,

pp. 290-93.

T H E SALES T A X IN 1929-33

IS

which the states have resorted to other sources of revenue before adopting a sales tax has a bearing on the question just discussed, and also indicates the relative popularity of the sales tax and other taxes besides the property tax. Again no generalization applicable to all states can be made. A t the one extreme stand Michigan, Pennsylvania, South Dakota, and West Virginia. These four enacted sales or gross income tax laws in 1 9 3 2 or 1 9 3 3 without having adopted any other measures of major importance, since 1 9 2 9 , to raise new revenue. None of them has a personal income tax. A t the other extreme may be placed N e w Y o r k , North Carolina, and North Dakota, where extensive changes were made in many taxes before the sales tax was passed. Among the other states, falling between these two extremes, the legislatures of

five—

Arizona, California, Illinois, Utah, and Washington—enacted a personal income tax before, or at the same time that, a sales tax was passed, but in two 25 the income tax was declared unconstitutional, and in a third 26 vetoed. In Indiana the income tax was defeated by popular vote in 1 9 3 2 . Among the states covered in this study which have not adopted a sales tax, very few have enacted revenue measures of importance since 1 9 2 9 . Property tax rate increases in Iowa and Texas, the adoption of a graduated income tax in Arkansas and Missouri, and marked increases in income tax rates in Wisconsin, the enactment of tobacco taxes in Ohio and Texas, an increase in gasoline taxes, the passage of liquor taxes in several of the states, and a few other miscellaneous changes complete the list of measures designed to increase revenues materially in these non-sales-tax states. In terms of taxes rather than states, it may be said that there has been a fairly widespread willingness on the part of legislators to try the personal income tax, but virtually no inclination to increase the rates drastically above the levels prevailing in most states in 1 9 2 9 . Gasoline tax increases have been fairly common.

Comparatively

little has been done with selective sales taxes on tobacco, etc. Taxes on business have been revised upward (and not greatly so) in only a few states. Death taxes have been called upon for almost no additional revenue. Special-rate intangibles taxes have been used but 21

Illinois and Washington.

!6

California.

16

T H E SALES TAX IN 1929-33

rarely. The property tax has been greatly reduced in many states, and temporarily increased (for state purposes) in only a few. Automobile registration fees have in almost no instance been increased, and in several states have been sharply cut. Recently, the beer tax and liquor taxes have spread over a fairly wide area. In summary, there has been no tax measure which has even remotely approached the enactment of the sales tax in scope or in severity as a method of supplying new revenue to state and local governments during the period 1929 to 1933, inclusive. Conclusions.—It is not possible to explain the spread of the sales tax to the close of 1933 by reference to dependence upon any one source of revenue, or to increases (or lack of decreases) in any one type of expenditure. In many states, however, the yield from the state property tax decreased enough to develop considerable pressure for new sources of revenue. Likewise, the refusal of taxpayers to continue paying local property taxes except on a much lower level has caused a demand for new state revenue, largely to care for the schools. In only a few states has the need for unemployment relief been an important factor in the development of the sales tax issue, but in those few it has been of great influence. Further explanation of the sales tax movement must be sought in the interplay of personal interests within each state. THE INFLUENCE OF VARIOUS GROUPS WITHIN THE COMMUNITY ON THE DEVELOPMENT OF THE SALES TAX MOVEMENT

The development of the sales tax movement within the United States since 1929 has offered an exceptional opportunity to observe the ways in which various groups within the community align themselves to give battle for or against a tax measure, and the methods they employ. At no time within the past few decades has a new tax spread so widely among the states in the face of such opposition and backed by proponents so well organized. In Arizona the tax was passed only when an agreement to enact an intangibles tax and income tax at the same time was reached, and then the sales tax was attacked in the courts and found unconstitutional. A second sales tax was likewise passed only when agreement had been reached on companion revenue measures. In Illinois the tax precipitated a bitter fight between Cook County and down-

T H E SALES T A X IN 1929-33

17

state interests. The first tax, barely obtaining the two-thirds majority needed to make it an emergency measure immediately applicable, was declared unconstitutional, and the second tax received no more than the simple majority of votes necessary for it to pass as an ordinary measure. The capitol of Kentucky was the scene of serious disorder when retailers massed in protest; a flat-rate retail sales tax has been defeated on several roll calls, the vote on some of them being very close. The Mississippi tax received no more than the three-fifths vote necessary for its passage. In North Carolina the contest kept two legislatures in session for an extraordinary period, and here too the vote was close. In Ohio the maneuvers of several powerful lobbies traced a pattern almost too intricate to follow even superficially, and two decisive defeats for the sales tax have rendered only more tense the situation now developing out of the recent passage of a tax limit amendment. The Oklahoma legislature felt it necessary to recall and revamp a sales tax it had passed in the face of a referendum threat. In Pennsylvania a sales tax was rushed through the legislature in the shortest time allowed by law, to forestall the development of protests that would have arisen had hearings been held or other delays permitted. In view of these examples, and others somewhat less striking, it is clear that the sales tax has not been accepted without considerable protest in many states. Opponents of the Tax.—A distinctive characteristic of the contest has been that one opposing group (retail merchants) has been prominent in almost every state. In many the retailers have stood virtually alone in their opposition. The proponents of the tax, in contrast, have consisted of a variety of groups, some active in some states, others, in other states, but no one of them influential in every state. The retailers' campaign of opposition has assumed a nationwide aspect, encouraged, if not directed, from a central headquarters, whereas most of those in favor of the tax have not coordinated their efforts over the entire country. The retail merchants have furnished the chief, and in some instances the only, organized opposition. In most of the states where their campaign has been extremely vigorous, however, it has in general been a losing one. Of the states covered by this study which do not levy a flat-rate tax upon retail sales, it is the writer's impression that it can be said only of Ohio and Kentucky, and possibly Massa-

18

T H E SALES TAX I N 1929-33

chusetts and New Jersey, that such a tax would probably now be in force were it not for the retailers' activities. In Mississippi and North Carolina their opposition was probably as decidedly expressed as in any state, yet they lost, although by a narrow margin. Failure of the retail merchants to check the spread of the sales tax has in many states resulted from a lack of interest in the issue at a time when proponents of the tax were laying plans so carefully that it soon became too late to oppose them effectively. Often the retailers' organizations were weak, and, in some commonwealths, they were non-existent on a state-wide basis. Effective cooperation between the small country merchant, who can influence the local legislator, and the large city store, which can furnish the funds needed to carry on a publicity campaign, has been difficult to achieve. The same has been true as concerns cooperation between independent merchants and chain store groups. Occasionally the larger chains seem to have been too preoccupied with the fear of special anti-chain legislation to lend aid in fighting an ordinary sales tax; in at least one state where the issue was close, it appears that assistance from nationwide chains might have defeated the tax. Furthermore, retailers are not retailers alone; in many places they are substantial owners of property, fearful alike of high property taxes and riots by the hungry unemployed; or they hold state and local warrants and bonds whose value may seem to depend upon the prompt passage of a new revenue measure; or they are linked strongly through business and personal connections with other interests who are to be singled out for taxation if the sales tax fails to pass; finally, they are in some cases convinced that if they can only secure the adoption of a provision making mandatory the shifting of the tax, or at least preventing the advertising of non-shifting, they will not suffer unduly. They are quick to point out the regressive feature of the tax and its other undesirable social qualities, but in general have based their campaigns frankly on the damage to their own interests which they fear will result, at least temporarily. On the whole, the writer has been surprised at the extent and vigor of the opposition furnished by retail merchants, and is inclined to attribute a large part of it to a few exceptionally energetic trade association officials who have recognized in the sales tax issue an opportunity to increase their usefulness to their supporters. In some instances, the passage of the sales tax has been an important

T H E SALES T A X IN 1929-33

19

factor in creating or in materially strengthening a state-wide organization of retailers to guard more carefully their interests with respect to taxation. If the activity of the retailers has been greater than one might have expected, opposition on the part of labor has been less. It may be of significance that of the ten states where it has been possible to discover very active opposition to the tax by organized labor,27 only four now have a sales tax. Had there been an effective labor lobby energetically at work in cooperation with the retailers in the other states, it is probable that the sales tax would be far less widespread. For the most part, lack of such cooperation seems to have arisen from the absence of a well organized labor group, but it must be recalled that in some states the sales tax has been linked directly to unemployment relief, and in others to the common schools. That ubiquitous and amorphous creature, the consumer, has not organized in opposition to the sales tax, save possibly in Massachusetts, nor is there any indication that he will do so. Discontent among the consumers of small means, whether laborers or white-collar workers, breadwinners or housewives, undoubtedly exists, but it has been given little, if any, formal expression. Occasionally the retailers have been able to materialize this feeling in a form threatening enough to make legislators pause, and in many instances the "consumer" has been the watchword of the opposition in the general assembly of the state, but the political possibilities of the sales tax issue in this respect seem as yet to have been relatively unexploited. Proponents of the Tax.—Analysis of the support given the sales tax is a complex problem. In various states and at various times welldirected campaigns have been undertaken by farm groups, teachers' organizations, urban real estate associations, public service corporations, governors, and local governmental authorities. Moreover, much of their activity has been directed to what may be called "forcing measures," such as those in Indiana, Michigan, Ohio, Washington, and West Virginia, limiting the tax rate on property, or those in California and North Carolina, placing a greatly increased share of the school costs upon the state government. Considering the hostile attitude toward a Federal sales tax taken ** Arkansas, California, Georgia, Iowa, Massachusetts, Missouri, New Jersey, New York, Oregon, and Utah.

20

T H E SALES T A X I N 1929-33

by farm organizations, it might be surprising to discover that considerable farm support for the sales tax was exhibited in several states, until it is recalled that there has often been a direct link between the sales tax and a reduction in property taxes. This probably indicates that the term "farmers" in this connection should be taken to mean landowners, not tenants. Their preference, in general, seems to have been for an income tax rather than a sales tax, but when it appeared to be a question of the sales tax or nothing, their opposition to the sales tax in almost every instance became decidedly feeble, and in a few cases was transformed into energetic support. Urban real estate interests as represented through real estate boards, associations of real estate dealers, etc., have been among the most energetic advocates of a sales tax, and, in a few states, the major force back of the movement, notably in California, New York, and Massachusetts. In four or five other states, chiefly in the Great Lakes region, these organizations have expressed approval of the sales tax, but seem not to have been prime movers. In Arkansas and Iowa they have either expressed opposition to the tax or refused to commit themselves, and in most of the other states covered by the present study they have been quiescent with respect to the issue. On the whole, much less organized activity on the part of such groups has been discovered than the present writer anticipated. A third group of property owners who might be expected to see in the sales tax a relief from current burdens is made up of a miscellany of corporations owning railroad, power and light, mining, and manufacturing property. Openly organized activity for the sales tax has naturally been rare on the part of these taxpayers; they do not conduct their legislative campaigns with the mass-action tactics used so extensively by the retailers. Possible exceptions are certain manufacturers, voicing their sentiments through manufacturers' associations of various types, and in such instances the opinions expressed from state to state have ranged from fairly active support of the sales tax to a rather weak opposition. Much more important have been the activities of small groups of public service corporation, mining, and manufacturing representatives. Direct evidence on this point is relatively difficult to obtain, and in the present study it has not proved feasible to gather as much information as desired, but enough has been learned strongly to indicate that in many states

T H E SALES T A X I N 1 9 2 9 - 3 3

21

these forces have been exceptionally influential in promoting the sales tax—not always, it is true, with success. Without intending to impute anything of the sinister or the stealthy to such advocates of the new tax, one may nevertheless say that much of the most effective work on its behalf has been done without the publicity attending the activities of the other groups. Support for the sales tax might be expected to come from some of those who stand to benefit, for the short term at least, from the money to be spent therefrom. There seems little doubt that of these interests, the most strongly organized, at least to the public eye, are the representatives of the common schools. Teachers, school supply interests, educational association officers, and parents of school children form varying percentages of this mixture, with varying degrees of potency, from state to state. It is of course impossible to say with certainty what the majority of individuals in each group have thought about the sales tax in each state. T o judge by the public stand taken by state-wide educational associations, however, the school group (if that name is not too vague) has vigorously supported the sales tax in Indiana, Michigan, Illinois (as to the 3 per cent tax), and North Carolina, and, to a certain degree, in Ohio. Aside from these and possibly one or two other states, the school group has stood clear of the sales tax contest, officially at least, and in N e w York one of the teachers' organizations opposes the tax. It is noticeable that in most of the instances where the educational representatives have actively supported the tax, they have professed no great liking for it, and have indicated a willingness to approve any revenue proposals which would supply money to meet educational needs. This theoretical impartiality towards all forms of taxation has not, however, inhibited lobbying as energetic as that accomplished by those who might be called the true bearers of the sales tax banner. Therefore, although the educational group no more than the urban real estate interests can be held responsible for the nation-wide sweep of the sales tax, it seems clear that in a few states there would be no sales tax today had not the teachers given it their vigorous support. The representatives of the other large item of state and local expenditure, roads, have indirectly been influential in spreading the sales tax doctrine through their opposition to diversion of motor fuel

22

THE SALES TAX IN 1929-33

tax and motor license fee revenues. Finally, local authorities—county boards, mayors, etc.—have in varying degrees praised the sales tax as a possible source of new revenue to be collected by the state and distributed to localities. This has been noticeable in California, Massachusetts, Mississippi, New York, and Texas. It may be observed that no one of the groups named above has been uniformly successful, even with respect to those states where their efforts in behalf of the sales tax have been marked; further, the tax has been passed in certain states without their active support. Is there, then, no one body of sales tax proponents who can claim to have been both essential to the passage of a sales tax, and successful in every instance? The nearest approach to such a group is furnished by the governors of the respective states. This fact in itself may not be very enlightening, since it is not evident exactly what groups in the community the governor most clearly represents. However, it indicates that the sales tax movement has not sprung directly from the people. No sales tax bill has yet been vetoed; 28 moreover, in almost every state which has enacted a sales tax the governor has favored it openly (although in some cases with reluctance), and in Illinois, Mississippi, and North Carolina, and probably in Indiana and North Dakota, gubernatorial support proved essential to its passage. A governor's favor has been no absolute guarantee, however; in Massachusetts, Kentucky, Ohio, and Texas the legislators have successfully resisted executive persuasion, and in North Dakota and Oregon the people have done the same, at referenda. Other forces working for the sales tax are not readily classified, and have been of greatly varying strength from state to state. The Reconstruction Finance Corporation seems to have been influential in pointing out, to states appealing for relief loans, the advantages of the sales tax as a source of immediate revenue, and lately the Federal Emergency Relief Administration, with its demands for new state revenue from any source whatsoever, has been an indirect influence in the contest over the sales tax, without expressing any " H o w e v e r , the low-rate sales tax in Mississippi in 1930 and the Oklahoma tax in 1933 became law without the governor's approval. In North Carolina the governor has no veto power, but Governor Ehringhaus favored the tax. In Washington certain sections of the bill were vetoed.

T H E SALES T A X I N 1929-33

23

preference for the sales tax in comparison with other revenue measures. The press, on the whole, has not been an active supporter of the sales tax, although the influence of the Hearst chain in favor of the tax may have had some effect. Persons purporting to represent certain types of taxpayers throughout the nation have been sedulous in their devotion to the cause of the sales tax. The present writer, however, is inclined to attach relatively little importance to such nation-wide influences, with the possible exception of those emanating from the Federal government. In some states, notably Utah and Oregon, state unemployment relief committees have backed the sales tax, and in a few other states financial institutions holding state and local obligations have expressed approval. In the matter of campaign tactics, the sales tax contest has been thus far particularly illuminating in demonstrating how a group such as retailers, hitherto not particularly well organized for tax struggles, or indeed for any other legislative struggles, can in a comparatively short time whip themselves into a frenzy of activity which for a while bears all the earmarks of a profound popular uprising. If some future historian should judge the opposition to the sales tax by the number of telegrams sent, mass meetings held, circulars distributed, and even local election activities fostered, he might well wonder how seventeen sales tax laws could have been passed within six months.28 Conclusion.—As has been indicated, almost every possible combination of fiscal and personal forces can be found among the states covered by this survey. At one extreme stands a state such as Michigan, where influential support by the school group, manufacturers, urban real estate interests, and the executive was not strongly opposed by retailers, once the tax limit measure had passed, and where a collapse of the property tax, coupled with a decided lack of inter" T h e log of the sales tax (date approved by the governor; but in North Carolina date ratified by legislature): 1929: Aug. 29, Georgia; 1930: March 17, Kentucky; May 10, Mississippi (low-rate tax); 1931: May 27, North Carolina (low-rate tax); 1932: April 28, Mississippi; Aug. 19, Pennsylvania; 1933: Feb. 27, Indiana; March 3, South Dakota; March 7, North Dakota; March 8, New Mexico; March 14, Oregon; March 20, Arizona (first tax); March 21, Utah (first tax) and Washington; March 22, Illinois (first tax); March 25, Vermont; April 19, New York; May 12, North Carolina; June 2, West Virginia; June 28, Arizona (second tax), Illinois (second tax), and Michigan; July 10, Oklahoma; July 31, California; Aug. 3, Utah (second tax). The Kentucky, New Mexico, and Vermont laws are of little importance in relation to the present sales tax movement, and New Mexico and Vermont are not included in the list of states covered by this study.

24

T H E SALES TAX I N 1929-33

est in an income tax or an increase in existing taxes, led fairly easily to the enactment of a retail sales tax with a rate of 3 per cent. At the other extreme is a state such as Wisconsin, where the sales tax has been virtually no issue at all. Perhaps the sales tax movement is still too young to permit of valid generalization; but the impression to be gained thus far is that inasmuch as the chief appeal of the tax has been as a source of ready revenue for emergency purposes, its progress has naturally differed greatly from state to state with the degree of the emergency and even more with the desire and the ability of various groups in the community to save something for themselves out of the economic wreckage. Demand for the lowering of local property taxes, and support by executives anxious to obtain immediate revenue seem to have been the most effective forces back of the sales tax movement, although they fail as explanations in certain states. P R O S P E C T S FOR T H E S A L E S T A X

The sales tax has in most states been an emergency measure, enacted in a hasty search for new revenue, and in eight states scheduled to expire within a year or two. Nevertheless, it will probably remain for several years in most of the states which have thus far adopted it. Once the large retailers have passed through the trying period of transition, their opposition to the tax will probably wane, especially if they find that the tax is linked with an appreciable decrease in property taxes. The small retailers, who probably suffer more under the tax than the large stores, cannot by themselves offer effective opposition. Voters in the role of consumers are not likely to remain exercised over the burden unless they are kept tax-conscious by retailers who are determined to charge the tax as a separate item. The natural reaction of the individual retailer is to hide the tax in the price. Even under a 3 per cent rate in Michigan it has taken strenuous group effort to maintain the practice of a separate charge, and the recent abandonment of the schedule system by the large Chicago stores is significant.30 More effective opposition by labor unions is a possibility, but on the whole the forces arrayed against the sales tax seem to be gradually losing their potency. Against them stand well organized interests determined not to yield their recently won gains without a severe struggle. * For further details, see infra, pp. 232, 433.

T H E SALES TAX IN 1929-33

25

Radical reduction, of state and local taxes is not likely to be a feature of whatever recovery period may occur in the near future, and if the sales tax is to be abandoned within the next few years such action will probably have to be coupled with increases in other tax rates or the passage of some new tax. The net income tax may be introduced into such states as California, Illinois, Indiana, Michigan, and Ohio, but constitutional difficulties and decided opposition on the part of those who would be unfavorably affected thereby promise to make progress in this direction slow. There is a possibility that steeply graduated retail sales taxes, aimed at large chains and department stores, and intended to be non-shiftable, will prove a popular substitute for the flat-rate sales tax. The United States Supreme Court, which may pass upon the Kentucky tax some time in 1934, will be one of the decisive factors in this matter. Furthermore, although unemployment relief needs may pass, school needs will remain, and it is not easy to visualize the educational groups in several states as willing to desert the sales tax, no matter what is promised in exchange. The yield has not been up to expectations in many instances, but it has proved sufficiently large to encourage the formation of vested interests in the proceeds. In view of these tentative predictions, one is bound to inquire why the sales tax has not sooner made its appearance in the states of the Union. Its obvious defects 31 have not been of the kind greatly to concern those who have been instrumental in its passage. T o some extent the writer is inclined to attribute the delay in its adoption to a fear that the tax would prove impracticable in the sense that it would not yield much revenue without great expense. It is true that if it is to be enforced equitably it will cost much money and time and effort; but with the growth of large retail units, it has become possible to obtain substantial sums at relatively low cost, provided no great concern is felt over evasion by the large number of small business firms, or much care taken about the numerous legal problems that arise. It is likely, however, that retail rates as high as those in California (2.5 per cent) and Michigan and North Carolina (3 per cent) will be reduced, and that the gross income type of tax in Indiana and South " See infra, pp. 101 ff.

26

THE

SALES TAX

IN

1929-33

Dakota will be gradually transformed into retail sales taxes.*1 A high rate, besides increasing deliberate efforts at evasion, brings too many legal problems into a position where litigation seems worth the trouble. In none of the sales tax contests covered in this study has a retail rate higher than 5 per cent been seriously suggested. The gross income taxes, loosely drawn as they are, seem destined to provoke many protests if energetic attempts at enforcement are made; and in any case most of the revenue will come from the retail rate. A factor difficult to evaluate is the possibility of a considerable change in state and Federal fiscal relationships. The freedom of interstate commerce from state sales taxes may be an important influence toward Federal administration of the tax, with a return of part or all of the revenue to the states (in North Carolina this would automatically lower the state sales tax rate 33 ). Such action does not appear probable for the near future, however. A D M I N I S T R A T I O N OF T H E SALES T A X

Only in Mississippi has a high-rate tax on all retail sales been in operation for a period longer than a year, and not until the spring of 1933 was a considerable degree of effective enforcement reached in that state.3* A study of the administration of the sales tax in the United States must at this time, therefore, be a description of initial steps taken and hopes expressed, rather than a critique of various methods in the light of experience.35 In general, the sales tax has been given a good opportunity to show what it can accomplish in the first few months of its life. In a majority of the sales-taxing states new administrative divisions have been formed, and recently-appointed officials, anxious to prove their worth, have been put in responsible positions. The sums allowed for administration could in most cases be increased with a resulting net gain in revenue, but are generally sufficient to permit of extensive field work. In Indiana, Kentucky, and Michigan, "such sums as are necessary" may be drawn from the sales tax revenue to cover ad" In West Virginia the extractive industries are so important that this change is unlikely t o occur. " S e e infra, p. 661. " See infra, p. 172. " P r o b l e m s of administration arising from provisions peculiar to certain laws are noted in t h e s u m m a r y of legal problems, infra, pp. 86-gi.

THE SALES TAX I N 1929-33

27

ministrative costs, and in a few states (Arizona, California, and North Carolina) such costs are made a function of sales tax receipts, the percentage ranging from 2 to 4. With one or two notable exceptions, the statutes give broad powers to the administrative authorities to obtain information bearing on taxable sales even from persons who are not taxpayers (such as wholesalers in a retail sales tax state). Administrators in most states seem to realize the importance, and to a considerable extent the difficulties, of the task they have undertaken. There has been a widespread tendency to be lenient with taxpayers for the first few months,M but this arises, not from any indifference, but rather from a studied desire to avoid friction which might imperil future collections, and perhaps the very existence of the tax. This attitude is also reflected in the efforts made in some states, notably Indiana, New York, and Pennsylvania, to acquaint taxpayers with the new levy, and to some degree popularize it among them. News releases, radio talks, and addresses before groups of business men, have proved helpful in this connection. More formal methods, typified by free distribution of printed copies of the law, tax forms, and sets of administrative rulings and regulations, have been used in a majority of the sales taxing states. District tax offices, local officials, banks, and trade associations have proved convenient channels through which to distribute this information. A few states, however, notably Arizona and Mississippi, have not compiled their administrative rulings for public distribution. The task of listing those subject to the tax has been approached in several ways. In some states, as Mississippi, Illinois, North Carolina, and Oklahoma, considerable reliance is placed upon a buildingto-building survey of the entire state by a group of field workers, who are expected to obtain the name and address of virtually everyone who might be subject to the tax." In other states, chief dependence is upon lists culled from classified telephone directories, books of commercial credit rating agencies, and lists of taxpayers under capital stock, chain store, privilege, and other taxes. In Indiana and West Virginia employers are being requested to furnish pay roll lists, as " A notable example of this is furnished by Mississippi, see infra, pp. 170, 175-77. " In Pennsylvania the same procedure has been followed since the expiration of the tax.

28

T H E SALES TAX IN 1929-33

the tax in those two states applies to salary and wage payments; in South Dakota collection at the source is employed. Arizona and South Dakota are unusual in that they are to depend largely upon local property assessors for lists of names and addresses. Lists of new incorporations, of registered voters, and lists compiled by various mailing bureaus are other sources which have been, or are hoped to be, utilized in some of the states. Inspection of the returns and of taxpayers' records to ascertain whether the correct amount of tax has been paid is only now getting under way in most states. A field force so large that it could, if necessary, at least casually inspect the books of every taxpayer once every two or three years seems to be considered necessary by most administrators. Actually, considerable attention will probably be concentrated on relatively few taxpayers, in lieu of spreading the inspection thinly over the entire group. Indicative of the importance attached to field work are the data showing that New York has more than eighty men dividing their time between field and office work; North Carolina, sixty-two field agents, devoting perhaps two-thirds of their time to the sales tax; and Mississippi, thirteen field inspectors devoting a large part of their time to the sales tax.58 There has not yet been time for a large body of litigation to develop; in some states, such as Mississippi, where considerable effort is made to avoid court action, numerous conferences between the taxing authorities and taxpayers have taken place. Nearly every state has a legal official who devotes virtually full time to the sales tax. Although litigation has not been extensive, heavy correspondence indicates a lively concern on the part of taxpayers; from 2 5 to 1,000 letters a day are being received by sales tax officials in the various states, aside from the routine correspondence requesting forms, copies of regulations, etc. Altogether, the sales tax has been received by administrators and many taxpayers with anything but indifference. The cost of administration ranges, or is estimated to range, between 1 and 4 per cent of the revenue from the tax, the figure for most of the states being between 2 and 3 per cent. It is not yet possible to use these figures for comparative purposes. Under a 2 or 3 per cent tax the percentage should probably be lower than under a " F o r further details on these and other states, see infra, Part T w o .

THE SALES TAX IN 1929-33

29

i per cent tax; it should undoubtedly be high under administrations which are determined to collect the tax due from virtually every taxpayer, as compared with those content to receive only that part of the revenue easiest to obtain. Outside of New York, there is as yet little evidence that the use of estimates of taxable sales rather than precise figures will be formally permitted.3* The use of such estimates on the part of taxpayers having small sales volume is probably widespread, however, even if not officially recognized as permissible; and in New York it has sometimes proved helpful in segregating taxable, from exempt, sales in avoiding an expenditure of time and money far out of proportion to the amount of revenue involved. In distinguishing between retail sales and sales for resale, necessary in almost all of the sales-taxing states, the use of resale certificates has been developed, but not widely so. Under this system the purchaser of goods for resale supplies his vendor with a statement that he is purchasing for resale, and the possession of such a certificate guarantees the vendor against a tax upon the sale at the retail rate. It exposes the purchaser, however, to the retail tax unless he in turn can prove he has sold the article for resale. The device is undoubtedly helpful to the administration, but is often troublesome to the taxpayer or his vendee, and it will take constant pressure to keep it in use in those cases where it is of most value both to the administration and the vendor. For the student of taxation an encouraging feature of current administration is the extent to which elaborate statistics on revenues collected and returns filed are being compiled in certain states. Indiana and Mississippi are notable in this respect, and classifications of revenue and returns by type and size of business are among the items which should prove helpful. The novel experiment by Mississippi's commission in using sales tax receipts as an index of business activity is noted below.40 E F F O R T S O F T H E T A X P A Y E R S TO S H I F T T H E

TAX

Retail trade associations and the larger retail stores throughout the country have been insistent upon the adoption of some provision " For the New Y o r k practice, see infra, p. 405. 40Infra, p. 179.

30

THE SALES TAX IN

1929-33

in the various statutes which would guarantee that the retail sales tax be shifted to consumers." T o the economist accustomed to think in terms of impersonal forces operating over long periods of time, such an attempt to control the incidence of the tax without involving price fixing seems at first sight naive. Closer study, however, with special reference to the period of six months or a year following the introduction of a sales tax, creates both an understanding of, and to some extent a belief in, the claims made by retailers for the mandatory shifting provisions. So, too, does a consideration of economic friction as viewed at work under a sales tax rate of i per cent or even 2 per cent; there seems to be a level below which the tax rate may go only with grave danger that some of the retailers will be forced thereby to lower their profit margin on sales, not only for a few months, but possibly for a year or two. Whether or not the tax is shifted in Illinois, Michigan, and New York is the subject of a statistical survey based on answers given by the taxpayers, presented in full in Part Three below.42 The Mississippi tax has already been the object of a similar statistical survey by members of the staff of the University of Mississippi.43 In the other states the information available is fragmentary, although in Pennsylvania and Georgia it is extensive enough to permit of some remarks. The present section will draw only to a limited extent upon the results of the statistical survey in Illinois, Michigan, and New York, for the information gathered thereby, concerning shifting, is summarized in Chapter II below, together with other data obtained through the same survey. In considering the evidence on shifting gathered by the present study, and its relation to the merchants' demands for the so-called "mandatory" provisions, it must be noted that there are severe limitations on the use of the data. Price levels are subject to a variety of forces, and it has not been possible to isolate the effect of the sales tax and trace its share, if any, in recent price fluctuations. Moreover, the information is in terms of what business men say they have done. " In the two countries with whose sales tax practice the writer is familiar—Cuba a n d France—he has found no trace of this movement which is so marked in the United States, nor has he heard or read of a n y indication of it in o t h e r countries. 4 3 Infra, p. 178. "Infra, pp. 325-30, 338-401. 430-73. 506-24.

THE SALES T A X IN 1929-33

31

Occasionally they may inadvertently, or even purposely, give incorrect statements concerning their actions with respect to specific pricing policies. More serious is the likelihood that in many instances they believe that certain actions have resulted in shifting the tax, whereas in fact larger net profits might have been obtained had no tax been levied. The volume of business may have been less than it would have been without the tax, or the price increases made "because" of the tax might in fact have been made even had there been no tax. Doubtless many of the merchants gave answers which expressed a mere hope or aspiration, or, on the other hand, discouragement over general business conditions. In view of these difficulties in the way of obtaining precise and wholly accurate answers, no attempt was made to distinguish between shifting defined as an increase of sales prices by the amount of the tax and shifting defined as complete success in avoiding any decrease in net profits because of the tax. For the sake of brevity, many of the statements in this section, and likewise in Chapter I I and Part Three below, carry an air of positiveness which must be modified in the reader's own mind in the light of the general remarks above. Several conclusions may be drawn from the evidence. In Georgia, owing to the low rates of the tax, virtually none of the burden was shifted to consumers. In Pennsylvania, as a result both of the low rate and the short life of the tax, shifting was apparently uncommon. Judging by replies of retailers in New York State, a majority of the small retailers have not succeeded in shifting the i per cent tax, but most of the larger outlets have been fairly successful, and manufacturers and wholesalers (taxably only on their retail sales) have absorbed very little of the burden. The 3 per cent rate in Illinois, Michigan, and North Carolina seems to have been high enough to force shifting in most instances, and under the 2 per cent rate in Illinois, about half of the taxable retailers interviewed reported shifting part, or all, of the tax. Only in North Carolina and California have the merchants obtained the mandatory provision which has been urged so strongly in many other states, notably Illinois, Michigan, Ohio (where no sales tax has yet been passed), Oregon, and Utah. In North Carolina there was enacted, as a companion measure, a law requiring the commis-

32

T H E SALES TAX IN 1929-33

sioner of revenue to devise regulations whereby the merchants should "collect from the consumers" the retail sales tax. Under rules promulgated by the commissioner, every merchant must quote the tax to the consumer as a separate item, in accordance with a schedule uniform for the entire state. In California the retailer is instructed by the law to "collect" the tax from the consumer, "in so far as the same can be done"; and the board of equalization is given power to require that the tax be charged by the retailer as a separate item, in so far as he "collects" it from the consumer. The board has exercised this power, although in view of the phrase "in so far as the same can be done," the full extent of the board's authority is not clearly defined. In Michigan, doubt as to the constitutionality of such a provision prevented its enactment, and in Ohio the proposal, in the form of a coupon system to be described below, was so unpopular as to be instrumental in the defeat of the tax. Plans devised by retailers for assuring the shifting of the tax may be divided roughly into three groups. In the first are the various schedules or bracket systems whereby all stores agree to add a separate charge for the tax in accordance with a uniform schedule. The simplest form is a schedule drawn up by applying the tax rate to the sale price, and calculating the tax due to the nearest cent. On sales where the tax rate gives a tax of less than one-half cent, therefore, no charge is made to the consumer. Even on sales above this level the merchant may collect more or less than the tax on aggregate sales, depending upon whether the bulk of his sales falls below or above the mid-points of the brackets in the schedule. To offset these factors, some schedules set the mid-point of each bracket above the point indicated by application of the tax rate. Under a 3 per cent tax, the tax due on a 33 J/3-cent sale is exactly 1 cent, and that due on a 66^-cent sale is exactly 2 cents; by using the first type of schedule noted above, the merchant charges the consumer 1 cent on sales from 33 or 34 cents to the mid-point, 50 cents, and 2 cents on sales from 50 cents to 66 or 67 cents. Under the extraordinary schedule formulated by Chicago's larger stores for the 3 per cent tax in Illinois, however,'" a tax of 2 cents was charged on all sales from 34 to 67 cents, inclusive. Variations between these extremes can be found, " See infra, pp. 433-34.

T H E SALES T A X I N 1 9 2 9 - 3 3

33

but nowhere does there seem to have been drawn up the kind of schedule according to which in the above example there would be charged less than 2 cents on sales of more than 50 cents. The use of schedules has been widespread in Michigan, common in Illinois, and negligible in New York, as indicated by the studies described in Part Three. In California and North Carolina the administrative authorities have required their use. In Arizona and Utah schedules have been employed to some extent. Merchants in the "panhandle" section of West Virginia, located close to the state line, and hence fearing loss of trade from a tax-conscious public, have objected to the plan. The Mississippi study above referred t o " indicates that the use of schedules has been fairly widespread in that state. In general it may be said that schedules have been employed frequently in those states with a retail tax rate higher than 1 per cent. The second group of plans for shifting involves the use of fractional-cent devices to supplement schedules. Under a 3 per cent tax, for instance, a consumer purchasing a 10-cent article would pay 11 cents and receive from the merchant a coupon, or metal slug, worth seven-tenths of a cent, thus allowing for exact payment of the tax. The worth of the coupon or slug would lie in the fact that it could be used in future purchases as a means of paying the tax charge; in some plans it was redeemable in merchandise, or even in cash, at the store where it was received, or at some local trade association office. Sometimes it was issued only in quarter- or half-cent denominations. As noted in Part Three, 46 devices such as this have been used to some extent in Illinois (under the 3 per cent tax) and in Michigan; the writer has seen no indication of their use in North Carolina, the other state which has as high a rate. The plan has been advocated in California, where the rate is 2.5 per cent, but the retailers seem to have been unable to reach an agreement upon the matter. Experience thus far indicates that it takes a tax rate higher than 2 per cent to develop the use of such devices, and that even under a 3 per cent rate they are not common. Figures 1 to 3 illustrate several types of fractional-cent devices used in Illinois and Michigan. A third device whereby shifting would be made more certain has 45

Supra,

p. 30.

46

Infra, pp. 431, 435-36, 507.

PAY NO MORE

3% SALES TAX You Pay 3 Cents Only For This Card 5c : 5c

w -

5c 1 Sc

1 3% 1 .e"«.

?

-

s

£

1 OS 1 as i 35 1 »S

YOU CAN THEN BUY $1.00 Worth of Merchandise Without Paying Additional Tax

TRADE WITH US AND S A V E MONEY FIGURE 2 : POSTER DISPLAYED B Y RETAILERS I N ILLINOIS This poster illustrates the effort made by certain Illinois merchants, under the 3 per cent tax, to instill in the public mind a consciousness of fractional parts of a cent. The punch card shown here is similar to those shown in Figure 3.

3 % I X U K O I B STATE BALES T A X

J % ILLINOIS S T A T E S A L E S T A X

PAUL STORCK

Green Front

QBOCEHY AJTD FÄUIT M A B K E T 1656 S. BIDGEWAY CRAWFORD 1259

Grocerie*. Meat», Fruit and Vegetable« TeL Delaware 9664 637 N. Clark St.

3

3 C E N T TAX PAID This ticket entitles bearer to buy one dollar'» worth of merchandise without paying further at any time.

I

L_

STORES

_l

I

I

I

t

I

Can.

I

1697

I

I

10

10

1034 N . D e a r b o r n St. RECEIPT FOR STATE SALES TAX This certifies that 3 per-cent sales tax has been paid and holder is entitled to purchases free from further taxation to the amount «tili unpunched on this card. Signed by 10

I

S 5

JO

TICKET

LANSING FOOD SHOP

3 C E N T T A X PAID T I C K E T This ticket entitles bearer to buy one dollar's worth of merchandise without paving-'further tax at the I. D. A. Drug Store indicated on back. Sare thi» card — Money refunded if law U held invalid

_J

TAX

City Pre»s, '1315 S. Ashland,

3 % ILLINOIS S A L E S T A X PAID

DRUG

CENT

paying further t u at any time.

10

10

5

mCH 3* COVERING WALDMAN'S GROCERY ILLINOIS STATE SUES JAX 1257 S. Lawndale Ave. ON ¿AKCm GOODS AMOUNTING TOliS 3%

THE PERFECT BAKERY

mGAiiNAm 3

/

/

J ,

/

Perry s Drug

Fob Om«-tmi«o o MICHIGAN S

P h o n . Crawford 4 8 6 5

m m

/

/ _

/

I

'

GOOD AT

3 Cent Tax Paid Ticket

MICHIGAN SALES TAX

x

2

I Linn Camera Shop R ONC-M ALF OF ONC C

Illinois S t a l e S a l e s T a x

QQOD AT ANY

Hill Drug Stores

r

MORRIS & TRAVIS DRUG STORE

MICHIGAN SALES T

F I G U R E 3 : S A M P L E S OF F R A C T I O N A L - C E N T DEVICES U S E D I N ILLINOIS AND MICHIGAN All of these devices illustrate practice under a 3 per cent retail sales tax. They are of two kinds: the punch card and the fractional-cent coupon. The punch card, which is bought by the consumer for 3 cents, is punched each time a purchase is made, until one dollar's worth of goods has been purchased, by which time the card is fully punched. The coupon is given to the customer as "change"; thus on a 10-cent purchase the customer pays 11 cents and receives two one-third cent coupons. These coupons are, of course, not suited for passing on the precise amount of the tax on all sales.

36

T H E SALES T A X IN 1929-33

been devised by the Ohio Retail Merchants Association. Under this (dan, coupon books would be printed by the state, the coupons being in denominations of one cent and up. A dollar book of coupons would be sold to the retailer for one cent, under a i per cent tax, 2 cents

F I G U R E 4 : T O K E N S E M P L O Y E D I N I L L I N O I S BORDER C I T I E S U N D E R T H E 3 PER C E N T T A X These fractional-cent devices were similar to the coupons shown in Figure 3, except that they were in the form of small metal discs. The top row shows the two faces of the token used in Rock Island, and the bottom row, the two faces of the token used in Moline, East Moline, and Silvis.

under a 2 per cent tax, and so on. T h e retailer would then resell the books to consumers a t the same price. C a r r y i n g these books around with them, consumers would be required to hand over to the retailer, at the time of e v e r y purchase, coupons to the face value of the purchase. T h e state w o u l d thus collect the tax in advance, and the m e r c h a n t would collect it f r o m the consumer in the exact amount,

T H E SALES T A X I N 1929-33

37

no matter what the tax rate or how small the sale. The only person to feel somewhat uncomfortable under this plan would be the consumer; and he would, indeed, be tax-conscious before long, especially after losing a few of the books or carrying well worn coupons around in his pocket for several days. It is hardly surprising that this suggestion has not met with great popular favor, and that its appearance during the Ohio contest resulted in an uproar against the proposed sales tax. Incidentally, the merchants are said to be willing to defray the cost of printing the books; they would probably clear a profit even after this expense, for a considerable proportion of the coupons would perhaps never be used. All of the plans discussed above require a high degree of cooperation on the part of merchants, or vigilant supervision by a tax commission, and the writer will be surprised if they do not gradually disappear in practice unless a rate of 5 per cent or more is levied. They are in large part a reflection of the extraordinary activity oven the sales tax issue stimulated and guided by a few leaders among the retailers. In border towns such as Moline and Rock Island in Illinois, where many of these devices originated, they have proved damaging to volume of trade, as the consumers, constantly reminded of the existence of the tax, explored possibilities of trading across the state line. YIELD OF THE SALES TAX

Data on the yield of the sales tax are presented in Part Two, below.47 Although the amounts now being received are in some instances less than estimated, on the whole the revenue receipts have not proved markedly disappointing. The average tax per return is usually considerably less than $100, but this varies chiefly with the nature of exemptions allowed, the time period covered by the return, and the scope and rate of the tax. The 3 per cent tax in North Carolina and the 2 per cent tax in Illinois have been yielding from $28 to $47 per return, the data being on a monthly basis, whereas in New York, where no monthly returns are filed, the average per return has been from $68 to $91. In comparison with total revenues of the state government, the yield of the sales tax in most states is an important, but by no means " See "Sales tax, revenue from," in Index.

38

THE SALES TAX IN 1929-33

an overshadowing, item. In California, Illinois, Michigan, and perhaps Oklahoma, it appears that the sales tax will yield not far from one-third as much as the state government received from all revenues in the year prior to the enactment of the sales tax.48 The fraction decreases to about one-fifth in the case of Indiana, North Carolina, and perhaps Washington, and to about one-tenth for Mississippi and New York.4* In states where the property tax has been significant as a source of state revenue, the sales tax proves to be relatively a very important item. Thus in Illinois it appears that the sales tax will yield not far from twice as much as the property tax has been providing for the state government, and three or four times as much as the average annual general fund receipts from the property tax for the past few years. In Indiana the sales, or gross income, tax will probably produce an amount roughly equal to that which the state government had been obtaining from the property tax before the tax limit law took effect. Michigan will get from the sales tax somewhat, but not much, more than the state levy on property yielded before the recent breakdown in collections, and the tax limit law; but the sales tax yield will be about three times as large as the amount collected from the property tax in 1932-33; these figures do not take into account the special school tax on public service corporation property, etc. In Mississippi, on the contrary, the sales tax revenue is about one-half as large as the state property tax yield. Compared to total state and local revenues from the property tax, the sales tax yield is still a minor item even in those states with high rates or extensive taxes. In California, Indiana, and Washington, for instance, it appears that the sales tax will produce not far from onetenth the amount that has been coming from the total state and local " In many instances the yield of the sales tax is so difficult to predict closely, and the data with which it might be compared are so incomplete that it was not thought necessary to do more here than to give rough estimates. The data on the total state revenues are those given by the Census Bureau; the property tax data were for the most part taken from the release of December 9, 1933, by the American Legislators Association, "Does a Sales Tax Pay ? " ; the remaining data were obtained from the sources listed in Appendix D below. " T h e release of the American Legislators Association compares monthly yield of sales taxes with monthly average of total state taxes (not total revenues), and arrives at the following percentage figures for the states noted above: California, 48; Indiana, 28; Illinois, 28; Mississippi, 1 7 ; New York, 1 1 ; North Carolina, 16; Oklahoma, 18; Washington, 36.

T H E S A L E S T A X IN

1929-33

39

property levy, and in Michigan, somewhat less than one-fifth. The American Legislators Association,50 comparing average monthly yield of the sales taxes to date with average monthly yield of state and local property taxes, arrives at a percentage of 5 or less for all states except California (where the percentage, 15, is highest), Illinois, Indiana, Mississippi, North Carolina, Oklahoma, and South Dakota." In most of the states covered by the present study the personal income tax is either non-existent or yields so little (owing partly to low rates and partly to somewhat lax administration) that the sales tax easily overshadows it as a source of revenue. Even in New York the sales tax is yielding more than one-half as much as the total yield (state and local shares combined) of the personal income tax, although less than one-third of the amount derived from the income tax in its peak year. Likewise, compared to the inheritance and estate taxes, the sales tax is a source of very large revenue. In New York, where the estate tax has been an important item, the sales tax is producing about two-thirds as much as this tax. In Illinois and Michigan the sales tax revenue will probably be five or six times as great as the yield from the death duties. PROVISIONS OF T H E SALES TAX L A W S

The provisions of the various sales tax laws are summarized on pages 40 to 60. The first section of the summary, on pages 40 to 45, shows the title, type, and rate of tax, the date the tax was approved, the date on which the tax became, or was to have become, effective, and, where specified, the expiration date. Requirements respecting license fee and frequency of payment are also covered by this section. The second section of the summary (pages 46 to 60) presents information concerning exemptions and disposition of revenue. Included in both sections are certain laws which have lapsed or which were defeated at referenda, and the proposed amendment and initiative act defeated in Arkansas. Further details respecting the provisions of the laws are presented in Part Two below,52 where each state is treated under a separate section. A discussion of the legal problems raised by the provisions of the laws is given in Part Four below. " See supra, note 48, p. 38. ™ Michigan was not covered in this compilation. " See "Sales tax, provisions of laws" in Index.

PRINCIPAL PROVISIONS

OF R E C E N T

STATE SALES

TAX

LAWS":

T I T L E OF T A X

T Y P E OF T A X 6

Arizona: First tax Tax held unconstitutional by Arizona Supreme Court in Cox v. Slulls Eagle Drug Co., 21 Pac. 2d. 914, April 29, 1933.

House Bill No. 146 (no short title)

Gross receipts (for details see infra, p. 283)

J of 1% and 2% (for details see infra, p. 283)

Arizona: Second tax

Emergency Revenue Act of 1933

General (for details see infra, p. 284)

Vs of 1% to 1 y 2 % (for details see infra, p. 284)

Arkansas Tax law initiated as Constitutional Amendment No. 19 and Initiative Act No. 1. Both defeated by voters Nov. 8,1932.

No short title

General (for details seet»/ra,p. 147)

1%

California

Retail Sales Tax Act of 1933

Retail

to June 30, 1935; 2% thereafter

Georgia

Gross Receipts Tax Law (so called by state tax commissioner; no short title in act)

Gross receipts (for details see infra, p. 156)

V20 of 1% to J/io of 1% (for details see infra, p. 156)

Illinois: First tax Tax held unconstitutional by Illinois Supreme Court in Winter v. Barrett, 352 111. 441, May 10,1933.

No short title

Retail

3%

Illinois: Second tax

Retailers' Occupation Tax Act

Retail

2%

Indiana

Gross Income Tax Act of 1933

Gross income (for details see infra, p. 239)

34 of 1% and 1% (for details see infra, P- 239)

Kentucky

Gross Retail Sales Tax Law (so called by state tax commission; no short title in act)

Retail

V20 of 1% to 1% (graduated according to sales volume; for details see infra, p. 160)

Michigan

General Sales Tax Act

Retail

3%

STATE

RATE OF T A X

A. GENERAL AND ADMINISTRATIVE PROVISIONS TAXABLE

PERIOD

LICENSE F E E REQUIRED

DATE

BY

SALES T A X A C T

APPROVED

FREQUENCY

OF

PAYMENT'

March 18,1933

May 1,1933

No date specified (held unconstitutional April 29, 1933)

Yes

Monthly, quarterly, or annually, according to amount of tax

June 28,1933

July 1,1933

Feb. 28,1935

Yes

Monthly

Date of pasage

No date specified

Yes

Monthly

July 31,1933

Aug. 1,1933

No date specified

Yes

Q u a r t e r l y , unless board of equalization decides otherwise

Aug. 29,1929

Oct. 1,1929

Dec. 31,1931

No

Quarterly

March 22, 1933

April 1, 1933

June 30, 1935 (held unconstitutional May 10, 1933)

No

Monthly

June 28,1933

July 1,1933

June 30,1935

No

Monthly

Feb. 27,1933

May 1,1933

No date specified

No

Quarterly or annually, according to amount of tax, and at discretion of department of treasury

March 17,1930

March 17,1930

No date specified

No

Annually

June 28,1933

July 1,1933

No date specified

Yes

Monthly

For footnotes see infra, p. 60.

PRINCIPAL

STATE

PROVISIONS OF R E C E N T

TITLE o r TAX

Mississippi: F i r s t t a x This t a x superseded b y second t a x .

R e v e n u e A c t of 1930, Article I

Mississippi: Second t a x

E m e r g e n c y Revenue A c t of 1 9 3 2

TYPE or

STATE SALES TAX

TAX1

RATE o r

Gross receipts (for details see infra, p. 167)

Gross receipts (for details see infra, p.

TAX

V10 Of 1 % to 1 % (for details see infra, p. 1 6 7 )

Vs of 1 % to

167)

(for details see p. 1 6 7 )

New Y o r k

T a x on R e t a i l Sales of Tangible Personal Property

Retail

1%

N o r t h Carolina: F i r s t t a x This t a x superseded b y second t a x .

Revenue Act, Section 164

General

For

North Carolina: Second t a x

E m e r g e n c y Revenue A c t of 1 9 3 3

1931,

LAWS:

$12.50

2

infra,

wholesalers or

more

and

for retailers $ 5 or morieeachsixmonths, specific t a x being levied on given amounts of sales General (for details

see infra, p. 189)

V25 of 1% on wholesalers (minimum sixmonths tax, $12.50);

3 % on retailers

North Dakota T a x referred to the people on petition and defeated Sept. 2 2 , 1 9 3 3 .

Emergency, Replacem e n t Revenue A c t

Oklahoma Sales t a x passed b y the Oklahoma legislature in April, 1933, and repealed before being p u t into effect, is omitted from this table.

Oklahoma Sales T a x Law

Oregon T a x referred to the people by the legislature and defeated on J u l y 2 I , 1933.

Oregon Laws, 1933, Chapter 400 (no short title)

Pennsylvania

E m e r g e n c y Relief Sales T a x A c t

Gross receipts (for details see infra, p.

Vs of 1 % to 3 % (for details see infra, p.

262)

262)

Retail

1%

Gross

receipts

details see infra, 3

0 1

)

Retail

(for p.

V,o of 1 % on sales for resale and on publishers; 2 % on all others taxed 1%

A. G E N E R A L

AND

ADMINISTRATIVE

PROVISIONS

T A X A B L E PERIOD DATE APPROVED

LICENSE F E E —

BEGINS

(Continued)

ENDS

REQUIRED BY

F R E Q U E N C Y OF

SALES T A X ACT

PAYMENT'

May 10, 1930 (became effective without approval of governor)

June 1 , 1 9 3 0 fied

No date sped(superseded by second tax)

Yes

Quarterly or annually, according to amount of tax

April 28, 1932 (amendments approved May 18,1932)

May 1 , 1 9 3 2

June 30,1934

Yes

Monthly, quarterly, or annually, according to amount of tax

April 19, 1933

May 1, 1933

June 30,1934

No

Quarterly, unless tax commission decides otherwise

May 27, 1931 (ratified by legislature; go vernor has no power of approval or veto)

June 1 , 1 9 3 1 fied

No date speci(superseded by second tax)

No

Semi-annually

May 15, 1933 (ratified by legislature; governor has no power of approval or veto)

July 1 , 1 9 3 3

Yes

Monthly, quarterly, or annually, according to amount of tax

June 30, 1935

March 7, 1933

Date act becomes effecttive

June 30,1935 (de feated at referendum Sept. 22, 1933)

No

Monthly or quarterly

July 10, 1933 (became effective without approval of governor)

July 10, 1933

June 30,1935

No

Monthly

March 14,1933

D a t e approved by the people

June 30,1935 (defeated at referendum July 21, 1933)

No

Monthly, quarterly, semi-annually, or annually, at discretion of tax commission

Aug. 1 9 , 1 9 3 2

Sept. i, 1932

Feb. 28,1933

No

One payment at end of taxable period

For footnotes see infra, p. 60.

PRINCIPAL PROVISIONS STATE

OE R E C E N T

STATE SALES TAX

LAWS:

TITLE o r T A X

TYPE o r TAX6

R A T E OP T A X

South Dakota

Gross Income Tax Law (so called by division of taxation; no short title in act)

Gross income (for details see infra, p. 273)

M of 1 % to 2% (for details see infra, p. 273)

Utah: First tax This tax superseded by second tax.

Emergency Revenue Act of 1933

Retail

l/i of 1% (except malt, 5 % ; for details see infra, p. 305)

Utah: Second tax

Emergency Revenue Act of 1933

Retail

2% (except malt, 10%; for details see infra, p. 306)

Washington

Tax upon Business Activities (so called by state tax commission; no short title in act)

General (as passed by the legislature, a gross receipts tax, but governor, vetoing taxes on personal services, changed its character; for details see infra, p. 314)

X of 1 % to 5 % (for details see infra, p. 314)

West Virginia: First tax This tax superseded by second tax.

Gross Sales Tax (so called in official compilation of 1931 session laws; no short title in act)

Gross receipts (for details see infra, p. 214)

K o f i%_to%of 1 % (for details see infra, p. 214)

West Virginia: Second tax This tax superseded by third tax.

Cross Sales License Tax Law (so called by state tax commissioner; no short title in act)

Gross receipts (for details see infra, p. 214)

V20 of 1 % to ! » / „ % (for details see infra, p. 214)

West Virginia: Third tax

Gross Sales and Income Tax Law, Artide 13 (see infra, p. 218 for Article 12-A; title used by state tax commissioner; no short title in act)

Gross income (interpretation of act uncertain; may be gross receipts tax; for details see infra, p. 217)

16/ioo

of i % to 6% (for details see infra, p. 217)

A. G E N E R A L A N D A D M I N I S T R A T I V E P R O V I S I O N S TAXABLE

PERIOD

DATE APPROVED

— BEGINS

ENDS

{Continued) LICENSE

FEE

R E Q U I R E D BY SALES T A X A C T

FREQUENCY

or

PAYMENT"

March 3,1933

July 1,1933

June 30,1935

No

Monthly or quarterl y , a c c o r d i n g to amount of tax

March 21,1933

June i , 1933

March 31, 1935 (governor had power to terminate act earlier by proclamation; this act was superseded by second tax)

Yes

Monthly or quarterl y , a c c o r d i n g to amount of tax

Aug. 3,1933

Aug. 4,1933

N o date specified

Yes

Monthly or quarterly, according to amount of tax

March 21, 1933 (three p a r a graphs vetoed)

Aug. 1, 1933

July 31,1935

No

Monthly, quarterly, or annually, according to amount of tax

May 3,1921

July 1,1921

N o date specified (superseded by second tax)

No

Quarterly or annuall y , a c c o r d i n g to amount of tax

June 5, 1925 (date passed by legislature)

July 1,1925

N o date specified (superseded by third tax)

No

Quarterly or annually, according to amount of tax

M a y 26, 1933 (date passed by legislature)

M a y 27,1933

N o date specified

No

Quarterly or annually, according to amount of tax

For footnotes see infra, p. 60.

PRINCIPAL

PROVISIONS

OF

RECENT

STATE

SALES

EXEMPTIONS''

TAX

SALES OF

STATE

- SERVICE MINIMUM

COMMODITIES

OTHER

LAWS:

SALES OT REAL

BY U T I L - PROPERTY

TOTAL OR

ITIES

UNIT RECEIPTS

TAXED*

TAXED

Arizona: First tax Tax held unconstitutional; see supra, p. 40.

$1,200 a year

Gasoline otherwise School bus lines Other motor vehicle taxed lines which pay Bonds and stocks an equivalent School books a t tax under the state-fixed price motor vehicle license laws Municipally owned public utilities Insurance companies Building and loan associations Banks Non-profit organizations Non-producing mines Proceeds of insurance and compensation contracts

Yes

No

Arizona: Second tax

None

Gasoline otherwise taxed

Sales to United States government Casual sales

Yes

No

Arkansas Tax defeated at polls; see supra, p. 40.

Unit sales of cents or less

Farm products Urban transportation where fare sold by original isiocentsorless producers Sales at wholesale Hotels of less than 10 rooms by processors of fruit, etc., canned in state-' Newspapers published within state-' Goods otherwise taxed-'

Yes

No

B. E X E M P T I O N S ,

AND

DISPOSITION

OF

REVENUE

DISPOSITION OF R E V E N U E ' ADMINIS-

UNEMPLOY-

COMMON

OTHER SPECIAL

LOCALITIES

TRATION OF

MENT RELIEE

SCHOOLS

STATE PURPOSES

OTHER THAN

STATE GENERAL FUND

FOR SCHOOLS

SALES TAX

AND UNEMPLOYMENT RELIEF

"A sum not to exceed s % of any one month's revenue" (presumably to be taken from state's share of proceeds)

1 0 % of state's share m a y be diverted to relief b y governor

4%

2% to vendor as payment for collecting tax; 2Y2% to state commissioner of revenue

14-4%

None

For footnotes see infra, p. 60.

None

None

None

None

75%

25%, _ to counties, on basis of collections

20.4%,

61.2%

to

counties, on basis of collections Sum equal to 4 T o provide for mills per dol- appropriations lar of assessed formerly paid value of prop- f r o m state millerty in state age on property Sales tax revenue not otherwise appropriated

None

None

PRINCIPAL PROVISIONS OF RECENT STATE SALES TAX LAWS: EXEMPTIONS'' STATE

— MINIMUM

COMMODITIES

OTHER

TOTAL OR

SALES OF SALES OF SERVICE REAL BY U T I L - PROPERTY ITIES

UNIT RECEIPTS

TAXED

TAXED'

California

None

Gas, electricity, and water sold by utilities Gold sold by producer or refiner Motor vehicle fuel otherwise taxed

Property to be used on public works contracted for before effective date of act T a x paid on foodstuffs bought by a governmental agency for free distribution to the poor to be refunded

No

No

Georgia

$30,000 a year

Farm products sold b y producers Fertilizers, fertilizer materials, and calcium arsenate

Insurance companies Banks and trust companies Dealersinsecurities Building and loan associations Non-profit organizations Offset for income tax paid"

Yes

Yes

Illinois: First tax T a x held unconstitutional; see supra, p. 40.

None

Farm products sold by producers Motor fuel

Sales to United States government

No

No

B. EXEMPTIONS, AND DISPOSITION OF REVENUE DISPOSITION

OF

(Continued)

REVENUE«

ADMINIS-

UNEMPLOY-

COMMON

OTHER SPECIAL

LOCALITIES

STATE

TRATION OF

MENT R E L I E F

SCHOOLS

STATE PURPOSES

OTHER THAN

G E N E R A L FUND

FOR SCHOOLS

SALES T A X

AND UNEMPLOYMENT RELIEF

2% plus license fees ($100,000 from general fund for board of equalization to be refunded from 2% allowance; $50,000 from proceeds of tax goes to s t a t e t r e a s urer; and $32,500 from proceeds of tax goes to state controller)

"Such sums as may be necessary"

Biennium ending June 30, 1933: $210,000 Biennium ending June 30, 1935: $1,200,000

None

None

In counties of more than 500,000 population: biennium ending June 30,1933, $11,000,000; biennium ending June 30, I93S. $62,500,000.*" In smaller counties funds provided for schools, but may be used for relief by vote of county boards

For footnotes see infra, p. 60.

None

None

In counties of 500,000 or less population: biennium ending June 30, 1933, $10,000,000; biennium ending June 30, 1935, $57,500,000.™ Funds to be used for schools. In larger counties schools get unexpended relief funds

None

None

N o specific provision is made for excess of revenue over the appropriations. I t would presumably be held in state sales tax fund

None

B a l a n c e not otherwise appropriated

None

Balance after payment for administration

None

None

PRINCIPAL

PROVISIONS

OF R E C E N T

STATE

SALES

EXEMPTIONS*

TAX

S A L E S OF S A L E S o r : SERVICE

STATE MINIMUM

LAWS:

REAL

BY U T I L - PROPERTY

COMMODITIES

T O T A L OR

ITIES

UNIT RECEIPTS

TAXED*

TAXED

Illinois: Second tax

None

None

Isolated or occasional sales

No''

No

Indiana

$1,000 a year

None

Non-profit corporations and organizations Certain insurance company income Proceeds of life insurance, endowment, and annuity contracts*

Yes

Yes

Kentucky

None

None

Farmers and gardeners s e l l i n g own products Offset for state license, excise, occupational, and corporation license taxes

No

No

Michigan

$600 a year

None

Isolated sales Sales to the United States or to state or local governments in Michigan

Yes

No

B. EXEMPTIONS, AND DISPOSITION OF REVENUE DISPOSITION

OF

(Continued,)

REVENUE«

AD MINIS-

UNEMPLOY-

COMMON

OTHER SPECIAL

LOCALITIES

TRATION OP

MENT RELIEF

SCHOOLS

STATE PURPOSES

OTHER THAN

SALES TAX

STATE GENERAL

FUND

FOR SCHOOLS AND UNEMPLOYMENT RELIEF

None

98% of revenue received prior to Feb. I. 1934*

None

All revenue re- None ceived after Jan. 31, 1934 to occupational tax fund'

2 % of revenue received prior to Feb. I, 1934

Such sums as are necessary to meet "any and all expenses incurred"

None

None

None

Balance after payment for administration

Such sums as are necessary to meet "all costs and expenses incurred'-'

None

None

After adminis- None tration costs: Yi. to board of charities and corrections for institutions; Yi to reduce indebtedness of commonwealth

None

"Theamountnecessary to defray the expenses" ($100,000 from general fund to be reimbursed out of sales tax)

In fiscal year 1934: $12,000,000

None''

In each fiscal year, 1934 and after: University of Michigan, $500,000; State College of Agriculture, $200,000. Sales tax revenue not otherwise appropriated to be held as a special fund

In each of fiscal years 1934 and 1935: $19,000,000

For footnotes see infra, p. 60.

None

None

P R I N C I P A L P R O V I S I O N S OF R E C E N T S T A T E S A L E S T A X LAWS: EXEMPTIONS''

S A L E S OF S A L E S OF

STATE

- SERVICE MINIMUM

COMMODITIES

OTHER

T O T A L OR

IT I E S

UNIT RECEIPTS

REAL

B Y U T I L - PROPERTY TAXED

TAXED'

Mississippi: First tax $5,000 a year This tax superseded by second tax.

Bonds, or other evidence of indebtedness, and stocks Farm products sold by producers

Insurance companies, banks, building and loan associations Non-profit organizations Railroad, express, telephone, telegraph, sleeping car, pipe line companies Persons taxed under sea foods act Proceeds of life insurance, annuity, and endowment contracts* Offset for taxes paid under privilege tax law

Yes

Yes

$1,200 a year

Fertilizers, seed, and containers forfarmproducts Cotton and cotton seed School books at state-fixed price Bonds, or other evidences of indebtedness, and stocks

Persons taxed under sea foods act Sales to the United States or to state government of Mississippi Insurance companies, banks, building and loan associations Non-profit organizations Farmers Hospitals School bus lines Municipally owned

Yes

Yes

No

No

Mississippi: Second tax

utilities Proceeds of life insurance, endowment, and annuity contracts* New York

Variable sum rang- Food (for details ing from nothing see infra, p. 653) to $1,250 in quar- Motor fuel otherter (for details see wise taxed infra, p. 124) Gas, steam, water, and electricity

Sales by or to state or local governments in New York

B. E X E M P T I O N S ,

AND

DISPOSITION

or

REVENUE

D I S P O S I T I O N OF

(Continued)

REVENUE"

AD MINIS-

UNEMPLOY-

COMMON

OTHER S P E C I A L

LOCALITIES

STATE

TRATION OF

MENT RELIEF

SCHOOLS

STATE PURPOSES

OTHER T H A N

GENERAL FUND

SALES T A X

FOR SCHOOLS AND U N E M P L O Y MENT R E L I E F

None

None

None

None

None

None

None

None

None

None

($400,000 a p p r o -

None

None

priated f r o m general f u n d )

F o r f o o t n o t e s s e e injra,

p.

60.

None

None

100%

100%

100%

P R I N C I P A L P R O V I S I O N S OF R E C E N T S T A T E S A L E S T A X EXEMPTIONS'*

S A L E S OF S A L E S OF

STATE

— MINIMUM

COMMODITIES

LAWS:

OTHER

TOTAL OR

SERVICE ITIES

UNIT R E C E I P T S

REAL

BY U T I L - PROPERTY TAXED

TAXED*

N o r t h Carolina: First tax T h i s tax superseded b y second tax.

None

Guano or fertilizer

Farmers s e l l i n g own products

No

No

N o r t h Carolina : Second tax

M a x i m u m tax on a n y single article of merchandise: $10

Gasoline otherwise Sales to state or local governtaxed ments in N o r t h School books at Carolina state-fixed price Commercial fertil- Manufacturers izer otherwise taxed Products of farms, forests, and mines sold b y producers Flour, meal, meat, lard, milk, molasses, salt, sugar, and coffee sold a t retail

No

No

North Dakota T a x defeated a t polls; see supra, p. 42.

None

Bonds and stocks and other choses in action

Farmers selling own products (apparently applies to retail sales only) Sales to state of North Dakota

Yes'

No

Oklahoma

None

Commodities otherwise taxed

Admissions to state or county fairs Sales b y the state or its municipal subdivisions

Yes

No

Oregon T a x defeated a t polls; see supra, p. 42.

$50 a month

Retail sales of motor vehicle fuels otherwise taxed Farm products sold b y producers for resale

Insurance premiums and considerations for annuities Ordinary salaries and waees (exempted specifically) Sales to the United States or state or local governments in Oregon

Yes

No

B. EXEMPTIONS, AND DISPOSITION OF REVENUE ( C o n t i n u e d ) DISPOSITION

OF

REVENUE"

ADMINIS-

UNEMPLOY-

COMMON

OTHER SPECIAL

LOCALITIES

STATE

TRATION OF

MENT RELIEF

SCHOOLS

STATE PURPOSES

OTHER THAN

GENERAL F U N D

SALES TAX

FOR SCHOOLS AND UNEMPLOYMENT RELIEF

None

2%

Such funds as may be necessary from general fund, to be reimbursed from revenues of the tax ($25,000 specifically appropriated for preliminary expenses) 3%

"So much of such revenues as may be necessary"

None

None

None

None

None

None

None

None

9 8 % (intended in part to provide revenue for the schools)

None

2 5 % of revenue after costs of administration to state equalization fund

7 5 % of revenue after costs of administration to real estate bond interest payment fund

None

None

None

9 7 % ; distributed in part on scholastic enumeration per capita basis, in part through equalization fund

None

None

Unexpended balance of administration fund

After sinking fund payment (see column headed "Other Special State Purposes"): next $250,000 to relief fund

None

For footnotes see infra, p. 60.

After payment of 1933 s t a t e property levy (see column headed "State General Fund"): next $518,897.23 to sinking fund of World W a r veterans' state aid commission in lieu of Vi mill levy for 1933

After other 1933 appropriations: Yi of residue. Followingi933: residue a f t e r eliminating state property levies

100%

After expenses of administration: first $1,487,918.96 in lieu of state property levy for general purposes last half of 1933. Following 1933: amount necessary to elimi nate state property levies

PRINCIPAL PROVISIONS OF RECENT STATE SALES TAX LAWS: EXEMPTIONS*

SALES OF SALES OF - SERVICE REAL

STATE MINIMUM TOTAL OR

COMMODITIES

OTHER

UNIT RECEIPTS

BY U T I L - P R O P E R T Y ITIES TAXED TAXED'

Pennsylvania

None

None

Farmers selling own products Sales to the United States

No

No

South Dakota

None

None

Insurance companies Express companies Non-profit organizations Gifts, inheritances Proceeds of insurance, annuity, and compensation contracts* Interest on South Dakota obligations

Yes

Yes

Utah: First tax None This tax superseded by second tax.

Commodities otherwise taxed

Sales to the United States and state and local governments in Utah Purchases by manufacturers

Yes

No

Utah: Second tax

Commodities otherwise taxed (except beer)

Sales to the United States and state and local governments in Utah Sales by religious, charitable, and eleemosynary institutions Purchases by manufacturers

Yes

No

None

B. EXEMPTIONS, AND DISPOSITION OF REVENUE ( C o n t i n u e d ) DISPOSITION OF ADMINISTRATION

or

REVENUE6

UNEMPLOY-

COMMON

OTHER SPECIAL

LOCALITIES

STATE

MENT RELIEF

SCHOOLS

STATE PURPOSES

OTHER THAN

GENERAL FUND

SALES TAX

FOR SCHOOLS AND UNEMPLOYMENT RELIEF

None

Revenue goes None to general fund but is specifically declared to be intended to meet appropriations for relief of unemployment

None 1

None

$60,000 for biennium ending June 3°, 1935 (plus $5,000 from general fund)

$500,000 annually

$60,000 for biennium ending June 30,1935

$2,000,000 an- Balance after nually other appropriations and unexpended portion of relief funds

For footnotes see infra, p. 60.

45%'

None

None

None

100% (see column h e a d e d "Unemployment Relief")

None

None

55%

None

None

Balance after other appropriations

None

None

None

P R I N C I P A L P R O V I S I O N S OF R E C E N T S T A T E S A L E S T A X L A W S : EXEMPTIONS' 1 STATE MINIMUM

COMMODITIES

OTHER

TOTAL OR

SALES o r

SALES OF

SERVICE

REAL

BY U T I L - PROPERTY

UNIT RECEIPTS

ITIES

TAXED

TAXED

Washington

Anyone whose tax would be less than $Sa year

None

Farmers, sellers of personal services, and all businesses, not s p e c i f i c a l l y taxed exempted by governor's veto Non-profit organizations Concessions at agricultural fairs Insurance companies Sales to United States and to state of Washington

Yes

Yes

West Virginia: First tax This tax superseded b y second tax.

f 10,000 a year

None

Insurance companies Mutual savings banks Non-profit organizations Sellers of securities

Yes

Yes

West Virginia: Second tax This tax superseded by third tax.

$10,000 a year

None

Insurance companies Mutual savings banks Non-profit organizations Sellers of securities

Yes

Yes

West Virginia: Third tax

$25 in amount of None tax (not applicable to tax on sales of professional and personal services, which carry exemptions of $6 for single persons, plus $4 for dependent spouse, plus S2 per dependent; maximum allowed, $24)

Farmers Insurance companies Mutual savings banks Non-profit organizations Sellers of securities Municipally owned utilities

Yes

Yes

B. EXEMPTIONS, AND DISPOSITION OF REVENUE ( C o n t i n u e d ) DISPOSITION

OF

REVENUE"

ADMINIS-

UNEMPLOY-

COMMON

OTHER SPECIAL

LOCALITIES

STATE

TRATION OF

MENT RELIEF

SCHOOLS

STATE PURPOSES

OTHER THAN

G E N E R A L FUND

FOR SCHOOLS

SALES T A X

AND UNEMPLOYMENT RELIEF

$50,000 from general fund to be repaid from proceeds of tax; $450,000 for biennium

None

Revenue after administration expenses and refunds up to a m a x i m u m of $12,500,000 a year

$10,000 for refunds

None

Revenue not otherwise appropriated

None

None

None

None

N'one

100%

None

None

None

None

None

100%

None

None

None

None

None

100%

For footnotes see infra, p. 60.

60

THE SALES TAX IN 1929-33

" Certain minor sales taxes are not included in this study, and no "selective" sales taxes are included. See supra,pp. 3-4. I t should be noted thatthischart is an analysis of the sales tax acts, but not of practice under them as developed in rulings or companion bills. 6 For definitions of the terms used in this column see supra, pp. 3-4. ' Under most of the statutes the taxpayer is required to make an annual report in addition to the monthly or quarterly returns otherwise required, the purpose being to permit a check by the tax collecting authorities. d Some statutes specifically exempt sales which in any event are not taxable under the state or Federal Constitutions. Such provisions are not noted in this chart. Also not noted are provisions excluding from the sales tax base moneys representing in effect a tax collected from the purchaser for the government (e.g., gasoline tax), and certain specific provisions which appear to be superfluous in view of the general provisions of the act. ' There are not noted here dispositions made in acts other than the sales tax act itself. As to Illinois, see infra, pp. 228, 234; as to South Dakota, see infra, p. 273. 1 Both the amendment and statute were so drafted that for all except farm products it is difficult to know whether the effect would be to tax or to exempt. ' In addition to taxes included in column headed " R a t e of T a x . " * It was understood that if sales tax revenue exceeded anticipated yield, this excess would go to common schools, up to $15,000,000 a year. See infra, p. 257. » The term "utilities" as here employed always includes companies furnishing electricity or gas, and sometimes includes other public service corporations. ' Not specifically taxed; taxability depends upon definition of "tangible personal property." * Endowment or annuity contracts: excess of total amount of premiums paid is taxable. ' For provisions of companion measure, see infra, p. 273. Section 1, §4 of the first Illinois law provided that "after deducting the expenses of the Department of Finance in administering this Act, the balance of [the proceeds of the sales tax] shall be apportioned among the several counties of the State in proportion to their population according to the last preceding United States census." * Repealed March 31, 1931. See infra, p. 156.

C H A P T E R

XI

R E A C T I O N OF T A X P A Y E R S TO T H E SALES T A X Part Three, below, presents the results of field work whereby information was obtained, through personal interviews, from more than 30,000 retail, wholesale, and manufacturing establishments in various parts of New York State, in Chicago, Moline, and Rock Island, Illinois, and in Detroit and Monroe, Michigan. 1 The primary aim of the study was to obtain statements from the firms with respect to their pricing policies as influenced by the sales tax. It was found possible to gather certain other relevant data, including, in New York, some material on the extent of, and reasons for, exemption.2 The data given represent a sample approximating 20 per cent of the number of firms in each of the lines of business covered in the three states; in Moline and Rock Island, Illinois, and in Monroe, Michigan, the sample was 40 per cent, and in New York certain additional lines were covered on a 10 per cent basis. It is therefore believed that the sample possesses a high degree of adequacy, in a statistical sense, and, owing to the methods used in selecting the firms to be interviewed, it is also believed that the sample is fairly representative with respect to type of business, size of business, and type of neighborhood.8 Since Part Three is itself a highly condensed summary of the findings, little will be done in the present summary chapter except to point out certain facts which seem to the writer to be of special interest. It will also be possible to make certain comparisons between New York City, Chicago, and Detroit. Separate tables for New York 1 Certain data were also gathered f r o m firms in D a v e n p o r t , I o w a , and T o l e d o , Ohio. ' T h e data on exemptions are not v e r y helpful in determining the amount of revenue lost b y such exemptions; compilation of such information w a s n o t one of t h e purposes o f the study, and the material obtained does not lend itself readily t o treatment designed t o t h r o w light on the revenue aspects of the tax. 1 W i t h respect to t y p e of business, it must be recalled that some lines were n o t c o v ered a t a l l ; but concerning those covered, it is felt that no u n d u e prominence w a s given t o a n y one line. As to the absolute number of firms in the sample, which has a bearing on a d e q u a c y , see mjra, pp. 331-33, 424-26, 500. Details on the manner in which t h e study w a s conducted are presented below in Appendix A ; and A p p e n d i x 8 is a critique of the questionnaires e m p l o y e d .

62

T A X P A Y E R S AND T H E SALES T A X

City are not published in this volume, but were compiled in manuscript form in order to make possible the brief comparative study presented in the present chapter. N E W YORK STATE SURVEY

The New York State survey did not cover all the state on a 10 or 20 per cent sample basis. However, it included New York City, Buffalo, Syracuse, the counties along the New Jersey, Pennsylvania, Connecticut, Massachusetts, and Vermont borders, the environs of Buffalo, and several interior counties around Syracuse. It is believed that had the entire state been covered the aggregate data would have presented a somewhat, but not materially, different aspect. Firms Subject to the Tax.—Data gathered in the present survey indicate that less than two-fifths of the retail firms in the state are subject to the tax. From an administrative point of view this is significant with respect to the trouble spared the tax administrators, although some of the exempt firms cause trouble because of the difficulty in determining their status. From a political point of view the data indicate that pressure against the renewal of the tax may be correspondingly difficult to organize on a large scale. The bases of exemption most commonly reported by retailers are, of course, sales of food, and sales less than the minimum amount taxable. It appears that of the wholly exempt retail firms, about 70 per cent4 offer the former fact as a basis of exemption, and about 60 per cent, the latter. The tabulated data do not reveal how many of those who sell food would be exempt because of low sales even if food sales were taxable,5 and hence do not offer a precise indication of the amount of revenue lost by the exemption of food sales. However, it appears that of the stores covered in the sample, at least three-quarters of those which reported food sales as a basis of 'Including firms not covered by this survey, but obviously exempt on account of sales of food. ' T h e data could be compiled from the punched cards now on hand, but this was not done owing to the limitations of time and funds. The same remark applies to most of the other possible cross tabulations which are not presented here. Some cross tabulations, made, but not presented here, were omitted because they appeared to show no results of significance. In a few other cases it might not be possible to make satisfactory cross tabulations owing to inconsistencies in replies on the questionnaires, or omissions.

T A X P A Y E R S AND T H E SALES T A X

63

exemption also reported low revenues as a basis,* and it is clear that the annual sales of most of the retail firms exempt from the tax for whatever reason, are very small.7 About three-quarters of the retail store tax revenue comes from about 20 per cent8 of all retail stores in the state, taxable and nontaxable. In addition, many of these large taxpayers are concentrated in a few lines of business. The impression to be gained from the data is that for the bulk of its tax revenue from retailers the state must depend upon a comparatively few large concerns in a few lines of business. Manufacturers and wholesalers are subject to tax only on sales made for use or consumption, and not for resale, and are, of course, exempt on all sales in interstate commerce. It is not surprising, therefore, that the data indicate that only about 20 per cent of the manufacturers and wholesalers in New York State are subject to tax on part, or all, of their sales. Even this figure, however, is probably higher than many students of the problem would expect. The importance of interstate commerce in the exemption of these firms is indicated by the fact that 46 per cent of those who said they were wholly exempt gave the handling of interstate commerce sales as one of the bases of exemption. In a few lines of business this percentage was 75 or more. No doubt these firms were also exempt on most of such sales because they were made to persons who were to resell; but the importance of interstate commerce with respect to a general sales tax (as contrasted with a retail sales tax) is apparent. There appears to be no significant difference, with respect to the percentage of firms wholly exempt, as one passes from the smaller to the larger manufacturers and wholesalers (except, of course, those with annual sales of less than $5,000). The percentage of retailers reporting complete exemption varies somewhat in the areas covered, apparently owing to the particular types of business engaged in, and to differences in the relative number of large concerns in each locality. With respect to manufacturers ' Derived from Table 2, infra, pp. 336-37. ' This may not be true with respect to certain types of food stores concerning which no data were gathered in the survey, since they were obviously wholly exempt. " This 20 per cent representing, of course, the "top" 20 per cent—i.e., counting from the largest store downward.

64

TAXPAYERS AND THE SALES TAX

and wholesalers, there is less significant geographic variation, inasmuch as N e w Y o r k City alone contains about 85 per cent of the firms in the sample. M a n y firms not wholly exempt are taxable only on part of their sales. It has been noted that only about two-fifths of the retail firms in N e w Y o r k State are subject to the tax, and it appears that of these, only about three-fifths are taxable on all of their sales. Therefore, approximately 60 per cent of the retail firms in the state are not subject to the tax at all, approximately 15 per cent are taxable only on part of their sales, and about 2 5 per cent are taxable on all their sales. The selling of food was the most common reason advanced for partial exemption; more than half of the partially exempt stores gave this as one of the reasons for partial exemption. Surprisingly few firms gave the vanishing exemption® as a reason for partial exemption, in view of the number reporting an annual sales volume between $5,000 and $10,000. However, the data on exempt or taxable status refer for the most part to the two-month period, M a y 1 to June 30, 1933, and seasonal factors may account for this apparent discrepancy. Doubtless the details of the vanishing exemption were also somewhat confused in the minds of many retailers. 10 N e w Y o r k is the only sales taxing state to employ this type of exemption. As might be expected, a large majority (between 80 and 90 per cent) of taxable manufacturers and wholesalers are taxable on only part of their sales. Reaction of Taxpayers to the Tax.—The chief aim of the present study has been to discover what the business firms say they are doing with respect to shifting the tax, and most of the following paragraphs devoted to reactions of taxpayers are concerned with this problem. 11 It may at first sight be surprising to note that of all the taxable retailers interviewed, less than one-fourth said they were shifting any part or all of the tax, and of these, about one-third said they were shifting only part of the tax. T o a certain degree this may represent ' Infra, p. 124. 10 These factors probably also account for the apparent inconsistency whereby a certain number of fully taxable firms are listed as having an annual sales volume of less than $10,000. " F o r comment on what is to be understood by "shifting," see supra, pp. 30, 31, and infra, pp. 73, 324, 358-64.

TAXPAYERS AND T H E SALES TAX

6S

fears rather than facts, or even deliberate attempts to create sympathy regardless of the facts, but the impression of those engaged in the study is that in almost every case the persons interviewed gave answers that are reliable and that fairly portray the situation. The results, however, do not indicate that a i per cent tax on all sales is so light a burden as to permit of absorption of the tax in three out of four cases, for further analysis of the data shows that the high percentage of firms reporting no shifting is traceable for the most part to (a) small firms in all lines of business, to whom the minimum exemption is of relatively large benefit, and (b) firms having a high degree of partial exemption for other reasons. In both cases, economic pressure to shift the tax is relatively light. On the other hand, in those lines of retail business in which taxable sales form a large proportion of total sales, and which are most important with respect to absolute amount of sales tax paid, a relatively high percentage of firms report shifting part or all of the tax. Owing to the complexities introduced by the various exemptions, it has not been found feasible to state even an approximate percentage of the total sales tax revenue which is reported as being shifted, but it is undoubtedly much more than might be inferred from the statement made at the beginning of this paragraph. Nevertheless, even after making all allowances, a surprising amount of the tax is not shifted by retailers, to judge by their own statements, and the striking degree of variation shown among different lines of business is not wholly explicable by the degree of partial exemption. It is evident that the tax burden represented by failure to shift is very unequally distributed over various types of business. It is also very unequally distributed with respect to size of business; as the size of firm increases, the percentage of firms reporting shifting increases decidedly. This is partly, but by no means wholly, explicable by the relative importance, to the firms in question, of the exemption granted. Among manufacturers and wholesalers, shifting is more widespread than among retailers, but even here only about half of the taxable firms report shifting part or all of the tax. As indicated above,12 relatively few manufacturers and wholesalers are taxable on all sales, and therefore the sales tax is a relatively light burden when u

Supra, p. 63.

66

T A X P A Y E R S AND T H E S A L E S T A X

compared with total sales. On the other hand, few of these concerns are so small that the minimum exemption is of much importance in reducing the burden of the tax. T h u s it is almost impossible to analyze the manufacturers and wholesalers in comparison with the retailers; however, both groups have in common the striking differences shown in various lines of business. Location does not appear to play a major role with respect to the problem of shifting, to judge from the replies received. In a few localities, especially along certain parts of the Pennsylvania border, the influence of out-of-state competition is noticeable. Furthermore, in N e w Y o r k C i t y only 2 0 per cent of the taxable firms reported shifting part or all of the tax, compared with 3 8 per cent in Syracuse and interior counties. It seems likely, however, that this fairly significant difference is to be accounted for by the intense competition within the N e w Y o r k C i t y market as much as by the fact that N e w Y o r k City is near large trading centers in N e w Jersey and Connecticut. Further study of the data might yield a more satisfactory explanation; the present writer's chief reason for minimizing the influence of location is the fact that less than 2 per cent of the retailers interviewed stated that they had lost business to firms in other states because of the sales tax. Retailers cannot, of course, be expected to know where all their lost trade is going, or even how much trade they hfwe lost because of the tax. Furthermore, it might be argued that the scarcity of reports of business lost to firms in other states might be due to the fact that relatively few retailers in the more exposed areas are shifting the tax. E v e n granting the validity of these statements, it still appears that the data do not clearly show that location with reference to other states is a major factor in the shifting problem for most lines of retail business. F o r manufacturers and wholesalers much the same conclusion may be drawn. An attempt was made to classify the districts visited into "good," " f a i r , " and " p o o r , " as judged from general appearances by field workers. Here again, the data as a whole show no marked differences as to the extent of the practice of shifting. There are several situations of interest, however, in certain areas. In the extremely poor sections of N e w Y o r k C i t y and in some of the farming communities up-state which have been in a depressed condition for many years,

T A X P A Y E R S AND T H E SALES TAX

67

relatively few cases of shifting were found. In many instances the field workers encountered a spirit of open defiance to the tax. Time is another important factor determining the extent of the practice of shifting. Some retailers had not heard of the sales tax until after the first taxable period had elapsed, and they had, of course, taken no measures to shift the tax. Others were unfamiliar with the extent to which the tax applied to their sales. Furthermore, an appreciably larger percentage of retailers who were interviewed in the latter part of August, 1 9 3 3 , and in the first week in September, stated they were shifting the tax than of those interviewed in J u l y . In answer to questions asking whether they had changed their policies in the past, and were planning to do so in the future, the retailers replied in a way which tends to substantiate the conclusion that there is a period of transition marked by a tendency to change from a policy of absorption to one of shifting. This is important, indicating that one reason the present survey shows such a small percentage of taxpayers reporting a policy of shifting is that it was carried on when the tax had been in force but a short time. This cannot be termed a major reason, however, for the percentage of change during the transition does not appear to be great. T h e preceding paragraphs have attempted to deduce from the data some of the reasons for the low percentage of firms reporting shifting, and for the variations from business to business and place to place. T h e business firms themselves, however, were asked whether certain reasons could be adduced for failure to shift. T h e structure of the questionnaire necessitated restricting the answers for tabulation to a few general statements. Thus, the most commonly cited cause for failure to shift was "customer resentment," and the next most common, "severe competition." Considerably behind come "low dollar value of merchandise" and "well known or customary prices." Although the first two terms are vague in connotation, a significant indication is that failure to shift cannot be laid entirely to the obvious difficulties inherent in shifting a 1 per cent tax on a lowpriced item, or on items where the slightest price change would be readily recognized. Much the same results were obtained with respect to difficulties encountered by those who said they shifted the tax. In this connection, it is significant that almost a third of the retailers

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reporting a full shifting of the tax did not add the exact amount of the tax to the nearest cent on each sale, but added more than the tax on some sales and less than the tax, or none, on others. This practice is less frequent among manufacturers and wholesalers. The types of sale which are penalized, so to speak, are usually those of high-priced goods and of goods not selling at well known standardized prices. Furthermore, of those retailers who were shifting the tax (part or all), less than one-third were quoting the tax as a separate charge, and relatively few were making public use of tax "schedules," so widespread in Illinois and Michigan.13 No instances of the use of fractional-cent devices14 were found. A few firms, notably those in the drug business, reported that they had reduced wages, dismissed employees, forced decreases in rentals, and achieved various other economies, in part or wholly because of the sales tax burden which they found impossible to shift to consumers. One of the objections often made to a sales tax is that it increases the merchants' cost of doing business. Records of sales must be kept, and exempt transactions segregated from taxable transactions. A surprisingly low number of retailers reported any such increase in cost—only about n per cent of the taxable retailers (among manufacturers and wholesalers the percentage was twice as large). Moreover, the increases were reported to be very small in most cases. In part, no doubt, these data reflect the use of methods by which a taxpayer is allowed to estimate, rather than record precisely, the volume of taxable sales when some of the firm's sales are also non-taxable; for there seems to be a fairly close correlation between increased expenses occasioned by the sales tax and difficulties encountered in segregating taxable sales from non-taxable sales. Among manufacturers and wholesalers the use of resale certificates might be expected to increase record-keeping costs, but such certificates are not widely employed. An expense of a peculiar nature undergone by many retailers was a bogus "registration fee" collected by a swindler who posed as an official of the tax commission. Unscrupulous "lawyers" and "accountants" charged exorbitant fees in some cases for aid in calculating the tax due. " S e e infra, p. 71.

" S e e infra, p. 72.

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The business men interviewed were asked whether they believed the sales tax was being shifted to them as consumers in other stores. A great majority believed this was not the case, and the rest had observed it in only a few instances. Although this sample is inadequate and not fully representative, it indicates that for the most part the New York sales tax is "painless" for the consumers, in the sense that an appreciable part is not shifted at all, and that most of the remainder is hidden in the sale price. The business men were asked whether they preferred the present sales tax to any other form of levy, and if not, what alternative they would suggest. The replies from retailers indicate that while the present tax ranks far below a manufacturers' sales tax in choice, as an emergency measure it is about as popular as an increase in the income tax. As a permanent feature of the tax system it had little support, except possibly among the exempt group. An increase in the real estate tax would have met with even less favor than the sales tax. The sales tax ranks higher in relative popularity among both taxable and exempt manufacturers and wholesalers than among retailers. By comparing preferences expressed as to taxes with statements concerning shifting, the expected result appears, i.e., the popularity of the sales tax decreases as one passes from those who say they shift to those who say they do not. A few stores favored an increase in the sales tax rate, on the basis that this would force all firms to shift the tax. A special study was made of chain stores and department stores, covering twelve of the largest chains in a variety of lines, and eighteen department stores in New York City. Perhaps the most significant aspect of the chain store study lies in the fact that only two out of the twelve chains stated that they were able to shift any part of the tax, and neither of these, the entire tax. Some of the other ten are moderately optimistic about the future, but in general it appears that the low rate of the New York tax prevents shifting by chain stores specializing in low-priced goods, including some chains which report that they are able to shift the higher-rate taxes in Illinois, Michigan, and North Carolina. In contrast to the chain stores, fifteen of the eighteen department stores stated that they shifted part or all of the tax, six of these say-

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ing that they shifted all of the tax. T h e usual practice is to conceal the tax in the price. CHICAGO AND MOLINE-ROCK ISLAND SURVEY

Unless otherwise noted, references in this section are to the 2 per cent tax, in force since July 1, 1933. W i t h respect to policies of shifting, certain data are presented concerning experience under the 3 per cent tax, in force for only about six weeks before it was declared unconstitutional in M a y , 1933. V e r y few of the retail firms covered b y this survey were entirely exempt, as the Illinois law taxes all retail sales of tangible personal property except those constitutionally exempt. Of the manufacturers and wholesalers visited, on the other hand, about three-quarters were entirely exempt (almost all of them because their sales were for resale) and the remainder were taxable only on part of their sales in each instance. T h e state has apparently lost little revenue because of inability to tax interstate commerce, for most of those reporting such sales also reported sales for resale as another basis of exemption, and, especially among the partially taxable firms, the percentage of receipts derived from interstate commerce was not great. However, the fact that more than one-fourth of the wholly exempt manufacturers and wholesalers reported that more than 50 per cent of their sales volume was in interstate commerce is of significance in any consideration of a general sales tax (in contrast with a retail sales tax). W i t h respect to the policy adopted toward shifting the tax, a noticeable difference developed when the 2 per cent tax replaced the 3 per cent tax. N o t much less than three-quarters of the taxable Chicago retailers interviewed stated that they shifted part or all of the tax under the high rate, whereas under the low rate the fraction dropped to less than one-half. A n even more drastic reversal of practice occurred in the border towns of Moline and R o c k Island, where somewhat less than one-fifth reported that they were shifting part or all of the tax under the 2 per cent rate. T h i s might be expected, in view of the exposed position of this area, Davenport being just across the river in Iowa, which has no sales tax; but the data for Chicago retailers are startling, inasmuch as the border influence is not so im-

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portant in this metropolis. Furthermore, there is a remarkable degree of correspondence between the size of firm reporting, and the extent of shifting. Only one-fourth of the Chicago retailers with annual sales of less than $5,000 reported shifting, under the 2 per cent tax, and the fraction increased steadily until in the largest group ($100,000 or more), nine-tenths reported shifting. These phenomena cannot be explained by lack of pressure owing to partial exemption, as in New York, nor can they, apparently, be attributed to any noticeable degree of. unreliability in the answers of the smaller firms, according to reports of the field workers. Even if one makes every allowance, it seems clear that the Illinois 2 per cent tax, at the time this study was being made, was proving a decidedly heavy (one is inclined to say "crushing") burden upon the small retail store. Certainly when this survey was initiated, the writer had no conception that more than one-half the retailers interviewed would state that they were shifting none of the tax. Economic friction must be a far more powerful factor than has hitherto been supposed. Under the 3 per cent tax the same variation from small business to large business is noticeable, though it is not so striking. Incidentally, it may be noted that few firms under either tax reported a policy of shifting only part of the tax. In most instances it was a question of shifting all or none. Nearly as many manufacturers and wholesalers continued to shift the tax under the 2 per cent rate as under the 3 per cent rate. Marked differences among the several lines of business are evident with respect to tax-shifting policies, although the range of variation is much less than when the firms are grouped according to size. In an attempt to maintain cooperation in shifting, and to keep consumers conscious of the tax, many of the retailers made public use of schedules, whereby the consumer was notified, usually by a printed placard, that the tax would be added as a separate charge on each sale, in accordance with the schedule. About half of the retailers who reported shifting all of the 3 per cent tax used schedules—most of them, the extraordinary schedule devised by certain large Chicago merchants whereby the consumer was certain to pay to the store a considerable amount more than the actual tax. Under the 2 per cent tax, the reported use of schedules was decidedly less. Among retailers

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shifting the tax, the public use of schedules was somewhat more widespread among the small stores than among the large, especially under the 3 per cent tax. It was among the several lines of business, however, that the greatest differences in practice were found. In some lines almost none of those shifting the entire tax used schedules publicly; in others, almost all did so. In October, 1933, many of the large Chicago stores, which had been most active in urging that the tax be shifted in this manner, abandoned the practice of adding the tax as a separate item in this, or any other, way. Some merchants felt that schedules alone were insufficient, and resorted to fractional-cent devices; this procedure was uncommon in Chicago, however, under both taxes; and in Moline and Rock Island, where quarter-cent metal tokens were extensively employed under the 3 per cent tax, the practice virtually disappeared under the 2 per cent tax. The fractional-cent device represents an extreme effort by alert merchants to shift the exact amount of the tax on low-priced goods, and probably also to render the tax unpopular. In view of their inconvenience to the consumer, it is not difficult to understand the disappearance after a short time of the various slugs, coupons, and punch cards. If the consuming public ever becomes vitally interested in quarter cents and tenths of a cent, it wi\l probably express its will through Congress and the United States mint, and not through retailers subject to a sales tax. As the data on schedules indicate, consumers have been to a considerable degree kept conscious of the tax, especially since the practices of shifting the tax and (until recently) of using schedules have been most common among the larger establishments. A separate question asking whether the dealer quoted the tax as a separate item confirmed these data, the replies indicating that not far from one quarter of the stores in the sample—that is, roughly one-half of the stores which shifted part or all of the tax—quoted the tax as a separate item. Doubtless most of these were the larger stores. Replies from business men as consumers indicate most such consumers in Chicago are aware of the tax on some of their purchases, in sharp contrast with the situation in Moline and Rock Island. There is some, but, on the whole, not much, indication that there will be a trend toward shifting for the near future.

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The remarks concerning shifting in this section and in other sections of this chapter should in strictness be interpreted as policies adopted, rather than as precise results achieved. A retailer may adopt a pricing policy which on its face might appear to result in a shifting of the tax, but careful inspection of records at the end of a few weeks or months might lead to a conclusion that the policy has not achieved the desired result. For instance, many more fractions of cents may be lost than gained under a shifting policy which does not utilize fractional-cent devices; and "occasional" lapses from policy may develop to an unexpected and even unrealized extent. After the general question of policy had been answered, retailers were again brought to the point, the question being stressed as to whether they were in fact succeeding in shifting part or all of the tax. The results of such further questioning were not, on the whole, satisfactory, but in general they led to a belief that in practice even less of the tax was being shifted than might be supposed in view of the policies stated. In addition to the questions concerning policies with respect to shifting, the business men were queried about certain other effects of the tax. The most common difficulties encountered in attempting to shift the tax were, as in New York State, consumers' resentment and severe competition, third rank going to low dollar value of merchandise. A negligible number of taxable firms attempted to escape the tax by transforming intrastate sales into interstate sales, and only a slightly larger number eased the sales tax burden by reducing wages, rent, or other expenses. A peculiar problem arose under the 3 per cent tax, for it was declared unconstitutional before the state collected any money from the business firms, most of whom had, however, been charging their customers for the tax. About half the firms reported that they had refunded part or all of the tax to their customers; very few had turned it over to charitable organizations, although the money was supposedly being raised to finance unemployment relief. More important than the above are the results obtained from questions asking what business, if any, had been lost under the two taxes. On the whole, relatively few firms, one-tenth of the total, reported loss of business under the 2 per cent tax, but under the 3 per cent tax about one-fifth reported this effect. In Moline and Rock Island this phenomenon was much more common than in Chicago, as

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confirmed by a survey of firms in Davenport, Iowa, across the river. Most of the loss of business in Chicago was believed by the firms to be to competitors within the state, rather than to mail order houses or other firms located outside of the state and able to sell tax-free. Appreciable differences among various lines of business were noted. Relatively few concerns (about one-tenth of the total interviewed) reported increased record-keeping costs under the 2 per cent tax, although a sharp difference is noted as one progresses from the smallest to the largest group of concerns, the percentage for retailers being 3 for the former group and 51 for the latter. This seems to indicate that the small concerns, the great majority of which employ no bookkeeper, are taking no elaborate precautions, to say the least, that their records shall be in perfect shape for sales tax purposes. Even among the larger concerns, the percentage of increase in recordkeeping costs occasioned by the sales tax is usually slight. In view of all the data noted above, it is not strange that less than one-fifth of the retailers interviewed preferred the present sales tax to any other alternative, and that most of these favored it only as an emergency source of revenue; indeed, there is some cause for surprise that the fraction is so large. Other types of sales tax in the aggregate, and a personal income tax, polled about the same number of first choices, and a business income tax was also popular. Higher real estate taxes15 had few sponsors. The present sales tax was decidedly unpopular among Moline and Rock Island merchants. DETROIT AND MONROE

SURVEY

The Michigan law allows virtually no exemptions except those constitutionally necessary; the minimum exemption of $600 per year is so small that for the purposes of this study all firms exempt from part of their sales only for this reason are considered "fully taxable," although strictly speaking there are no fully taxable firms under the Michigan law. The distribution of retail firms among fully and partially taxable and wholly exempt groups is, in general, about the same as was found in the Chicago and Moline and Rock Island sample, and likewise all the taxable manufacturers and wholesalers were taxable only on part " See infra, p. 49211.

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of their sales. A somewhat smaller proportion (less than 60 per cent) of manufacturers and wholesalers, however, were wholly exempt. The role played by sales in interstate commerce in the exemption of manufacturers and wholesalers was about the same as that discovered in Chicago. The Michigan rate is 3 per cent, and it is probably of significance that more than nine-tenths of the retailers interviewed stated that their policy was to shift part or all of the tax, in sharp contrast to the results found in Chicago. Very few shifted only part of the tax. As in Chicago, however, the percentage of firms reporting shifting part or all of the tax mounts steadily as one progresses from the small firms to the larger ones. Under both the 3 per cent and 2 per cent taxes in Chicago, and under the 3 per cent tax in Detroit, this progression is unbroken as one goes up the scale of firms—in every instance, for the firms in the size-group immediately below any given group, the percentage is smaller, and in the group immediately above, larger. There seems to be ample evidence here that the retail sales tax is regressive in a sense not usually considered, i.e., its relative burden on the business man is greater, the smaller the firm. Virtually all of the taxable manufacturers and wholesalers stated that they shifted the entire tax. A contrast with the Chicago situation is seen in the public use of schedules, which was more widespread in Detroit and Monroe. About three-quarters of the retailers reported use of the 17-cent schedule, that is, one designed to shift the tax to the nearest cent on each sale. On the other hand, few firms reported use of fractional-cent devices. Still another difference found was that in the border city of Monroe almost all of the retailers reported shifting part or all of the tax, in contrast to the practice in Moline and Rock Island under the 2 per cent rate. The types of retail business in which the greatest number of firms, relative to the size of the sample, reported shifting were not exactly the same as those noted in Chicago under the 3 per cent tax, but there is a high degree of correspondence between the two sets of data. Automobile dealers, clothing stores, department stores, dry goods stores, dealers in lumber and other building materials, men's furnishings shops, and women's apparel shops appeared in both lists.

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Another example of a striking degree of similarity between the results reported in Chicago (under the 3 per cent tax) and in Detroit concerns the extent to which public use was made of schedules in various lines of business. With respect only to those firms which stated they were shifting part or all of the tax, most of the lines of business which in Chicago showed a high percentage of their firms using schedules, in Detroit revealed the same results. The low percentages likewise fell in virtually the same categories in both cities. There seems to be some connection here with the degree to which selling methods are standardized (in these cases schedules were used frequently), but further generalization would best be left to those specializing in marketing problems. With few exceptions, the response to the other questions asked was very nearly the same as that obtained in Chicago under the 2 per cent tax. However, as might be expected, a larger percentage of the business men replying as consumers reported tax shifting, and a larger percentage of the firms reported quoting the tax as a separate item. About one-third of the Detroit retailers reported a loss in business owing to the sales tax, a figure considerably higher than that shown in Chicago (even under the 3 per cent tax). Likewise, attempts to transform intrastate transactions into interstate transactions and hence to avoid the tax were more widespread than in Chicago under the 2 per cent tax. Increased record-keeping costs among the small retailers, and among all manufacturers and wholesalers, were reported more frequently in Detroit than in Chicago, although, as in the latter city, the great majority of the increases in Detroit amounted to 10 per cent or less. The other significant difference between the two cities concerns preference among sales taxes. The existing sales tax was relatively much more popular in Detroit than in Chicago, with relatively more favoring it as a permanent part of the revenue system. The income tax (personal and corporate) was far less popular. Sales taxes of other types likewise met with much more widespread favor in Detroit than in Chicago. COMPARISON OF N E W YORK C I T Y , CHICAGO, AND DETROIT

No tables in this volume are devoted to New York City alone, but certain tabulations were made on this basis to permit of the present summary section comparing the three largest cities covered in the

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survey. The New York City data refer to a 20 per cent sample of the same lines of business covered in the Chicago and Detroit surveys. It was found, however, that the New York City data did not differ materially, with respect to most of the important points, from those for New York State. As the contrast between New York State and the cities of Chicago and Detroit is probably clear from the remarks already made in this chapter, attention will here be devoted chiefly to a few of the data concerning shifting. With respect to the extent of shifting, the New York City data are like those of Chicago and Detroit in showing an unbroken progression of more widespread shifting as one passes from the smaller retail firms to the larger, and the difference shown between the smallest size-group and the largest is so great as to be more like that revealed in Chicago than in Detroit. Only 13 per cent of the taxable retailers in New York City reporting annual sales under $5,000 reported a partial or complete shifting of the tax. The percentage steadily increases until for those with annual sales over $50,000 it is 49 per cent. The New York City percentages differ only slightly from those shown for New York State, and it may therefore be said that in every instance covered by the entire survey this unbroken progression among retailers can be noted. The extent of shifting reported in each size-group was far less in New York City" than in Chicago and Detroit. The percentage of New York City manufacturers and wholesalers reporting complete or partial shifting more nearly approaches the Chicago data for the 2 per cent tax than is the case with retailers. However, only slightly more than half of the New York City taxable firms reported shifting, compared with a percentage of 65 in Chicago and 95 in Detroit. The difference was especially marked among the smaller firms. Of the New York City firms which reported shifting part or all of the tax, about one-fifth reported shifting only part of the tax, in contrast to Detroit, and, to a lesser extent, Chicago. There was, of course, a great difference between the three cities with respect to the percentage of retailers in the sample who added the tax as a separate item, the percentage being very low in New York City because so many retailers reported they were not shifting "The remarks made above, p. 65, with respect to New York State also apply to New York City.

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the tax at all. Of more significance is the percentage of retailers who reported shifting part or all of the tax who also reported adding the tax as a separate item, instead of concealing it in the price. Although the data on this point, owing to certain structural defects in the questionnaires, are not as reliable as most of the other data, it can be said with confidence that the percentage was far higher in Detroit than in Chicago (under the 2 per cent tax), and somewhat higher in Chicago than in New York. At least nine-tenths of the Detroit retailers who reported they were shifting part or all of the tax said they were adding it as a separate item; the fraction for Chicago appears to be not far from three-fifths, and for New York City less than twofifths.17 The public use of schedules in conjunction with the addition of the tax as a separate item was negligible in New York City, in sharp contrast to Chicago and Detroit. Some interesting differences between New York, Chicago, and Detroit retailers (taxable and exempt) were found with respect to the type of tax which the retailers preferred. The preference was understood to be in favor of the revenue raised by the existing sales t a x — that is, the endeavor was to find whether the retailers preferred to have the sales tax retained, or to have it abolished and obtain an equivalent revenue from some other source. The existing sales tax was somewhat more popular in Detroit than in the other cities, about one-quarter of the Detroit retailers giving it as their first choice, and about one-fifth of the New York retailers and about one-sixth of the Chicago retailers expressing a similar preference. This is the more surprising in view of the large number of exempt firms included in the New York sample. A still greater difference of opinion existed with respect to the income tax, personal or corporate, which was more popular in Chicago than in New York or Detroit. About twofifths of the Chicago retailers gave the income tax as first choice, contrasted to about one-fifth in New York and Detroit. There was agreement in all three cities that no more revenue should be sought from real estate,18 only 2 or 3 per cent of the retailers in each city 17 T h e N e w Y o r k C i t y figure is much less reliable than the other t w o , as it w a s found possible to tabulate answers to this question f r o m only a b o u t o n e - f o u r t h of the total number of retailers w h o said they shifted part or all of the t a x — h e n c e the sample approaches a 5 per cent rather than 20 per cent basis.

" See note, infra, p. 492n.

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presenting the real estate tax as first choice. Some type of tax other than those mentioned above was favored by about two-fifths of the Detroit firms, one-third of the New York firms, and one-fifth of the Chicago firms, with a manufacturers' or wholesalers' sales tax providing a majority of these answers. These data are to be taken as only roughly indicative of preferences, for additional questions bearing on the same subject seem to show that many business men are in reality not at all sure which taxes they prefer. The samples in the three cities of course differed greatly with respect to the percentage of firms interviewed who were exempt. In New York City 36 per cent of the retailers interviewed were wholly exempt; in Chicago and Detroit the percentage was 4 and 6 respectively. As to manufacturers and wholesalers, four-fifths of the New York City firms were wholly exempt, and in Chicago and Detroit the fraction was about three-quarters and three-fifths, respectively. Decidedly more manufacturers and wholesalers in New York City reported sales in interstate commerce as a basis for complete or partial exemption than was the case in Detroit, and Chicago fell about midway between the other two cities in this respect. About half of the total number of manufacturers and wholesalers interviewed in New York City reported sales in interstate commerce, and about onequarter in Detroit. The Chicago figure is more doubtful because of inconsistencies in replies, but it appears that the corresponding fraction for this city was between three-fifths and four-tenths. The retail sample taken on the 20 per cent basis in New York, Chicago, and Detroit did not differ in the three cities to an appreciable extent with respect to type of outlet (independent, branch of main store, chain store unit), or reliability of replies (reliable, doubtful, unreliable). As concerns size of business, the samples in the three cities were nearly identical except that the Chicago sample contained, relative to the total sample, decidedly more stores in the group reporting annual sales under $5,000 and less in the $10,000 to $49,999 range than did the New York sample. The Detroit sample differed from the New York sample in the same way, but to a less marked degree. As to type of neighborhood (good, fair, poor) a somewhat greater percentage of the stores were reported in good neighborhoods in Chicago than in Detroit, and in Detroit than in New York; and

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a smaller percentage were reported in fair neighborhoods in Chicago than in Detroit, and in Detroit than in New York. The differences, however, were probably not great enough to be significant, in view of the lack of definite standards for rating the neighborhoods. With respect to race or nationality of retailers, the Chicago and Detroit samples showed very nearly the same percentages, except that there was found a greater percentage of dealers of native white gentile stock, and a somewhat smaller percentage of Jewish dealers, in Detroit than in Chicago. The New York sample was marked by a high percentage of Jewish dealers, about half being of that type, in contrast to about one-fifth and one-quarter in Detroit and Chicago respectively. The corresponding decrease in the New York percentages was found with reference to those of native white gentile stock. On the whole, it is not believed that the above differences found in the three samples are of significance with respect to the differences in the other data, such as those on policies of shifting, reported in the surveys.

CHAPTER

III

LEGAL P R O B L E M S I N S T A T E SALES T A X A T I O N 1 Virtually all of the present state sales taxes bear evidence of hasty drafting which has sometimes been necessitated by an emergency, and always rendered dangerous by the lack of suitable precedents conveniently at hand. The problems arising under a sales tax have not been, and perhaps in many cases could not have been, clearly foreseen. Verbatim copying from statutes and regulations in other states has been widespread and not always judicious. Finally, the absence of court decisions on many points, natural in view of the newness of the tax, has made it uncertain what language to adopt even when imagination and search for precedents have been employed. True, some of the legal problems developing under a sales tax have already been extensively adjudicated. Those concerned with interstate commerce are of this type. In most instances, however, the past gives little help, as, for example, in distinguishing a wholesale sale from one at retail, or in determining the taxable status of receipts from the sale of services as opposed to the sale of tangible personal property when both types of sale seem to be inextricably combined in a single transaction. Complex as the problem seems with respect to any single state, it appears more so when the sales tax movement is viewed as a whole. The term "sales tax" is used in this study, for convenience, to cover a group of taxes which differ widely in their scope and in their degree of internal refinement. A tax restricted to retail sales made in the course of business, as in Illinois, contrasts with the new West Virginia tax which levies ten different rates, contains complex provisions for the taxation of activities unaccompanied by sales, and reaches such payments as salaries and wages and apparently investment income. The New York and North Carolina exemptions of foodstuffs raise problems of definition peculiar to those states alone, and Indiana and possibly South Dakota have no counterparts in respect to the broad sweep of their "gross income" taxes. 1 This chapter summarizes and, to some extent, interprets the material presented in Part Four below, pp. 594-664.

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LEGAL PROBLEMS

A study of legal problems under the sales tax therefore resembles more closely an expedition into unexplored territory than a deftly conducted visit to a museum. While this gives a certain zest to the enterprise, as drafters of recent statutes and regulations can doubtless testify, it also evokes a feeling of uncertainty which is heightened by the knowledge that the problems encountered are many and difficult. Whatever a sales tax may be, it is not extremely "simple," in the sense that a body of conscientious taxpayers and able officials can work under the law without occasion for misunderstanding or dispute. T o some extent the lack of simplicity arises from the necessity of conforming to certain Federal or state constitutional requirements. In part, also, it is due to the desire of the legislature to differentiate the various economic groups. Finally, it ¡9 to a high degree inherent in the sales tax itself. Accordingly, a grouping of the legal problems in this summary chapter may be of assistance in determining, for any given state which considers levying a sales tax, how important it may be to strive for constitutional changes, how far the legislature may safely go in attempting to refine the tax, and whether the inherent difficulties are too great to permit of satisfactory cooperation between the tax administrators and the taxpayers. DIFFICULTIES IMPOSED B Y CONSTITUTIONAL LIMITATIONS

Interstate Commerce.2—The constitutional issue at once brings to mind the interstate commerce clause of the Federal Constitution. This in turn raises doubt whether the sales tax can ever be more than a moderately effective state fiscal instrument unless the Constitution is modified or unless Congress can and does authorize state taxation of interstate commerce. The sales tax laws and regulations contain no novel provisions on this point, aside from the preferential rate granted in South Dakota to wholesalers in competition with interstate shipments.3 The regulations, however, differ with respect to certain points. One of these, although the law itself seems clear, arises when the seller is not ob2 F o r a detailed treatment of this subject, see infra, pp. 638-43. * Infra, pp. 594, 643.

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Iigated, by the terms of the sales contract, to make physical delivery across the state line, although the contract of sale contemplates interstate movement. In informal interviews, legal officials of the several states have shown marked differences in attitude toward the interstate commerce problem. Some of them seem ready to disregard many court decisions, trusting that the temper of the Supreme Court will have changed, or, perhaps, that taxpayers will not be inclined to protest. Most of the officials, however, accept the present situation without any hope of material change. On the whole, the statutes, the administration rulings, and the informal interviews have indicated to the writer a much less lively interest in the problem than he anticipated. Perhaps this is because so many problems which are pressing under the sales tax are wholly new, demanding immediate and original thought, whereas interstate commerce queries can often be answered in a tentative manner by reference to recorded court decisions. In many communities not close to state lines and subject only to a retail sales tax, the effects of the commerce clause have not yet had time to be keenly felt. Lately, however, there is evidence of a growing interest. At the Twenty-fifth Annual Conference on Taxation held under the auspices of the National Tax Association at Columbus, Ohio, in 1932, the attorney to the Oklahoma tax commission urged the passage by Congress of a bill permitting, in general terms, state taxation of interstate commerce, and in the autumn of 1933 the North Carolina director of the sales tax division sponsored a movement to petition Congress for authority to tax interstate sales on an equal basis with intrastate sales. It should also be noted that the statutes of several states, which apply the tax to extractors of natural resource products and to manufacturers, levy it on production rather than sale, and hence escape the restriction of the commerce clause. Rates applicable to such taxpayers are universally low, however, owing to the fear of driving them to states without sales taxes; hence the device of taxing on production rather than sales is not a major revenue factor. In practice the importance of the restriction depends largely upon the rate of the tax, its scope, and the use of the tax proceeds. It may be doubted whether a 1 per cent tax, for instance, will cause much diversion of retail purchases to other states. It is true that even taxes

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restricted to "retail" sales apply to certain sales by manufacturers, and this type of transaction is particularly liable to diversion to other states under a slight price differential; but if the sales tax is a substitute for an increase in, or a failure to lower, the property tax, many manufacturers may be better able to meet competition, for the short term, at least, than if there were no sales tax. On the other hand, if the sales tax is adopted as a major source of state and local revenue, with a rate far higher than i per cent, there will probably be an effective subsidy to interstate commerce, with all the inconvenience, waste of effort in transportation, and destruction of established values that might result. Sale of high-unit-value goods by sample, shipment being made from an out-of-state warehouse or other branch so that the sale would involve interstate commerce, would often be worth the trouble under a high tax rate. Jurisdiction.*—Another constitutional question is that of jurisdiction. Under the due process clause of the Federal Constitution, it is held that a state may not tax persons, property, or activities over which it has no jurisdiction. This problem arises when, during the negotiation of a sale, the buyer is in one state, the seller in another, and the goods in either of the two states; or when both buyer and seller are in one state and the goods in another. Estate tax cases seem to indicate that the state in which the goods are located at the time of consummation of the sale is the one which has the power to tax, but there is no certainty that this will be the ultimate solution. Assuming that consummation of the sale depends upon factors other than transfer of possession of the goods, it may be difficult to determine in which state the consummation took place. The problem is likely to be of most importance as to sales between manufacturers and their business customers who buy to use and not to resell, in states with high-rate retail taxes which reach such sales. It may also arise, however, in connection with retail sales as ordinarily understood, if an out-of-state customer gives an order over the telephone. The statutes and regulations offer virtually no aid in solving the problem, and those of Indiana, and, possibly, South Dakota, pose it the more sharply by specifically taxing gross income derived from 4

F o r a detailed treatment of this subject, see infra, pp. 643-46.

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intrastate sources by non-residents, and the entire gross income derived from all sources by residents. Federal Instrumentalities.B—A third difficulty arising under the Federal Constitution is based on the implied prohibition of state taxation of the Federal Government or its instrumentalities. In relation to the total revenue to be derived from the sales tax, this problem has perhaps not as much potentiality for trouble as the other two discussed above, but because the sums involved are relatively large as viewed by the individual taxpayer, considerable litigation seems likely. An important problem which appears yet to be unsettled is the applicability of the prohibition, even though the sale in question is to, and not by, the Federal Government, and the tax is on the seller and is not proven to be shifted to the government. Sales to contractors operating under a cost-plus contract with the government, and sales to non-employees by a cafeteria operated by a post office, offer examples of difficulty in determining who or what is an exempt Federal instrumentality. The national bank question, already so vexing in connection with property taxation, is due for further probing under several sales tax acts, especially that of Washington, which specifically taxes national banks—probably under a "gentlemen's agreement." Many of the statutes and regulations differ materially with respect to Federal instrumentalities, some of them appearing to go further than is necessary, from a constitutional viewpoint, in granting exemption. State Constitutional Restrictions *—Under the state constitutions the provisions for uniformity, existing in many instances, may prove as troublesome for sales tax legislation as they were in Illinois, where the invalidation of the 3 per cent tax was based in part upon the exemption of sales by farmers and sales of motor fuel otherwise taxed. Even where the uniformity provision is applicable only to property taxes, there is danger in so far as the sales tax may be held to be a property tax. The "due process" and "equal protection" clauses of the Federal Constitution and many state constitutions may raise the same problem; hence the absence of a uniformity provision 5 For a detailed treatment of this subject, see infra, pp. 646-50. ' For a detailed treatment of this subject, see infra, pp. 661-64.

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in a state constitution does not imply that any exemption whatsoever is permissible. However, aside from the exemption of farmers' sales, sales of food, and sales of goods otherwise taxed, most of the sales tax laws do not contain broad exemptions other than those constitutionally necessary or clearly in harmony with the general scope of the act. D I F F I C U L T I E S IMPOSED AT T H E OPTION OF T H E

LEGISLATURE

Although no precise line can be drawn between difficulties selfimposed and those which are inherent in any sales tax, it seems clear that the legislature has considerable power over the degree of future misunderstanding, litigation, and evasion in respect to exemptions, special treatment accorded to wholesalers, manufacturers, extractors, agriculturists, service enterprises, and investors, and provisions designed to safeguard independent units against integrated concerns. The same might be said of the attempt to distinguish between retailers and all other business; however, this problem is inherent in any retail sales tax, and the reasons for restricting the tax to retail sales are often so important that it seems best to treat this as one of the phases of sales taxation which the legislature has little power to control. Exemptions?—Of the exemption provisions in the several laws, the simplest provide for a stated sum, applicable to all taxpayers. There may arise questions of prorating annual exemptions over quarterly or monthly returns, involving refunds, or credits against future tax payments; and when a number of business entities are acting together, there arises the problem of whether to allow single or multiple exemptions. Such matters, however, can. usually be made clear by careful wording of the statute. Opportunity for evasion exists for those at the border line between exemption and taxability, if the administration is not exceptionally efficient; but the sums involved will be small. Hardly more troublesome are the specific exemptions sometimes granted to sales of electricity, gas, steam, and water, although here, too, care in wording the exemption provision is essential. Indeed, some definite statement in the law with respect to such commodities is "For a detailed treatment of this subject, see injra, pp. 650-61.

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preferable to the omission of any statement, which leads to a period of uncertainty in connection with the applicability of a tax imposed on sales of tangible personal property. Exemption of sales otherwise taxed, as for instance the sale of motor fuel, cigarettes, and beer, may cause a certain amount of bookkeeping inconvenience. Unless the other taxing statutes are themselves vague, such provisions should not lead to serious dispute, although the possibility of constitutional conflict, noted above,8 should be recalled in connection with these or any other exemptions. Much the same may be said regarding exemption of receipts which, in effect, represent the moneys collected by the business man from the consumer, as agent for the government; in several states, for example, the sales tax is levied only on that part of the receipts from the sale of motor fuel remaining after deduction of Federal or state tax collections. Exemption of sales to the state is common. In a few states the exemption is specifically extended to sales to political subdivisions; failure to cover this matter explicitly may lead to difficulty in interpreting the statute. California approaches the problem differently, by allowing the state or its political subdivisions to apply for a refund of taxes paid by those who sell foodstuffs to the state or its subdivisions for free distribution to the poor. This provision can be justified only if the tax is in fact shifted by the seller. Only two statutes exempt sales by the state. Somewhat more difficult of interpretation than any of the exemptions noted above are those applying to non-profit organizations. The few statutes mentioning the matter usually list the types of organization which are exempt, and difficulty may arise in determining whether a given organization is "educational," "religious," etc. Washington, alone, exempts all non-profit institutions, but this probably does not make the problem of interpretation any the easier. Even under those statutes not mentioning the matter, the exemption may apply, if the tax is restricted to business; this is one of the difficulties inherent in any sales tax, to be discussed below." The exemption of farm products, wherever it occurs, is limited " Supra, p. 8s.

' Infra, p. 97.

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to sale by the farmer himself; hence it is of general importance only in states whose sales taxes are not restricted to retail sales, since farmers generally do not sell at retail. This exemption exists in all such states except Indiana and South Dakota; it also existed in Pennsylvania. Indiana grants a low rate, and in South Dakota, farm sales fall under the catch-all provision and hence are taxable at i per cent. Considerable difficulty in interpreting the law and in administering it when it is interpreted is bound to arise when differential treatment is accorded farmers. The varying terms used in the several statutes are indicative of this. The phrases "farm products," "raw products from farms, orchards or gardens," "products of farm, grove or garden," and "engaging in the business of agriculture" are, unless further qualiñed, likely to leave in doubt the status of some one or all of such products as milk, butter, cheese, eggs, poultry, live stock, manure, fruits, flowers, and forest products. "Engaging in the business of agriculture," furthermore, might or might not include such services as clearing, spraying, threshing, and irrigation. On the whole, the matter is one calling for great detail in both the law and administrative rulings, without which there will be constant dispute. Sales of certain food products are exempt only in New York and North Carolina. Unlike the other exemptions treated above, this type has the disadvantage of causing appreciable trouble to the taxpayer in separating taxable receipts from non-taxable receipts, as it is rare that any one firm sells the exempt items without also making other sales that are taxable. Interpretation of the law has often been found difficult, despite the fact that in both states the statutes name the products that are to be tax free. Ice cream with, and without, syrup, and malted milk, popcorn, and milk chocolate illustrate borderline cases which make doubtful the interpretation of certain of the New York phrases. The North Carolina exemptions, applicable to a restricted line of products nearer the raw state, may cause less trouble. The status of containers of exempt food products might prove of importance under a high-rate tax. Finally, under gross income tax laws such as those of Indiana, and possibly South Dakota and West Virginia, many exemptions similar to those in force under net income tax laws are to be found, but they raise no problems peculiar to a sales tax as such.

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Special Rates Applicable to Manufacturers and Mining, Logging and Fishing Enterprises, etc.10—With regard to difficulties in drafting, interpretation, and administration, the provisions subjecting manufacturers and certain other enterprises to low rates are analogous to those discussed above which exempt agricultural activities. All states whose laws tax all sales by manufacturers grant a relatively low rate to part, or all, of such sales. In five of these states,11 where the particular rate applies only to manufacturers, and in North Carolina, which exempts the business of manufacturing, this activity must be distinguished from all others. The definitions of "manufacturing" given in the statutes are substantially similar, but general in wording and broad in scope. The tax officials have been and will continue to be called upon to make a large number of decisions concerning individual cases. Court decisions developed under other types of law are numerous but not especially helpful. If the large cracker, cake, and bread concern is a manufacturer, is also the small baker and retail seller of bread? This type of question raises the issue of overlapping classifications, discussed below.12 If a book publisher is a manufacturer, is a newspaper publisher the same? Decisions bearing on other laws have given a negative answer. Other examples can easily be imagined; and several of them are listed elsewhere.13 One or more special rates applicable to mining, logging, fishing, etc., are found in all states taxing such activities except Indiana, where the manufacturing rate applies, and in South Dakota, where the catch-all "other business" clause is pertinent. North Carolina grants exemption to some of these activities, with certain restrictions. The statutes use general terms such as "other natural resource products," "other mineral products," and "mining and producing," even though certain items are sometimes singled out for special rates. The first phrase may make difficult a decision as to whether pelts and certain analogous items are to be considered taxable natural-resource products or exempt agricultural products. More important is the confusion likely to arise between extracting and 10

For a detailed treatment of this subject, see infra, pp. 595-623. " Arizona, Mississippi, South Dakota, Washington, and West Virginia. "Infra, pp. 91, 606-10. "Infra, pp. 596-98.

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manufacturing, inasmuch as "mining and producing" and "felling and producing," read literally, include many activities otherwise treated in the sections on manufacturing. Less likely to cause difficulty are the provisions in many states taxing receipts by transportation and communication companies at a special rate. In several jurisdictions the revenue received will not be great, owing to the freedom of interstate traffic receipts from taxation as a result of the commerce clause. Because of this, in 1933 West Virginia substituted special taxes on the property and net income of railroads for the gross receipts tax hitherto applicable. The treatment of receipts from radio broadcasting will be of some interest in this connection. Special treatment accorded receipts from amusements, receipts of financial institutions, and receipts by contractors each raise their own problems. Distinguishing amusements from certain other activities will often be difficult, as will the determination of the precise scope of the sections taxing financial institutions. The national bank issue has been noted above.14 Perhaps most troublesome of all from an administrative point of view, and even from the standpoint of interpreting the law, are the provisions which expand a tax on sales into one on gross income by taxing investment and labor income. Five states tax investment income, such as rentals, dividends, and interest. Until the laws are carefully redrafted, or until court decisions have provided interpretations, it will in many cases be impossible to state with confidence in what cases investment income is taxable. The provision in four states whereby the tax applies to investment income flowing from "the capital of the business engaged in" needs elucidation, as do also the general phrases in some of the laws taxing income derived from any "activity," "business," "calling," or "occupation." The sweeping provision of the Indiana law, taxing "all receipts from any source whatsoever," may be noted in this connection. In some states one may be certain that a given investment income is taxable and at the same time have reasonable doubts concerning the precise rate to be applied. Four states tax income from professional services, and three of these four tax wage and salary income. Most of the difficulties arisM

Supra, p. 85.

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ing here have already been considered under personal income tax laws. Treatment of Integrated Concerns—A single business concern may be engaged in extracting raw products, manufacturing them, and selling them for resale or for use, in competition with independent units each of which is engaged only in some one of those activities. The special treatment of the integrated concern is a feature of some of the sales tax laws. As noted above, most of the taxes on extracting and manufacturing are based on those activities as such, and not solely upon the sales derived therefrom. 14 The chief reason for this appears to have been a desire to escape the restrictions of the commerce clause of the Federal Constitution, since a relatively large amount of producers' sales are in interstate commerce, especially in the smaller states. When the sale is made intrastate, however, a law taxing extracting and manufacturing, and also selling, may be difficult of interpretation in a given case unless specific language has been inserted to care for such instances; moreover, the legislature must face the issue of the relative tax burdens of the integrated concern and its independent competitors. In some of the states where this problem arises, no special provision for meeting it has been placed in the law, and decisions to be made by the taxing authorities must be awaited. In the absence of clarifying provisions, however, double or triple taxation of the integrated concern would seem to be indicated. In the other states the answer is in many respects vague, and does not cover all possible cases. In general, it may be said that the more common practice is to subject the integrated concern to two or more taxes. The matter is a complex one, however, which needs to be clarified by a series of administrative rulings, and, in some instances, by a redrafting of the law. Even when the application of the law is thoroughly understood, there will remain the difficult problem of valuation, necessary in those instances where a tax is levied in the absence of a sale. DIFFICULTIES INHERENT IN T H E SALES

TAX

Any of the major types of tax presents certain difficulties inherent in its nature, unavoidable no matter what particular subtype the For a detailed treatment of this subject, see infra, pp. 606-9. "Supra, p. 83.

u

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legislature decides to adopt. The property tax (e.g., valuation) and the income tax (e.g., computation of depreciation) pose such problems; so too does the sales tax. Distinguishing Retail Sales from Other Sales."—Given the existing situation, whereby states dare not tax the relatively mobile wholesaler and manufacturer at high rates, and hence must tax the immobile retail establishments heavily if appreciable revenue is to be obtained, it seems fair to say that the necessity for distinguishing between retail sales and other sales is inherent in any state sales tax. At first sight the problem does not seem unduly difficult. The statutory definitions fall into two groups. In one, the test is the disposition of the goods made by the buyer; sales of goods to be used or consumed and not resold are retail sales. In the other group the character of the seller or buyer is the determining factor. A wholesaler is defined, sales by him are held not to be retail sales, and all other sales not specifically covered in other sections of the act are deemed to be retail sales; sometimes a definition of a retailer is also presented. A little thought, however, shows that neither of these methods is free from serious difficulties. Where the test is sale for use or consumption as opposed to sale for resale, it must be decided whether the taxing authorities are to follow the progress of each article and determine whether it is, in fact, consumed or resold. This would be a tedious task, and would involve refunds and deficiencies. The administrative authorities of some states have ruled that the intent expressed at the time of sale must be taken as conclusive, regardless of what happens later, if the intent is expressed through a resale certificate signed by the purchaser, in which he states that he is buying the article for resale and not for use. His vendor escapes the retail tax no matter what happens to the article later. A corollary to this is that the purchaser is subsequently taxable on a presumed retail sale, unless he in turn can produce a resale certificate from a purchaser. It seems to follow that if one buying for use subsequently decides to sell, the sale to him does not lose its characteristic of a retail sale. It may be doubted " F o r a detailed treatment of this subject, see infra, pp. 581-94.

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whether statutory authority can be found for such interpretations, but no other practical way seems open. Of more importance in practice, because of more frequent occurrence, are those instances in which there may be doubt as to whether a certain use to which an article is put represents consumption or resale. Coal used by a manufacturer and store fixtures used by a retailer are examples of commodities resold in an economic, but not in a direct physical, sense. Some legislatures (notably, for example, the Michigan legislature), 18 do not seem to have realized that under a strict construction of the statute the sales of such commodities to the manufacturer, storekeeper, etc., are retail sales, taxable as such. Indeed, in one state the taxing authorities have deliberately taken the opposite view in certain instances, convinced that in so doing they are acting in accordance with the real intent of the lawmakers.1® Even a strict constructionist might hesitate in the interpretation of some cases: e.g., the sale of feed used in fattening live stock, either they or their offspring being subsequently sold; and the sale of seed from which are grown products subsequently sold. Perfume to be resold in soap, bumpers to be resold on an automobile, and logs to be resold as lumber are perhaps clearer cases of non-taxability, but may nevertheless puzzle certain legislators. Finally, there are instances in which the article is clearly transferred, but perhaps not resold, or which involve both use and resale. The most common case is that of containers. Certain types of containers are sold to a manufacturer, "used" (but not "consumed") by him in preparing his products for shipment, and then technically resold to the wholesaler or retailer, who, however, neither uses nor resells them, but simply discards them. Other containers, such as tooth-paste tubes, reach the ultimate consumer. Among those few states where rulings on this subject have appeared, the solutions adopted differ appreciably. Analogous to the container cases are those wherein stationery, commercially "used," is likewise subsequently transferred for a consideration—in the form of a letter or manuscript, for example. Price, and shipping, tags, advertising matter, and labels and name plates afford similar instances. Articles such as check books, premium merchandise, etc., apparently given " Infra,

p. 257.

" Infra,

pp. 584-85.

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away, may be considered legally as being transferred for a consideration and hence resold instead of consumed by the "donor." Machinery sold for junk has been used and resold; yet the laws are drafted in terms which imply that one does not both use and resell. A sale of an article which is to be resold in a tax-exempt transaction also presents a problem which few of the laws have covered at all, and none, fully. In the second group of states, where the nature of the sale depends upon the characteristics of the seller, and, less frequently, the buyer, the problem becomes one of applying to any particular instance a general phrase such as "regularly organized wholesale business, known to the trade as such" or some similar definition. Occasionally, either the statute or the regulations apply certain tests, often of doubtful value, such as size of transactions. West Virginia formerly required that to qualify as a wholesaler a firm must employ at least one traveling salesman. Incidentally it may be noted that if the test of resale versus consumption is not used at all, it is probable that some wholesalers might to a certain degree enter the retail trade, selling tax-free or with but a light tax; or conversely, some retailers might be able to add a wholesale department large enough to entitle them to the same privileges. Neither the statutes nor the regulations are, in general, very clear as to such mixed enterprises. There seems little doubt that the distinction between retail sales and other sales will always prove troublesome, and under a highrate sales tax considerable dispute, and perhaps litigation, on this point appear inevitable. Definition of "Sale."2"—The statutes of the several sales-taxing states differ in their concepts of taxable transfers, and may be grouped into those which define sales in terms of closed transactions, those which state that a sale involves transfer of title or ownership, and those which declare that "any transfer" is a sale. The last group appears to give the tax a wider scope than the first or second. In each state, however, regardless of the group in which it falls, there arise the problems of distinguishing between "sales" in the strict legal sense, and other transfers, including conditional sales, " F o r a detailed treatment of this subject, see infra, pp. 559-76.

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bailments, leases, chattel mortgages, etc., and between sales and contracts for labor and materials. Both problems appear to offer a fertile field for the ingenuity of taxpayers who may be able to do much the same business as before and at the same time escape taxation by avoiding "sales" as that term is to be interpreted in the taxing statute. Rentals or lease receipts, for instance, are probably not taxable in any of the states restricting their taxes to retail sales, yet a distinction between a rental or lease and a conditional sale will sometimes be difficult to draw. Successful attempts may be made to sell on consignment to avoid tax, although in some states the tax is nevertheless levied on the gross receipts handled by the consignee, either by statute or administrative ruling. On the other hand, the law may in certain instances have a greater scope than the legislature intended; transfers under chattel mortgages and leases may conceivably be taxable in the "any transfer" jurisdictions. Every instance involves determining the nature of a given transaction, and deciding whether the taxing law covers transactions of that nature. A further problem may arise in ascertaining whether or not a given transaction falls within the taxing period; this depends upon the time of consummation of sale or other transfer, for tax purposes. Time of delivery, adopted by some of the "any transfer" states, does not seem applicable in the "transfer of title" states, despite certain rulings to the contrary. The distinction between a sale and a contract for labor and materials is made necessary inasmuch as the latter type of transaction is in some states completely non-taxable, and in others taxable only with respect to the materials. Four typical examples will serve to illustrate the point, ( i ) A consumer may buy a radio: the radio embodies a considerable amount of past labor, but it is clear that this fact does not justify deduction of the labor cost from the sales price. (2) A consumer may buy an oil painting from an artist, or pay a lawyer for drawing up and delivering a deed; both the painting and the deed embody tangible personal property. However, is any part, or all, or no part, of the sales price to be subject to a sales tax restricted to sales of tangible personal property? (3) A consumer may buy a radio and, in the purchase price, pay a sum to compensate for

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the installation of the radio; should that part of the payment representing such compensation be taxed? (4) Finally, a consumer may buy a shampoo, the purchase price being set high enough to cover at least the cost, if not more, of the liquid used in the process; should that part of the purchase price be taxed under a sales tax on the sale at retail of tangible personal property? The second example is analogous to cases where both services and property, completely intermingled, are sold by architects, dentists, oculists, opticians, pharmacists, physicians, vendors of books, newspapers, and periodicals, and of correspondence school courses, wire and ticker tape service, and credit information. Many specific rulings have been issued in several states, and not all of them are in agreement. Perhaps the ultimate solution will be to tax all producers on the full sales price, irrespective of the art involved, thus likening all such transactions to that of the sale of the radio given as the first example above. The third example typifies cases involving electricians, garage owners, undertakers, picture framers, plumbers, etc. In contrast to the first two examples, the labor element has not become embodied in the article before the latter is sold; it is sold as an item separate from the good itself. The usual rule is that the service payment is not taxable, but requirements that the service item and the tangible property item be segregated may cause inconvenience in some instances. The fourth example illustrates a group of cases closely related to those of the third example, the difference being that the tangible personal property transferred is of a type, or in an amount, not usually sold without accompanying service. Barbers, beauty shops, cobblers, contractors, engravers, and garment repairers, offer some illustrations. In contrast to the first and second examples, and as in the third, the labor element has not become embodied in the article before the latter is sold. The rulings in the various states are not in general agreement. Once a decision has been made in a case typical of any of the four examples above, the only difficulty remaining is that of collecting the tax, which indeed is likely to be an arduous enough task in many instances, and not productive of much revenue. Meanwhile,

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administrative officials, if not legislators, face a period of compulsory instruction in the degree to which multitudinous business activities differ slightly from one another. Definition of "Property."21—Under most of the sales tax laws, real property must be distinguished from personalty. There is a wealth of common law precedent available which need not be discussed at this point. Tangible personalty must often be distinguished from intangible personalty; the major difficulties seem to involve: (a) the status of electricity, gas, steam, water, and air products, which, although apparently tangible in any real sense of the word, seem to have been considered otherwise by certain legislators (it would be well in any sales tax act to make a specific statement as to the taxability of these goods); (b) the treatment to be accorded negotiation of documents of title such as bills of lading and warehouse receipts (a bank transferring a discounted bill of lading to the buyer might conceivably be subject to a sales tax thereby, especially in the "any transfer" group of states). Finally, trouble may arise in those states which make use of terms such as "commodities," "goods," "merchandise," "wares," etc., which, the courts have held, do not always cover the same things, and cut across the other dividing lines just mentioned. Definition of "Business.'"2—Only a few of the sales taxes can with certainty be said to reach non-business receipts. Some statutes exclude isolated or casual sales; some restrict the tax to business receipts, but they define "business" loosely; and some, as indicated above,23 refer to "activity," "calling," or "occupation." Problems therefore arise as to so-called passive recipients of income, such as corporations organized solely to receive and distribute rentals, and individuals in their capacity as investors; this issue, however, is only important in the states taxing gross income or gross receipts. More widespread is the difficulty of determining whether or not an organization is of a non-profit character, and if so, whether it is thereby non-business in character and exempt in the "business tax" states. Cooperatives, especially consumers' cooperatives, may cause trouble in this connection. The distinction between isolated and continuous " For a detailed treatment of this subject, see infra, pp. 576-80. " F o r a detailed treatment of this subject, see infra, pp. 552-59. 13 Supra, p. 90.

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PROBLEMS

activity is likely to prove difficult to formulate, particularly with reference to individuals dealing in securities and commodities. Sales by pledgees and mortgagees, and by receivers are likewise susceptible of differing interpretations in relation to the "business" test. T h i s problem is not peculiar to the sales tax; it has been probed at intervals in connection with the income tax, and in other matters. It is not likely to prove much easier of solution under the sales tax. Measure of the Tax."—The term "measure" is here used with reference to such items as credits, trade and cash discounts, freight and delivery charges, refunds and price adjustments, the tax itself, and the definition of "market value." If it be granted that a given transaction is taxable, these points are of importance in determining the precise amount upon which the tax is to be paid at a given moment of time. Almost all the laws specify the treatment to be accorded credits, and hence the time at which a given sale becomes taxable. Four states expressly levy the tax only when payments are made; four tax when the credit arises, but provide for a privilege of extending time of payment until collection; five draw no distinction between cash and credit transactions. Awaiting clarification in most states is the status of financing or carrying charges involved in credit transactions. Trade and cash discounts taken are generally not to be included by the seller in calculating his taxable gross receipts; where they are supposed to be included, it will probably be a simple matter to avoid taxation by billing at a lower sum and providing a penalty for delayed payment. The taxable status of amounts received by the seller to cover freight and delivery costs has been specified in only a few jurisdictions, but the tendency is to exclude them from the tax base, although separate billing is held necessary in those jurisdictions which have covered the matter by regulation rather than by statute. T h e refund of the sales price of a returned article is in most states held to render that amount deductible from the proceeds of sales. Treatment to be accorded the unpaid amount of credit extended on a repossessed article is not so generally explained, nor is " F o r a detailed treatment of this subject, see infra, pp. 626-37.

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PROBLEMS

99

there agreement among the states which have ruled upon the question. Perhaps the issue of most importance likely to arise under the category of refunds, etc., is that of distinguishing between refunds and resales, but even this is not likely to be a frequent cause of trouble. Only three states, two by statute and one by administrative ruling, allow deduction of the sales tax itself from gross sales, and in one of them proof must be made that tax has been "added to the sale price and not absorbed by the retailer," which means either a task for a corps of economic experts, or else merely a little change in record-keeping methods. All the problems discussed above assume that the sales price is the fundamental base of the tax. In certain instances, however, this is not the case. The taxation of extractors and manufacturers in certain states has already been noted;24 further, these same states provide that where such taxpayers are not dealing at arm's length, the tax authorities may disregard sales .figures in setting the value upon which the extracting or manufacturing tax is levied. Cases of barter may occasionally be of importance in practice, with reference to the sales tax. Since only one state restricts the tax base to monetary consideration, an exchange of one piece of property against another would appear to result in two taxable sales, but it is not yet clear that all the taxing authorities will adopt this interpretation. In the case of trade-ins (of automobiles or radios, for instance), two taxes would seem to be applicable, at least in states whose tax extends to those not engaged in business. * Supra, p. 83.

CHAPTER

IV

E V A L U A T I O N OF T H E S A L E S T A X AS A S T A T E FISCAL MEASURE In the light of the data gathered in the course of the present study, it is possible to review and evaluate some of the claims made by proponents of the sales tax and some of the objections offered by its opponents. The Sales Tax as a Source of Emergency Revenue.—The recent sales tax movement has been closely linked with fiscal crises developing out of the depression. The chief argument of those who have favored the tax has been that, by the sales tax and by this means only, could a large amount of current revenue be obtained under such financial and economic conditions as have prevailed during the past few years. It is at least doubtful whether the sales tax has offered the only solution, in view of the possibilities, as yet largely unexplored, of an efficiently administered state personal income tax with low exemptions and high rates. If it be true that there has not been enough net income to support government on that basis, then it follows that the sales tax is being paid out of accumulated capital, and hence there is the possibility of using some other form of capital tax designed to avoid the defects of the sales tax. Whatever the possible choices have been, however, the sales tax has proved to be an instrument by which taxpayers have provided several states with enough revenue materially to relieve fiscal strains which have threatened almost complete suspension of essential governmental services. T o accomplish this, it has been necessary to set the rate on retail sales at 2 per cent or 3 per cent or to extend the tax to virtually all gross receipts of any kind. The New York retail tax of 1 per cent, for instance, with its important exemptions, is yielding annually less than one-fortieth of the amount collected from all state and local taxes in New York in the year 1931-32; such a tax cannot claim support chiefly on the basis of its productivity. The $25 million a year which New York State is getting from the sales tax could be obtained from any one of several other sources, in the

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sense that if the legislature were willing to tap such sources, for the emergency, the money would as a matter of fact be collected therefrom. The same is true with respect to the $9.3 million obtained from Pennsylvania's six-month tax. However, when one considers Illinois, Indiana, Michigan, and North Carolina (this list is not necessarily inclusive), the importance of the sales tax viewed solely as a source of immediate revenue appears so great as to entitle the tax to recognition on this basis. The tax has not been greatly disappointing in its yield—in part, it is true, because the estimates have been made on a fairly conservative basis. The yield has in many instances fallen somewhat below expectations, but, in view of the difficulties of making any type of estimate in times of fiscal crisis, the sales tax has obtained a high rank with respect to the relative ease and certainty with which its yield can be forecast. This is, of course, an important attribute in times of emergency. Likewise important in such times is an ability to produce revenue within a short period, and this ability the sales tax has demonstrated. In some states a substantial amount of money was forthcoming within two months after the law was enacted. However, it has not been shown that other taxes cannot be collected on a monthly basis. Distribution of the Sales Tax Burden.—The distribution of the tax burden is, from the writer's point of view, the most important single factor to be considered in any tax, particularly in times of emergency, because there have probably been few, if any, instances in which the revenue obtained from the sales tax could not have been obtained in some other way, whereas each tax has its own unique method of spreading the burden, and in periods of general distress the distribution of the burden assumes an added importance. State legislators in general, however, appear to have placed more emphasis upon the revenue-producing possibilities of the tax than upon its distributive features. True, there have been many advocates of the sales tax who have stressed what they consider the fair and just manner in which, within the framework of present Federal and state tax systems, it apportions the tax load. The recent sales tax movement, nevertheless, has been notable for the number of reluctant adherents to the cause—governors, legislators, and others— who have openly avowed their dislike of the manner in which the

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burden of the sales tax is distributed, but who have supported the tax solely because of its revenue potentialities. They have been caught in a swirl of political and economic forces which often seemed to leave no choice except the sales tax or chaos. Both those who favor and those who oppose the distributive features of the tax have usually assumed that it is passed on to consumers, 1 and hence is linked with expenditures, obviously taking a larger percentage of the poor man's income than of the rich man's income. Whether such an addition to the existing tax structure seems desirable or not will doubtless depend to a considerable degree on the amount of the observer's income, and it is unnecessary to pursue this already well debated question further except perhaps to note the doubtful wisdom of doling out relief money to the unemployed with one hand and drawing part of it back with the other. Of more importance for the present inquiry is the indication that both proponents and opponents of the sales tax have reasoned from premises which are in part false. The data gathered in the present survey indicate that a large part of the burden rests directly upon the business man himself, and that in proportion to their number, more of the retailers operating small stores shift none of the tax than is the case among the large retail establishments. In other words, economic friction, which prevents shifting, appears to be much greater than has usually been noted by students of taxation, and the friction seems to be more widespread among small establishments than among large ones, giving rise to a type of regressive distribution of burden. Almost all of the data gathered refer to a period of a few months immediately following the introduction of the tax, and it is the writer's surmise that a similar survey a year later would show a much larger percentage of taxpayers reporting a policy of shifting. However, the sales tax has in most states been passed as an emergency measure, expected to lapse within a year or two, and hence the effects of the tax during the first few months are particularly relevant. The friction varies sharply with the tax rate, as may be noted by comparing results under the Georgia,2 New York, 3 ' S o m e retailers are marked exceptions; many of them w h o have been articulate before legislative committees, etc., have predicted that a large part of the tax w o u l d not be shifted. 'Infra, p. 156. 'Infra, pp. 325-30.

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Illinois,4 and Michigan 5 taxes. The higher the rate, the greater the percentage of firms reporting a policy of shifting. Qualifications to any statement based upon data gathered in this survey must necessarily be several, and important; they are outlined elsewhere in this volume.* The writer, however, was surprised at the results of the survey, and has altered some of his assumptions regarding the sales tax accordingly. If it be true that a sales tax at a rate of 2 per cent or less is in large part a levy, at least temporarily, upon the profits or capital of business firms, especially the small ones, what then may be said of the distributive effects of the tax? Although ideas concerning equity in taxation naturally differ, it is difficult to conceive of any basis upon which such an apportionment of the tax burden can be justified. The sales tax, if not shifted, bears a percentage relation to income or capital which varies widely from one type of business to another, and even more widely from one business owner to another; contrast, for instance, the individual proprietor of a small store with any one of a number of stockholders of a large department store. Indeed one cannot make any general statement whatsoever as to the burden of a non-shifted sales tax compared to the income or capital of businesses as such or of those who have an ownership interest in business. The consequences in relation to equity are obvious. It is sometimes said that the sales tax, although regressive, is justifiable as a part of a tax system which has progressive elements. Certainly the sales tax must be considered as a part of a tax system, and not as an isolated phenomenon. Although adequate information is at present lacking, the writer is inclined" to feel that it will take a higher degree of progression than now exists in the Federal and state tax systems of the United States to justify such a burden on the destitute and near-destitute as the sales tax creates. The rates of the Federal income and estate taxes are often claimed to be so steeply progressive as to justify the enactment of a sales tax. T o go into the subject of the degree of progression shown by the entire Federal, state, and local tax system would be outside the scope of this volume. It may be pointed out, however, that the Federal personal income tax and estate tax are yielding not more than ' Infra, pp. 438-44' Infra, pp. 507-13. ' See especially supra, pp. 30, 31, 73, and infra, pp. 324, 358-64.

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S per cent of the total Federal, state, and local tax revenues, and the non-progressive burden represented by that part of the property tax which is shifted, the customs duties, the excise taxes, and other elements in the Federal-state-local complex is considerable. A fundamental objection to the use of the sales tax to counterbalance progressive elements in the tax system can be inferred from the remarks above with reference to the distribution of its burden. In so far as it rests on the business establishment it fails in the aim set for it, and even when shifted, its burden cannot be apportioned as precisely as can that of certain other taxes. On the whole, the writer sees little merit in the attempt to counterpoise regression and progression through the use of the sales tax. The Sales Tax as an Instrument of Tax-Consciousness.—Most students of taxation have assumed that the sales tax, although shifted, is concealed in prices and that this fact tends to make the public ignorant of the true extent of the tax burden. Whether this is an advantage or disadvantage depends upon one's point of view. It presents a favorable aspect to the harassed legislator who must see that essential public services are maintained, or who for some other reason wishes to raise revenue, but whose political life depends upon a voting public stricken by a business depression and blindly set against new taxes in any form. It is disquieting to those who believe that an intelligent democracy cannot be erected on a basis of long-continued ignorance with respect to taxation. The results of the present survey show clearly that the old assumptions must be modified with respect to the first few months in the life of a sales tax having a retail rate of 2 per cent or more. More often than was anticipated by the present writer, there was found the practice of charging the tax to the purchaser as a separate item. Even under the 1 per cent rate in New York this practice was fairly widespread among those who reported shifting the tax, but since the number shifting was so small relative to the total number of firms taxable, it may be said that consumers in New York are not generally conscious of the sales tax. On the other hand one may cite North Carolina, where the law requires that the tax be charged as a separate item. There is also evidence that separate charging of the tax is primarily a feature of the first few months of operation under the new

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levy. Charging the tax separately represents in the main an effort on the part of retailers to keep the public conscious of the tax, in the hope that chances for the repeal of the law may be strengthened. To assure widespread adoption of the practice there seems to be required either cooperation among the retailers, or governmental control. The present writer expects that, a year from now, separate charging will be much less widespread, except where decreed by law. The sales tax is therefore likely to be displeasing both to those who, for emergency's sake, wish it to be hidden at once, and to those who deplore a lack of tax-consciousness over a longer term. Administrative Burdens of the Sales Tax.—The sales tax cannot be equitably administered without a considerable field force and able legal counsel. Under retail rates of i per cent or more, evasion will be widespread unless the books or records of taxpayers are inspected, and a considerable body of litigation will develop if enforcement is vigorously prosecuted. So much has been known to students of sales taxation for some time, owing to the experience of other countries; also, the same remarks concerning evasion and litigation are applicable to the personal income tax, the property tax, and many other taxes. In certain circles, however, the sales tax seems to have gained a wholly unwarranted reputation for simplicity and ease of administration. The reasons for believing such a reputation is unwarranted are indicated in the sections of this volume which detail the measures deemed necessary by the state administrators to assure a fairly thorough enforcement of the tax,7 and in Part Four below,® which reveals some of the legal points that will probably soon be before the courts. It is not easy to compare the administrative difficulties of the sales tax with those of other taxes; the difficulties of the sales tax are for the most part unique, not hitherto encountered in taxation in the United States. To give but two illustrations, the definition of a retail sale and the segregation of sales of tangible personal property and sales of service are unfamiliar problems for tax administrator and taxpayer. The statements above do not mean that the administrative costs of the sales tax are prohibitive, especially if the great body of small retailers, who furnish little revenue even under thorough enforceT See index, "Administration." ' Infra, pp. 549-664.

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ment, are exempt by law or (as is undoubtedly so in many instances), partially or wholly exempt in practice. On the other hand, what the cost would be to assure collection of, for instance, 95 per cent of the tax due from 95 per cent of the taxpayers, may never be known. Despite the vigorous measures of enforcement being provided in many states, the writer has serious doubts whether such a standard, or one close to it, will be reached. The cost of collection, calculated as a percentage of revenue received, probably mounts very rapidly after the first and easiest three-quarters of the tax is collected. Admittedly, there are few, if any, data upon which one can base such statements, which merely represent the writer's general impression gained during the course of the study. Part of the cost of collection of almost any tax is borne by the taxpayer. One of the complaints against the income tax is that an appreciable cost in time or money is incurred by the taxpayer in making out his return, or in litigation. The sales tax, it has usually been assumed, shows to better advantage with respect to this factor. As to litigation, the remarks made above9 are relevant. The recordkeeping costs generated by the recently-enacted sales taxes, on the other hand, seem not to have been great. Taxpayers covered by the present survey were not greatly concerned over this aspect of the tax. Influence of the Sales Tax on Methods oj Doing Business.—One of the chief objections to the sales tax in foreign countries has been the influence it was supposed to exert toward the integration of business firms, the substitution of brokers for wholesalers, the extension of selling on consignment, and other changes in the business structure resulting from an attempt to avoid sales, and hence a sales tax. Such changes have as yet been negligible in number and influence in the several states of the Union, to judge from the results of the present survey. Many states tax only retail sales; those taxing other sales usually do so at low rates. Moreover, the tax is as yet, perhaps, too new for such experiments to have developed. Two factors not operative in foreign countries to an appreciable degree have been so influential in the states of this country that ' Supra, p. 105.

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they have been readily foreseen, and countered by restriction of the scope and rates of the tax as noted above. One of these factors is the relative mobility of manufacturers and wholesalers, who threaten to move from a sales-taxing state to one with no sales tax if subjected to a high rate. In the writer's estimation, this factor has been considerably exaggerated, especially where sales tax revenue represents a substitute for a certain amount of property tax revenue. However, the power to move remains a potential force for changing the place, and hence the methods, of doing business. Although the firm itself may not move, part of its business may be lost to concerns in other states. This is a result of the second factor, i.e., the inability of the states to tax sales in interstate commerce. Even under a retail sales tax this seems to be of considerable significance, although it proved difficult to obtain illuminating data with respect thereto in the course of the present survey, and the matter remains one largely of conjecture. The subsidy granted to interstate commerce in contrast with intrastate commerce, especially under a state sales tax levied on wholesalers and manufacturers, is, however, evident. The sales tax as an instrument of Federal finance has been advocated by many who are opposed to its use by the states, especially since the interstate commerce limitation would not then be applicable, and a manufacturers' sales tax could be levied rather than a retail sales tax. The present study is devoted to state sales taxes, but it may be pointed out here that all of the objections noted above as to the distributive features of the tax might well be evidenced under any type of Federal sales tax, although prima facie it seems as though there might be more widespread shifting than under a retail tax. As an instrument of tax-consciousness, a Federal manufacturers' tax would doubtless fail almost completely. The administration of such a tax might be somewhat easier than in the case of taxes covered in this volume, but this is highly uncertain. Conclusion.—In common with most professional students of taxation in this country, the writer has had an unfavorable opinion of the sales tax, although he has not believed it to be by any means unworkable or impracticable with respect to raising considerable

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amounts of revenue. The results of the present study have caused him to favor the tax even less than before, chiefly because of the indications found with respect to the distribution of its burden. As an emergency source of revenue the tax has the undeniable advantage of yielding a certain amount of money, quickly; but it is not the only tax possessing this virtue. It should not be difficult for the professional student, though removed from the immediate arena of contest, to sympathize with the actions of legislators and others in many states who have been trapped by constitutional limitations on the taxing power and by the threats of articulate and powerful groups who would be injured by resort to forms of emergency revenue other than the sales tax. Nevertheless, in the writer's opinion, the sales tax as an emergency form of revenue, and certainly as a permanent part of any state's tax system, marks an unnecessary and backward step in taxation.

PART

TWO

T H E SALES TAX IN T H E SEVERAL

STATES

CHAPTER

V

REPRESENTATIVE EASTERN STATES The present chapter and the three following chapters cover the development of the sales tax issue in each of twenty-seven states,1 including fifteen of the seventeen states having, at the end of 1933, a "sales tax" as that term is used in this study, 2 the two states which have tried and abandoned a sales tax,3 the three states in which the sales tax has been placed before the electorate (in each instance it has been defeated), 4 and eight states not falling in any of the three groups above.5 The particular states in the last group were chosen because the time and funds available for this study did not permit a survey of every state, and it was felt that the ones selected gave as representative a picture as any other possible choice. The states omitted8 had an aggregate population, as of 1930, of 25.4 million, or only 20.7 per cent of the population of the United States. 1 Most of the information upon which this and the succeeding three chapters are based (except the sections dealing with recent fiscal developments) was obtained in interviews with those who, it is believed, have first-hand and comprehensive knowledge of the subjects discussed. The number and nature of the persons interviewed is indicated for each state. In addition, through the courtesy of a trade group having nation-wide contacts in the sales tax contest, files containing several hundred letters from interested parties in all parts of the country were made available to the writers. News dispatches were also utilized, but to a comparatively minor degree. The statements as to number and type of sales tax bills introduced in legislatures, and statements that no such bills were introduced in certain instances, are based on research done for this study by Commerce Clearing House, Inc. 2 Arizona, California, Illinois, Indiana, Kentucky, Michigan, Mississippi, New Y o r k , North Carolina, Oklahoma, Oregon, South Dakota, Utah, Washington, and West Virginia. There are two other states which have a "sales tax" as that term is used in this study: New Mexico and Vermont impose a graduated sales tax similar to that of Kentucky, and unimportant in its revenue aspects. A s to the third, Wisconsin, see note 5 below. See supra, p. 4, for further remarks as to other states such as Connecticut, Delaware, and Louisiana. 3 Georgia and Pennsylvania. 'Arkansas, North Dakota, and Oregon. In December, 1933, the Oregon legislature passed another sales tax. "Iowa, Massachusetts, Missouri, New Jersey, Ohio, Texas, Virginia, and Wisconsin. Wisconsin's graduated retail sales tax is restricted to chain stores, and has very low rates. In the early months of 1934 Iowa and Missouri enacted sales taxes. ' A l a b a m a , Colorado, Connecticut, Delaware, Florida, Idaho, Kansas, Louisiana, Maine, Maryland, Minnesota, Montana, Nebraska, Nevada, N e w Hampshire, New Mexico, Rhode Island, South Carolina, Tennessee, Vermont, and Wyoming, and the District of Columbia.

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In each instance the description of the development of the sales tax issue is preceded by a short sketch of the chief fiscal developments that have occurred since 1929. These summaries are based on more detailed statements of the states' recent fiscal histories, which are presented in Appendix D,T where they form a group of annals of state public finance for the period from 1929 to date. For those states which have had experience with the sales tax, and from which it has been possible to secure information, sections are devoted to problems of administration, tax statistics, and efforts of the taxpayers to shift the tax.8 With respect to the last point, the reader is also referred to Part Three below," which presents the results of a field survey in New York, Illinois, and Michigan. MASSACHUSETTS

Although the justices of the Supreme Judicial Court declared in 1933 that a retail sales tax would be constitutional, measures introduced in the legislature levying such a tax have not even come to a roll call. Development of the Fiscal Situation since 1929.10—"Taxes and revenue" of the commonwealth have come largely from three sources —the gasoline tax, the inheritance and estate taxes, and the state tax assessed against localities, pro-rated chiefly on the basis of property. Thus, of $43.3 million net amount accruing to the commonwealth in the fiscal year ending November 30, 1932, not far from 25 per cent came from each of these three. The insurance and savings-bank taxes supplied another 16 per cent. In most states the combination of an inheritance tax and a tax linked to property would have proven a dangerous one in the depression, in point of yield, but in Massachusetts the opposite seems to have been true, at least up to December 1, 1932. The inheritance tax revenue in 1931-32 was about the same as in 1928-29 and 1929-30, and the state tax, with assessed valuations in 1932 only slightly below the ' Infra, pp. 692-793. * In each case, copies of the manuscript of these sections, and of the section on the development of the sales t a x issue, were submitted t o competent observers in t h e respective states f o r criticism. T h e i r generous cooperation, making possible a review of the story of e v e r y state, has been of material assistance. 10 F o r sources, see infra, p. 717. * Infra, pp. 319-546.

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peak in 1931, was 30 per cent greater in 1931-32 than in the preceding year. The local units, rather than the state, have had to bear the chief burden of adjusting expenditures to tax sources shrinking rapidly because of the depression. The localities receive virtually all of the income tax revenue collected by the state, five-sixths of the excises on foreign and domestic business corporations, and the tax on public service corporation, national bank, trust company, etc., shares owned by residents. All of these revenues have shown substantial decreases. One result of the type of fiscal structure existing in Massachusetts has been that total city, town, and county property and poll levy increased from 1930-31 to 1931-32 (by about 6 per cent). Although the shrinkage of total state revenues up to and including 1931-32 was not serious, ordinary revenues exclusive of the state tax and highway fund receipts declined about $8 million from 192930 to 1931-32—the same amount that was diverted from highway revenues for 1932-33 in order to avoid a drastic increase in the state tax levied against localities. Total expenditures increased notably from 1928-29 through 193132, largely as a result of highway increases designed in part to relieve unemployment; but for 1932-33 the total will be sharply lower for most general-fund items and for the. highway fund. By December 1, 1932, a former general credit balance had been seriously depleted, and a slight budget deficit was incurred in 1931-32. No major changes in the taxing system have been made, however.11 Development of the Sales Tax Issue.12—The history of the recent sales tax movement in Massachusetts falls into two periods, with the dividing line on April 17, 1933. Prior to that time the opposition to all the broader types of sales tax (naturally strong in a heavily industrialized state) was fortified by a belief on the part of some that the Massachusetts constitution outlawed such a tax. Since that venerable document, which dates from early colonial days, can be amended only by a laborious procedure extending over five years, the sales tax was not considered to offer advantages to legislators For relatively minor alterations in the bank and corporation taxes, see infra, p. 720. The information upon which this section of the Massachusetts study is based was obtained in interviews with eight individuals (two trade association executives, three legislators, and three tax officials). See also supra, p. i n n . 11

11

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looking for quick and easy sources of new emergency revenue. It also seemed to be beyond reach as a ready supplement to the real estate tax, which many owners of real property had come to consider an intolerable burden. It is true that sales tax bills sponsored by certain real-estate interests appeared in the legislature in recent years; but against the twin obstacles of widespread unpopularity and supposed unconstitutionality they could make practically no progress, and the only proposals concerning taxation on a sales base which even approached enactment were those for selective types on so-called "luxuries." All this changed dramatically on April 17, 1933, when the Supreme Judicial Court, to the surprise of a number of interested observers, handed down an opinion holding a retail sales tax to be an excise tax and as such valid. Under the Massachusetts constitution the legislature may ask for and receive from the highest court of the state an advisory opinion as to the constitutionality of a proposed statute, thus obviating the long delay and inconvenience involved in the more usual practice of testing constitutionality after enactment. When the effects of the business depression upon local finances made the sales tax look particularly attractive to the governor, who was being urged to have the state come to the aid of the localities, recourse was had to this procedure. There seems reason to believe that the decision was anticipated by several observers well-versed in Massachusetts law; but it appears to have been a surprise to the public, and it greatly strengthened the position of the sales tax advocates. The principal proponents of the sales tax in this state are certain real estate interests. One of their spokesmen, William J . MacDonald, a director of the Boston and Massachusetts Real Estate Exchange, introduced proposals for a sales tax in the legislature regularly from 1930 on, but obtained only meager support for them until 1933, when certain officials of some local subdivisions, who had become extremely anxious to find new sources of revenue, ranged their forces behind the tax. Governor Ely also came out in favor of it in 1933, first guardedly, then openly. Some of the bankers of the state also supported it because of their interest in municipal finances. The Farm Bureau expressed feeble approval but did not work vigorously for the enactment of any sales tax law.

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Leading the opposition to the sales tax were the strongly organized retail merchants, who fought the proposal actively both before the legislature and by stirring up opposition among the voters. Particularly effective were their efforts to build up a sentiment against the tax among the foreign-born voters through the foreign-language newspapers. Members of the legislature who opposed the sales tax were induced to speak over the radio, and the aid of local trade organizations was enlisted. The retailers were supported by the State Federation of Labor, which was very active before the legislature, and by the State Federation of Women's Clubs, and other consumer groups, which carried on a vigorous agitation against the tax among their members. The manufacturers of the state took no concerted and active position on the issue. Similarly, most of the newspapers, other than foreign-language publications, took no stand, although there were one or two exceptions. The presence of so many organizations should not be understood to indicate a prolonged or even a close dispute over the sales tax in 1933. On the contrary, the well organized and financed opponents of the measure forestalled it fairly easily. The contest, such as it was, opened in January when the governor in his inaugural address suggested with due caution that new sources of revenue were needed. This was followed by the introduction of W. J . MacDonald's customary bill calling for the enactment of a 1 per cent retail sales tax. Subsequent maneuvers centered on this bill and on the bills of the commissioner of corporations and taxation which were substituted for it by the joint committee on taxation and the house committee on ways and means. Matters came to a standstill soon, however, when the issue of the constitutionality of the tax was raised and the committee decided to refer the matter to the Supreme Judicial Court. The ruling of that court greatly stimulated the proponents of the sales tax. Governor Ely now threw the prestige of the administration behind the proposal by sending to the legislature a special message recommending a 1 per cent retail sales tax, and the real estate interests, fortified in the belief that they had at least a possibility of enacting a sales tax, showed signs of pushing it vigorously. On May 9 the joint committee on taxation, after considering a number of other proposals, reported out a revenue bill which

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would impose a 2 per cent tax on sales of tangible personal property at retail and a tax of 0.5 mill upon each kilowatt hour of electrical energy sold, the proceeds to be distributed to the cities and towns to reduce property taxes levied for public welfare, soldiers' benefits, and maturing debts. Referred to the house committee on ways and means, the bill was further amended and reported out on May 29 with the recommendation that it be passed. As drafted by this committee the measure authorized the commonwealth to borrow $33 million and to lend the proceeds to the cities and towns for use in the relief of unemployment. To finance the loans, the measure proposed a tax of 6 per cent on domestic dividends not heretofore taxed, an increase of the tax on personal net incomes from professions, business, trade or employment to 2 per cent, the exemptions and allowances being reduced, and a 1 per cent tax on sales of tangible personal property and electrical energy at retail. The income taxes would have applied to income received during the calendar year 1933 and the sales tax to sales made during the year beginning December 1, 1933 and ending November 30, 1934. The measure made no progress in the house. Opposition built up throughout the state, by the forces noted above, effectively checked the efforts of the real estate interests and others, and prevented the governor from exerting any substantial pressure even though he favored the bill. So obvious was its state-wide unpopularity that it died without even coming to a roll call. In its place the legislature enacted a program which included a tax on beer and wine, a tax on domestic dividends, diversion of part of the highway fund, and borrowing from the Federal government. Opponents of the sales tax were prepared to invoke the referendum law, had the tax passed. Individuals who have been active in fighting the sales tax in various parts of the country profess themselves to be completely unconcerned over a state such as Massachusetts, whose legislature is dominated by representatives from the industrial, urban areas. They believe that where the predominance of voting power rests with those who would bear the chief burden of a sales tax, the likelihood of such a levy is very remote. The experience of the state in 1933 would seem to bear out the contention, since it is doubtless significant that in a year when all state fiscal systems were in difficulties and when state sales taxation was sweeping over the country its

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proponents made so little progress in Massachusetts. In this state the portion of the population which would feel the tax most keenly is not only predominant in numbers but also exceptionally well organized. Nevertheless, there are powerful political groups, such as the bankers and the public officials, who already lean toward the sales tax, and other similarly powerful groups, such as the manufacturers, who probably would take the sales tax in preference to other taxes if they were forced to choose. Enactment of a sales tax in Massachusetts cannot therefore be lightly dismissed as an impossibility. Doubtless the development of the sales tax issue in Massachusetts has been more complex than it might appear from the outline given above; within the limits of the present study it has not been possible to trace the reasons for the development of all the forces pro and contra. It is believed, however, that the description here given sets forth in their essentials the effect of these forces as they revealed themselves in action. NEW

JERSEY

Although the sales tax issue has become of increasing importance in New Jersey in the past few months, no such measure has yet come to a vote in the legislature. Development of the Fiscal Situation since ip^p"—The state's tax revenue comes chiefly from the usual motor vehicle and gasoline taxes, from a state tax on all property and one on certain railroad property (the amounts levied under this tax are at present the subject of litigation), and from the inheritance tax. Corporation, bank, and insurance taxes each furnish a relatively minor amount. Much of the revenue from the above sources, particularly from the gasoline and property taxes, is earmarked for return to the localities, and thus although the inheritance tax was the only one to show marked effects of the depression up to the end of the fiscal year June 30, 1932, it was such an important element in the general fund that the total receipts of the latter declined nearly 18 per cent in 1931-32 from the 1929-30 level. A further shrinkage in 1932-33 resulted in a deficit despite economies. Still further expenditure reductions, plus revenues from a beer tax, are, however, estimated to provide a " F o r sources, see infra, p. 733.

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balanced budget for the current year. Extraordinary expenditures such as those for unemployment relief, to which the state has contributed appreciable amounts, have been met largely out of borrowed funds. Aside from an increase of one cent in the gasoline tax in 1930, to provide revenue for distribution to the localities, no major change other than the beer tax has been made in the state revenue system. The impression one obtains is that the state government, not yet forced to a major readjustment of state-local relationships, has been able to meet its own fiscal problems by economies and borrowing. Meanwhile local budgets appear to have been little if at all lower in 1933 than in 1929. The local debt problem seems to be growing acute, and pressure for additional assistance by the state is increasing. Development of the Sales Tax Issue.14—Aggressive lobbying by an organization of retail merchants thrown together to meet the crisis was probably responsible, more than any other one factor, for the defeat of the sales tax in New Jersey in 1932. Prior to that year no serious attempt had been made to enact such a measure, although the pressure of taxation upon property and the growing need for unemployment relief had caused some talk about both the sales tax and the income tax as early as 1930. The legislature, each time it convened, found other ways of meeting the fiscal situation. Late in 1 9 3 1 , however, it became apparent that the sales tax stood a good chance of becoming an active issue in the 1932 legislature, and some of the more far-sighted retailers began to cast about for ways of organizing to forestall it. Various proposals for income and sales taxes made their appearance when the legislature assembled. Thus in March it was proposed that the state impose a 10 per cent tax on amusements and a 2 per cent tax on various "luxuries," such as tobacco products, soft drinks and ice cream. Shortly thereafter the attention of the legislature shifted to a possible increase in the gasoline tax from 3 to 5 cents a gallon as a means of providing $ 1 million a month for relief. The proposal first made by Governor Moore and his advisers called " T h e information upon which this section of the New Jersey study is based was obtained in interviews and correspondence with five individuals ( t w o tax officials, two trade association executives, and a university official). See also supra, p. m n .

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for a 5-cent tax from June i, 1932 to February 1, 1933, and a 3.5-cent tax thereafter, provided the voters of the state approved a $20 million bond issue for relief purposes. The 0.5-cent increase in effect after February 1 would have been used for the service of the bonds. When this proposal met' vigorous protests from those directly affected, the governor suggested two other expedients: first, that the Interstate Bridge Commission sell bonds and use the funds so obtained to reimburse the state for its share of the cost of the CamdenPhiladelphia bridge; second, that the state borrow from the state teachers' pension fund. The general sales tax appeared on the scene after the defects of this program became apparent. About the middle of May, 1932, a conference of legislative leaders and business men meeting at the call of the governor during a legislative recess proposed a 1 per cent general sales tax. The legislature, reassembling on May 23, decided that the tax as proposed would not raise an adequate revenue, and its leaders set about revising the plan by graduating the rates. They proposed, in due course, that the tax be imposed for one year, that the basic rate be 1 per cent, that a long list of "luxuries" be taxed 2 per cent, and that widely varying rates be levied on amusements, tobacco products, newspapers, magazines, hotel accommodations, restaurants, gasoline, gas and electricity, telephone service, coal and oil, real estate transactions, mortgages, sales of securities, and bus fares. License fees ranging from $ 1 to $100 would be required of merchants, the fee being graduated upward according to sales volume. Chain stores were to be taxed according to the Indiana system, the fee being graduated upward as the number of stores operated increased. The plan was intended to raise approximately $ 1 8 million for unemployment relief. A bill embodying these general principles was introduced on June 1 as Assembly No. 513. Its principal addition to the plan as announced by the leaders was the so-called "snooper" clause inserted at the request of merchants, which would have given to individuals reporting evasions of the tax a share in the revenue recovered. The bill was referred to the judiciary committee, which called a public hearing. The retail merchants of the state, led by the department stores,

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promptly organized against the tax. Especially energetic were those in the metropolitan areas of N e w Y o r k and Philadelphia w h o felt they were in a particularly vulnerable position. W o r k i n g through local merchants and chambers of commerce, they called mass meetings and obtained publicity for their opinions in the newspapers. T h e y also cooperated with other organizations opposed to the tax, notably the State Federation of L a b o r and various associations of manufacturers. T h e latent opposition thus brought into action overwhelmed the legislators with what has been said to be the greatest number of protests against proposed legislation received b y the legislature in many years. According to one estimate (probably exaggerated) approximately 100,000 letters and telegrams poured into Trenton. T o supplement these protests, several hundred merchants and their friends came to the capitol for the hearing to present their objections in person. Such pressure could not be withstood. T h e governor, a f t e r a conference with his legislative advisers, interrupted the hearing on June 6 to announce the withdrawal of the proposed tax and the drafting of a substitute relief program based on the ideas discussed earlier in the session. It included the borrowing of more than $4 million from the state teachers' pension fund, liquidation of the state's interest in the Camden-Philadelphia bridge through the sale of bonds b y the Interstate Bridge Commission, which would make available approximately $10 million, and the diversion to relief of $20 million of the $100 million bond issue for roads, waterways and institutions authorized in 1930. T h e last proposal was to be presented to the voters at the November election. W i t h this compromise the 1932 sales tax contest closed. In due course, the voters approved the bond diversion. Of the $20 million diversion authorized, $10 million had been sold b y N o v e m b e r , 1933. T h e teachers' pension fund is to be reimbursed from the proceeds of the Camden-Philadelphia bridge bonds when they are sold. Thoroughly aroused b y their narrow escape from a tax they regarded as wholly obnoxious and convinced that their struggle had only begun, the merchants, late in 1932, formally organized the N e w Jersey Retail Merchants Association, an organization which includes all types of retailers in its membership. T h a n k s to this action they

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were prepared for an even more aggressive campaign when both the income tax and the sales tax came before the 1933 legislature. In this instance the revenue was to be used not for relief directly but for balancing the state budget and for the aid of local subdivisions, whose finances were rapidly falling into a deplorable condition. Unemployment relief was again cared for through borrowing, the legislature having authorized the municipalities to issue bonds for this purpose. Acting in cooperation with the New Jersey Taxpayers Association, the retailers generated opposition to the tax, throughout the state, by sending out a paid speaker and inserting advertisements in newspapers. They brought pressure to bear upon the legislators and circulated petitions to be sent to the governor in case of need. As it turned out, the petitions were not used. The other efforts proved sufficiently effective to keep the sales tax in committee throughout the regular session, which lasted from January to June with frequent recesses. Towards the close of the session, heavy pressure for new taxes began to be applied from a number of sources. The real estate interests and property owners in general were active in demanding that their tax burden be lightened. Educational authorities expressed grave fears as to the outlook for the public schools. Many of the localities were in serious financial straits. The house and senate committees on taxation formed a joint committee to consider new taxes. Three new levies were included in its proposals—a business franchise tax. an income tax (including a supplementary tax on income from intangibles), and a sales tax. It was first proposed that the sales tax be levied at the rate of 1 per cent, but some of the later press releases mentioned a 2 per cent rate. The committee outlined its program to the public in a series of articles published in the newspapers at weekly intervals during July and August, 1933, and then called a public hearing to discuss the plan. Following the hearing it decided to present its report and recommendations to the legislature but not to introduce any bills embodying its proposals. None of the proposed new taxes was enacted, in part because earlier recommendations for local government reforms had not been heeded, and there was opposition to voting new taxes before assuring economies. To meet the demands for unemployment relief and for state aid to the localities, recourse

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was again had to diversion of the bonds authorized in 1930. A t the election in November, 1933, the voters approved a proposal to divert $12 million of these bonds, $5 million to be used for unemployment relief and $7 million to be used for school relief and county dependents. As long as New Jersey can continue to meet its emergency problems by borrowing, there is little likelihood of the passage of the sales tax in that state. There is still unissued $5 million of the $20 million bond diversion authorized in 1932. Part of the proceeds of the sale of the state's interest in the Camden-Philadelphia bridge is unencumbered and should become available in the present fiscal year. When to these is added the additional diversion of $5 million approved by the voters in November, 1933, it is apparent that a substantial revenue will be available for unemployment relief without a sales tax. Similar procedures are being resorted to for the relief of distressed localities. NEW

YORK

In April, 1933, New York enacted a tax of 1 per cent on retail sales of tangible personal property, except certain foocf products, motor fuel otherwise taxed, and gas, steam, water, and electricity. Effective M a y 1, 1933, the tax expires June 30, 1934. Development of the Fiscal Situation since 1929™—The effect of the depression upon state revenues was felt earlier and more sharply in New York than in most of the other states, as a result of reliance on revenue sources and of dates of collection which were quick to reflect economic conditions. The yield of the personal income tax dropped by more than 50 per cent from 1929-30 to 1930-31, and that of the stock transfer tax by nearly as much. B y 1932-33 the yield of the other chief tax sources, aside from the motor fuel tax and license fees, had likewise decreased sharply, the corporation income tax revenue being more than one-third less than the 1930-31 yield, and the inheritance tax revenue showing an equal decline. A doubling of the income tax rates, first applicable to 1931 incomes, merely served to raise the yield slightly from the low level to which it had fallen, but appreciable increases were obtained through raising the stock transfer and motor fuel taxes in 1932. 15

For sources, see infra, p. 738.

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The net result, however, was that in 1932-33 general fund revenues (including those from the motor fuel tax and motor vehicle fees) totaled not much more than four-fifths of the peak amount realized in 1929-30. Meanwhile, total ordinary expenditures had increased steadily until in 1931-32 they reached a level about 40 per cent above that of 1928-29, largely owing to increases in state aid and to unemployment relief expenditures. A sharp reduction, especially in capital outlays, brought 1932-33 expenditures down by 15 per cent compared to the previous year; but the former increases, in the face of declining revenues, had caused a treasury balance of nearly $100 million as of July 1, 1930 to be replaced by a deficit of nearly as great a sum three years later. A 1 per cent sales tax, a 1 per cent "emergency income" tax, a lowering of exemptions under the personal income tax, a revision of the stock transfer tax, new beer and wine taxes, and an increase in the inheritance tax were enacted in 1933. All but the stock transfer tax revision will be reflected for the first time in 193J-34 receipts. These new revenues may aid to such an extent that by July 1, 1934, the accumulated deficit may be paid off. A $60 million relief bond issue was approved by the voters in November, 1933. The extensive increase in taxation has been necessitated in large part by a refusal to cut drastically the amounts distributed in aid, particularly for education, to the localities. Indeed, during the early part of the depression these sums increased materially. The overshadowing factor in local finance has been New York City's fiscal crisis, where a delay in economizing, plus a heavy growth in property tax delinquency, has threatened to make necessary an appeal to new state sources of revenue. Development of the Sales Tax Issue.™—Although the sales tax had been a subject of public debate since 1930, no sales tax bills were introduced in either house of the legislature during the regular 1931 session, and in the 1931 special and 1932 regular sessions only one such bill appeared—in each instance, in the senate. The 1931 proposal would have levied a 5 per cent retail sales tax during the " F o r the information upon which this section of the New York study is based the writer has relied upon contacts developed over a period of years in work on New York fiscal matters. See also supra, p. 11 in.

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"present unemployment emergency." It died in the senate finance committee. The 1932 bill, sponsored by the same senator, called for the same type of tax, at 1 per cent; it, too, died in a senate committee. As no sales tax bills were introduced in the 1932 special session, it was not until the regular session of 1933 that the legislative contest over this issue opened in earnest. Five retail sales tax bills were introduced during the 1933 session, three in the house and two in the senate, at rates ranging from 0.5 per cent to 2 per cent. The 2 per cent bill would have distributed half of the revenue to the localities. All of these either died in committee or were tabled, save a senate bill (S. 996), which, carrying a 1 per cent rate, was passed April 8 and two days later sent to the governor, who signed it April 19. The bill had been introduced on February 16, and had spent over a month and a half in the senate committee on taxation, but when reported out on April 6, amended, it passed both houses rapidly. The law (Chap. 2 8 1 ) levies a tax of 1 per cent on the privilege of selling tangible personal property at retail for the period beginning May 1 , 1933, and ending June 30, 1934. Sales of certain specified food products for human consumption are exempt, as are also sales of motor fuel otherwise taxed, sales of gas, steam, or water delivered to consumers through pipes and mains, sales of electricity, and sales by or to the state or its political subdivisions. Every taxpayer whose quarterly receipts are $1,250, or less, is exempt; if the quarterly receipts are more than $ 1 , 2 5 0 , but less than $ 1 , 3 2 5 , a tax of $ 1 . 5 0 is due; if the receipts are more than $ 1 , 3 2 5 , but less than $2,500, there is granted an exemption which starts at $ 1 , 1 7 5 decreases pro rata as the receipts increase, until it reaches zero for receipts of $2,500. Returns and payments are to be made quarterly, and everyone who sells tangible personal property at retail is deemed to have procured a license to do so, which may be suspended under certain conditions. The sales tax issue first received marked publicity in New York State in the early winter of 1930, when the recently appointed New York State Commission for the Revision of the Tax Laws held a series of hearings both in up-state counties and in New York City. The commission, consisting of nine members appointed jointly by the governor, the temporary president of the senate, and the speaker

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of the house, was functioning under a 1930 statute directing it to "report to the legislature a bill or bills which shall provide for New York State a system of taxation which shall reasonably distribute the tax burden as widely and evenly as possible and thereby relieve those present sources of revenue, particularly real estate, which now bear a disproportionate part of the whole tax burden of the state." 17 This language is worth quotation because the phrases "as widely . . . as possible" and "particularly real estate" indicate the hand of certain real estate groups, whose influence had played an important part in the passage of this statute, and whose eyes were already fixed on some type of sales tax as a source of revenue to replace a large part of the property tax. During the next year and a half most of the significant developments of the sales tax issue occurred within the commission itself, which soon split on this point. Members representative of urban real estate groups and of large industrial concerns declared themselves in favor of gross sales taxation, on one hand primarily as a means of reducing the property tax (which in New York, for all practical purposes, means the real estate tax), and on the other, as a substitute for, or supplement to, the corporate net income tax. Two members of the commission, one a merchant, the other a university professor, were as decidedly against the sales tax. At the public hearings in 1930 it was made clear that there was considerable sentiment among the commission members for a sales tax, and as soon as the retailers realized this they hastened to present elaborate briefs condemning such a proposal. Their opposition, however, appears to have been of minor importance in shaping the commission's opinions; influences within the commission itself rather than pressure brought from such organized groups as the retailers were responsible for the fact that when the final report18 was issued in 1932 no mention was made of a retail or general sales tax, and only two commissioners went on record as favoring certain luxury taxes and these only as temporary levies for emergency purposes. All the members agreed that relief for real estate should be sought " N e w Y o r k State Commission for the Revision of the T a x L a w s , Report, Feb. 15, 1932, pp. iii-iv. (Leg. Doc. N o . 77.) 18 The commission is still in existence, but has submitted no comprehensive tax report since February 15, 1932.

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primarily through more revenue from the personal income tax, the gasoline tax, and the motor vehicle license fees. At this point it appeared that the effort to develop effective sentiment for the sales tax as a permanent part of the revenue system had failed, and that the issue would not be raised again for some time to come. Meanwhile, however, the effect of the depression on revenues made new tax sources appear advisable, and advocates of the sales tax now urged it as a suitable emergency measure. In the early part of 1933 the new governor finally decided to recommend a retail sales tax at a rate of 0.75 per cent, with exemption of sales of food products. The governor was not a strong advocate of the sales tax, but felt that existing state taxes had been increased as much as they should be, and that a state tax on property for the emergency was out of the question. Further substantial economies seemed likely to involve an appreciable reduction in state aid to schools, which, it was feared, would mean additional burdens locally on property. The legislature was more enthusiastic over the sales tax than was the governor, and at committee hearings the members did not appear to be impressed by the vigorous protests of the retail merchants and the labor representatives. The rate was increased to 1 per cent and the tax passed both houses without much difficulty. In the summer of 1933 the issue was again raised, when New York City, in need of additional revenue, requested the legislature to double the sales tax rate and increase the stock transfer tax by one cent, the proceeds from these measures to be distributed to localities throughout the state on the basis of population. The governor objected to levying state-wide taxes merely because New York City was in difficulty, and the city's representatives thereupon acceded to a proposal that New York City alone be granted permission to levy a temporary retail sales tax at not more than 1 per cent, and a stock transfer tax equal to that levied by the state. Such a measure required a two-thirds vote in each house in order to pass. Furthermore, the retailers now organized a campaign far surpassing their former one in scope and intensity, and even real estate interests who had formerly supported a sales tax stated their opposition to a rate increase for local purposes, at least on a statewide basis, on the grounds that it would check much-needed econ-

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omies.19 The plan was abandoned, and instead, New York City was given general taxing powers for relief purposes. The failure of the merchants to defeat the state sales tax in the spring of 1933 may probably be accounted for by the lack of an effective state-wide organization which could enlist the support of a majority of country merchants, so necessary in a state where the rural areas have great influence in the legislature. There was no carefully planned program of persuading legislators to commit themselves in opposition to a sales tax some time before the issue should be faced at the capitol. The protest against the plan for an additional 1 per cent tax was elaborately organized, and involved the formation of a "sales tax vigilante committee of one thousand" at a mass meeting called in New York, but it may be doubted whether even this would have been effective had it not been for the special circumstances surrounding the New York City situation. Retailers, especially those in New York City, have announced their intention to oppose any proposals for an extension of the life of the present sales tax when the legislature meets in regular session in 1934. Labor representatives appeared at the hearings on the state tax in 1933 and joined in the protest against the proposed increase later in the year, but, at the former time, at least, their efforts do not seem to have been well coordinated with those of the retailers. On the other side were organizations and individuals who had for several years been winning legislators to a belief in the sales tax as a permanent part of the revenue system, and who were able to use the leverage thus acquired to swing votes behind a proposal for the tax as an emergency measure. Apparently the most influential of these sales tax proponents were urban real estate groups, aided by certain large manufacturing interests who had something to fear from higher income or property taxes. Furthermore, one of the members of the New York State tax commission had for some time been using his influence in favor of the principle of sales taxation. The farmers as organized groups were not hostile to the sales tax, and a certain amount of support for it came from some rural areas where it appeared that property taxes might be reduced at the expense of consumers in the large cities. " Statement of U. G. Stockwell, of New York State Association of Real Estate Boards, New York Times, July 30, 1933.

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The educational interests played no active part in the campaign. It seemed quite unlikely that there would be a drastic cut in state aid for education, and there was no such widespread crisis in local finances that increases in such aid should be deemed imperative. In submitting his 1934-35 budget to the legislature in January, 1934, Governor Lehman recommended that the sales tax be allowed to lapse as of June 30, 1934. Administration of the Tax.20—Compared with the other state sales taxes now in force, the one in New York seems to rank about midway in relative ease of enforcement, although the president of the tax commission has stated that it poses one of the most difficult problems of administration he has ever encountered in taxation. The tax is restricted to retail sales of tangible personal property and has only one rate. True, it exempts sales of foodstuffs (with certain exceptions) and motor fuel, and reaches isolated (as well as "business") sales, all of which makes thorough administration more difficult, but those whose quarterly receipts are less than $1,250 pay no tax, and need file no returns, which eliminates many of the isolated sales. The requirement of quarterly returns, rather than monthly returns as in most of the states, lessens the paper work but makes prompt checking more important. The tax commission has ample powers of control, being empowered to inspect the records of all persons selling tangible personal property, and to suspend the (implied) "licenses" and impose other penalties for violation of the law. As soon as the law was passed, the tax commission took steps to interpret its provisions and to promulgate information concerning its operation. It was realized that inasmuch as the tax was a temporary measure, there could be no protracted period of experimentation with its operation. About 100,000 tax blanks and copies of the law were printed and sent to every bank in the state for local distribution. The president of the tax commission sent daily releases to the newspapers throughout the state. A program of radio talks was launched in order to acquaint the general public and the taxpayers in particular with the chief features of the law. A series of speeches and conferences was also arranged by the commission with local chambers of commerce, hoards of trade, merchants' " T h e information upon which this section of the New Y o r k study is based was obtained largely from officials of the New York State tax commission.

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groups, and industrial representatives, in order to explain specific problems arising in the application of the tax. In June, some 20,000 copies of sales tax regulations, with explanatory questions and answers, were distributed to the tax offices throughout the state. These offices maintain sales tax information desks and have obtained the cooperation of some local chambers of commerce in doing likewise. B y the time the last date for the filing of the first returns had been reached (July 3 1 ) , the general characteristics of the law were fairly widely known throughout the state. However, data presented below21 indicate a surprising degree of ignorance among certain taxpayers. In order to compile a list, as complete as possible, of the names and addresses of those subject to tax (and without involving undue expense), telephone and street directories have been used as guides. A clerical staff has been set to work deleting the names of those listed merely as residents, as opposed to those engaged in business. T o the latter, letters and tax blanks are being sent, but as it has not been possible to handle more than 1,000 or 1,200 returns received per day, the mailing of tax blanks has been kept down to this figure, and as of December 31, 1933, there were about 80,000 names on the list to whom blanks had not been sent. The entire list of business establishments shows about 176,000 names, many of whom, doubtless, are not liable to the retail sales tax. In certain districts the listing of names has not yet been completed. Employees recently received from the Civil Works Administration, however, are now aiding in speeding up the work. After a period of two weeks has elapsed, a more emphatic followup letter is mailed, if no results have been achieved in the interim. Finally, in those cases where unsatisfactory replies have been received, or no answers obtained, field workers are dispatched. B y October 1, 1933, 63,921 returns with remittances had been received, and about 10,000 additional returns without remittances, or upon which payments were to be forthcoming in the near future. 22 The attempt to check those who have been delinquent in filing returns and those who have filed erroneous reports has resulted in the creation of a special office and field staff. The field work is handled by eighty-four persons, who divide their time between field and 21 22

See infra, p. 380. For further data of interest in this connection, see infra, pp. 330-58.

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office work. The field work is still in its initial stages and it is difficult to forecast how effective it will be and how efficiently it may be organized. At present, calls per day per field worker vary from three to fifteen, depending upon the size of the business, the extent to which the checking of records must be made, and the amount of information required. It is not yet possible to say what percentage of the total number of taxpayers do not keep records adequate to show how much tax is due. According to the field workers, this information is more commonly withheld by taxpayers than actually lacking, and is usually brought to light when penalties are threatened. Moreover, where such records cannot be produced, the commission is empowered to estimate the tax on the basis of external indices. In most cases where satisfactory records are lacking, such indices indicate beyond any doubt that the establishment is in the exempt class. Most companies or individuals in the taxable class maintain at least minimum records of gross sales. T o December 3 1 , 1 9 3 3 , examiners, assigned to districts with instructions to make a complete canvass of all presumed taxpayers, had made 3 5 , 1 3 1 calls. They had found 3,751 delinquent taxpayers, and 3,429 who were not required to file returns owing to exemptions. The amount collected was $108,873.46. With respect to field audits completed, 1 , 1 4 3 returns had been audited to December 2, 1 9 3 3 , and additional taxes of $28,653.13 collected. Every return marked for field audit, with but few exceptions, has resulted in additional assessments, some as high as $2,000. In developing this field staff the commission was fortunate in obtaining, at clerical salary levels, experienced accountants and auditors who were unemployed and were willing to accept comparatively low remuneration. Had this not been possible, the quality of the field work would have been sacrificed, or the cost of administration increased. The office audit thus far has resulted in the collection of 5 per cent of the revenue received to date. About $70,000 had been collected to December 2, 1933, as a result of sending notices of deficiency. All returns are being audited in the offices of the tax commission. A surprisingly large number (approximately 50 per cent) of all returns have been proved to be in error in one matter or another. The most common errors made have been in connection with the deduction of

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allowable exemptions—either too much or too little being deducted from gross revenues reported. Another common error has been in the interpretation of taxable status when an individual signs a resale certificate for another. Resale certificates, as specified in the law, are written statements signed by the purchaser of goods and certifying that the property was bought for resale. They offer proof to the seller that he has not sold to a final consumer. However, they automatically expose the buyer to the tax unless he can prove that he in turn has sold for resale purposes. If he cannot do this, he must pay a tax on the value of tangible personal property purchased without tax. Although the law makes provision for the use of these certificates, there are some classes of business (particularly in the wholesale and jobbing line) where sales are so obviously for resale purposes that the commission has tacitly agreed to waive this requirement in such individual cases, as it would derive no special value from the use of certificates in these instances, while the companies in question would only be called upon to make additional unnecessary expenditures. This does not affect the power of the commission to demand the use of such certificates in other cases, however.23 In connection with the office work involved in administering the tax it is of interest to note that an average of 1,000 letters a day is being sent by the offices of the commission. This does not include replies to requests for tax forms or copies of the law and the regulations. The penalties officially imposed for failure to comply properly with the law call for a fine equal to 5 per cent of the amount of the tax due, plus 1 per cent additional for each month's delay. Possible suspension of the license to do business is also provided, and a fine of $1,000 or of a year's imprisonment is threatened if business is conducted after revocation of such license. The tax commission has, however, deemed it wise to deal lightly with first offenders, particularly when some logical reason may be offered for failure to file a return. Where willful negligence in filing has been found, the offense has been punished. To October, 1933, only $4,500 had been levied for penalties, and no misdemeanor convictions had been sought. After " For additional data on resale certificates, see infra, p. 408.

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the tax has been in operation for several months, however, more severe penalties will be meted out to violators of the law who are seeking to evade the tax. Although several industrial and trade associations have challenged the interpretations on the part of the commission relative to the taxable status of their members under the law, no court cases have come up on the subject. Private hearings between representatives of the tax commission and delegates from the business and industrial groups affected have been held from time to time, and agreements have been reached in many cases. There are still a number of important lines of business in which the issue is unsettled and tax payments are consequently pending. No test cases concerning the constitutionality of the tax have yet been carried to the courts, but one is threatened at the present time. Under the provisions of the act creating the sales tax law, $400,000 was appropriated for expenses, including personal service and maintenance, in administering the tax. This money has been allocated on the basis of a fourteen-month budget, and it is expected that all expenses will be kept well within the allowance. If more money had been made available, a more complete field audit could have been organized. Under the circumstances, however, it is the desire of the president of the tax commission to keep the expenses down to less than 1.5 per cent of total revenues collected. Efforts of the Taxpayers to Shift the Tax.—For information concerning the policy adopted by taxpayers toward the problem of shifting the tax, the reader is referred to Part Three,24 where the results of a comprehensive statistical study are presented. Tax Statistics.—As of October 1,1933, collections were as follows: Albany New York Brooklyn Utica Syracuse Rochester Buffalo

$ 452,642.36 2,228,078.47 792,521.83 146,743.70 217,769.27 210,980.56 308.976.71

Total

$4,357,712.90

See infra,

pp. 325-30, 359-401, 415-23.

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This represents a taxable period of two months ( M a y and June, 1933). Of the total amount, 70 per cent was collected by the New York and Brooklyn district offices, which, however, cover certain counties outside New York City. As of November 22, 1933, collections for the second period of the tax (July, August, September) totaled $5.5 million. The New York and Brooklyn offices accounted for 66 per cent of the total, which was distributed among the districts as follows: Albany New York Brooklyn Utica Syracuse Rochester Buffalo

$ 645,434.56 2,616,884.74 1,008,559.66 206,085.31 298,245.22 274,816.67 459,654.44

Total

$5,509,680.60

Data as of December 22, 1933, show that for the M a y and June period, $4.3 million had been collected on approximately 62,900 returns, giving an average of about $68 per return. For the period covering July, August, and September, $5.8 million had been collected on 63,730 returns, giving an average of about $91 per return. On many of these returns, however, no tax was due. Records for taxpayers within the boroughs of Manhattan and the Bronx, and the county of Westchester, show 54 taxpayers each paying a tax of $3,000 or more for the first period, with an aggregate tax of $847,000, or an average per return of nearly $16,000. For the second period the same 54 returns showed a tax of $1,057,000. The estimated revenues under the act, before it went into operation, were placed at $30 million for fourteen months. Present indications are that the actual revenues collected will reach this figure, and perhaps exceed it. PENNSYLVANIA

In addition to the low-rate mercantile license tax, which has been on the statute books for a long period, and which is not covered by the present study save as to certain administrative aspects, Pennsylvania enacted a 1 per cent retail sales tax which, effective September 1, 1932, expired six months later and has not been renewed.

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Development of the Fiscal Situation since 1929™—Overshadowing all other tax sources for general fund purposes in Pennsylvania's state government are taxes on corporations and inheritances; neither a property tax nor an income tax is employed. The yield of the corporation and inheritance taxes has fluctuated markedly with general economic conditions, but as there is a considerable lag between the taxable period and the fiscal year in which the revenue is paid, the amounts received from these sources did not reach their peaks until 1930-31, and even in 1931-32 the combined yield was virtually the same as in the prosperous year 1929-30. Therefore it was not until the fall of 1932 that the legislature felt impelled to cut appropriations appreciably. At that time, however, the fiscal situation became serious. A decided shrinkage in general fund receipts was a certainty for the coming year or so (although the inheritance tax yield did in fact show a marked increase in 1932-33), and the state was committed to a continuation of its policy of spending money for unemployment relief directly from current funds. Plans were laid to borrow for this purpose, but approval by the voters was necessary, and could not be obtained before November, 1933. This approval has been obtained, and the bonds will soon be issued. Meanwhile local tax levies had remained fairly constant from 1929 to 1931, and although the state rendered some assistance by taking over certain rural highways, there was evidence that the pressure on local tax sources (in the main, the property tax) was leading to serious trouble. This, in turn, had a bearing on the possibility of economy in state expenditures, as a large proportion of general fund receipts has for many years been turned back to localities, chiefly as educational aid. Some decrease has been made, however, in this type of expenditure as well as in the ordinary operating costs of the state government. Largely by drawing on a surplus built up in the period from 1927 to 1931, the state has been able to date to avoid any serious fiscal crisis in its own affairs, although even with the economies noted above, general fund expenditures have increased steadily each year from 1927-28 to 1932-33, inclusive, owing at first to heavy outlays under a building construction program, and later, to extraordinary emergency relief payments. 20

For sources, see infra, p. 762.

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13S

Except for the short-lived sales tax, the state has been able to care for this increasing burden without recourse to important new taxes or increases in existing taxes. A state dependent upon fluctuating revenues and compelled to spend current revenues in large amounts for unemployment relief, yet able to avoid a fiscal crisis with but little new tax revenue, must be one whose localities have not brought to bear the degree of pressure for local tax reduction and additional state aid so marked in many other states. Whether such pressure will soon develop effectively, and how much the state government must spend for unemployment relief seem to be two major factors which will influence the future of all tax agitation in Pennsylvania. Development of the Sales Tax Issue.29—No general sales tax bills were introduced in the Pennsylvania legislature during the depression, until the special session in the summer of 1932. The session had lasted for several weeks and no agreement had been reached on means of raising revenue for unemployment relief when on August 15, 1932, a measure (H. 264) was introduced in the house providing for a 1 per cent retail sales tax. Two days later it passed the house by a vote of 123 to 61, and the next day, the senate, by a vote of 36 to 8. On August 19, the governor approved the act and the legislature adjourned. The bill had gone through both houses in the shortest time possible under Pennsylvania procedure. The act, as passed, imposed "a tax at the rate of 1 per cent on the amount derived from the sale of tangible personal property to consumers or to any person, for any purpose other than for resale, during the six-month period starting September 1, 1932 and ending February 28, 1933." 27 The tax was inapplicable to farmers selling their own farm products. Vendors were required to file returns with the department of revenue on or before April 1, 1933, stating the amount of gross income derived from the sale of tangible personal property during the six-month period ending February 28, " T h e information upon which this and succeeding sections of study are based was obtained in interviews with ten individuals (four trade association officials, two lawyers, an educational representative, See also supra, p. i n n . Statement on Emergency Relief Sales Tax Act, by Clyde L. King, enue, Commonwealth of Pennsylvania, August 31, 1932.

the Pennsylvania state officials, t w o and a legislator). Secretary of Rev-

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1933. The tax was due and payable at the time the return was required to be filed. The estimate of yield was placed at $ 1 2 . 0 million. The Pennsylvania sales tax has been described by one observer as " a rabbit pulled out of a hat to meet a fiscal necessity." The "fiscal necessity" was unemployment relief, for which the state appears to have been seeking $ 1 2 . 0 million. The refusal of the Reconstruction Finance Corporation, on August 4, 1932, to grant the state's application for $45 million with $ 1 0 million as an immediate emergency loan, unless the state first aided its own unemployed, served to impress upon the legislators the urgent necessity of raising revenue for this purpose. The choice of the sales tax as the means of meeting the demand might be said to be a result of the unpopularity or the legal impracticability of the other proposals advanced. For example, a progressive income tax was rejected because it was thought to require a constitutional amendment; a flat tax on incomes was discarded because of widespread vigorous opposition, including that of the state chamber of commerce; and a general sales tax of 1 per cent, exempting sales of food, gasoline, and real estate, was not adopted because it would provide too much revenue.28 The successive dismissal by the legislature of various types of taxation led the governor to say that he would be willing to accept "any reasonable measure" which would meet the situation, and an examination of the official Journal discloses that it was in much this spirit that the sales tax was passed. Many legislators voted for the measure with expressed reluctance but claimed to see in it the only possible escape from a desperate position. In any event, it is clear that in recent years no organized movement of consequence in support of this type of taxation has arisen in Pennsylvania. Further, since the bill was law four days after it was introduced, its life in the legislature was too short to allow hearings to be held. It has been sug28 Other measures were considered, including an increase of one cent in the gasoline tax; a special tax on automobile licenses having low numbers; a county occupational tax under which the county commissioner could assess the value of each occupation and fix the rate of tax; a transfer of $12.0 million of the motor vehicle license f u n d to the general f u n d ; an increase in motor vehicle license fees; a tax on cigarettes (1 cent for 10 cigarettes); taxes on cigarettes, cosmetics and soft drinks; and a combination of a cigarette tax, a transfer of $4.0 million from the motor vehicle license fund, and a further cut of $2 o million in general appropriations.

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gested that if hearings on the bill had been held, and if the special session had lasted longer, the bill would never have been passed. Events after the passage of the tax confirm this impression of almost universal unpopularity. In an effort to insure that the tax would not be reènacted after the six-month period, the Pennsylvania Retailers' Association began a campaign which included regional meetings, distribution of bulletins, and flooding of the legislature with letters and telegrams. Opposition to the tax was also organized by the state chamber of commerce, which cooperated with local chambers, urging them to send letters to legislators. The chamber also gave out stories to newspapers and directed its legislative representative to oppose the continuation of the tax. The Pennsylvania State Federation of Labor had sent a resolution to the special session in opposition to the tax before it passed the legislature; and although not participating in an active campaign, this organization continued to express its support of the movement against reènactment of the measure. It is difficult to find any organized support for the continuation of the tax. The Pennsylvania State Education Association, while "recognizing the injustice of the present system of taxation which places such heavy penalties on real estate ownership" took no stand on the sales tax and looked to an income tax and a. process of "plugging up holes in the existing tax structure" for relief to property. 29 The real estate dealers are not organized on a state-wide basis, and the farm organizations apparently have not played a major political role in the sales tax issue. Lack of support for the tax on one hand, and vigorous opposition to it on the other, had their obvious reflection in the regular session of January, 1933. N o bills were introduced contemplating a continuation of the tax, and several were offered revising its terms in order to extend the time for payment. A measure was also proposed repealing the mercantile license law, which has for many years levied a light sales tax on wholesalers and retailers. These efforts, however, all died in committee. Perhaps the most significant political result of the sales tax in "Official resolution adopted at annual state convention, Dec. 29, 1932. See Pennsylvania State Education Association, Education Bulletin, Vol. 1, No. 5.

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Pennsylvania is the strengthening of the solidarity of the retailers. T h e Pennsylvania Retailers' Association has grown in membership from 50 to 600 organizations. A t present, the association does not contemplate making efforts to secure the repeal of the mercantile license law, feeling not only that the state needs this revenue but also that the longevity of this law has resulted in retail business being operated in such a fashion as to cover the cost of this tax. Administration of the Tax.—Pennsylvania's problem with the 1 per cent retail sales tax was unique in the sense that the authorities had to administer a tax which was destined to lapse within six months of its inception, and for which but one return was to be made by the taxpayer, to cover the entire six-month period. On one hand this gave the secretary of revenue a relatively long period of time in which to prepare to receive the returns; on the other hand it involved the danger that taxpayers would yield to the temptation to be careless about a tax so obviously temporary, and not payable until after the taxable period had lapsed. T h e attitude taken by the administration has fitted itself to these circumstances; an initial period of attempting to put taxpayers in a receptive frame of mind has been followed by a collection period wherein there seems little indication of leniency. T h e Mississippi policy of introducing a tax by easy stages 30 is hardly applicable to an innovation doomed to disappear six months after it has first been tried. An extensive publicity campaign was undertaken by the department of revenue just as the taxable period started. The radio was utilized several times, specially prepared news releases were given to the papers, and the tax officials traveled through the state giving talks to groups of potential taxpayers. A f t e r the taxable period had expired (February 28, 1933), and before the tax payment was due (April 1, 1933), employees of the department were stationed in every county seat and in several other cities and instructed to assist taxpayers in making out returns. Through notices in the daily papers, taxpayers were encouraged to go to these offices for assistance, some of which were located in chambers of commerce and other convenient places. About 25,000 copies of the act, and 25,000 copies of a statement explaining the act were printed and distributed " S e e infra,

p. 1 7 0 .

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throughout the state. In addition, regulations covering specific points, such as contractors' sales, interstate commerce, and public utility receipts were issued from time to time, about 5,000 copies of each being printed. Shortly after the sales tax was passed, the new sales tax division (employing about 25 office workers) in the department of revenue mailed from 250,000 to 300,000 sets of forms to a list of names compiled from the mercantile tax list, the capital stock tax list, and classified telephone directories. During the period of collection (still going on) field inspectors are making a building-to-building survey to uncover delinquents. Only one return, due April 1, was required for the entire sixmonth period, although the department encouraged advance installment payment of the tax, and found that from one to two thousand taxpayers paid in this manner. Effective field work started toward the end of May, 1933. In sharp contrast to the policy in some other states, the field inspectors were given no selected list of names (derived, for instance, as a result of an office audit), but were told to call upon everyone in their respective districts who might possibly be a taxpayer. As there was no universal exemption of a certain number of dollars, this implied seeing everyone in the state who sold tangible personal property to a consumer or to any person for any purpose other than for resale (except farmers selling their own farm products). In practice, this lias been restricted to places of "business." The inspectors have also been instructed to check on the payment of the mercantile license tax and in certain cases the corporation tax and other state taxes. As to the sales tax, the procedure is to demand that the receipt for sales tax paid be shown, and also a duplicate of the return that should have been filed. If these documents are available, they are at once checked with the taxpayer's books, sales records, etc. When the taxpayer says he has no record, the possibility of an "estimated additional assessment" plus a 10 per cent penalty (section 9 of the law) is mentioned, and the usual result has been that the taxpayer discovers he has pertinent records after all. It is estimated that less than 5 per cent of the taxpayers have in reality no records at all that are of material assistance in determining the tax due. Very few "estimated additional assessments" have been made to date.

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Sometimes the taxpayer has made a return but has not yet paid the tax, whereupon the agent attempts to collect the tax on the spot. Sometimes the taxpayer has not made a return, whereupon the agent gives him an opportunity to make a voluntary return, in which case no penalty is imposed, although the return is of course not filed on time. If the taxpayer does not voluntarily make a return, the agent at once makes an "estimated assessment," with the help of the taxpayer's records, if any, or by observing certain external indicia such as size of building, number of employees, etc., and likewise attempts to collect this tax, together with the 10 per cent penalty. T o date, a negligible amount has been collected under this penalty. No fines have been collected under the misdemeanor clauses. Interest charges of 6 and 12 per cent on overdue tax are provided for by the law. Usually this charge is not paid by the taxpayer voluntarily, and the department has been forced to send collectors to obtain the money. It is the aim of the department to compare with data in the taxpayers' own records every one of the returns voluntarily filed, and, through the type of survey noted above, to reach every one who has failed to file a return. B y July, 1933, there were about 30 agents in the field (each agent covering a certain territory), and by October 1 about 25, giving about one-third to one-half of their time to the investigation of sales tax returns and liability. In addition to his duties in connection with other taxes (assuming they occupy 50 per cent of his time), a field agent can cover from 5 to 10 sales taxpayers in a day. If any case presents especially difficult problems of accounting, a trained auditor is later sent to examine the taxpayer's books, and several days of one man's time may thus be taken up with a single taxpayer. All in all, it appears that between 75,000 and 100,000 taxpayers a year may be covered. The department has until April 1, 1935 in which to make assessments, and it intends to keep as many field men as possible at this work until this date, sparing no one either because of his insignificance or because of the time elapsed. In the period of approximately two years between the latter part of May, 1933 and April 1, 1935, however, it seems clear that not all of the 250,000 (estimated) potential taxpayers can be reached unless the field force is increased. In addition to the 30 men noted above, others, more highly trained,

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have been sent to inspect the records of department stores and of the central offices (often outside Pennsylvania) of the chain stores. As of July i, 1933, out of an estimated 250,000 potential returns, 175,000 had been received—relatively few as a result of field work. In the following three months about 10,000 more returns were obtained, almost all of them being the result of activities of the field agents. As to delinquency in the sense of failure to pay the correct amount of tax, although filing a return, field work up to July 1, 1933, indicated that about one out of four of the smaller returns were incorrect, at least as judged by the department's interpretation of the law, whereas, of the larger returns, one out of two, or even two out of three, were subject to correction, chiefly because the larger concerns are more likely to seek to take advantage of many points about which there can be a certain amount of dispute. Some types of taxpayers, indeed, such as dentists selling bridgework, and pharmacists selling drugs compounded by prescription, have as groups openly asserted their belief that the department of revenue has wrongly interpreted the law, and have thus far refused to pay. The department is at the present time preparing estimated returns against the dentists. Although there has not yet been time for litigation to have developed very extensively, there promises to be a considerable number of cases, even though the tax no longer exists and the rate was only 1 per cent. The most difficult problem of statute interpretation is said by administrative officials to be that brought about by the use of an article which was not clearly resold in the same form by the purchaser (if it had been, the sale to him would not be taxable) and yet not clearly consumed by him without resale (if it had been, the sale to him would be taxable). Attempts to tax the sale of tangible personal property which is sold only incidentally in connection with a sale of service has aroused keen resentment among doctors, pharmacists, etc. The bailment-lease question, too, is being litigated; the taxpayer retains title until the last "installment" payment, and claims that all payments prior to the last one are rentals and hence non-taxable. As of the first of October, 148 hearings had been held, 58 petitions for reassessment had been filed by taxpayers, and 48 appeals had been taken by taxpayers to the Court of Common Pleas. Corre-

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spondence is still running fairly heavy, from 30 to 60 letters a day being received at the present time (October, 1933) concerning the sales tax. Under the mercantile license tax law such questions as now plague the sales tax authorities would have arisen and been settled long ago, were it not for the fact that, at least until the present drastic business depression, the mercantile license tax seemed so small as to make litigation or even dispute over these matters not worth the trouble. Administration oj the Mercantile License Tax.—Although the lowrate mercantile license tax is not included within the scope of the present study, the following facts concerning its administration may be of interest for purposes of comparison with the 1 per cent sales tax. The mercantile license tax is administered through mercantile appraisers, county treasurers, and the mercantile section of the county bureau in the department of revenue at Harrisburg. The assessment of the tax is made by the mercantile appraisers of each county on the basis of the books and records of the taxpayer and a visitation to the mercantile establishment of the taxpayer to appraise the amount of business done for the year prior to the taxable year in order to arrive at the amount of the mercantile tax liability. The collection of the tax is made by the county treasurer of each county who receives a list of taxpayers and their liability from the mercantile appraisers, a copy of which list is also forwarded to the mercantile section of the county bureau in the department of revenue at Harrisburg. The county treasurer remits the amount collected, less a predetermined fee, to the department of revenue at Harrisburg. Audits of the county treasurer's account and the account in the department of revenue at Harrisburg are made by the auditor general's department of the commonwealth. There has been no significant change in the administration of this act during recent years, excepting that within the last three years the department of revenue, through its field agents, has investigated the appraisals made by the mercantile appraisers and the assessments rendered based on these appraisals, with a result that many thousands of additional dollars in taxes have been collected which had

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not been paid originally owing to incorrect appraisals and incorrect returns. There appears to be a widespread feeling that, at least until recently, the administration of the mercantile license tax has been unsatisfactory, and that a certain degree of evasion has been common. Some observers are inclined to lay the blame for this situation upon the system of relying heavily upon local authorities. Efforts of the Taxpayers to Shift the Tax.—There is good reason to believe that Pennsylvania's temporary i per cent retail sales tax was, on the whole, not shifted to the consumer. True, the only evidence on this point comes from the retailers themselves, but it is of so consistent a nature as to acquire a certain degree of validity. In September, shortly after the tax became effective, the Bureau of Taxation Information of the National Retail Dry Goods Association, at Columbus, Ohio, received letters from twenty representative merchants or officials of merchants' and business men's associations, covering more than a dozen Pennsylvania cities; the letters stated the intentions of merchants in these vicinities with respect to the policy to be adopted toward shifting the tax. In October of the same year a representative of the bureau interviewed about twenty merchants during a week's tour of the state. Finally, the bureau received in April, 1933, copies of some dozen replies to a form letter sent out to chambers of commerce, merchants' associations, etc., by a Pennsylvania organization in the early spring of 1933, apparently shortly after the taxable period had ended, but before payment was due. The sample is thus too small for one to be able to rely upon it with a high degree of confidence, but it appears to be fairly representative, especially as concerns the larger stores. An examination of this evidence discloses an interesting contrast between the hopes and plans of autumn, 1932, and the almost unanimous chorus of despondent resignation a few weeks later, and again in the spring of 1933. Although few of the merchants represented by the 1932 letters planned to add the tax as a separate item, seeming to fear the reactions of tax-conscious consumers, almost all hoped to recoup from their customers a considerable part, if not all, of the tax by increasing mark-ups, particularly on goods

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not sold at standard prices. The October interviews, however, showed a widespread feeling, save on the part of a few department stores, that the tax could not be passed on to the consumer even by concealing it in the price. Perhaps the low rate of the tax accounted for this as much as did its temporary nature. Grocery and drug stores in particular, among those interviewed, stated that in view of the fact that so many of their sales were under one dollar, and in a keenly competitive market, they saw no chance of passing on the tax. The replies received in 1933 were even more emphatic to the effect that the tax had been in reality a levy on merchants' profits. Every one of the answers stated that all or most of the merchants in the area had been unable to pass the tax on, and some said that wage cuts, and special pressure on manufacturers for lower prices, were direct results of the tax. In several communities the merchants had met in groups, in the fall of 1932, to agree upon a policy with regard to shifting, but in few of these cases, it seems, was agreement reached, or if reached, it was not long-lived. Seldom were tax "schedules" or "bracket" plans mentioned—in contrast, for instance, to Illinois and Michigan, where the use of such devices has been widespread.31 The few replies representing manufacturers and wholesalers, on the other hand, indicated that most of them were charging the tax as a separate item on their taxable sales—i.e., sales "at retail." Tax Statistics.—As of October 1, 1933, approximately $9.3 million had been collected under the 1 per cent tax, and it is estimated that by that date 185,000 returns had been received. T o November 30, 1933, $9,373,561.39 had been collected. This compares with the official estimate, made at the time the act was passed, of $12 million. It appears that no detailed statistics concerning the tax will be published, as no appropriation has been made for that purpose. " Infra, pp. 430-38, 506-7.

CHAPTER

VI

R E P R E S E N T A T I V E S O U T H E R N STATES ARKANSAS

No sales tax has been passed by the Arkansas legislature; a proposed constitutional amendment and an initiative act which would have levied a i per cent general sales tax with complex collection provisions was overwhelmingly defeated at the November, 1932, election. Development of the Fiscal Situation since 1929}—Even sources of revenue such as the gasoline, motor vehicle license, and state property taxes had shown a considerable decrease in Arkansas by 193132, and meanwhile total state expenditures were found difficult to reduce because of the extraordinarily heavy fixed charges in the form of debt service, arising in large part through state assumption of certain local debts. Aside from the enactment of an income tax, first effective in 1930, and an increase of one cent in the gasoline tax to 6 cents in 1931, no important steps were taken to increase revenue until 1932, when a sales tax was submitted to the people (and defeated). In 1933 a beer tax was passed. The income tax, which was coupled with a provision for a reduction in the state property tax, proved at first only a minor, and later an almost negligible, revenue source, and as a result the property tax rate in 1932 was returned to its level of a few years earlier. Estimates for 1932-33 indicate an even sharper contraction in revenue, and it appears that the state property tax yield was about 30 per cent below the level of two years before, and that of the gasoline tax, about 25 per cent. These two taxes, together with the motor vehicle license tax (whose yield has dropped sharply as a result of lowered rates designed to stimulate gasoline consumption), furnished about three-quarters of the state government's total revenue in 1930-31The decline in revenue had not been serious up to the end of 1

For sources, see infra, p. 692.

14$

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1931, and, financed in part by borrowing, total state government expenditures mounted considerably from 1928-29 to 1930-31. A severe cut in highway expenditures and a refusal to spend any state money for unemployment relief were major factors in causing a sharp decline in 1931-32. A recent law giving the governor blanket powers to consolidate administrative departments has resulted in a further decrease. Recently an attempt has been made to reduce the interest rate and extend the maturity on the state debt, and some relief may be obtained in this manner. Adequate local data over a period of years are not available, but local units must have been seriously affected by the decline in assessed values of nearly 30 per cent between 1929 and 1933, and a decided increase in state property tax delinquency suggests another source of local troubles. Development 0} the Sales Tax Issue.2—The sales tax issue was officially raised in Arkansas by the filing of sufficient initiative petitions on July 6, 1932 to secure the inclusion of the necessary measures (Proposed Constitutional Amendment No. 19 and Initiative Act No. 1) on the ballot at the general election the following November. Thus the controversy was confined to a direct appeal to the electorate, for prior to this time no measures of this character had been introduced in the legislature in recent years. Since the proposed tax was overwhelmingly defeated at the polls, it has not been introduced at any subsequent legislative sessions. The proposed constitutional amendment provided that the state taxes on property should not "in the aggregate exceed i/2oth of 1 % of the assessed value of the property" within the state, and levied a poll tax of $1.00 on all inhabitants over 21 years, the revenue from this source, together with a portion3 of the sales tax revenue, to go to the support of common schools. The 0.5-mill state property tax was assigned to the department of education for equalization purposes among school districts, as was also a part of the sales tax revenue equivalent to that which would be raised by a 1 -mill ' T h e information upon w h i c h this section of the Arkansas study is based w a s obtained in interviews w i t h seven individuals (three university officials, t w o state officials, an educational representative a n d a trade association official). See also supra, p. m n . ' T h e a m o u n t of sales tax revenue devoted to this end was to be equivalent t o the sum w h i c h w o u l d be raised b y a l e v y of three mills on the dollar on the assessed v a l u e of the p r o p e r t y within the state. T h i s w a s the current l e v y for c o m m o n schools.

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levy on property. The remaining revenue was to be appropriated by the general assembly as the millage from state property taxes other than for common schools was then appropriated, and any balance was to go to the supplementary fund for common schools. Section 3 of the amendment described the tax, which levied a rate of i per cent on all sales of "all merchandise, goods, raw and finished material for manufacture, machinery, tools, appliances, wares and natural and artificial products, other than . . . farm products in the hands of original producers. . . ." The tax was also to apply to the sale of public utility services, to admissions, to hotels (with certain exceptions), and restaurants. Although it was to be one on sales, the tax was to be "assessed against and collected from the buyer"; however, the initiative act provided that the seller was to agree to act, in effect, as agent for the state in collecting the tax, and was to be given a 2 per cent allowance as compensation therefor. The seller was to be required to collect the exact amount of the tax on each sale, and for "fractional sales of less than one dollar" the seller was to use either fractional-cent stamps, or a strictly regulated system of reducing the quantity sold at the established price by enough to make up for the tax. The initiative act also limited the cost of administration of the tax to 4.5 per cent of its yield. Altogether, this is probably the most curious and complex sales tax measure that has been placed before the electorate or legislature in any state. Its yield was estimated by certain competent observers at $1 million per year. Perhaps the most striking characteristic of the sales tax movement in Arkansas is the difficulty in identifying its advocates with any specific section of the community. Its original supporters consisted of a few individuals who, for several years before its introduction on the ballot, unsuccessfully urged its merits. In the spring and summer of 1932 the movement appears to have gained both in numerical and financial power, and the required number of signatures was secured on the initiative petitions. This development cannot be assigned with certainty to the backing of any particular section or industrial group in the community, nor did it result in persuading any of these groups to take a public stand in support of the tax. Some of the opponents of the measure have suggested that it received private support from the railroads,

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SOUTHERN STATES

the public utilities, and large out-of-state individual and institutional land owners. It has been pointed out that these groups would be reluctant to take a public stand on the matter, being in too vulnerable a position if the tax should meet with disfavor. It is evident that great reliance cannot be placed on these conjectures, but some significance may be attached to the fact that such groups would have been materially benefited had the bill passed as it was drafted. The opposition was headed by the state chamber of commerce, which on March 15, 1932 placed itself on record against the tax. The controversy did not begin in earnest, however, until the petitions had been filed. After this, it grew in intensity as the November election approached. The chamber was supported by the merchants, the manufacturers, and labor. The last was bitterly opposed to the tax, seeing in it an increase in the cost of living. Some doubt exists as to the attitude of the school interests, inasmuch as the organized opposition had classified them as being in favor of the measure, while a number of the educators themselves have stated that the schools had little to gain from the tax and that in consequence, although the teachers did not publicly oppose the measure, they exerted an influence against it in the rural sections which was not wholly without significance. Finally, although the tax was designed to relieve the burden upon real estate, the Arkansas Association of Real Estate Boards, after listening at their annual meeting to speakers on both sides, took no action. The campaign was an inexpensive affair, and consisted largely in the circulation of pamphlets throughout the state. Speakers donated their services in order to appear before meetings of various political, social, and trade organizations, but no mass meetings of consequence were called for the express purpose of discussing the tax. Though the chamber led an intensive fight, the defeat of the tax left the organizations much as it found them. The solidarity of the various groups is receiving much greater stimulus from the National Industrial Recovery Act than from the sales tax issue. The tax was overwhelmingly defeated, the amendment receiving 19,160 votes, as compared with 148,965 in opposition. All of the other four amendments submitted at the same time were defeated, but none by such a wide margin. This result, however, furnishes a

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poor test of public sentiment on the sales tax. Many of those who opposed the amendment have stated that they are not against the sales tax in principle, but felt that this particular measure was poorly drafted. It has been said that the chamber of commerce would not be united in opposition to a more satisfactory bill, and it is also clear that measures could be proposed which would be more attractive to the school group. Public disfavor concentrated largely upon the provision for fractional-cent stamps, and upon the fact that the tax was one which would be "pyramided" as an article passed through a number of hands to its ultimate consumer. It should be noted that the voters were not offered an opportunity of passing on a principle or even a flexibly phrased law, but were asked instead to accept or reject a specific tax and an elaborate method of enforcement. It is doubtful whether the sales tax issue will again be raised in Arkansas for some time. In spite of the results of the election, it was feared that measures of this character would be proposed at the regular session in 1933, but no such bills were introduced either at this time or during the special session later in the year. There is no regular session of the legislature until 1935. The possibility exists, however, that the sales tax may be proposed if another special session is called to consider the school finance problem. GEORGIA

For the period October 1, 1929-December 31, 1931, Georgia levied a low-rate gross receipts tax. Efforts to extend the life of this tax or to enact a high-rate sales tax have failed. Development of the Fiscal Situation since 1929.*—By the end of 1932 Georgia's general fund had accumulated a deficit nearly equal to a year's general fund revenue. This cannot be traced primarily to the effect of the business depression upon the tax machinery. Furthermore, there has been no important change in state-local relationships, and the state government has not undertaken any new functions {e.g., care of the unemployed). The existence of the deficit is accounted for by the fact that for the four calendar-fiscal years, 1928-31 inclusive, the legislature appropriated in excess of antici4

F o r sources, see infra, p. 699.

150

SOUTHERN STATES

pated revenues, and in addition allowed the sales (gross receipts) tax to lapse at the end of 1931 without enacting any other general fund tax of importance. Deep cuts in expenditure in 1932 and 1933 brought it down to the level of income; under the 1931 budget law, if actual revenues fall short of original appropriations, each appropriation (with certain exceptions) is automatically scaled down pro rata so that at the close of the year the total can be no greater than revenues. Under the influence of this act, 1933 general fund expenditures will be about 35 per cent below those of 1931. Special fund expenditures (chiefly for highway purposes) have totaled about twice those from the general fund, but they cannot exceed the yield from their earmarked sources, and have not, directly at least, been an appreciable factor in the state's fiscal crisis. Georgia entered the depression with two new taxes—a sales tax and an income tax. A third tax, the one on property, kept at the constitutional 5-mill limit until 1933, has supplied over 50 per cent of general fund revenues. The fourth important tax source for the general fund is the insurance tax. None of these showed a serious drop in yield from 1930 through 1932, except that the lapsing of the sales tax deprived the fund of some 10 per cent of its revenue. The property tax yield was only slightly affected by delinquency (although this factor promises to be important in 1933), and assessed valuations dropped little until a reduction of about 13 per cent in 1932 from 1931. The income tax increased its yield somewhat through 1932, partly owing to a slight rate increase in 1931, partly because of more vigorous collection of back taxes. In 1933 the tax-reduction policy was continued by lowering the property tax rate to 4 mills. The only important changes in taxation since 1929, other than those already noted, were a two-year doubling of the cigarette tax rate (this affected chiefly a special fund) and the reduction of all motor vehicle fees in 1933 to a flat $3, by executive order. The net result has been that general fund revenues for 1933 will be some 2 7 per cent below the peak of 1931. The deficit cannot be funded, under the constitution, but much of it represents school fund money owed to counties, and part of it is covered by unspent appropriations.

SOUTHERN STATES

151

The ability of the state to reduce taxes and yet balance its budget undoubtedly masks a serious fiscal situation in the localities, concerning which, however, no comprehensive data are available. Development of the Sales Tax Issue ®—The general fund deficit noted above had already reached substantial proportions when the 1929 legislature met, and as there was no effective move to reduce appropriations, increased revenue seemed advisable. By agreement in the legislature, both the income and the sales tax were passed, the latter by a fairly close vote, and with the understanding, on the part of some, at least, that its proponents would not ask for an extension of its life at the expiration of the two-year period. In the special session of the 1931 legislature an attempt to extend the life of the sales tax and to increase its rate died in committee. The regular 1931 session, busy with governmental reorganization, paid little attention to tax matters. In the closing days of the 1933 session the sales tax issue was prominent, several bills, some with a 2 per cent rate and one at 5 per cent, being introduced. The contest centered around the 5 per cent tax (on retail sales), which was reported out of the house committee only to meet defeat by a ratio of approximately 10 to 7. It seems unlikely that the legislature will meet again until the early part of 1935, but at that time the sales tax will probably once more be an important issue. In discussing the sales tax issue in Georgia, it is important to recall that the burden of the 1929-31 tax appears to have rested on business owners rather than on consumers, owing chiefly to the low rates and high exemption.8 After 1929 the issue centered on sales tax proposals which carried rates high enough to permit of, or compel, shifting to the consumer, and when reference below is made to a sales tax, it is to this type of levy rather than to the 1929-31 tax, unless otherwise specifically noted. Certain groups which might favor a 2 per cent sales tax, for instance, could at the same time logically oppose prolongation of the life of the 1929-31 tax, and the converse is likewise true. Thus certain of the labor interests did not oppose " T h e information upon which this and succeeding sections of the Georgia study are based w a s obtained chiefly in interviews with eight individuals (three state officials, a reporter, an editor, a retailer, a l a w y e r , and a labor representative), and f r o m correspondence with manufacturing and public utility representatives. See also supra, p. mn. ' S e e infra, p. 156.

152

SOUTHERN STATES

the low-rate tax, but protested vigorously against the proposed 5 per cent tax. The sales tax does not appear to have been backed openly by organized interests, although several of them, especially those paying large property taxes, are said to have favored it. Public agitation for the sales tax has been largely on the part of certain individuals. Thus the passage of the 1929 act was in considerable measure due to the influence of the late R. C. Norman, at that time tax commissioner. The 1933 campaign was led by E. D. Rivers, speaker of the house. A certain amount of support in 1933 was furnished by school interests, although the state-wide education association took no official stand on the matter. It is likely, however, that unless conditions among the teachers have improved by 1935, the association will at that time officially endorse a sales tax, especially if the funds are allocated for education. The association membership is at present divided on this question, many members believing that the educators as such should not commit themselves with respect to any specific method of raising new revenues. Until 1933, school influence in the sales tax issue does not appear to have been important. Public service corporations, especially the railroads and electric light and power companies, would logically be expected to favor a sales tax in the hope that it might result in a reduction of property taxes, and although these groups did not make an extensive public campaign in favor of the tax, they threw their influence behind it in the 1933 legislature. The 5 per cent tax proposed in 1933 was to have replaced the state tax and most, if not all, of the county tax on property. Support for the sales tax has also come from certain well-to-do individuals, who fear a more effective income tax or intangibles tax, or who believe the present income tax should be abolished. The sales tax has at times been advocated as a means whereby the negro could be made to contribute toward the support of government, but this argument does not appear to have been widely employed in public debate on the question. Although the farm interests have no well-knit state-wide organization, they effectively control the legislature. The farm element as such, however, has taken no unified stand on the sales tax, nor do

SOUTHERN S T A T E S

153

the urban real estate groups seem to have played a decisive part in the dispute. Opponents of the sales tax have been more public and—at least recently—more effective in their stand than have the tax's proponents. The retail merchants and the labor organizations have furnished the organized opposition. Labor's influence, through the Georgia Federation of Labor, was not a significant element until 1933, but in that year it played an important role in the defeat of the tax. This organization has about 30,000 members, most of them concentrated in six industrial counties. The retail merchants offered opposition, in 1929, but a skeleton statewide organization hastily thrown together to fight the tax did not function effectively enough, largely owing to failure to obtain active support from the country merchants. In 1930 some merchants secured a statement from one of the gubernatorial candidates to the effect that he was opposed to a sales tax, and, as this candidate, Richard B. Russell, Jr., was elected, the mercantile group was able to use the statement effectively to quash a movement for prolonging the sales tax (with a rate of 2 per cent) which developed in the 1931 special session. In the 1933 session the merchants' success was due largely to their efforts to enlist the country storekeepers in active opposition. The direction and main force for the campaign has originated in the Atlanta Retail Merchants Association, although the state-wide Georgia Mercantile Association, owing its existence largely to the sales tax issue, is still functioning. B y concentrating attention on the 5 per cent bill rather than on those with a 2 per cent rate the merchants were better able to enlist recruits in opposition to the tax. The present governor, Eugene Talmadge, is said by opponents of the sales tax to have openly stated his opposition to such a revenue measure; saying that he would veto it if it were passed. Administration of the Tax.—Only a brief description of the administration of the 1929-31 tax will be presented here; for reasons noted above, the experience during this period offers little of worth in evaluating the type of sales tax which forms the main theme of the present study. With the high exemption of $30,000 a year, only 6,987 returns were filed covering the last quarter of 1929, of which

1S4

SOUTHERN STATES

668 indicated no tax liability. For the years 1 9 3 0 and 1 9 3 1 the numbers were respectively 6,612 (of which 603 were non-taxable) and 5,828 (of which 1,057 were non-taxable). These figures are on an annual basis, and thus represent the number of different taxpayers—not the number of quarterly returns. In addition, it is estimated that on September 1 5 , 1933 there were assessments outstanding against some 200 persons who have never filed returns. Most of those included in the figures above were business enterprises. Although the tax applied to professional men (doctors, lawyers, etc.), not more than 200 such taxpayers filed returns. Those whose gross receipts did not exceed $30,000 were not required to file a return (the last sentence of section 12 of the law, an error in legislative drafting, was disregarded in practice). T a x forms were mailed to all corporations on file under the corporation franchise tax. Otherwise no blanks were sent out save to those who requested them, and later to those who had filed returns in preceding quarters. A mimeographed letter of general information and copies of the law were sent to school superintendents and to banks, among others, for distribution. In general, however, no comprehensive list of potential taxpayers or potential returnmakers was drawn up. Starting in 1 9 3 2 , a partial check was made against state income tax returns, and a list of firms furnished by a commercial rating agency was used. About 1,000 delinquents were found by checking against these two sources of information. In very few cases was it necessary for the officials to make an estimated return for the taxpayer as provided for in section 1 5 ; as soon as the taxpayer realized that the administration was in earnest, he submitted the necessary data. T w o or three men had charge of the office audit, and usually spent about six weeks inspecting each quarter's returns. When not working in the office, these same men went out into the field to check returns which from office inspection indicated underpayment of tax. T h e y also carried a list of all taxpayers, and while on their field trips paid visits to most of the important places of business, not restricting their work to the sales tax. They were not, however, specialized field auditors. Field work started about M a y , 1930. More field men could have been used to advantage, but Commissioner Norman, heartily in favor of the tax, did not wish to make it un-

SOUTHERN STATES

1SS

popular at the beginning. Furthermore, the general sentiment for decreasing government expenditures worked against expansion of the tax-collecting force, although it would probably have been real economy, from the state's point of view, to increase the personnel. The sales tax division as such was abolished December 31, 1931, but the income tax division has continued to collect delinquent sales tax revenue, and in 1932 received from this source about $50,000 at a cost of from $5,000 to $7,000. A rough estimate is that out of the total $2.5 million collected in sales tax up to June 30, 1933, perhaps 20 per cent would not have been obtained had it not been for the field work. It is hoped to have all sales tax matters cleared up by 1934, although the state has four years from the due date in which to collect the revenue. N o field work is being done at present, except incidentally as the income tax field men notice sales tax delinquents. Pending litigation is the only factor keeping the sales tax books open at this time. A misdemeanor penalty was applicable to taxpayers failing to make a return, or making false returns with intent to defraud, but this provision was never invoked. T h e only other penalty that could be levied was 5 per cent on the amount of any tax due and unpaid, plus an additional 2 per cent for every thirtydays' delay after the initial delay of thirty days. In practice, the 5 per cent was applied in almost every case of delinquency, the extra 2 per cent, rarely. T h e total of penalties collected is said not to have exceeded $6,000, which on the 5 per cent basis indicates delinquent taxes of about $120,000. The cost of collection has been estimated to be between 2 and 3 per cent. Litigation under the tax has not been extensive, less than a dozen cases having been carried to the courts, although included in these was the highly significant case of Fox Film Co. v. Doyal,7 holding that copyrights and patents are not Federal government instrumentalities, and that receipts from these sources were taxable. Beginning in 1932 one of six assistants to the attorney general was delegated to handle, among other matters, sales tax cases, but throughout the life of the levy most of the disputes were settled within the offices 7

286 U.S. 123.

156

SOUTHERN STATES

of the sales tax division. The chief matters of disagreement centered around (a) the interpretation of the words "business of manufacturing, compounding or preparing for sale, profit or use," as road and bridge contractors wished to be considered "manufacturers" and hence taxable at 0.05 per cent rather than under the catch-all clause at 0.20 per cent; and (b) interstate commerce. Under section 17, taxpayers had the right to appeal from the revenue commission's decisions to a state tax board, and about 25 appeals were so taken. In almost all these cases the board decided against the taxpayer, and in 5 cases it was reversed by the courts. The sales tax yield was to be affected to some degree by the income tax offset in section 27, whereby the taxpayer could credit against his sales tax any income tax payment made by him after January 1, 1931. As amended March 31, 1931, however, the offset was reversed, and the taxpayer making his income tax return in 1932 for 1931 income was allowed to credit against income tax any sum paid as sales tax for the calendar year 1931. The offset provision was an essential part of the compromise by which both taxes were passed in 1929. Efforts of the Taxpayers to Shift the Tax.—Since the rates of the 1929-31 sales tax were low, since the exemption ($30,000) was high, and since the tax itself was regarded as only a temporary measure, it appears that little, if any, of the burden was passed on to consumers. In effect the tax rested largely on the profits of all but the smaller businesses. The rate on manufacturers was only 0.05 per cent, and testimony from this group is to the effect that the burden was not shifted. The retail tax of 0.20 per cent, according to a representative merchant, was never even thought of as a factor in setting prices. The 0.30 per cent tax on public service corporations was not shifted. N o evidence is at hand as to the taxes of 0.10 per cent on wholesalers, 0.30 per cent on amusements, and 0.20 per cent on all other business, but especially in the last two instances there seems no reason to expect that there was any shifting. Thus the Georgia sales tax of 1929-31 must be regarded as something quite different from the recent high-rate sales taxes enacted in other states. It offers few, if any, lessons of value as concerns the true sales tax. Tax Statistics.—The

sales tax was in force from October 1, 1929

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157

TABLE I TOTAL REVENUE COLLECTED UNDER GEORGIA GROSS SALES TAX Amounts collected in calendar years 1930 1931 193» January 1 -June 30, 1933 Penalties on 1931 tax* TOTAL TO JUNE

$1,212,213.11 954,608.67 277,057.61 8,842.40 2,784.00

30, 1933

$2,455,505.79

Amounts collected (non-delinquent) on gross receipts originating in calendar years, as of October 13,1933 1929 (3 months) 1930 (12 months) 1931 (12 months) Delinquent on 1929-31 business (27 months)

375.33°-5i 1,154,449.73 910,995.79 17,180.68

$2,457,956.71

TOTAL 1

$

Penalties for other years not stated, but see supra, p. 155.

to December 3 1 ,

1 9 3 1 , inclusive; the first tax payment w a s due

J a n u a r y 3 1 , 1 9 3 0 , a n d the last, J a n u a r y 3 1 , 1 9 3 2 . T a b l e s I to I V present d a t a on various aspects of tax collections. T h e amount collected in each of the calendar years 1 9 3 0 and 1 9 3 1 w a s not far from $ 1 million. A s T a b l e I also indicates, the amount collected on 1 9 3 1 business w a s about 2 0 per cent lower than collections on 1 9 3 0 business. T a b l e I I shows the amount which various types of taxpayers, at various gross income levels, were required to p a y . I t can TABLE II EXAMPLES OF TAX PAYABLE UNDER GEORGIA GROSS SALES TAX ON TAXABLE GEOSS RECEIPTS (BEFOKE DEDUCTION OF THE

$30,000 EXEMPTION) OF:

$100,000

$1,000,000

T Y P E OF TAXPAYER

^ ^ PAYABI

Manufacturer Wholesaler Retailer Public service corporation or amusement enterprise

$ 35 70 140

Manufacturer Wholesaler Retailer Public service corporation or amusement enterprise

485 97° i,940

210

2,9'°

158

S O U T H E R N

S T A T E S

TABLE III R E V E N U E , S E G R E G A T E D B Y C L A S S E S OE T A X P A Y E R S , G E O R G I A GROSS S A L E S T A X ,

1930 T A X COLLECTED

C L A S S OF T A X P A Y E R

D U R I N G CALENDAR Y E A R 1 9 3 0 (IN THOUSANDS)

Manufacturers Wholesalers Retailers Public service corporations Amusement enterprises All others

$231 224 455 170 11 121 $1,212

TOTAL

be seen that the m a n u f a c t u r e r s ' t a x w a s e x t r e m e l y light, a n d that e v e n t h e r e t a i l s a l e s t a x a m o u n t e d to o n l y 0 . 1 4

per cent on

total

s a l e s of $ 1 0 0 , 0 0 0 . F r o m T a b l e I I I it c a n b e s e e n t h a t in 1 9 3 0

re-

t a i l e r s s u p p l i e d 3 8 p e r c e n t of t h e t o t a l s a l e s t a x r e v e n u e , m a n u f a c turers, 1 9 per cent, a n d wholesalers, 1 8 per cent. T h e

geographical

d i s t r i b u t i o n of t h e s a l e s t a x r e v e n u e is i l l u s t r a t e d in T a b l e I V , w h i c h shows

t h a t in

1930

nearly

half

of

the revenue

and

one-third

of

T A B L E IV R E T U R N S AND R E V E N U E , S E G R E G A T E D B Y G E O R G I A GROSS S A L E S T A X , 1 9 2 9 A N D

COUNTY

COUNTIES, 1930°

L A S T QUARTER o r 1 9 2 9

C A L E N D A R YEAR

NUMBER

TAX COL-

NUMBER

TAX COL-

OP

LECTED (TO

OF

LECTED (TO

RETURNS

NEAREST

RETURNS

NEAREST

DOLLAR)

Fulton (containing Atlanta) Chatham (containing Savannah) Bibb (containing Macon) Muscogee (containing Columbus) Richmond (containing Augusta) Floyd (containing Rome) All other counties (all less than Floyd). "Foreign" TOTALS

1930

DOLLAR)

1,724 408 276 241 248 us 2,721 349

$145,520 24,357 16,326 13,979 11,35° 4,652 88,920 58,898

1,575 362 228 206 208 97 2 , 262 418

$SS0,20I

6,082

$364,002

5,356

$1,168,082

72,223 45,147 36,894 29,307 13,492 227,428 I 93,39°

" Total number of counties in Georgia, 159; number of counties having not more than five gross receipts taxpayers on 1930 business, 43; number of counties having no gross receipts taxpayers on either 1929 or 1930 business, 1 1 .

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ISO

the returns came from Fulton County, containing Atlanta. Eleven counties had no sales taxpayers on either 1929 or 1930 business. KENTUCKY

In 1930 Kentucky enacted a graduated retail sales tax, the rates ranging from 0.05 per cent on yearly sales to $400,000, to 1 per cent on that portion of sales above $1,000,000. Collections have been impaired by litigation. Recent attempts to change the tax into one which would place a heavier burden on small enterprises have been defeated. Development of the Fiscal Situation since 1929.*—Many data for the past year or two not being at hand at the time of writing, it can merely be noted in this section that up to the end of the fiscal year 1931 the tax system of the state government, although drawing heavily on the property tax, gave no indication of collapse. Total state revenues, furthermore, were about the same in 1930-31 as in 1929-30. Total state expenditures increased meanwhile from 1928-29 through 1930-31, so that despite a large decrease in the year 1932-33, outstanding unpaid warrants, which had been accumulating for many years as a result of deficit financiering, were by the end of 1933 equivalent to one year's expenditure of departments operated on revenue from taxes. Unemployment relief expenditures played no part in the state's fiscal affairs until the 1933 special session earmarked liquor taxes for that purpose. Aside from this, and the graduated retail sales tax passed in 1930 (a negligible revenue source thus far), no important changes in the tax system have been made since 1929. Development oj the Sales Tax Issue."—The distinctive characteristic of the sales tax issue in Kentucky has been the attempt to convert an anti-chain-store and anti-department-store sales tax, which has produced little revenue, into a flat sales tax which would yield a substantial sum. The existing tax became law in 1930. At the time there was grave doubt as to the constitutionality of a tax such as • For sources, and data obtained after this section was written, see infra, p. 714. ' T h e information upon which this and succeeding sections of the Kentucky study are based was obtained in interviews with nine individuals (three trade association officials, two economists, a tax official, a former tax official, a school official, and an assistant attorney general). See also supra, p. m n .

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STATES

that passed in Indiana, which had rates graduated according to the number of stores operated (subsequently upheld by the United States Supreme Court), 1 0 so that independent retailers turned to the alternative of a tax graduated according to volume of sales. A difference of opinion immediately arose behind the scenes in the legislature. Some legislators wanted a schedule of rates designed to produce sizable revenue, which meant starting with a fairly high rate on the smallest stores, while the retailers demanded a schedule that would impose an inconsequential tax upon the smaller enterprises and a heavy tax upon the larger stores of all kinds, especially the chains. The retailers won easily. In fact, it is doubtful whether either the general membership of the legislature or the general public knew that the difference of opinion existed. The tax which Governor Sampson approved on March 17, 1930 imposed a rate of 0.05 per cent upon aggregate sales of $400,000 a year, or less, and graduated rates rising to 1 per cent upon that portion of sales in excess of $1 million a year. In effect it selected some 40 or 50 large mercantile enterprises and levied upon them a tax deliberately designed to weaken their competitive position. There is allowed an offset for any special state license, excise, occupational or corporation license tax paid. Maintaining that the tax was unreasonably discriminatory, the larger mercantile establishments combined to file suit against it. The case is now on its way through the Federal courts, the law having been upheld by the Kentucky state court of appeals and the United States District Court for the Western District of Kentucky. Such revenue as the tax produces is divided equally between permanent improvements to state eleemosynary institutions and the retirement of the large volume of state general fund, interestbearing warrants outstanding. Critics of the measure at the time of its enactment warned the jubilant retailers that they were merely presenting themselves with a standing threat of a flat sales tax; but the warnings were ignored. Time has amply proved the reality of the threat. Like the rest of the country, Kentucky's state and local governments have felt the pinch of hard times grow more severe year by year, and this has "State 1931.

Board of Tax Commissioners

oj Indiana v. Jackson,

283 U.S. 527, M a y 18,

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161

led to repeated attempts to convert the sales tax into a revenue producer. At the same time, the interests which might normally be expected to unite in opposition to a sales tax are divided over the graduated tax. The independent retailers continue to oppose the flat-rate sales tax, but the larger mercantile establishments, and especially the chains, have become half-hearted in their opposition. A flat-rate tax passed as a temporary emergency measure is much more desirable to many of them than a permanent graduated tax. Consequently they tend to favor a sales tax provided that it carries a clause repealing the graduated tax. Only the extraordinarily belligerent tactics of the independent retailers have prevented passage of such a law on several occasions during 1932 and 1933. As the 1932 regular session of the legislature drew near there were two forces operating to create a demand for new revenue—the desire of the office-holding and tax-spending groups for funds to offset reductions in the yields of the old taxes and the demand of property owners for a lightening of their tax burden. T o meet these demands the leaders of the Democratic Party, which at present dominates the politics of the state, agreed upon a legislative program including diversion of part of the gasoline tax and a selective sales tax. After the legislature convened, however, it developed that Governor Laffoon, who had by that time come into office, was inclining toward a 2 per cent retail sales tax. To offset this proposal, the larger merchants proposed a two-year general sales tax of 0.5 per cent repealing the graduated tax. Governor Laffoon considered for a while, then came out in favor of a 2 per cent retail sales tax which would repeal the graduated tax. His recommendation alienated virtually all of the retailers, who hastily threw together an organization and started to fight. Even most of the larger merchants felt that 2 per cent was too big a price to pay for the repeal of the graduated tax. The recommendation also gave the factions of the Democratic Party opposed to the governor an opportunity to attack. A bitter and extremely complex struggle followed. The governor tried to compromise with his opponents by switching to a 1 per cent tax on retail sales, but they would not agree to this. In the face of their opposition, the governor, thanks to the support of the pro-

162

SOUTHERN STATES

administration men and, outside the legislature, of the tax-spending groups and the property owners whose taxes were to be reduced under the law, succeeded on March i in pushing the i per cent tax through the house by the decisive vote of 65 to 30. Since there seemed to be every likelihood that the governor would have the same success in the senate, the retailers decided to make a spectacular display of force. They urged as many merchants and as many of their friends as could, to march on Frankfort. A large number, variously estimated at from 3,000 to 30,000, responded. Whether their truculence was responsible for what followed or whether the real reason was political maneuvering by legislative opponents of the governor remains a matter of dispute. In any event, in order to forestall even a vote, the rules committee of the senate refused to report out the sales tax, the lieutenant governor refused to recognize any senator who wanted to offer a motion to override the committee, and the majority of the senate were quite satisfied to make no attempt to override the lieutenant governor. This effectively buried the sales tax for the time being. During the rest of 1932 and part of 1933, Governor Laffoon campaigned vigorously for a retail sales tax. His emphasis shifted, however, from property tax relief and the need of the state for general revenue to the necessity for emergency unemployment relief, which had hitherto been left to the localities. His arguments were reenforced by pronouncements from the Federal emergency relief administrator, who announced publicly in July that after August 1 5 , 1 9 3 3 , Kentucky would receive no more Federal money until the legislature appropriated substantial funds for unemployment relief. Thus the stage was set for another struggle over the sales tax when the legislature met in special session in August to consider, among other matters, unemployment relief. Governor Laffoon now proposed a x per cent base tax on all retailers, and a surtax graduated according to sales, starting at $10,000 a quarter and rising to 1 per cent on sales in excess of $100,000 a quarter. The surtax was designed to replace the graduated tax imposed in 1930. Amusements were to be subject to a 2 per cent rate. The retailers, whose state organization had now been firmly established, again opposed the governor. They had had an opportunity in the interval to show their political power, since by active partici-

SOUTHERN STATES

163

pation in the 1933 primaries they had defeated for reelection most of the legislators who in 1932 had favored the sales tax and had elected one of their supporters to Congress over the opposition of the regular Democratic organization. Lobbying energetically in the special session, they again broke party lines and defeated the tax. On August 31, after an acrimonious debate, the house voted against the bill, 51 to 46. Two weeks later on September 13 the house again defeated it on reconsideration, 50 to 48. Following these two votes, the legislature turned to other subjects of taxation. For unemployment relief it passed two laws taking advantage of the impending repeal of the eighteenth amendment to the Federal constitution. One taxed wine and beer; the other, whiskey. When the legislature adjourned on September 26, the graduated sales tax had not yet been replaced by any other type of sales tax. It is yet too soon to permit of sound judgment as to the significance of these rejections of the sales tax. Even though the tax has been finally defeated for 1933, it is almost certain to come up once more for consideration at the regular session in 1934. It is by no means certain that the retailers will be able to hold their small margin of victory at that time, since there are strong demands for new revenue, and the state eventually will be forced to do something about its outstanding warrants. There is a possibility, of course, that the solution will be an income tax rather than a sales tax. T h e farmers of the state, while they have not taken a formal position against the sales tax, are definitely in favor of the income tax as the method for relieving property. School teachers apparently favor anything which will restore their salary schedules. Individually they probably favored the sales tax during 1932 and 1933, but as an organization they seem to have felt it wise to take no official position on the matter. Administration of the Graduated Sales Tax.—Litigation has interfered with the administration of the graduated sales tax ever since it went into effect. It is being enforced against the smaller merchants, but collections under the highest brackets have been enjoined. It is impossible to tell exactly how much the costs of administration have been. Prior to i93 2 "33, there was no special administrative fund for the sales tax. For the fiscal year ended June 30, 1933, a

164

SOUTHERN STATES

special appropriation of $35,000 was made b y the legislature, but even now the administration of this tax, especially in the field work, overlaps that of others. A list of merchants, used in enforcing the tax, was originally made up from those of commercial credit agencies. F o r keeping the list up to date, reliance is placed upon the record of new incorporations in the office of the secretary of state and upon the field men in 28 district offices. Report forms and instructions for filling them out are sent directly to the merchants from the central office. A s of June 30, 1933, the number of forms which had been sent out but not returned was 3,850 for 1932, 1,180 for 1931, and 112 for 1930. T a x officials believe that the larger numbers for the later years do not indicate inaccuracies in the list so much as a growth in the number who are withholding payment until litigation over the tax is decided. T h e number of reports filed for which the tax was delinquent June 30, 1933 was 1 1 7 for 1932, 55 for 1931, and 41 for 1930. N o suits for collection have been filed as yet, and there has been no instance where the 20 per cent penalty for delinquency after each February 1 has been collected. Legal questions are answered b y an assistant attorney general as they arise. T h e most important litigation against the law has been the actions brought in the state and Federal courts to test its constitutionality. There has also been some litigation over the meaning of phrases, notably over the offset provisions, but such actions must remain of secondary significance until the primary question of the law's constitutionality is answered. Tax Statistics.—The amounts collected under the graduated tax have been small, owing to litigation. It has been estimated that if those with large tax liabilities had been paying, the collections would have totaled between $3 50,000 and $400,000 a year. In contrast, only $75,572.10 was collected in the period from January 1 to June 30, 1931, $95,503.49 in the fiscal year 1931-32, and $61,274.61 in the fiscal year 1932-33. MISSISSIPPI A low-rate gross receipts tax enacted in Mississippi in 1930 was replaced in 1932 b y a similar tax with much higher rates, including 2 per cent on retail sales. Effective M a y 1, 1932, the tax expires June 30, 1934. Sales b y farmers are not taxable, and an exemption of $1,200 a year is granted.

SOUTHERN S T A T E S

16S

Development of the Fiscal Situation since 1929."—The crisis in Mississippi's state finances resulted from the legislature's refusal to keep appropriations down to the level of estimated revenues, and to a lesser degree from the decline of general fund tax revenue owing to the business depression. No important change in state-local relationships occurred, and the state has spent no money directly for unemployment relief. The general fund cumulative deficit, equal to a year's general fund income by the end of 1931, has since then grown no larger and has been funded. Most of it was incurred in the one biennium 1930-31 (calendar years). Whereas the general fund income for the biennial appropriation period 1932-33 will be slightly larger than for 1930-31, expenditures will be about 30 per cent lower, largely as a result of salary cuts averaging about 20 per cent, and a decrease in bond redemption and in the only important grant-in-aid to localities (for education). This was accomplished by legislative action—not as in Georgia by automatic, or as in Virginia and Ohio, discretionary, executive action. The three chief sources of the general revenue fund up to 1932 were the state property tax, the privilege taxes, and the income tax. The property tax rate has been kept steadily at 8 mills, but from 1928 to 1932 assessed values of various types of property dropped between 23 and 38 per cent. This, more than delinquency, explains the decrease in yield of about 30 per cent between the revenue years 1928-29 and 1932-33. The yield of the privilege taxes declined by the same percentage, and the income tax, despite a moderate increase in rates and a decrease in personal exemptions (beginning with incomes for 1932), produced over 80 per cent less in 1932-33 than in 1928-29. Several minor changes were made in the taxing system before appeal was made to the new sales tax, but the only important alteration from a revenue standpoint was the introduction of a tobacco tax in 1930 and an increase in insurance tax rates. Special fund revenues and expenditures are not quite half those of the general fund, and having had no deficits of importance, they have not been a direct factor in the fiscal crisis. The situation of the localities is not clear, but the available data 11

For sources, see infra, p. 726.

166

SOUTHERN S T A T E S

suggest that up to the spring of 1932 (when the legislature passed the new sales tax) there had been no general breakdown in collections under the property tax, and that the state of local finances was scarcely even an indirect influence in the passage of the sales tax. It is of interest that Mississippi's legislature, meeting in 1930,1932, and 1934, instead of 1 9 3 1 , 1933, and 1935, as do the legislatures of so many other states, accomplished fiscal adjustment before the depression had had time to rnake its full effect felt on either state or local finances, and the data given above for 1932-33 should be considered with this fact in mind. Development 0) the Sales Tax Issue.™—Effective June 1, 1930, Mississippi enacted a gross receipts tax with rates which were very low except for certain extractive industries and amusements (both 1 per cent). Public utilities were taxed at 0.5 per cent, manufacturers at from 0.1 to 0.5 per cent, wholesalers at 0.125 per cent, and all others, including retailers, at 0.25 per cent. Any person operating more than five retail stores, however, paid 0.5 per cent (an anti-chain store feature). The tax was levied upon all those already subject to privilege taxes, and its weight was greatly lessened by proyiding that privilege taxes paid could be offset against the gross receipts tax, and by a $5,000 exemption. The tax yield for 1930-31 was only $192,980.94 and for 1931-32, $131,124.32. The tax was in general so light that it appears not to have been an important factor in the 1932 debate. It was replaced in 1932 by the new high-rate sales tax. No sales tax bills were introduced in the 1931 special session, but in the regular 1932 session several made their appearance. One levying a 5 per cent tax on retail sales was introduced in the house February 16 (H. 292), but was unfavorably reported by the wa>s and means committee. The bill (H. 328) which finally became law was introduced in the house February 23, passed the house March 10, and the senate April 5, and was approved by the governor Ap-il 28. Its rates, together with those of the 1930 law, are shown in Table V. The 1932 tax does not apply to sales of farm products (induding live stock) in their original state made by the producer thereof; to " T h e i n f o r m a t i o n upon w h i c h this and succeeding sections of the Mississipji s t u d y are based w a s obtained in i n t e r v i e w s with t w e l v e individuals (nine state oficials, a l a w y e r - l e g i s l a t o r , a m e r c h a n t , a n d a n industrial representative), and correspondeice w i t h three others ( t w o merchants a n d a l a w y e r ) . See also supra, p. i n n .

SOUTHERN STATES

167

sales of cotton, no matter by whom sold, and whether or not baled or compressed; to sales of cottonseed in its original condition, and to sales of fertilizers, seeds, and boxes or crates for use in preparing agricultural products for market. Other important exemptions include that given to insurance companies paying a premium tax, and the allowable deduction of $1,200 per year granted to every TABLE V T A X R A T E S , MISSISSIPPI SALES T A X E S , 1 9 3 0 AND 1 9 3 2 1932

SUBJECT OR PERSONS TAXED

Producers of: Natural gas Oil, limestone, sand, gravel, or other mineral products. . Timber Manufacturers of: Brick, drain tile, building tile, sewer pipe, Portland cement, and Portland cement products, and clay products Bottled soft drinks Cotton seed oil All other goods Automobile dealers or agents Wholesalers Retailers Sales of electricity or gas for industrial purposes Sales of electricity or gas for other purposes Gross income of other public utilities and of common earners Contractors Amusements All others subject to the privilege tax laws of the s t a t e . . .

TAX

Rates in per cent

1930 TAX Rates in per cent

2,•5 2 2

i i i

I

o-S

I

0. 25 0. 25 0. 25 I

0. 125 2

05 0.125 0.5 0. R [no special rate]

2

0.125 0.25" 05 0.5

2

o-S k

I

I

2 2

0.25 I

0.25

Plus 0.25 per cent on persons operating more than five stores in the state. Restricted to street railroads, water works, gas companies, and electric light and power companies. 0

b

taxpayer. T h e tax is payable monthly, except that those whose tax falls below certain amounts may pay quarterly or annually. Effective M a y 1,1932, the tax expires June 30,1934. An attempt in the 1932 session to reduce the tax rate on certain manufacturers (H. 874) was passed by the house but not by the senate. An amending act, chiefly concerned with certain administrative provisions, was passed, however, by both houses and approved by the governor in M a y .

168

SOUTHERN STATES

The passage of the sales tax was a direct result of the precarious condition of the state's finances in the spring of 1932. After the gubernatorial election in 1931, the governor-elect, Martin Conner, conferred with the incoming legislators as to the means whereby new revenue could be obtained. If the appropriation of $30 million made in the 1930-31 biennium were cut to about $20 million for the coming two years there would still be a gap of some $4 million to fill. Conner was strongly in favor of the sales tax, although it had not been an issue in the 1931 gubernatorial campaign. He has continued to be an active advocate of the tax, making it the subject of addresses to the legislatures of several other states from time to time. In the plans discussed by the incoming administration in the latter part of 1931 the sales tax was in the foreground at all times, and a 3 per cent rate on retailers (instead of the 2 per cent rate finally adopted) was given serious consideration. Raising the state 8-mill tax on property, although possible constitutionally, was apparently unthinkable from a political point of view, and it seems never to have received much support from any quarter. The income tax was yielding only between $300,000 and $400,000 a year. Diversion of gasoline tax revenue was strongly opposed. Furthermore, there was some feeling that negroes had been contributing little or nothing toward the support of the government, even indirectly through the real estate levy, and that it would be proper to ask them to pay something through a sales tax. Other than the administration forces led by the governor, there seem to have been no organized groups publicly active in promoting a sales tax, although educational interests were represented in a mass demonstration held in its favor at Jackson. Virtually the only organized opposition to the tax came from retailers. They had no well developed state-wide body, but, led by some of the prominent merchants, they made a fairly effective campaign, which included a mass meeting at Jackson and a parade to the capitol grounds. It was largely through their influence that the scope of the tax was broadened to include public service corporations, professional men, etc. The merchants felt that they would thus obtain allies in any future fight against an increase in the rate. The result was a long and close contest, as indicated by the dates

SOUTHERN

STATES

169

13

above, and by the fact that the tax passed in both houses with only one vote over the requisite three-fifths majority. In the opinion of some competent observers, the Mississippi struggle outranked in intensity even that in North Carolina, if not the one in Kentucky. The farmers have not been well organized in Mississippi. The industrial laboring element is not strong enough numerically to be of much significance (although some of the merchants say they had the active support of labor, and of traveling men's groups), and the urban real estate interests, like the farmers and the laborers, seem to have had little influence—at least as an organized body—on the outcome of the sales tax issue. The same may be said of the doctors and lawyers, who pay on their fees at the 2 per cent rate; certainly the lawyers did not act in concert to oppose the tax, and there seems to be little sentiment, among the more important, at least, for its repeal. In general it appears that publicly organized effort of various economic groups, either for, or against, the sales tax (with the important exception of the merchants) has been lacking. The legislature meets again in regular session in 1934. There is a probability that the sales tax will be reenacted, and there is strong pressure from county authorities for an increase in the rate to 5 per cent, the counties to share in the yield. The governor has publicly stated that he favors a 3 per cent rate. 14 Although in some parts of the state, notably Vicksburg, the merchants are still urging abandonment of the tax, there is no active state-wide campaign for repeal, and it seems likely that the vigor of the retailers' opposition of 1932 will not be repeated in 1 9 3 4 . Perhaps this is because they believe that they can pass the tax on without appreciable loss to themselves or even with a certain amount of gain on small sales in certain country districts where competition is not keen. Perhaps they feel that if the sales tax is repealed they will be harder hit in some other way—for instance, by strict enforcement of the personal property tax as it applies to stock of goods in trade. This conjecture is based on the fact that the writer was assured, from a reliable source, that the merchants' opposition to the sales tax declined noticeably after the administration had caused to be published in some papers in u Supra, p. 166. "Address by Governor Conner before Joint Session of Illinois General Assembly, Feb. 21, 1933.

170

S O U T H E R N STATES

the state a list of unnamed merchants showing in one column the assessment actually made for such personal property, and in another column its true value. Another factor in lessening the merchants' opposition to the tax has undoubtedly been the intentionally diplomatic and to some extent lenient manner in which the tax has been administered to date, in an effort to make it as popular as possible. 1 5 Whether the true bearers of the b u r d e n — t h e poorer classes who benefit little b y the reduction in the property tax (or the lack of increase in i t ) — a r e in revolt against the sales tax is not known. T h e r e seems to have been no organized expression of resentment on their part. Administration

oj the Tax.—About

the time the 1932 sales tax

became effective ( M a y 1 ) the Mississippi tax commission was reorganized, and A . H . Stone was appointed chairman and tax commissioner in charge of this law. It was the philosophy of the new commissioner that tax administration should be " h u m a n i z e d " as far as possible in its relation with taxpayers. This meant that the new sales tax was not to be enforced to the last letter of the law, at least for the first year or so. Indeed, the implications of the word "enforcement" were extremely distasteful to the commissioner. H e realized that there would be considerable opposition to collection of the sales tax, and felt that it would best serve the state to introduce it b y easy stages. I f , despite a somewhat lenient attitude, the taxpayers still responded disappointingly, the tax would have to be regarded as a failure, for it could not possibly be enforced without the cooperation of most of the public. T h u s not all of the interest charges and penalties provided in the law have been enforced to date; in general, in so far as it has been possible to construe the law in favor of the taxpayer, this has been done; every effort has been made to answer correspondence promptly, and to treat courteously with taxpayers in case of dispute. Little was attempted through newspaper publicity and over the radio to acquaint the public with the tax, or to gain their acceptance of it. T h i s task was left to the men in charge of the business survey and field checking. Perhaps more preliminary publicity would have been advantageous, but on the other hand, the tax had had so much " Infra,

pp. 175-77-

SOUTHERN STATES

171

unfavorable publicity in the press during the time it was under consideration by the legislature that it was felt preferable to rely upon direct personal contact after the tax became law. To obtain a list of all who came within the scope of the law, resort was had to a state-wide business survey. Beginning August i, 1932, and ending for the most part in January, 1933, this survey was made by a force of men numbering at one time as high as twentythree, who went through every business building in the state, and covered the country districts as thoroughly as possible to reach even the small merchants, obtaining a record of all who might come under the law. Each person interviewed was requested to fill out a blank form giving pertinent details as to his business or profession. The survey was not, of course, complete, as some of the persons were not available for interviewing at the time. It is rather deficient in the listing of professional men—doctors, lawyers, insurance agents, etc. One of the greatest difficulties developed in reaching small merchants in remote country districts, especially with roads bad and weather conditions unfavorable. All told, however, some 22,000 names were listed. The information on these cards has not yet been completely checked against returns received, but within two or three months this will probably be done.1" A separate "master index" is also being prepared in part from the survey cards. This was the only method used in listing possible taxpayers, except that the already-existing roll of persons subject to the various privilege taxes has offered another check, which has proved limited in its usefulness. The survey list is, of course, already somewhat outof-date, but field men have been ordered to report any new businesses they see, and it is expected that with such additions no new survey need be made within four or five years. An annual license, costing one dollar, must be obtained by everyone coming within the scope of the law (whether or not he has any tax to pay). On the license is printed "Post in a conspicuous place." Only one license need be taken out by any one person or partnership or corporation, regardless of the number of businesses in which the taxpayer is engaged or the number of places at which a business is conducted. Field workers with no special knowledge of accounting may be " Unless otherwise noted, statements in this section (Administration of the T a x ) are as of September, 1933.

172

SOUTHERN

STATES

used to see whether every one who should make a return is in fact doing so, and to check on obvious instances of erroneous returns where evidence in the return itself shows probable understatement or where external indicia such as the physical size of the establishment, number of employees, etc., taken in conjunction with the tax return, clearly imply understatement by the taxpayer. T o perform these functions, and to assist taxpayers puzzled by the new law, a force of thirteen field men is now at work. It was not until M a y , 1933, a year after the tax took effect, that effective field checking was started, the men having previously been used in the business survey noted above, with the exception that during July and August, 1932, eight men made trips throughout the state explaining the nature of the tax to city and county officials, business associations, etc. Time had to be allowed also for the preliminary training of these field men. The first work of the field force has been to interview taxpayers who are delinquent as to taxes on 1932 business, as shown by the office audit of the annual returns. Opinion in the administration is that thirteen field men is about the right number, and the force should in no case be less than ten, other than trained auditors. These men also handle other tax matters (they comprise all but three of the entire field force of the commission, aside from two field auditors), but almost all of their time is devoted to the sales tax. Lists showing every taxpayer who is supposed to file a monthly or quarterly return, taken from the files at the central office, with data as to tax paid in prior months, etc., are now being sent out monthly to the field men. It is expected that every taxpayer on record will be visited about once a year, if only to be reminded that the tax commission is functioning. A s there are at least 20,000 taxpayers, each of the thirteen field men would thus have to cover four or five taxpayers per working day, on the average. This rate is now being maintained. Field auditors, capable of going through the taxpayers' books, invoices, etc., are necessary. Only two of them are at present being used by the commission, and they spend most of their time on the sales tax. Opinion in the administration is that not less than two or three more could be used to advantage. N o t every taxpayer's books, of course, will be audited. Attention will probably be confined to obviously suspect returns', and to trial samples taken at random,

S O U T H E R N STATES

173

but so selected that they will be scattered throughout the state, and representative of the various lines of business. The commission is making an effort, as to every case of delinquency it discovers, to notify the taxpayer of this fact within a week or two following the due date. This standard has not as yet been reached, but it is expected it soon will be. As of August 20, 1933, notices of delinquency being sent to taxpayers referred in some instances to returns as far back as January. There is no doubt that very many taxpayers, especially in the rural sections, are not keeping all the records of sales necessary if adequate checking by field men or field auditors is to be possible. They probably will never do so. In such instances the commission's representatives must, of course, resort to reasoned guesses as to the taxpayer's taxable volume. They are at the same time trying to educate such taxpayers to keep at least elementary records, and are distributing a simple form for this purpose. Everyone coming within the scope of the sales tax law must file an annual report, whether or not he has any tax to pay. In addition to the annual return, returns must be filed quarterly if the taxpayer's tax liability is more than $ 1 0 per quarter but less than $ 1 0 per month, and monthly if the tax liability is more than $ 1 0 per month. For the eight-month period, May 1 to December 3 1 , 1932, it was not specified that taxpayers making monthly or quarterly returns had to make a return for the last month or last quarter of the year, in addition to the annual return (the latter being due fifteen days after the former), and some confusion resulted. It has now been made clear that both returns must be filed. There is, of course, no means of ascertaining the full extent of delinquency in the sense of failure to file a return (whether or not there is any tax due). Some statistics covering the taxable period of eight months, May 1 to December 3 1 , 1932, however, are of interest in this connection. On March 6, 1933, a thorough office audit was commenced, to see how many of those listed in the files had made one or more returns for part or all of that eight-month period. The files contained 23,609 names, representing almost entirely (with the exception of about 300) taxpayers who had applied for and obtained dollar registration licenses. B y April 26, 1933, when this office audit was finished (the audit occupied 297 man-days), it was found that

174

SOUTHERN STATES

1 4 4 7 0 of these 23,609 had filed one or more returns for part or all of the eight-month period (12,022 "annual," 2,448 quarterly or monthly), while the remaining 9,139 had not as yet made any return. While the audit was under way, however, and between April 26 and July 3 1 , 1 9 3 3 , many more returns covering the same period poured in, as a result of correspondence (every taxpayer in the files was notified by letter of his duty to make a return) and activity in the field. The result was that by July 3 1 , 20,719 taxpayers had filed one or more returns for part or all of the 1932 period, of which 7,263 indicated no tax liability. This represents a nearly complete response on the part of those listed in the files, since many of the licenses for various reasons (duplications, firms gone out of business, misunderstanding of the law) did not in reality represent an obligation to file a return. There is no way to determine how many of those who should have applied for licenses (and likewise should have filed returns) have not done so. The business survey should give some clue when the current check of this survey list against the files noted above is completed. As stated above, about 22,000 names were listed by this survey. How many of these are already in the files, and how many have yet to take out their licenses is now being ascertained. The resulting figures will not by themselves indicate the full usefulness of the survey, for there is no doubt that the number of licenses already taken out would have been considerably less had it not been for spreading knowledge of the tax as a result of the survey. Furthermore, although it was not at first the intention that the survey men should at the time collect any license fees or distribute any license forms, they were later allowed to do so. How great is delinquency in the sense, not of failure to file a return, but of failure to pay the proper amount of tax although filing a return? Not even an approximate answer to this question can be given yet, since effective field checking started only in M a y 1933. Particularly as to the eight-month period, May to December, 1932, it will probably never be known how great the delinquency was, as in its effort to get up to date on 1933 returns and to keep there, the commission has by now largely abandoned efforts to discover delinquencies for the 1932 period. A certain amount of 1932 delinquency, however, has been recov-

SOUTHERN STATES

175

ered. Out of the 20,719 returns covering part or all of the 1932 period. 644 have to August 23, 1933 been requested to pay $13,049.23 additional tax, and one-third of these have paid upon the first request. About 90 per cent of the $13,049.23 has by now been collected. However, only about 20 per cent of the monthly and quarterly returns were inspected for obvious errors as they came into the office during this eight-month period. It is estimated that during the first few months of the tax about three-quarters of the returns were erroneous on their face, but most of them involved very small amounts of tax, and it has not proven feasible to follow up these small amounts. About one-fourth of the current returns are erroneous on their face, involving a delinquency totaling some $2,000 a month. It is not this type of delinquency, of course, that is the most serious, but rather the hidden kind that is not discoverable by a mere office audit. Delinquency in the sense of failure of the taxpayers to inclose sufficient remittance with the filed return has resulted from many types of errors, intentional and unintentional. Judging from form letters drafted by the commission to be mailed to such taxpayers, the most common types of error have included insufficient explanation of deductions taken, failure to show the number of gallons on which the deductible gasoline tax was paid, simple mathematical errors, failure to sign the report, failure to take the specified exemption of $1,200 per year (or $100 a month or $300 a quarter), the taking of a greater exemption for a monthly or quarterly period than allowed, failure to distinguish cash sales from credit sales, failure to distinguish sales from collections, failure to apply the correct tax rate to the several types of taxable income, and deduction, from taxable income, of taxes paid other than those allowable. The form letter listing all these possible errors was later replaced by a much shorter one listing only the first two items above, plus failure to apply for and obtain permission to defer payment of the tax on credit sales until collections thereon have been made, overpayment of tax, and failure to file any return with the remittance. Those who fail to make returns and/or to pay the full amount of the tax due on time are subject to certain penalties. As yet virtually no such penalties have been applied. The 0.5 per cent per month

176

SOUTHERN

STATES

interest charge on taxes overdue without negligence or fraud has never been applied. Indeed, the "notice of additional tax now due," sent to a taxpayer following an office examination of his report of gross income has no place on it for listing this 0.5 per cent interest charge, and on the notice is printed " M a k e Y o u r Remittance Promptly to Avoid Penalty." T h e 10 per cent penalty and 1 per cent per month charge on taxes overdue through "negligence or intentional disregard" were applied to almost none of the 1932 accounts, and have been applied sparingly in 1933. T h e 100 per cent (or less) damages on account of fraud has been applied to no more than ten taxpayers to date. N o warrants (addressed to county sheriffs) for the collection of unpaid taxes have yet been issued, although some are now being prepared. N o injunctions have been issued against delinquent taxpayers, restraining them from continuing in business until the tax is paid (section ix of the l a w ) . Under section 8, if one subject to the law fails to make a return, the commissioner is required to give notice to such a person, b y registered mail, of his liability to file a return. T h e law sets no time limit within which the commissioner must act; the first of such registered letters were in fact sent out about the beginning of July, 1933; they totaled about 400 to August 20, 1933. About 50 per cent of the taxpayers to whom this letter was addressed replied b y the latter date. T h e significance of this registered letter is that if the taxpayer does not make a return within 30 days from the date of the letter, the commissioner must make a return on behalf of the taxpayer, which shall be prima facie correct (again, there is no time limit within which the commissioner must a c t ) , and demand payment of this amount (about 100 such demands have been made to August 20, 1933). If this amount is not paid within 30 days from such demand, the commissioner must add not more than 100 per cent as damages, plus interest at r per cent per month. Therefore the sending of the registered letter is likely to lead up to a heavy penalty, and the fact that no such letters were sent until July of 1933 reflects the desire of the commissioner not to be active in assessing penalties during the first year or so of the tax. It must not be thought that taxpayers failing to make returns were entirely neglected until July, 1933; on the contrary, starting M a r c h 6, 1933, a form letter referring to section 6 of the law, and stating that " T h e records of the office show that

SOUTHERN STATES

177

the annual report has not been filed under the name to whom this letter is addressed"—but making no reference to penalties—was sent to 11,587 taxpayers who, in the course of the office audit noted above, were found to have failed to file an annual return. This attitude toward application of penalties is in part a result of the confused wording of the statute, which in some cases makes it doubtful what penalties should be applied. The wording must undoubtedly be revised, as it is impossible to fit the provisions of sections 7 and 8 with those of section 11. In part, the failure to apply penalties is a result of the commission's deliberate plan, noted above, of introducing the tax by easy stages (for example, the forms first used for the tax have been replaced by much simpler ones, as it was found that most taxpayers did not have the data, the skill, or the inclination to furnish all the information it was at first hoped to obtain). Finally, until the results of the business survey have been checked, it cannot be known who among those who should have filed returns have failed to do so (although those in charge of the tax feel reasonably certain that there are not many such cases), and until field men, and field auditors especially, have had more time to check returns with data obtained in the field, many existing cases of underpayment cannot be uncovered. A certain amount of overpayment of tax has been noted, especially on the part of some professional men who thought they had to pay tax on their total income—e.g., not only on fees, but on receipts from investments. However, not over $2,500 has been overpaid. About 85 per cent of those who have overpaid have been cared for by crediting the excess against future payments of tax. The others will have to be given a refund, which cannot be done until the legislature makes an appropriation for that purpose. The cost of administering the sales tax amounted roughly to $100,000 for the sixteen-month period from May 1, 1932 to August 31, 1933, this being about $75,000 on an annual basis or about 3.2 per cent of the receipts for the first twelve months. The administration of the tax to date has been marked by a flood of correspondence and a practically complete absence of litigation. For a while more than 100 letters a day from curious, puzzled, and sometimes irate taxpayers had to be answered; even now the mail averages from 25 to 50 letters a day. This is doubtless in part a result of

178

SOUTHERN

STATES

the commission's policy whereby no rulings or regulations concerning the sales tax are published, although the rulings that have been made to date are available through a nationally-known legal service, but not through local agencies. T h e law makes provision for hearings if the taxpayer feels aggrieved because of a deficiency assessment by the commission. There have been only some half-dozen petitions for such hearings to date. T h i s is due largely to the liberal attitude whereby taxpayers are invited to talk their troubles over with the commission, being assured that if the law can possibly be interpreted in their favor, this will be done. T h e commission's attorney has had some 2,500 conferences of this kind to date. So far there has been but one case pushed to the point of litigation, and this (involving the proper tax rate to apply to a cotton gin) has not yet come up for hearing in court. Efforts 0} the Taxpayers to Shift the Tax.—No intensive survey of the economic aspects of the sales tax in Mississippi was made for the present study. Competent observers differ as to whether the practice of adding the tax as an item in addition to the quoted price is more common in the larger towns than in the country districts. N o uniform schedule for adding the tax is in state-wide use. L a w y e r s advise that in virtually no instance is the tax (2 per cent) added as a separate charge on their bills, being simply regarded as another item of expense, like regular office expenses. For further details as of 1932, the reader is referred to the recent study made by the University of Mississippi. 17 Although it is not clearly stated how adequate or representative, statistically speaking, its sample is, the report indicates a possibility that the use of schedules for adding the tax as a separate item was fairly widespread at that time. Tax Statistics.—Table V I shows the monthly receipts, together with number of returns, received under the new Mississippi sales tax to the end of July, 1933. 18 Mississippi has published to date more elaborate statistics concerning the sales tax than has any other state. These indicate that most of the tax comes from the retailers, as shown by Table VII. 1 9 " B e l l , J . W . , G u y t o n , G r a d y , and Sackett, Ralph L., Mississippi's —How

It Works.

General

Sales

Tax

Bulletin N o . 3, Series X X X , University of Mississippi, J a n u a r y 14,

1933-

" D a t a supplied by Mississippi State T a x Commission. "Mississippi Business Index, State T a x Commission, Jackson, Miss., J u l y ,

IQ33.

SOUTHERN STATES

179

Within the retail group, the general merchandise group, i.e., department stores, dry goods stores, general stores, variety five- and ten-cent stores,20 supplied 25.9 per cent of all revenue from the sales tax, the food group (chiefly grocery stores), 18.7 per cent, and the automotive group, 12.9 per cent. Virtually the same percentages were shown for sales tax revenue accumulated from May 1 to October 31, 1932." TABLE TAXPAYERS

REPORTING

VI

UNDER, AND REVENUES

MISSISSIPPI SALES

(May, 1932 to July,

January February March April May June« JulyAugust September October November December

4,i33

4,828

6,445 4.SOS 5,5i3

6,200 4,638 11,220

1933 3,5i9 3,478 5,484 4,359

FROIF,

1933)

T A X P A Y E R S REPORTING

1932

RECEIVED

TAX

REVENUE J

93J

RECEIVED

1933 " U M a •3

0 »o « io pi oo 11 i-» io ^ to r* O» H 00 »o fi < r'

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MM

• Q N « Ifl N • 00 00 O M tN. • tN. «O MM

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•II

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CHAPTER

REPRESENTATIVE

VII

MID-WESTERN

STATES

ILLINOIS

Illinois enacted a 3 per cent tax on retail sales, effective April 1, 1933, which was declared unconstitutional on M a y 10, in part because of exemptions granted to sales of farm products and motor fuel. Another tax on retail sales, with no exemptions, and with a rate of 2 per cent, was enacted in June, 1933. It became effective July 1, 1933 and expires June 30, 1935. Development oj the Fiscal Situation since 1929-1—Illinois presents the unique picture of a state whose general fund revenue increased markedly during the first two years of the depression as a result of disorganization in local finance. This paradox is explained by the fact that during the fiscal years ending June 30, 1929 and 1930 the general fund was feeling the effects of assessment difficulties in Cook County whereby payment of all property taxes from that area, including the state's levy, was being delayed. Nearly half of the 1928 levy did not reach the state until 1930-31. Meanwhile the inheritance tax yield, the chief support of the general fund, increased nearly 40 per cent in 1929-30 over 1928-29, and in the next year fell back only to the 1928-29 level. The yield of the insurance taxes, the corporation taxes, and the special tax on the Illinois Central Railroad remained steady. None of these experienced important rate changes during this period. The result was that general fund revenues were 28 per cent higher in 1930-31 than in 1928-29. In the next year, however, the tax yields went steeply downward, and general fund revenue, excluding money received from the sale of tax anticipation notes, dropped nearly 30 per cent, to a level well below that of 1928-29. Property tax receipts were off 50 per cent (to a slight degree because the state rate was lowered from 1.5 to 1.4 mills), and the inheritance tax yield declined 36 per cent (nearly 60 per cent below the peak). 1

F o r sources, see infra, p. 703.

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Meanwhile general fund expenditures had been appreciably above receipts, even in 1 9 3 0 - 3 1 , when they reached a peak of some 16 per cent above 1928-29. T h e year 1 9 3 1 - 3 2 saw only a negligible shrinkage. N o extraordinary expenditures such as for unemployment relief, and no important alteration in state and local relationships can be held accountable for this increase. T h e first state expenditure on unemployment relief as such occurred in 1 9 3 1 - 3 2 , amounting to nearly $ 1 0 million, but this was not included in general fund figures, being financed by borrowing (the electorate approved a $ 2 0 million bond issue for this purpose). T h e first important change in state-local relationships since the depression started takes effect J a n u a r y 1 , 1 9 3 4 , when the municipalities begin to share in the 3-cent gasoline tax to the extent of one cent. The excess of general fund expenditures over revenues has resulted in drawing heavily upon a substantial surplus. T h e unemployment situation has been met chiefly by loans and grants from the Federal government, which by J u l y 3 1 , 1 9 3 3 , had reached a sum nearly twice as great as one year's general fund expenditure. The motor fuel and license tax yields have held up well, and, again with the aid of borrowing, have enabled highway construction and maintenance to be increased over the 1929-30 (but not over the 1928-29) level. This appears in part to have fitted in with a policy of using road work as a means of unemployment relief. Special funds, chiefly for school aid and service on veterans bonds, financed by state property levies equaling, in the aggregate, that for the general fund, have, of course, felt the effects of erratic tax collections. A drastic cut of about 22 per cent in average annual general fund expenditure for 1 9 3 3 - 3 5 , as indicated by appropriations, was not enough to obviate the necessity for new revenue sources, particularly in view of the unemployment relief problem in Cook County. T h e tax measures taken to meet this situation are noted in the section immediately following; aside from the sales tax no important new tax or tax increase is now in force, the state having refrained even from taking full advantage of the 80 per cent Federal credit under the inheritance tax.

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STATES

227

Development of the Sales Tax Issue.1—Some thirty sales tax bills have been introduced in the Illinois legislature since the regular session of 193 x. Eight of them proposed to let the counties tax themselves in order that Cook County might take care of'its own destitute. Of this group one bill was approved by the governor on December s, 1932, authorizing any county, by a two-thirds vote of the county board, to levy a tax at the rate of not more than 1 per cent upon the retail sale of tangible personal property, excepting farm products and motor fuel. This act was never put into operation. In addition to the county sales tax bills there were proposed general sales taxes both including and excluding taxation of sales of services, and retail sales taxes both including and excluding taxation of sales of real property, farm products, and motor fuel. One bill authorized a state manufacturers' sales tax. The rates varied from 0.2 per cent to 3 per cent. The first state-wide sales tax was approved March 22, 1933, became effective April 1, and was declared unconstitutional by the Illinois supreme court on May 10, 1933. It was a 3 per cent tax on retail sales of tangible personal property (legally an "occupation tax"), exempting farm products and motor fuel, and passed as an emergency measure, according to the act, because of the excessive tax burden upon property and the insistent revenue demands for school and relief purposes. The proceeds were to be apportioned among the several counties in proportion to population. An appropriation was made to the Illinois Emergency Relief Committee for Cook County, and any unused portion thereof could be turned over to the schools. In every other county the revenue was to be used for educational purposes except that the county board could divert, by a two-thirds vote, any portion of the receipts to unemployment relief. In Winter v. Barrett3 the Illinois supreme court held the tax unconstitutional in that (a) by the exemption of motor fuel and of farm produce sold ' T h e information upon which this scction of the Illinois study is based was obtained in interviews with twenty-one individuals (seven state officials, three representatives of real estate groups and three of merchant groups, two representatives of farm groups and two of manufacturing interests, a civic organization official, an editor, a lawyer, and a university official). * Infra, pp. 661-64.

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b y the producer thereof it provided for an illegal classification in violation of the uniformity provision of section i , article I X of the state constitution and the equal protection clause of the Federal C o n stitution, and ( b ) it provided for a double appropriation contrary to the provisions of section 16, article V of the state constitution. A c c o r d i n g to the Illinois constitution, the only taxes permitted are those on general property, franchises and privileges, and certain types of occupation. T h e present law, which was introduced M a y 23, approved June 28, and effective July 1, 1933, is a 2 per cent retailers' occupation tax, measured b y gross receipts from sales of tangible personal property to purchasers for use or consumption. L i k e the 3 per cent act, it taxes sales b y manufacturers and wholesalers in so far as they sell to final users. It expires June 30, 1935. N o exemptions are allowed. T h e proceeds for the first six months were used for relief purposes; following this period, the revenue has allowed the state tax on property to be abolished. Provision is made for monthly payment, and although no registration fee is collected from the retailers, they are required, b y the regulations issued b y the department of finance pursuant to the act, to register with the department. T h e tax is expected to yield about $36 million per year. T h e development of the movement for a sales tax in Illinois is intimately associated with the breakdown of the assessment procedure in C o o k C o u n t y , which was well under w a y long before the onset of the depression. A large number of citizens complained of the 1927 quadrennial assessment. E a r l y in 1928 two courts in C o o k C o u n t y declared part of the roll " f r a u d u l e n t . " L a t e r in 1928 the tax commission ordered a reassessment of real property. Litigation went on apace, and finally, on June 20, 1930, the supreme court of Illinois restrained collection of taxes on a considerable part of the 1927 roll. A taxpayers' strike went into effect, and the delinquency situation grew worse as the depression continued, while the number of unemployed increased. T h e constitution of Illinois, the Chicago press, and the organized interests, agricultural groups and schools excepted, have successfully blocked the income tax as a way out. Until F e b r u a r y 22, 1932, no statute had been enacted in Illinois imposing either a corporate or an individual income tax. Efforts to impose an income tax b y means of a constitutional amendment had been defeated before 1930 through

M I D - W E S T E R N STATES

229

failure to obtain a favorable majority of all voting at the election, and in the November, 1930, election the people overwhelmingly voted down the so-called "income tax amendment." In the 1931 session of the general assembly there was considerable sentiment for the enactment of some sort of income tax, and on October 31, 1931, the Governor's Tax Conference, a body investigating the Illinois fiscal problem, reported in favor of such a tax. On February 22, 1932, the governor approved Senate Bill 20, imposing a graduated income tax on individuals but virtually exempting income from tangible property, owing to an offset provision. The Illinois supreme court, on October 22, 1932, in Bachrach v. Nelson* held the act unconstitutional, in violation of the uniformity provisions of section 1, article IX. The unemployment situation in Illinois, especially in Chicago, was very acute. In January, 1933, it was estimated by the Illinois Relief Commission that there were about 1,400,000 unemployed in Illinois, of whom about 750,000 were in Chicago. Public officials were frequently threatened, and riots were not unexpected by responsible parties. Prior to the enactment of the sales tax, relief funds came from three sources. The first state-financed relief measure was a $20 million bond issue, approved by the legislature February 6, 1932, and by the voters November 8, 1932. The Civic Federation and Bureau of Public Efficiency, the Illinois Agricultural Association, and the Illinois Federation of Labor were especially active in supporting this in order to prevent a $25 million property tax levy against which $18.75 million in tax warrants had been sold to provide immediate funds for relief, and which would have been added to 1932 tax bills, had the bond proceeds not been made available for payment of warrants and interest. Principal and interest charges on these bonds are being met proportionately out of the state motor fuel tax allotments of such counties as have used the relief funds thus produced. A further step was taken to divert a portion of the motor fuel tax revenue to relief by an act approved October 17, 1932, which permitted the county boards to use for relief, either directly or through distribution to the townships, the motor fuel money allotted to them until July 1, 1933. The constitutionality of this act was at once ques4

349 ill., 579.

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tioned, and a final decree was granted on June 21,1933, b y the circuit court of Sangamon County,® prohibiting the further use of motor fuel revenues for relief. This decision had been anticipated by students of the Barrett v. Winter case, owing to the judges' ruling on double appropriations. In his fight for the second sales tax bill the governor stressed the point that another source of revenue was about to be shut off. In any event, where the crisis was most acute, in Cook County, the receipts from the motor fuel tax were insignificant by contrast with the requirements. The Reconstruction Finance Corporation had supplied Illinois with a $45 million fund, which became exhausted early in February, 1933. The Federal authorities had repeatedly urged, upon those negotiating the loans at Washington, new state taxes, and pointed to the experiments with sales taxes in other states. The pressure for the Federal grant was an important element in shaping the administration's sales tax policy; the county sales tax was enacted to appease the Reconstruction Finance Corporation officials. It was meant to be a mark of good faith, though at the time of enactment it was known to be of questionable constitutionality. B y the beginning of 1933 a sales tax seemed inevitable. A favorable market for Cook County bonds could not be expected; the Reconstruction Finance Corporation fund was exhausted; the portion of the motor fuel tax diverted to relief was insignificant and, because of pending litigation, very uncertain; and delinquency in property tax payments, especially in Cook County, had reached a new high level. On the other hand, the Illinois Emergency Relief Commission estimated its 1933 requirements at $92 million. All the leading newspapers in Chicago, more especially the Hearst group, campaigned for the sales tax and against the income tax. Beginning August 29, 1932, the Examiner published a series of articles on the Mississippi sales tax, which probably inspired the invitation to Governor Conner, who addressed a joint session of the Illinois legislature on February 21, 1933. None of the organized interests can be held responsible for the enactment of the sales tax in Illinois. T h e Chicago Real Estate Board's concern has been primarily with some type of replacement * Reif

v. Barrett,

et al., A u g . 12, 1933.

M I D - W E S T E R N STATES

231

tax. It was ready to support the income tax bill in 1931 provided that the measure included an offset provision authorizing the deduction of property tax payments from the amount of income tax due. Likewise, with respect to the sales tax in 1933, it tried to have included in the law a specific requirement for an abatement from the property tax of an amount equivalent to the receipts from the sales tax. The board does not anticipate much benefit from the 2 per cent law, because no definite limitation upon expenditures has been imposed, and recently it joined the Hearst papers in a demand for a Federal sales tax, onehalf of the revenue to be returned to the states on the basis of school population as an offset to the school portion of the general property tax. The plan embraces an optional county tax on all public utility charges to be utilized for relief purposes. The Association of Real Estate Taxpayers in Chicago would have the Federal government supply all relief money. In any case it does not believe that the yield of the 2 per cent sales tax for the first six months will provide sufficient funds. Its ultimate solution to the tax problem is the imposition of a 1 per cent tax limit with a view to getting on the tax rolls much of the $16 billion of personal property alleged to be in hiding under the present higher rates. If this measure should fail, the association would favor the sales tax for replacement purposes, but it has a definite feeling that replacement taxes would not be needed. The real estate interests in general do not appear to have been in the thick of the battle for the passage of either the 3 per cent or the 2 per cent sales tax. The Illinois Agricultural Association has long been identified with the income tax movement. In view of the extraordinary circumstances, it supported the 3 per cent bill as a replacement tax, but by insisting on the exemption of farm products and by urging the use of the proceeds to replace property taxes for educational purposes, it was largely responsible for rendering the act unconstitutional. The association refused to support the 2 per cent measure because it understood that the primary purpose of this act was to continue unemployment relief work, especially in Chicago, whereas it believed that each county should care for its own poor. It was especially irritating to find the up-state members voting down all proposals designed to put Cook County on a self-supporting basis. After the 3 per cent act was declared unconstitutional, the Illinois Agricultural

232

MID-WESTERN STATES

Association, reverting to type, sponsored a 1.5 per cent tax on personal incomes in excess of $300. The educational groups, though opposed to the property tax offset provision, privately at least, favored an income tax. When confronted with a shrinkage of funds, the Illinois State Teachers' Association at first advocated, among other revenue measures, a selective sales tax and subsequently actively supported the 3 per cent bill which gave them most of the money. However, they did not, as did the Michigan Education Association, carry the brunt of the battle for the sales tax. The Board of Education in Chicago was a more vehement advocate and entered the lists as early as July, 1932. It sought funds for teachers' pay-rolls and for general school purposes, rather than for the unemployed. The retail merchants at first fought the sales tax. The State Street Council, representing the larger down-town Chicago merchants, was the first to give up the opposition, because it felt that the time had come for drastic steps in order to cope with the relief problem. It favors the sales tax as a temporary emergency measure for relief purposes only and is anxious to eliminate it as soon as possible after the crisis has passed. The Chicago Association of Commerce and the Illinois Chamber of Commerce take the same position, although these organizations have a more varied membership and hence find it somewhat more difficult to make a definite pronouncement on the issue. T o avoid unfair competitive practices arising from differing tax policies and also, perhaps, to help arouse the wrath of a tax-conscious public, the merchants insisted on making it mandatory for retailers to pass the tax to the consumer as a separate item. Failing in this, the Chicago merchants evolved a schedule system which has been widely used in the state.8 They attempted to encourage the practice of showing the tax separately to the customer, whereas the administration, especially in the 2 per cent bill, clearly intended the tax to be included in the quoted price. At the beginning of October, 1933, the leading Chicago retailers abandoned their attempt to show the tax as a separate item, and it thus appears that the administration has carried its point for the time being, at least. The Illinois politicians appear to have lost interest in tax con' F o r statistical evidence of this, see infra, pp. 430-41.

M I D - W E S T E R N STATES

233

sciousness. The 2 per cent bill passed each house by the bare required majority (in contrast to the two-thirds vote obtained for passage of the earlier 3 per cent tax). When the sales tax again comes up for consideration, in the 1935 session, the down-state members, with an eye on their political life, may not be as manageable as formerly, and the border merchants and the down-state merchants are generally hostile to the sales tax. A group of these, organized as the Council of Illinois Merchants, carried the 2 per cent act to the courts. They maintained that it was a tax on income and hence, by Illinois supreme court decision, a tax on property and as such violative of the uniformity clause in the state constitution. This plea was denied by the circuit court of Sangamon County, and the Illinois supreme court, upon appeal, upheld the lower court decision. The Illinois Manufacturers Association has worked in close cooperation with the merchant associations. It did not oppose the sales tax bills, because of the emergency. However, both the 3 per cent and the 2 per cent acts have taxed sales by wholesalers and manufacturers to final consumers and users, who in turn are in many cases manufacturers. The Manufacturers Association sought to convince the department of finance of the unwisdom of this procedure under the 3 per cent bill and has joined with the Illinois Chamber of Commerce and the Chicago Association of Commerce and other similar organizations in a plea to the department to remove this class of sale from the scope of the 2 per cent act. It is alleged that through the operation of the interstate commerce exemption, Illinois cannot meet the competition of out-of-state companies, the result being a loss of business and unemployment. Thus the sales tax law is said to be defeating its very purpose, although information from official circles is to the effect that, aside from the experience of automobile retailers on the western boundary of the state, there is little evidence to substantiate such a contention. In this connection the information gathered from business men in Chicago and in Rock Island-Moline, presented in Part Three 7 below, is of interest. The coal dealers cannot understand why all shipments in carload lots should not be exempt. The public utilities find it difficult to understand the meaning of tangible personal property. The container companies are puzzled with the con' Infra,

pp. 475-86.

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cept of ultímate consumption or use. All these groups have engaged attorneys to negotiate with the department in a formal but friendly fashion, but a certain amount of litigation has also accumulated. 8 It was not the balance of power between the organized interests, but the emergency and the governor's patronage club, which placed the sales tax act on the Illinois statute book. It will probably require the same instrumentalities to keep it there. A t a special session held toward the end of 1933, the legislature authorized the issuance of tax anticipation notes for relief purposes and provided for submission, at the November, 1934, election, of a $30 million bond issue, to be retired, like the former $20 million issue, from the proceeds of the counties' share of gasoline tax funds. Proceeds of the bonds, if voted, will retire the anticipation notes and obviate raising the $30 million through a state tax on property. Extension of the time period within which the sales tax revenue would go to relief purposes was rejected. Administration of the Tax.—The Illinois sales tax (retailers' occupation tax) is limited to persons engaged in the business of selling tangible personal property for use or consumption, and does not reach isolated or occasional transactions by persons not engaging in the business of making such sales. There are no exemptions granted to sales of food, gasoline, farm products, etc., which create administrative difficulties in certain other states. T h e powers of the department of finance relating to the inspection of taxpayers' books are broad, and the penalties imposed are fairly severe. T h e lack of any universal exemption of a stated number of dollars, however, and the requirement that every taxpayer, large or small, must file a return each month, create paper work with little corresponding return. On the whole, however, the Illinois tax may be ranked near the top of existing sales taxes in feasibility of thorough enforcement. T h e 3 per cent tax was not on the statute books long enough to develop any significant features of administration. T h e 2 per cent tax passed the legislature June 26, 1933, was approved two days later, and took effect July 1, the first payment to be made between August 1 and August 15. It was not considered necessary to make special efforts to spread 'Infra,

p. 237.

MID-WESTERN STATES

23 S

knowledge of the new levy. Doubtless the public was fairly well aware of the tax, owing to the lengthy legislative contest.* About 500,000 tax forms have been distributed by county and city clerks and chambers of commerce. Regulations were promulgated June 30, and a revised edition was issued September 1. Of the first edition, about 200,000 copies were distributed through the same channels as the tax forms. Of the revised edition, only about 10,000 have been printed, to be distributed directly to those individuals and groups who are known to have a special interest in the more detailed phases of the subject. The 77 "special rules" issued to date, concerning specific occupations, have also been printed on separate sheets, for use in responding to individual queries concerning tax liability. Rather than use lists of those subject to other state taxes, or employ other indirect sources of information, the department prefers to send field inspectors on a building-to-building survey throughout the state to visit everyone coming within the scope of the sales tax. It is expected that by the end of November, 1933, the entire state will have been thoroughly surveyed. Each taxpayer is asked whether he has filed a return and made his first tax payment. If he has done so, he should be able to show the (free) "certificate of registration," which is sent to him shortly after he makes his first payment, and which must be publicly displayed—wherever possible, affixed to the glass part of the store windows or door. If the retailer has not made his first return, he is notified of his duty, although no threat of penalty is made; but, if he does not respond within a few weeks, a second notice, containing reference to a penalty, is sent to him. The policy of refraining from immediately subjecting taxpayers to all the penalties provided by the law (25 per cent of the tax is the penalty for failing to file a return on time), arises from a desire to avoid arousing great opposition to the tax in the early months of its life. Furthermore, the law requires that a notice to one who has failed to file a return, and a hearing, are necessary before the penalty can be applied. This is not the case, however, when a taxpayer has filed a return but has failed to pay the tax. The administration has not officially waived any penalties, pending receipt of opinions from the attorney-general. * Data on this point are presented infra, pp. 491-93.

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MID-WESTERN STATES

As of September 25,1933, about 95,000 certificates of registration had been sent to retailers, and new certificates were being issued at the rate of 500 to 600 a day. This represents the number who have to date filed the first return (due by August 15). Through the buildingto-building survey noted above, about 60,000 retailers (about 40 per cent of the estimated total number) had been reached by September 23, about 10 per cent of whom were found to have failed to make any return. They were served with enforcement notices, and the response to these notices has been gratifying in the Chicago metropolitan area, about 90 per cent of those so served having responded, by the above date, with returns and payments. The corresponding percentage for the down-state area is about fifty. Present plans call for setting up an enforcement staff of the newlycreated occupational tax division consisting of office auditors, field auditors, investigators, special representatives, and field agents. The field force will consist of about 100 men, evenly divided between the Chicago metropolitan area and 42 districts outside this area. Two collection offices are provided: one in Chicago and one in Springfield. It is too early to state what method will be followed in ascertaining whether or not the returns filed show the correct amount of tax, but it is doubtful whether it will be possible to undertake annually a field audit or even inspection of every taxpayer's books. As to the office audit, about 10 per cent of the returns received to September 25, 1933, have been audited, and about 20 per cent of these thus audited have revealed errors. The most common errors, as shown by the audit, have been: return unaccompanied by remittance, or remittance unaccompanied by return; failure to sign return or to have it sworn to; remittance differing from amount shown due by a "face check" of the return; failure to sign check; return covering a period other than a calendar month. As of the end of September, 1933, there had been held but one hearing—and that one adjourned sine die—under sections 4 and 5 of the law (providing for assessment of additional tax, or of tax where no return has been filed), and no formal notices of additional tax had been sent to taxpayers; hence it is yet too early to evaluate experience under these provisions of the law. Correspondence concerning the tax has been fairly heavy. During the first half of September, 1933, for instance, letters averaged about 300 a day, in

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addition to requests for information which could be answered by form letters. Litigation under the 3 per cent tax, declared unconstitutional, has been noted above. 10 Under the 2 per cent tax a considerable amount of litigation had accumulated as of the end of September, 1933. One of the suits seeks to review the department of finance's ruling as to containers. Public utilities have obtained an injunction against the department to restrain collection of the tax on the sale of electric power, etc., which the department maintains are items of tangible personal property. Some suits have been filed in compliance with a statutory provision intended to prevent the transfer, into the proper place in the state treasury, of funds coming from tax payments made under protest. A suit attacking the constitutionality of the law has been noted above. The legislature has appropriated $1.85 million to administer the sales tax law over a two-year period. This is about 2.7 per cent of the estimated yield. Efforts of the Taxpayers to Shift the Tax.—For information concerning the policy adopted by taxpayers toward the problem of shifting the tax, the reader is referred to Part Three 1 1 where the results of a comprehensive statistical study are presented. Tax Statistics.—No money from the short-lived 3 per cent tax went into the state treasury, and the merchants who had obtained money from the public on the basis of the tax handled those sums in various ways. 12 In 1933 under the 2 per cent tax, $2.2 million was collected for July, $3.0 for August, $3.0 for September, and $3.1 for October. The number of returns increased at an even greater rate than the revenue, being 61,060 for July, 95,368 for August, 100,784 for September, and 106,278 for October. Thus the average tax per return decreased somewhat, being $36.21, $31.23, $30.20, and $29.10 for the same four months. INDIANA

A tax of 1 per cent on gross income from all sources (including salaries and wages and investment income) was enacted in Indiana in February, 1933, and became effective M a y 1, 1933. Manufactur10Supra,

pp. 227-28.

" Infra, pp. 430-73.

"Infra,

pp. 487-88.

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ers, wholesalers, farmers, and extractors are, however, taxed at but 0.25 per cent. Development of the Fiscal Situation since 1929™—Indiana's fiscal strain was not to be found in the state government until the $1.50 property tax limitation adopted by the legislature in 1932 cut almost in half the state rate on property, which had been furnishing not far from one-fourth of total state revenues (including motor vehicle taxes). Coupled with a drastic shrinkage in assessed valuations and a demand for increased state aid to localities, this made it imperative for the state government to seek new revenue sources even though the other tax yields had been holding up fairly well through 1931-32. The state has not been operating on an unbalanced budget, and decided economies have been made in ordinary state expenditures. Until the fiscal year (nine months) 1932-33, state revenues showed little effect of the depression, the total in 1931-32 being somewhat above that of 1928-29. State expenditures remained even more stable, until a special legislative session in 1932 made certain economies. Unemployment relief did not enter the state budget until 1933, and then only for a relatively small amount. The gross income (sales) tax passed in 1933 was the first major tax measure, from a revenue standpoint, to be enacted since 1929. An income tax amendment had been defeated at the polls. It is evident that the local tax situation was the chief factor bringing about the sweeping change in the state's own system. For one not intimately acquainted with conditions in Indiana it is not easy to locate from the available data the precise sources of trouble, but whatever they may have been, the tax limitation law crystallized them, and the result is a threatened breakdown of governmental finance in many localities, unless the state succeeds in carrying out its greatly increased program of aid to localities through highway and school moneys. Development of the Sales Tax Issue.14—The Indiana legislature had sales tax bills presented for its consideration in sessions prior to that of 1933. In 1931 two measures were introduced, one proposing " For sources, see infra, p. 706. " T h e information upon which this and succeeding sections of the Indiana study are based was obtained in interviews with eight individuals (three state officials, three officials of trade or taxpayers' associations, an educational representative, and a labor union representative). See also supra, p. 11 i n .

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a i per cent tax on gross retail sales and the other a tax varying from 2 to s per cent on a number of specified luxury articles selling above certain specific prices. During the first special session of July, 1932, two bills were proposed, one contemplating a tax on specified articles and the other a gross receipts tax of 1 per cent on individuals, firms, and corporations. These measures, however, were all referred to the committee on ways and means and did not reappear on the floor. In opening the 1933 session, Governor McNutt stated that while he was "unalterably opposed to the principle of a sales tax," he found that "the exigencies of the situation force its serious consideration." In response to this message, two gross receipts tax bills (H. 162 and H. 169) were introduced on January 20. Both levied a tax at rates varying from 0.25 per cent to 2 per cent upon the gross incomes of manufacturers, wholesalers, retailers, and individuals, but one of the measures exempted incomes of professional men from taxation and imposed slightly different rates. Both bills died in the committee on ways and means. On February 21, 1933, a combination gross income and sales tax bill (H. 513) was introduced and with the support of the administration passed both houses the next day. Five days later it received the governor's approval, and it became effective May 1, 1933The measure enacted imposes a tax of 0.25 per cent on the gross income of manufacturers, producers of natural resources, farmers, wholesalers, and jobbers, and one of 1 per cent on the gross income of retailers, hotels, amusements, utilities, financial institutions, and individuals. Thus salaries, wages, investment income, and gross receipts from virtually any sale of any kind of property are taxable. An exemption is permitted on the first $1,000 of gross income of each taxpayer. Charitable institutions and income from life insurance policies and government bonds are exempt from taxation. The annual yield of the tax is estimated at $12 million. Two obstacles lie in the way of an accurate appraisal of the opposition to, and support for the Indiana gross income tax law. The first arises out of the fact that a majority of the legislators were solidly supporting the governor. The latter maintained throughout the session that this tax, although not a personal preference, was an unfortunate necessity. In these circumstances, a vigorous and expensive campaign on the part of the supporters of the tax proved to be super-

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fluous. Certainly the real extent of the support for the gross income tax cannot be accurately measured on the basis of the activity of its advocates during 1933. In the second place, the situation is complicated by the fact that several measures were considered by the administration before the bill which finally became law was introduced, with the result that various organizations registered opposition to one or another of these proposals. There appears some foundation for a suspicion that some of the organizations relaxed their antagonism to the final measure because this bill did not deal so harshly with their particular groups as did some of its predecessors. With these qualifications in mind, an examination can be made of the expressed support of, and opposition to, the tax, and of the methods employed. The opposition to the gross income tax was expressed in vigorous campaigns on the part of a few large organizations and in a host of resolutions from smaller groups. With regard to the latter it is clear that an examination of newspaper files cannot yield a complete catalogue of their activities, but it may serve to give an impression of the extent and nature of this opposition. B y the middle of February, 1933, resolutions opposing the tax had been sent to legislators by a dozen local chambers of commerce and about the same number of local merchants associations; by an association of limestone companies; by two Kiwanis clubs; and by the central committee of the Socialist Party. Protest mass meetings were held by two local chambers of commerce. A meeting of milk dealers sent a delegation to call on the governor, and the ice industries instructed their representative to oppose the bill. The Indianapolis News conducted a survey to appraise newspaper sentiment and reported 43 papers against the tax and 4 in favor of it. This journal strongly opposed the measure, and, in addition to frequent editorials and cartoons, 5 columns of three-quarter length advertisements to the same effect appeared in its pages on February 15. Perhaps the most impressive opposition, however, came from a few large organizations. The state chamber of commerce, for example, called a conference of industry, business, and the professions on February 1, sent out copies of the bill, and appeared in opposition to it before the legislative committee on February 22. The chamber also cooperated with local chambers of commerce, and on February

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21 there was a protest meeting held at which the Indiana Commercial Secretaries, four merchants associations, the Indiana Manufacturers Association, the Indiana State Dental Association, and fifteen local chambers of commerce were represented. This meeting, the fourth of its kind, appointed a delegate to call on the governor. A t the opening of the session there was no state-wide organization of merchants, although one has since been formed. On January 26 a mass meeting was held with an attendance of 350 retailers representing individuals and organizations from all parts of the state. This meeting, too, sent a committee of protest to the governor. Mention should also be made of the State Federation of Labor, which had registered consistent opposition to sales taxes for more than three years. This organization was prepared to support a gross income tax with low exemptions, however, and in consequence it is possible to interpret the bill which was finally enacted as a partial concession to its view. In any event the Federation of Labor did not conduct a campaign or appear in opposition to the bill, since it felt that its attitude was sufficiently well known to the legislators. It is interesting to notice that the Federation has not discovered any perceptible increase in the cost of living as a result of the law and has therefore refrained from urging its repeal. The campaign in support of the tax consisted almost entirely in the activity of large organizations. It was led by the Indiana Farm Bureau, which secured the signatures of a large number of farmers on a petition urging the passage of a sales tax. On February 12 a meeting of farmers and other property owners was held, and several thousand marched to the capitol. For several years the bureau had been urging the reduction of property taxes, and partly as a result of its efforts the $1.50 law was passed in the special session of 1932, limiting the state levy to 15 cents and all local levies to $1.35 per $100 of assessed value. 15 In its original program, the bureau had favored a net income tax as a source of relief for real property, but the constitutional amendment which this tax demanded was defeated in the general election in November, 1932. In these circumstances the Farm Bureau took the position that, although it recognized the critical financial position of the state resulting from the $1.50 law, 15

T h i s l a w w a s later amended. See infra, p. 709.

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it was irrevocably opposed to increases in property taxation and was prepared to support any tax which would avoid this increase. The Indiana State Teachers Association joined in the support of sales taxation. Not only did this organization appear in favor of the measure before the legislative committee, but it called the attention of school teachers to occasional radio broadcasts on the topic, through newspaper advertisements. The association had favored a sales tax even before the 1933 legislative session, and in view of the $1.50 law, it desired to find a source of revenue which would obviate further curtailment of educational appropriations. The Indianapolis Real Estate Board, in addition to cooperating with the Indiana Farm Bureau, worked with the Indiana Real Estate Association and the Federation of Community Civic Clubs. A meeting of all these organizations, held on February 10, 1933, passed resolutions favoring the sales tax. The danger exists, none the less, of exaggerating the influence of these public campaigns upon the legislators and the governor. The latter commanded a solid majority in the legislature, and there appears little doubt that he was in a position to dictate either the passage or the failure of the measure. As indicated above, he repeatedly expressed a distaste for the principle of a sales tax, but felt that it was the only escape from a critical financial condition. T o the several delegations who called on him in protest against the tax his reply appears to have consisted of an eagerness to accept any more effective suggestions which they could offer for balancing the budget. Most of the delegates seem to have been unable to suggest any method which would not involve further drastic curtailment of public expenditure, and it was the governor's conviction that such reduction would gravely impair the public services and institutions. Furthermore, most of the proposals were submitted after the governor had finally decided to ask the legislature to pass the gross income tax. Administration of the Tax.—The Indiana tax deserves classification with those of South Dakota and West Virginia as being among the most difficult of all sales tax or gross income tax measures in the country to administer. This is because of the wide scope of the levy, which makes it more than a "sales tax." It is, indeed, a "gross income

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tax," involving the problem of collecting a tax on wages and salaries, investment income, and receipts from the sale of any type of property, tangible or intangible. It applies to non-residents in so far as they derive gross income from sources within Indiana. No collection at the source is provided for, and, although the flat exemption of $1,000 a year will relieve the department of much paper work (those who need pay no tax, need make no returns), the task of reaching all taxpayers will be a formidable one. No monthly returns are required, and the department of treasury has ample powers to check resident taxpayers' records. The sales tax act was approved February 2 7,1933, to become effective May 1, 1933, the first payment to be made during the first half of July. The newly-created sales tax division in the department of treasury began to issue press releases throughout the state shortly after April 1, explaining the nature of the tax, asking all taxpayers to send in returns in July (whether or not they were required to do so at that time), and attempting to make the tax popular with the public by detailing its advantages and the uses to which the revenue would be put. A member of the division made more than fifty speeches throughout the state, to the middle of July, before groups of manufacturers, merchants, and other business men. The radio, however, was used only once. Under the recent reorganization of the state administration, the governor had obtained power to transfer employees from one department to another. Upon the request of the sales tax division, Governor McNutt ordered the employees of the 135 branches of the state bureau of motor vehicles (averaging more than one branch to a county) to act as distribution points for sales tax forms (of which about 500,000 individual, 60,000 corporation, and 45,000 partnership "informational" forms have been printed). The branches act also as information centers for taxpayers. Their employees "attended school" at five points in the state, to be drilled to assist taxpayers. The branches also distributed tax forms among banks, notaries, etc. No forms were mailed directly to taxpayers except by request. As the branches could not, under the law, accept payment of the tax, they were made agencies of an express company, and the taxpayers are thus able to pay at their local offices if they so wish.

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Only fragmentary plans have thus far been developed for ascertaining how many persons should pay the tax, and who they are. The chain store tax, enacted in 1929, which applies to all "stores," offers a means of building up a list of taxable retailers. Parenthetically, it may be noted that the data gathered in administering the sales tax itself will not be of any assistance in collecting other taxes; the law strictly prohibits this. There has been projected no state-wide field survey to list all other businesses subject to the tax or to obtain the names of all who might be taxable on wages, salaries, investment income, etc. It is, however, planned to use information obtained from manufacturers as to pay rolls, to assist in ascertaining what persons are subject to the tax on wages and salaries. County clerks will be asked to supply lists of registered voters. Doubtless the most difficult task will be to reach the receipts of professional men and of non-residents. T o September 14, 1933, 146,340 returns, with remittances, covering the first tax period, had been received. It is estimated that fully one-half of these represent taxpayers who under the law need not have filed at this time, being liable only for an annual return. In addition there have been received some 50,000 returns, without payment, but reflecting tax due. The department of treasury is required under the law to notify by registered mail any taxpayer who fails to make a return, but no time limit is set within which the department must act, and to September 14, 1933, no such notices had been sent out. The field force used in connection with the gross income tax consists of twenty men, about two-thirds of whose time is devoted to this tax. Three are trained auditors and accountants. T o September 14, 1933, the field men had called upon taxpayers whose returns and payments had been found by the central office audit section to be erroneous, and at the present time the field men are restricting their visits to taxpayers of this type. The field men have no power to accept returns or payments from the taxpayers. As to the office check, about 50 per cent of the returns received had been audited to September 14, 1933. Of the returns thus audited, about 1 per cent had been obviously erroneous in stating the amount of tax due, though there had doubtless been many other types of error. The most common

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kind of mistake in stating the amount of tax due arises from the deduction of items not properly deductible (e.g., certain taxes paid, freight paid, and discounts taken). T o a lesser degree there exist errors in computation of the tax at the wrong rate, and deduction of improper exemptions. Under the law, the department may recompute the amount of tax due when it discovers an error, charge interest at i per cent per month of the deficiency, and, if there is negligence or "intentional disregard" on the part of the taxpayer, assess a penalty of 10 per cent or 50 per cent of the deficiency (the latter amount if the deficiency is due to fraud with intent to evade the tax). The law does not set any time limit, however, within which the department must act, and to September 14, 1933, no interest or penalty demands had been made. Likewise no hearings on additional assessments had been requested or held. Correspondence is heavy, about 200 letters being received each day, exclusive of those accompanying returns and those relating to a specific return. Litigation has not been extensive to date. A suit has been filed by proponents of the law, seeking legal clarification of certain points, and this is now pending in the Indiana supreme court. Another suit filed in a local Indianapolis court contests the validity of certain regulations, chiefly those which would tax receipts from sources without the state. In both of these cases the constitutionality of the law is also brought into question. It is expected by the department of treasury that the cost of administering the gross income tax will be about 2.5 per cent of the receipts the first year, and smaller thereafter. The legislature estimated the annual tax yield at $12 million. Tax Statistics.—Collections on income of M a y and June, 1933, due in July, totaled $1,746,962.84, the number of taxpayers being 146,590. On income of July, August, and September, 1933, the tax being due in October, $2,664,012.98 has been paid by 109,937 taxpayers. All of these data are as of the latter part of December, 1933. It will be noted that the average tax per return, only about $12 for the first period, increased to about $24 for the second period, in part, but not wholly, because the second period was longer than the first.

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IOWA

In February, 1934, the Iowa legislature passed a 2 per cent retail sales tax, but the paragraphs below carry the story of the sales tax movement only through November, 1933. Development of the Fiscal Situation since 1929-1®—To anyone who attempted to judge solely by fiscal statistics, Iowa would appear to have been almost immune from the depression to the middle or end of 1932. Heavy reliance on the property tax did not, up to that time, result in a collapse of the revenue source. Total state and local revenue, total yield of the property tax, state property tax receipts, total general fund revenues, total state government expenditures, and state general fund expenditures were all higher in 1932 than in the corresponding 1929 period. Expenditures by all units, by counties and townships, by cities and towns, and by school districts were only slightly lower in 1932 than in 1929. Meanwhile the state general fund maintained a surplus at a nearly constant level for the same period, and state and local borrowings, after reaching a peak in 1931, were apparently lower in 1932 than in 1929. The level of state revenues up to 1933 was not a result of tapping new sources of revenue. Until September, 1933, no new tax of importance had been enacted since 1929, and the only significant change in the state tax system was the increase in the aggregate rate of the state levy on property, from 7.68 mills in 1929 to 10.25 in 1930. This was lowered to 10.00 and 8.00 mills in the succeeding two years. This tax has supplied about half of the state general fund revenues, and the insurance, cigarette, and estate taxes supply about half of the remainder. The yield of these, as well as of the highway taxes, fluctuated remarkably little from 1929 through 1932. Valuations upon which the property tax was levied (exclusive of moneys and credits, whose total valuation increased owing to better administration) were only some 8 per cent lower in 1932 than in 1929, and delinquency, at least as to the state tax, was apparently not a factor of major importance. State expenditure appears not to have changed greatly in character from 1929 to 1932. No radical alteration in state and local fiscal relationships was made, and the unemployment relief burden was left " F o r sources, see infra, p. 710.

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to the localities, except as highway expenditures and certain minor general fund items can be considered in this connection. Federal aid has contributed toward unemployment relief. T h e very brightness (statistically speaking) of this picture may forecast a darker period, however. The board of assessment and review has declared that the property tax in Iowa is facing a breakdown ; total property tax levies, as of assessment dates, show a sharp decrease (nearly 30 per cent) for 1933 compared to 1929; and the 1933 legislature enacted many economy measures and voted to reduce the 1933 and 1934 millage 20 per cent below the 1930 level. Development oj the Sales Tax Issue"—Throughout the past seven years, the Iowa house, in response to demands that the tax base be broadened, has been intermittently passing net income tax measures. On the other hand, the senate has looked with slight favor on this source of revenue and has consistently defeated i t . " However, some time after the legislature convened in 1933, the consequences of the Beatty-Bennett law, providing for a 20 per cent reduction in the rate of the state property tax, made the necessity of securing additional revenue from new sources appear inescapable. Several bills of a gross income tax nature were introduced and strongly supported in the house. On March 28 one of these measures (H. 204) was taken up for consideration in the house under special order of business. Discussion of the bill was prevented, however, by a special message from the governor, in which it was urged that action on all tax revision measures be deferred until the convening of a special session in the late summer. The message stated that the governor had for twelve years "advocated a complete revision of our taxing machinery," but pointed out that " a comprehensive study of revenue systems, state and local, is now being made." After reminding the legislature that he proposed calling a special session in the latter part of the summer, the governor pledged "that one of the very first matters to be urged for consideration by this special session will 11 The information upon which this section of the Iowa study is based was obtained in interviews with ten individuals (three trade, and t w o civic, association officials, t w o state officials, a labor union representative, a legislator, and a university official). See also supra, p. i n n . " T h e senate passed the net income tax in 1931 but amended it to include the county assessor bill. The house was unprepared to pass the bill as amended, however, and it died in conference.

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be tax revision, to be based upon full and complete revenue information which will be laid before y o u . " 1 9 Since the legislature followed the governor's recommendations and postponed further discussion of the gross income tax, the balance of the session offers little opportunity to appraise the current legislative strength of the movement. N o n e the less, some significance m a y be attached to the fact that the vote to accept the governor's proposal w a s 62 to 43. T h e report to which the message referred w a s one that was being prepared b y the Brookings Institution for the interim Committee on Reduction of Governmental Expenditures. Appointed to consider the problem of a general reorganization of state and local government, the committee employed the Brookings Institution to make an extensive study of this topic and the problem of tax revision. A summ a r y of the tax revision section was made public on August 29, 1933, and this contained, among other suggestions, a recommendation for a " n e t value product" tax. T h e summary suggests t h a t : All concerns engaged in manufacturing and trade and all local utility concerns engaged in the production and sale of gas, electricity, water, and street railway service should be taxed on their franchise to carry on business within the state. Each of these concerns should be required to pay the highest of three taxes computed on the following basis: 1. A minimum tax of a relatively small and flat amount. 2. A tax based upon the gross sales less purchase of materials and supplies from other taxable concerns or from concerns located outside the state (called net value product). 3. A tax based upon the net income. Concerns in the above specified lines of business with adequate accounting records should be taxed under the system proposed above.20 I t is further suggested that the minimum tax be applied to small concerns whose net value product does not exceed an amount which would warrant detailed administration. On the other hand, larger concerns whose accounting records are nevertheless inadequate for income tax purposes would be taxed on the basis of net value product. "Iowa State House Journal, March 28, 1033, p. 1077. "Des Moines Tribune, Aug. 29, 1933, p. 6.

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In submitting this summary to the interim committee, to the joint committee of both houses, and to the public," W. F. Riley, chairman of the interim committee, said, It is to be understood that this digest is not in any sense the recommendations of the interim committee. The committee has considered . . . the proposals . . . an aid and n o t . . . a mandate. It is hoped . . . with the aid of public comment stimulated by the Brookings proposals . . . to formulate . . . definite recommendations as to tax revision. The interim committee invites the comments of the people on the proposals of the Brookings Institution.22 Some clue as to the implications of this comment may be gleaned from the past history of the tax revision movement in Iowa. The demand for revision has arisen from the holders of and dealers in real estate, who began protesting eight years ago against the proportion of the fiscal burden which was being borne by general property. T o lend effectiveness to this movement, the Iowa Real Estate Dealers Association formed a standing committee in attendance at the legislature, which it has continued to maintain. Although interested in tax revision, this organization did not urge gross income or general sales taxation, but concentrated its efforts on securing the adoption of the net income tax. At its last convention, which adjourned October 20, 1933, this organization again refused to endorse a gross income tax, but passed a resolution merely recommending "that the Legislature give earnest consideration to the merits of such a tax." However, during the last three sessions of the legislature a three-point program has been proposed consisting of: a net income tax, a luxury sales tax, and an increase in the fees charged for governmental services. Few bench-marks exist by which to estimate the political strength of this organization. Though a large proportion of her citizens are landholders, Iowa finds it possible to support a scant dozen real estate boards, and until recently the association had slight newspaper support of its program. T o avoid confusion it should be noted that two committees were studying taxation in Iowa. The interim committee, appointed by the governor and the legislature, was in existence before the last session of that body, and considered the whole problem of reorganization of the state government. The joint committee of the legislature was called into existence at the conclusion of the last session and was more particularly concerned with the problem of tax revision. 27 Des Moines Tribune, Aug. 29, 1933, p. 6.

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The net income tax has also found a vigorous supporter in the State Federation of Labor. The tax which the federation endorses, however, contemplates higher exemptions than that which the Real Estate Dealers Association supports. The federation's campaign has consisted chiefly of distributing pamphlets, passing resolutions, and appearing before legislative committees. Reasons may exist for accepting the federation's claim to a virtually undivided opposition to gross income and general sales taxation, but it is also true that at present the labor group in this state does not enjoy a dominating political position. It was largely the support of the farm group that insured the consistent passage of the net income tax in the house. This section of the community represents the numerically strongest political faction in the state, but its influence in the senate is challenged by representatives of the eastern and industrial counties. The dominant political organization appears to be the Iowa Farm Bureau. Evidence of a recent change of attitude is found in the fact that on August 10, 1933, this organization appeared before the Joint Legislative Tax Committee and proposed that the general property tax be limited to ten mills and that a "classified transactions tax," similar in nature and scope to South Dakota's gross income tax, be adopted. The bureau has relied almost exclusively upon its magazine The Bureau Farmer in influencing the electorate. The most ardent supporters of the gross income tax, however, are found in the ranks of the Association for Tax Justice, which began campaigning for this form of tax revision shortly after the net income tax won enough support to pass the house. As the association is expressly designed to support a cause, it£ membership cannot be accurately identified as being wholly drawn from a particular section of the community. The ends of approximate classification may be served, however, by pointing out that much of the association's strength lies in the eastern portion of the state and the manufacturing centers, and that its headquarters are in Davenport. It has pressed its views by the extensive use of pamphlets and newspaper publicity, supplemented by the customary appearances before legislative committees. Although many manufacturers are members of the Association for Tax Justice, the Iowa Manufacturers Association is almost unan-

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imous in its support of a general retail sales tax and in its opposition to a net corporate income tax. Suggestions have been made that a majority of the Manufacturers Association's members might favor a gross income tax as a second choice and thirdly a combination consisting of the net individual income tax, the general retail sales tax, and a corporate franchise tax, but division of opinion on these questions has made it difficult for the association to conduct any elaborate campaign on tax revision. It has largely confined its political activity to appearing before legislative committees in support of a retail sales tax strictly for replacement purposes. The Des Moines Retail Merchants Bureau opposes both general retail sales and net income taxation, and favors a gross income tax to be used entirely for replacement purposes. In furtherance of this program it contemplates organizing representative groups of business men to supplement its traditional policy of appearing before legislative committees. Mention should also be made of the educational group, which has taken no stand on any of the proposed tax legislation. Instead, it has made efforts to insure that a portion of the new revenue be assigned to the public schools, which have suffered a decrease in income in consequence of the Beatty-Bennett law. Clearly, this program implies a reluctance to endorse legislation which is exclusively designed for replacement purposes. The legislative committees reported in November, 1933, and recommended the imposition of a personal income tax ranging from 1 to 5 per cent, a 2 per cent corporation net income tax, and a 2 per cent retail sales tax, the receipts to be returned to localities to reduce property taxation. A gross income tax bill and a so-called classified transactions or graduated gross income tax bill have also been under discussion. MICHIGAN

In June, 1933, Michigan enacted a 3 per cent retail sales tax effective July 1, 1933. The only exemption of importance is one of $600 a year. Development of the Fiscal Situation since 1929.**—The chief reason for the extreme fiscal crisis in state finance which came to a " For sources, see infra, p. 722.

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head in Michigan in 1933 seems to be the extraordinary degree of dependence placed on the property tax as a source of state revenue in a state where the property tax yield has been greatly affected by the depression. A single percentage figure will perhaps indicate the trouble: in 1929-30 more than 60 per cent of general fund revenues came from the state tax on property, and from 1929-30 to 1932-33 the yield of the tax dropped nearly 60 per cent, most of the decline occurring between 1931-32 and 1932-33. This was largely a result of delinquency, for the state levy (as opposed to actual yield) had in that period been decreased only some 20 per cent. Even with this decrease the levy on a percentage basis did not decline, for assessed valuations dropped about as fast as the absolute amount levied. The yield of the other chief source of general fund revenue, the capital stock tax, also declined appreciably. General fund expenditures, meanwhile, were in excess of receipts every year except 1930, and no serious effort at reduction was made until a special session of the legislature in 1932 cut appropriations. Although 1932-33 expenditures were almost 25 per cent below those for the preceding year, the deflation in revenue had been too swift, and by June 30, 1933, the general fund credit balance existing June 30, 1928, had been replaced by a deficit equal to about one-half of the 1932-33 receipts. To cover this, money was borrowed to some extent, apparently from the highway fund, which has defaulted on some of its payments to localities. Not only has the general fund relied heavily on the property tax, but the school aid fund (primary school interest fund) has also been fed largely from this source, and by the inheritance and insurance taxes. The latter tax being the only stable element in this group, the school fund has suffered a severe drop in income. Meanwhile, the state has decided to spend some of its own tax money directly on unemployment relief during 1933-34. To July 3 1 , 1933, it had received as loans and grants for this purpose from the Federal government an amount roughly equal to the 1930-31 general fund property levy. Thus, without reference to the local situation, except in relation to the school fund, the pressure for additional sources of state revenue is readily understandable. It becomes still more clear when one considers that, through the approval, by the electorate, of a 15-

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mill property tax limit (not applying, however, to almost all cities and villages) in 1932 and through the extraordinary amount of delinquency, the localities have become so restricted fiscally that it has been necessary for the state to give up almost all claim to a share in the property tax, and furthermore to grant them additional aid. Until 1933, no tax measures of outstanding importance were passed to close the gap between revenues and expenditures. Indeed, the tendency has been somewhat in the other direction, more favorable terms to taxpayers as to time of payment, penalties, etc., having been granted. Development of the Sales Tax Issue?*—No general sales tax bill was introduced in the legislature until the regular session of 1933, although suggestions for such legislation began to appear a few years earlier. In 1929 the State Commission of Inquiry into Taxation was appointed. T h e majority report in 1930 favored the income tax as a new source of revenue to supplement the general property tax, but two members definitely opposed the income tax proposal, and one of them recommended consideration of the sales tax. Prior to 1933, in addition to the gasoline tax, a few sporadic attempts at selective sales taxes were made. A cigarette tax—one cent per 10 cigarettes— was imposed in 1929 and repealed by a referendum vote on November 4, 1930. In 1931 a malt t a x — 5 cents a pound on malt extract or syrup and 5 cents a gallon on wort or liquid malt—was passed over the governor's veto. Chain store tax proposals also made their appearance in Michigan in the guise of graduated sales taxes based on the Kentucky plan. One of the last of these efforts, the Dykstra-McBride bill, was defeated in the house on April 23,1931. In the regular session of 1933 five sales tax bills were introduced. T h e first proposed to tax the sale of tangible personal property by practically all business units, including manufacturers, at the rate of 2 per cent; the second provided for a 1 per cent, the third, for a 3 per cent tax on retail sales of tangible personal property; the fourth proposed a 0.5 per cent levy on the gross income of persons and corporations. All of these measures died in committee; the fifth bill, in" The information upon which this section of the Michigan study is based was obtained in interviews with twelve individuals (four representatives of merchant groups, two educators, two state officials, a chamber of commerce official, a manufacturing representative, a real estate representative, and a university official). See supra, p. i n n .

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troduced on February 2 as H. 184, was sponsored by the governor, who had promised the elimination of the state general property tax in the election campaign. Early in 1933 the governor called to his assistance a group of experts, who drafted this last bill. It contained four taxes: a 3 per cent tax on retail sales of tangible personal property; a 3 per cent tax on sales of services of various types; a 0.3 per cent tax on sales by manufacturers; and a 0.2 per cent tax upon sales by extractive industries. Sales of farm products by the producer and sales by wholesalers were to be exempt. There were certain other exemptions, such as those of non-profit societies, insurance companies, and banks, hospitals, etc. The tax was not to apply to business units with annual receipts less than $4,800. The revenue from this bill was estimated at about $45 million annually. After the introduction of H. 184 in February, 1933, most of the conflict among organized interests and between the administration and any one or more of these had to do with the precise form which the sales tax law should take. All groups were more or less reconciled to the passage of sales tax legislation, at least as a temporary relief measure—a striking indication of the seriousness of the fiscal and the unemployment situations. There were two reasons why the administration bill did not survive. Except in the educational group, there was general belief that $45 million was excessive for state purposes. Secondly, the manufacturers did not like the 0.3 per cent tax. The school interests, throughout a long legislative struggle, adhered for the most part to the administration's bill; but the manufacturers, working through the senate, finally won their point. When it became obvious that only a retail tax could pass both houses, the governor yielded, and approved an amended measure on June 28. The law became effective July 1, 1933It imposes a 3 per cent privilege tax on the sale of tangible personal property at retail, and applies to manufacturers and wholesalers only as to those of their sales which fall within the definition of a sale at retail. Generally speaking, the law applies to sales by public utilities. An exemption of $600 a year is provided. Sales to governmental units are exempt. Taxpayers must obtain a license to do business, which may be renewed annually upon payment of a fee of one dollar.

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The estimated yield of the tax is $31.7 million annually. Specific allocation of this amount was made as follows (in millions of dollars) : State emergency welfare fund, fiscal year 1933-34 General fund for each of fiscal years 1933-34, 1934-35 University of Michigan, each fiscal year Michigan State College of Agriculture, each fiscal year

$12.0 I 9 ° 0.5 0.2

Property tax delinquency and the recent tax-limit amendment have probably been the two most important elements in the development of the sales tax issue in Michigan. Data indicating the drop in property tax collections are presented elsewhere.26 As to the 15-mill limitation by constitutional amendment in November, 1932, the farm groups, especially the Michigan State Grange and (although it took no official action) the Farm League, were largely responsible for its passage. Subsequent Michigan supreme court decisions have determined that the limit does not apply to local units having home rule charters, which include all cities and a majority of the villages. Nevertheless, the limit has on the average reduced by about 30 per cent in rural sections the prospective revenues available to the several political jurisdictions from the property tax. For a few townships it means a reduction in operating revenues of from 40 to 60 per cent. When the Michigan Education Association realized what the tax limit meant, it came out in opposition to the proposal. A t the same time it promised to use its influence to relieve real property of a large portion of the cost of education and to favor special taxes to relieve real estate. Throughout the 1933 sales tax campaign it adhered to these policies. The educational group was largely responsible for calling the special hearings in the house, at which men from other states spoke favorably of their own experience with the sales tax. The effort extended by the school interests was the chief factor in the passage of the sales tax, although they were willing to accept any other feasible revenue measure. On general grounds the real estate interests and the educational group would seem to be in agreement. However, the Michigan Real Estate Association favored the substitute H. 184 for two reasons: first, real estate transactions were therein specifically exempt; sec" Infra, pp. 723-24.

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ondly, the association's members believed that the substitute H. 184 would produce adequate revenue despite its emasculation by the senate. On the second point there is probably a fundamental difference in attitude between the two groups. The Grange, Farm Bureau, Milk Producers Association, Michigan Elevator Exchange, Michigan Livestock Exchange, Michigan Potato Growers Association, and the Michigan Farmers all opposed the sales tax unless the proceeds were to be used entirely for the further reduction of property levies below the 15-mill limit. In principle these groups favor the income tax, and they have made various attempts to enact such legislation. They withdrew their active opposition to sales tax legislation towards the final stages of the battle when it appeared that this tax offered the quickest solution of the emergency problem. The manufacturers favor a retail sales tax provided it is construed so as not to apply to any portion of their sales. They carried on an extensive lobby against the governor's bill and were responsible for deleting certain features, especially the tax on manufacturers noted above. They believed that the original H. 184 would have raised more revenue than was necessary. In general the manufacturers were in agreement with the real estate interests on matters of taxation. They supported the 15-mill amendment. In the early stages of the sales tax movement the merchants were hostile to sales tax legislation and occasionally strengthened their organization with special attorneys assigned to the task of fighting the sales tax. Shortly after the 15-mill amendment was adopted they came to regard some type of sales tax as inevitable and set themselves to prepare the best one possible from the merchants' viewpoint. They proposed (1) to make the tax rate 3 per cent, rather than 2 or 1 per cent, because they felt it would be easier to pass on a 3 per cent tax, (2) to exempt manufacturers' sales, (3) to limit the act to two years, (4) to provide in the act for permission to pass the tax on to the consumer, and (5) to provide a penalty for advertising absorption of the tax. They first asked that it be made mandatory to pass the tax on to the consumer, but withdrew the suggestion when its constitutionality was questioned. Most of the features supported by the merchants are to be found in the act, but they failed to con-

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vince the sponsors of the sales tax that it should be limited to t w o years' duration. T h e manufacturers soon began to realize that theirs w a s an empty victory over the educational interests. T h e y had escaped a 0.3 per cent tax as proposed in the administration bill, only to fall under a 3 per cent tax on a large part of their sales. 2 * T o protect them, the legislature, on the last d a y of its session, passed a resolution to the effect that the intent of the statute was to tax only retail sales as popularly understood. I n accordance with this resolution, the state board of tax administration, after some wavering, announced the following policy effective as of A u g u s t 1, 1933: " I t is the sense of this board that a retail sale be so interpreted as to exclude tangible personal property used in the processing, producing and/or manufacturing of tangible personal property to be ultimately sold at retail, including any article used in the wrapping, crating a n d / o r otherwise preparing for delivery any tangible personal property to be sold." T h e manufacturer was therefore completely excluded f r o m the scope of the act, and the tax became one on retail sales as popularly understood. Shortly thereafter, however, the board reversed itself, in view of an opinion of the attorney general, so that at present the sale of equipment, e.g., machinery, store fixtures, etc., direct f r o m the manufacturer to the user, is a retail sale. I t is to be noted that the manufacturers, complaining that such treatment will drive them, or their trade, out-of-state, do not mention the large saving in property taxes which the sales tax has made possible. T h e farmers, too, now become taxable (as consumers) on their purchases of fertilizers and machinery. T h e school interests feel that they have been badly treated in the sales tax act, because no specific appropriation is made in it for common school purposes. T h e y have only a contingent claim, whereas they originally asked for $25 million in state aid. In the original H . 184 $15 million was definitely allocated for this purpose, f r o m the estimated revenues. D u r i n g the process of deletion this definite school appropriation disappeared, so that the schools cannot expect any state aid until the yield from the sales t a x exceeds the aggregate of the specific appropriations. O n l y if the sales tax yield reaches $46.7 " Infra,

pp. 609-10.

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million will the schools have the opportunity of obtaining a full $15 million of state aid from this source of revenue in 1933-34. As residual claimants, obtaining all revenue over $31.7 million, up to $15 million, they will be greatly affected by business conditions. On the whole the litigation which has been initiated since the act became operative on July 1, 1933, has been unimportant except that instigated by the chain store companies, which are challenging the constitutionality of the sales tax on the ground that it duplicates the chain store tax for the privilege of selling at retail, both laws requiring a license. The chain store tax was passed over the governor's veto after he had signed the sales tax act. His veto was based on the fear that the chain store tax would jeopardize the sales tax. Except for the chain stores there does not appear to be any serious opposition to the tax on the part of the merchants at this juncture. Administration of the Tax.—As the first returns were due August 1 to 15, 1933, it is too early at this writing (September, 1933) to gauge accurately the extent of the difficulties that may be encountered and the degree of effort that will be taken to meet them under the Michigan tax. The administrative problem is simplified on one hand by the facts that the tax applies only to retail sales made in the course of business, as opposed to isolated sales; that the tax authorities have the power to examine any taxpayer's books, records, etc.; that fairly heavy penalties are provided; and that no exemptions, other than one of $600 a year for each taxpayer, are granted. On the other hand, every taxpayer must file a monthly return, no matter how small his tax, and this will involve a large amount of paper work which might otherwise be avoided. The tax is administered by a state board of tax administration created by the sales tax law. Its members are the state treasurer, the auditor-general, the secretary of state, and a managing director appointed by the governor by and with the consent of the senate for a term of two years. An annual license costing one dollar must be obtained by each taxpayer, and the board is requiring that this license be prominently displayed in the place of business. If a taxpayer engages in the same business in two or more places, he must obtain one $1 license and an additional license costing 10 cents for each additional place of business.

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To September, 1933 a six-page set of "preliminary regulations" had been printed and distributed by the board. About 75,000 copies were sent to chambers of commerce throughout the state. The same channels were used for distribution of return forms and of special regulations for certain lines of business. The importance of such efforts at instruction of the taxpaying public is indicated by the fact that in Michigan, as in New York, retailers were approached by persons attempting to obtain money under false pretenses in connection with the sales tax. The statistical survey of Detroit and Monroe" showed that, of 2,203 retailers, 605 were approached in this manner, although only 23 were actually mulcted. Efforts of the Taxpayers to Shift the Tax.—For information concerning the policy adopted by taxpayers toward the problem of shifting the tax, the reader is referred to Part Three,88 where the results of a comprehensive statistical study are presented. NORTH DAKOTA

A gross receipts tax with rates ranging from 0.125 per cent to 2 per cent was passed by the North Dakota legislature in 1933, but was decisively defeated when referred to the people on petition at the September election. No such tax has since been enacted. Development of the Fiscal Situation since 1929™—Almost half of North Dakota's state government tax revenue (including motor fuel and license taxes) has in recent years come from the state levy on property. When in 1932 the voters, by an initiated measure, reduced the basis of taxation from 75 per cent of the true value to 50 per cent, the state found that its property tax levy was up to the constitutional 4-mill limitation for general state purposes, and that it was facing a deficit, particularly since general fund expenditures had increased slightly during the depression. For the current biennium, however, appropriations have been reduced more than 50 per cent. From 1929 to 1932 collections from the state tax on property (for general state purposes) had been declining slightly—a little over 10 per cent in 1932 from the 1929 level—and would have c|pclined more, had not the rate been increased from 2.81 mills (fixed in 1928) " Infra, pp. 500-546. 28 Infra, pp. 506-24. 25 For sources, see infra, p. 746.

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to 3.35 mills (fixed in 1 9 3 1 ) . In fixing the levy in 1932 it became necessary to add 2.66 mills—outside the constitutional limit—to carry part of the debt service on bonds which the state had issued to raise funds for loans on farm mortgages, as many of the farmers had defaulted on their mortgage payments. Thus the total levy for all state purposes increased suddenly from 3.16 mills (fixed in 1929) to 6.83 mills (fixed in 1 9 3 2 ) ; when the latter figure is corrected for the change in taxable basis, the increase is from 3 . 1 6 to 4.55. Meanwhile assessed values (i.e., on the 100 per cent basis) had not declined drastically, being fixed in 1932 at 15 per cent below the 1930 (peak) level. Obviously, considerable pressure was being put on the property tax, especially since local levies (not collections—delinquencies are important), 30 were in 1931-32 down less than 10 per cent from the 1928-29 level. Aside from an increase in the gasoline tax rate, nothing of importance was done by the legislature to alter the taxing system until 1 9 3 3 , and general fund revenues had consequently declined steadily, in 1 9 3 1 - 3 2 being nearly 25 per cent below the 1928-29 level. The significance of this, in the face of failure to reduce expenses, is obvious. The 1933 legislature approved a thoroughgoing revision. The income tax, which hitherto had been a minor factor in state finance, was sharply increased, as was also the inheritance tax. Certain public utility taxes were transferred from an ad valorem to a gross earnings basis, the rate being fixed at 12 per cent, and a sales tax and a beer tax were passed. It was hoped that the sales tax would care for the service on the farm loan bonds, and also yield something for distribution to rural schools, but it was defeated at referendum. Development of the Sales Tax Issue.31—North Dakota's importance in this study is due to the fact that it is one of those states in which the people have expressed their opinion on the sales tax directly at the polls. As in Arkansas and Oregon, the tax went down to an overwhelming defeat; but the heavily adverse vote apparently represented not so much hostility to the principle of the sales tax as a strenuous, and perhaps unreasoning, opposition to taxes of all sorts "Infra, p. 750. " T h e information upon which this section of the North Dakota study is based was obtained in interviews with four individuals (two state officials, a banker, and a merchant). Sep also supra, p 1 1 in.

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engendered by four years of world-wide depression superimposed upon nearly fifteen years of agricultural depression. How the voters would act in a clear-cut choice between the sales tax and other forms of taxation, as contrasted with a choice between the sales tax and no tax, it is still impossible to say. The economic life of North Dakota is based almost exclusively upon agriculture. From this it follows that the state has an exceptionally homogeneous population. The disparity in the incomes of individuals is comparatively small. The state has no large cities and comparatively few towns large enough to permit the appearance of a sharp division of interest between the rural and the urban population. There is, consequently, little opportunity for a political organization dominated by rural elements of the population to shift the tax burden from agriculture to a large and (in the farmer's opinion) comparatively prosperous industrial and financial group within the state. Excepting the inevitable attacks upon the "trusts," especially the railroads and the other public utilities, the political history of North Dakota thus becomes a story of factions within the agricultural party rather than of conflict between farm and city or between rich and poor. This situation probably accounts for the absence of any real movement for a sales tax in North Dakota. In most states a long and more or less organized campaign lies back of the adoption of the sales tax by the legislature, but not in North Dakota. The farmers, while they have grown progressively more and more restive under their tax burden, have not turned toward any particular tax for relief, their demand having been primarily for tax reduction. When it became impossible to postpone an answer to their demands any longer, the legislature enacted a general revision of the fiscal system, of which the sales tax was only one element. The organization perhaps responsible more than any other for the passage of the sales tax is a faction of the Non-Partisan League, although it is to be noted that some who were opposed to the league nevertheless supported the sales tax. Predominantly agricultural in its interests and long a power in the state's politics, this organization carried all the state offices in the 1932 elections and an overwhelming majority in each house of the legislature. Safely in control in contrast to other contenders, it then split into factions, of which the one led

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by Governor Langer pushed through the sales tax. Opposed to the governor on this issue were the groups within the Non-Partisan League led by such officials as the lieutenant governor, the superintendent of schools, and the commissioner of agriculture and labor. Of the other farm organizations, the Farm Holiday Association, which was active throughout 1933 and particularly energetic in its lobbying at Bismarck, had no great liking for the sales tax but accepted it as a necessity in the emergency. The Farmers' Union definitely opposed it. The Farm Bureau is not very strong in North Dakota and did not take a formal position or participate actively in the sales tax struggle. Outside of the farm groups, the best organized interest was that of the retail merchants. They opposed the tax with some energy but could not prevail against the demand for a reorganization of the state's fiscal system. Organized labor, the natural resource industries, and the manufacturers of the state also offered some organized opposition; but they are comparatively weak. Urban real estate interests, although generally in favor of the sales tax, have no organization of any great consequence and so played no significant part. Against such opposition as offered itself, the governor had no serious difficulty in prevailing, save for a time in the senate. Introduced on February 13, the sales tax went through the legislature in less than three weeks and was signed by the governor on March 7. As approved, the act imposed for a two-year period ending June 30, 1935, a tax ranging from 0.125 per cent to 2 per cent upon the gross income derived from sales of tangible personal property and sales of professional services, excepting sales of malt and malt cereal beverages, which were taxed at a rate of 3 per cent. The rate to be paid by each business was fixed in two ways. The first was in the section imposing the tax, which levied a general tax of 2 per cent on sales of tangible personal property for use and sales of professional services with the following "deviations"; contractors, light and power for industrial use, pottery, drain tile, brick and concrete, and lignite mining, 1 per cent. Manufacturers or wholesalers selling for resale were taxed at 0.25 per cent, with the following "deviations": wholesale bakeries, wholesale meat distributing plants, wholesale gasoline dealers, wholesale dealers in soft drinks and wholesale tire dealers, 0.125 per cent.

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The second method of determining the tax was a long schedule attached to the law which listed more than 300 occupations and businesses and the tax payable by each. This schedule imposed the 3 per cent tax on malt products. If a conflict should appear in the rates fixed by the two methods, that fixed by the schedule was to prevail. If the tax commissioner of the state should discover any business or occupation not listed, he could add it to the schedule and assess against it a rate "which shall be the same as that assessed against analogous occupations or sales." The only exemption granted was to sales by farmers of their own farm products. Revenue from the tax after providing for administration costs was to be divided between the real estate bond interest payment fund, which received 75 per cent, and the state school equalization fund, which received 25 per cent. It was anticipated that much of the revenue used to pay interest on the real estate bonds would find its way into school warrants and certificates of indebtedness, via the Bank of North Dakota. The board of equalization could reduce or increase the rates of the tax "whenever such rates are excessive or insufficient, provided such rates shall be reduced or increased pro rata and shall not exceed 2 per cent except the rate upon malt and cereal beverages which shall be 3 per cent." Since one of the rates already provided for was 2 per cent, this merely gave the board power to reduce the rates as its first move. N o specific amount was appropriated for administration aside from $25,000 for preliminary expenses, the tax commissioner being authorized to expend such amounts as were necessary. Although Governor Langer succeeded in mustering a simple majority for the sales tax in the legislature, he did not obtain the twothirds necessary to make it an emergency measure not subject to referendum. The retailers consequently started circulating petitions and quickly obtained enough signatures to force an election. Not wanting to delay action until the next general election in November, 1934, the governor called a special election for September 22, 1933, at which the electorate was asked to vote on this and two other referred measures, two initiated measures, and two constitutional amendments. In his statement calling the special election, the governor justified

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his action regarding the sales tax on the grounds that without the revenue many of the common schools would be forced to close, and that such a condition amounted to a public calamity which had to be recognized by the executive of the state. Despite this warning, the voters rejected the tax by a decisive margin, 113,807 to 41,241, or more than two and one-half to one. The result differed from the defeat of the sales tax in Arkansas, for in North Dakota it did not represent a wholesale rejection of a group of proposed changes with the sales tax going down in a general sweep. On the contrary, three of the measures up for consideration by the North Dakota voters received substantial favorable majorities. Furthermore, the result differed from those in both Arkansas and Oregon in that the adverse margin, while overwhelming, was considerably smaller in North Dakota than in the other two states. This election should dispose of the sales tax in North Dakota for the time being. Whether the tax is dead, cannot be judged until enough time has elapsed to permit the effects both of the failure of the state to receive the revenue from this source, and of the wholesale revision of the fiscal system, to become manifest. If those who see disaster for the schools in the failure of the sales tax are right in their prophecies, it can hardly be doubted that the sales tax will become once more a possibility. It is important to remember, however, that North Dakota thus far has had no strong organized group of voters working for the tax, so that there does not exist the continuing pressure for its enactment which can be found elsewhere. OHIO

Retail sales tax measures submitted to the legislature in 1933 were defeated, but recent developments have again made the tax an important issue. Development of the Fiscal Situation since 1929,32—Although Ohio's state government has been taking only a negligible share of that mainstay of local units, the property tax, pressure by the localities for more assistance from the state was an important factor even in the early years of the depression. The result has not been any sudden and far-reaching change in state and local relationships such as occurred, for instance, in North Carolina, but bit by bit the state has 32

F o r sources, see infra, p. 750.

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been finding new revenue sources and turning the money over to local units. The enactment of a cigarette tax, a rate increase in public utility taxes, and (in effect) the diversion of one cent of the gasoline tax to a newly created public school fund have in the past three years marked steps in this program. The fiscal crisis in the localities seems to have developed fairly early in the depression with decreases in assessed valuation, coupled with heavy unemployment relief expenditures. It was also to some extent the result of the 15-miIl property tax limitation (which could be exceeded under certain conditions) enacted before the depression started. While the local-aid problem (chiefly in relation to schools) was being debated, Federal pressure began to make the raising of money for unemployment relief an important factor in state finance, and the 1933 legislative sessions enacted a series of "luxury" taxes (including a beer tax) earmarked for this use. Aside from the measures noted above, no new taxes or tax increases of importance have been passed by the legislature since the depression began, and the state has had to rely on the fiscal machinery as it existed in 1929 to supply its own needs. General fund revenue comes largely from business taxes and (one-half of) the inheritance tax, and although these held up well during the first year or so after 1929, a decided shrinkage later occurred, the 1932 calendar-fiscal year showing a decrease of 20 per cent from 1931 (these figures not including the yield of the school-fund cigarette tax). The governor exercised his power to cut appropriations, and 1932 expenditures were sharply reduced. Nevertheless, it has been necessary to draw heavily on the general fund balance. Development of the Sales Tax Issue.'3—Exceedingly adroit lobbying by the retail merchants, more than any other one influence, was responsible for the defeat of the sales tax in the 1933 regular session of the Ohio legislature. T o a much greater extent than in most other states, the Ohio retailers are united for legislative work, chain stores, independent stores, and department stores having agreed to bury their differences so as to promote their common interests more ef33 The information upon which this section of the Ohio study is based was obtained chiefly in interviews with thirteen individuals (three economists, three tax officials, two school officials, two trade association officials, a newspaper editor, an attorney, and a merchant). See also supra, p. i n n .

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fectively. B y joining hands, the large enterprises obtain the political benefit of the small merchants' numerous votes and local influence, while the small enterprises obtain the financial benefit of the large enterprises' ability to supply the money needed for effective propagandizing and lobbying. Thus organized, they combat all proposals to impose legislation they consider inimical to any type of retailer. During the last few years in particular, they have energetically and effectively opposed sales taxes of any kind. The technique of the retailers is adapted to the circumstances. In 1933 they lobbied strenuously at Columbus and also worked through their local members to bring pressure to bear on individual legislators. Thanks to the fact that they are substantial advertisers in the newspapers and so have very friendly relations with the press, they were able to bring large quantities of propaganda before the public and to induce many editors to oppose the sales tax either directly, or indirectly through demands that the state pass no new taxes of any sort. They were able to influence public opinion further by training speakers and sending them out to the localities under the auspices of local retail associations. In the legislature they took full advantage of the facts that the senate was tied, having sixteen Democratic, and sixteen Republican, members, and that in the Democratcontrolled house factional discords were abundant. Finally, by agile maneuvers, they were able to split the groups who favored the sales tax into squabbling factions which would vote only for particular types of sales taxes, thus making certain that any specific tax bill would be combatted by a considerable number of those who logically should have befriended it. Consistent support for the merchants in their battle against the sales tax came from the labor unions and representatives of the border communities, such as Cincinnati and Toledo, which feared that a sales tax would drive their trade into adjacent states. Arrayed against them were: ( 1 ) the school lobby (a powerful one despite its tactical blunder in demanding a new program of state aid for schools in a depression year) representing the county superintendents, the teachers, the parent-teacher associations, the textbook publishers, and the school-supply companies; (2) groups which feared the imposition of special taxes if the sales tax failed to pass, such as public utilities, amusements, and manufacturers of tobacco, soft drinks, and

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cosmetics; (3) the farmers and urban real estate interests, who wanted anything which would produce a reduction in property taxes; (4) groups interested in the construction and maintenance of highways, who wished to prevent any further diversion of revenues from the gasoline tax and the motor vehicle licenses; (5) gasoline interests, who wanted both to avert diversion and to prevent any increase in the gasoline tax. The need of funds for the relief of unemployment, a crisis in school finances, and the demand by property owners for relief from taxation were the principal forces back of the sales tax in 1933. It was not a new issue. As far back as 1929 there had been some agitation for such a tax, inspired apparently by owners of large amounts of real estate. In 1931 three sales tax bills were introduced, but the pressing needs of the schools were met by a tax on cigarettes, and the sales tax measures failed. The 1932 special sessions again put aside the issue by increasing the tax on public utilities and by providing revenue for relief in the localities through diversion of highway moneys. In the 1932 political campaign, the Democratic Party platform specifically declared itself against the sales tax. Despite Governor White's victory on this platform, it became apparent as 1932 ended that the sales tax would again be a live issue in the 1933 legislature. Estimates as to the amounts needed varied, but there was no question that substantial funds had to be provided to take care of the unemployed and to make sure that all the schools would open in the fall. The relief problem grew particularly ominous during the session as sporadic food riots occurred and as the national bank holiday made the future outlook black. Ten sales tax measures were introduced during the session, but the contest centered on the governor's program. His first proposals to the legislature in January were that $12.0 million be obtained for unemployment relief by a selective sales tax on amusements, soft drinks, and malt, and by diverting $4.0 million from the gasoline tax revenues, and that $7.0 million a year be provided for the schools by extending for two years the 10 per cent tax on cigarettes first imposed in 1931. This program encountered vigorous opposition from the interests affected by these taxes as well as from the schools, who held that it provided inadequate revenues, and from the property owners, who contended that it gave them no relief.

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Matters drifted along until April, when the legislature turned the whole matter over to a special joint committee, and recessed. After an acrimonious dispute, an apparent agreement was reached and a new program was made public by the governor. Announced on May i in the form of a message to the committee, it called for a 2 per cent retail sales tax, exempting sales of food and of farm products by producers direct to consumers, the tax to be collected from the consumer by an elaborate system of coupons. It also called for a personal income tax graduated from 1 to 5 per cent and for several minor revenue changes. B y this program the governor hoped to provide a sum variously estimated at from $40 million to $60 million for unemployment relief, the schools, and the reduction of property taxes. The hand of the retailers may be seen in the proposal for a coupon system for passing on the sales tax. They agreed in the emergency to support the tax if this provision were included, but not otherwise. The general public failed to be so amenable. In so far as the public was concerned, the coupon proposal merely dramatized the regressive incidence of the sales tax, and the entire plan was buried under an avalanche of protests. The governor, taking the brunt of the public indignation, retreated to the advocacy of a sales tax without the coupon plan and found even that position untenable. The legislature, reconvening on May 15, 1933, found itself in worse confusion than ever. From then on, the care of the retailers was to keep the legislature in chaos with every faction fighting every other faction. They succeeded admirably. The legislators were already frightened and angry over the public outburst. The schools and the property owners were soon divided over the extent to which new revenues should be used to finance the schools and the extent to which they should be used to reduce property taxes. Various interests were stirred up by proposals to amend the sales tax in such ways as to affect them adversely. In the end, the house, on June 22, 1933, voted down the sales tax, 88 to 37, the overwhelming negative vote being piled up by a combination of the merchants, labor, the border cities, the real estate people who were dissatisfied because the proposed law did not give what they regarded as adequate relief to real estate, and the Catholics, whose request that part of the school aid go to their parochial schools was rejected.

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Governor White let the senate take charge, and in a few days this body presented a makeshift program which the legislature approved on July 3. One cent of the 4-cent gasoline tax then in effect was repealed; for it was substituted a i-cent tax on all liquid fuel for the benefit of the schools; the cigarette tax was reenacted, likewise for the schools; unemployment relief was provided for by imposing taxes on cosmetics, beer, amusements, and vending machines. In repealing the gasoline tax the legislature inadvertently repealed the provision passed in a special session in 1932 which permitted the localities to divert part of their highway funds to relief, thus probably injuring the cause of relief more than it helped it. The amusements tax was amended on the floor so as to exempt all admissions of 40 cents and less (thus exempting virtually all motion picture theaters), and so as to tax golf dues, green fees, and riding academy fees. Governor White permitted all the bills passed as the senate program to become laws without his signature, except the proposed vending machine tax, which he vetoed on the ground that it would raise no appreciable amount of revenue. In accepting the senate program the governor expressed doubt that it would produce adequate revenue and promised to call a special session of the legislature in the fall if necessary. True to his promise, he called the legislature in August, 1933, and submitted to it half a dozen programs designed to raise more revenue for unemployment relief. One of the proposals was a retail sales tax. There was again formed a joint committee with five members from each house, and this committee recommended one of the governor's plans, which consisted of modifying the senate program adopted at the regular session. The measures proposed included extension of the beer tax to all bottled beverages, the rate being lowered somewhat, extension of the amusements tax to admissions as low as 11 cents, certain administrative changes in the cosmetics tax, and a stamp tax of 10 cents a pound on malt and brewer's wort. Revenue from these measures was to go to the state relief commission until the end of 1933 and thereafter to be distributed among the counties for relief purposes. This program proved acceptable to the legislature and was duly enacted without substantial change, except that the malt tax was reduced from 10 cents to 3 cents a pound. When it became apparent that the relief program was assured,

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the governor sent another message to the legislature in which he called attention to the fact that the revenue for the biennium from the cigarette tax had been largely anticipated by grants previously made and asked that funds be provided to finance the present program of state aid for schools during the remainder of the biennium. He recommended passage of a sales tax on luxuries for the purpose or, as an alternative, a retail sales tax. The assembly recessed while a special committee struggled with this problem. When the time for the reconvening of the assembly arrived, the committee, having failed to agree on a plan, in desperation proposed a i per cent retail sales tax. Opponents of the sales tax promptly brought it to a vote in the house and slaughtered it, 85 to 26. The next proposal was for a $3 million appropriation for the schools from the general fund, the money to be provided by a special temporary tax on certain utilities and a high tax on medicinal whiskey. This plan seemed to be well on its way to passage, when the house, in a sudden move that surprised many of its own members, brought the session to a close by voting to adjourn. The net effect of all this was to leave the problem of school finances unsolved. At least two considerations swayed the legislature toward its determination to do as little as possible in working out a definite solution of the tax problem at the time. One was that it had already adopted a joint resolution providing for the appointment of a special commission to study the entire fiscal system of the state. The other was the initiation by petition of a proposed amendment to the constitution limiting the tax rate on property to 10 mills instead of 15 as provided in the constitutional amendment of 1929. It was quite apparent that no final decision could be given to the tax problem until the voters had expressed themselves on the io-mill limitation amendment. In the November, 1933, election the amendment carried, and its probable effect upon local finances has led to renewed consideration of the sales tax. SOUTH DAKOTA

Effective July 1, 1933, South Dakota's gross income tax reaches even salaries and wages. The rates range from 0.2 5 per cent to 2 per cent, and the tax expires June 30, 1935.

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Development of the Fiscal Situation since 1929—The state government of South Dakota, as far as its general fund is concerned, had its own cycle of fiscal crisis and recovery some few years ahead of the rest of the country. By the beginning of 1928 a general fund overdraft equal to about a year's general fund revenue had accumulated, and during the next four years, well into the depression, this overdraft was reduced to a small amount—not by any radical cuts in expenditure year by year, but simply by maintaining a level of general fund revenue well above that of expenditure. By 1932, however, this program had to be halted. General fund revenues dropped markedly in 1931-32 and still more sharply in 1932-33, being then more than 30 per cent below the 1930-31 level, while expenditures were cut by only 5 per cent (estimated)—almost 10 per cent from 1931-32, the peak year. Such expenditure has been almost entirely for state institutions (including higher education) and general governmental departments, and until 1933 included virtually nothing for unemployment relief or school aid. The drop in general fund revenue was largely a result of shrinkage in assessed valuations, and, to an uncertain degree, delinquency, for more than half of annual general fund revenues have been derived from the state tax on property at a rate which has remained unchanged at 2 mills. Assessed valuation of taxable property declined almost 15 per cent between 1929 and 1931, and almost 30 per cent between 1929 and 1932. Fluctuations in each of the other tax sources of revenue have been of minor importance. This does not tell the whole story of the state's dependence on the property tax, however, for, in addition to the general fund rate, special-purpose levies were made, which resulted in the total state tax rate on property increasing from 3.1 mills in 1930 to 4 mills in 1932. Of this 1932 levy, 1.35 mills was needed for the state rural credit fund. Until 1933, then, South Dakota met the impact of the depression on its revenues, neither by new taxes, for no new tax measures of importance had been enacted from 1929 to 1933, nor by drastic expenditure reduction, but instead by stopping its program of overdraft retirement and by increasing the property tax rate. " For sources, see injra, p. 766.

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Meanwhile, local revenues were being impaired by the drop in valuations and by delinquency. Between 1930 and 1932 tax levies (collection data not available) for the counties dropped almost 30 per cent, for the townships, more than 40 per cent, for the school districts, about 10 per cent, and for the cities and towns, nearly 15 per cent. Furthermore, the state had been obliged to default on a considerable portion of the highway aid, apparently partly as a consequence of a sudden shrinkage of not far from 30 per cent in motor vehicle license fee revenue from 1930-31 to 1931-32. The motor fuel tax yield also dropped appreciably in the same period, and state highway expenditures seem to have increased notably from 1928-29 through 1931-32. Relief was given to the localities by the 1933 legislature through eliminating the state tax on property for the general fund, providing for the distribution of school aid, and contributing directly toward unemployment relief. At the same time progress was made toward resuming the overdraft payment program. These achievements were accomplished by the enactment of a sales (gross income) tax and a beer tax, and by a further cut in general fund expenditures involving decreases in salaries. Development of the Sales Tax Issue.™—The passage of the gross income tax in South Dakota was in the main uneventful. The legislature convened on January 3, 1933, and the gross income tax bill (S. 101), after being introduced by the joint committee on February 8, was recommitted to them at their own request for hearings. These continued until six days before the close of the session, when the bill was reported to the senate and passed by exactly a twothirds majority. On the last day of February it came to the floor of the house and there secured a majority of 8 votes. Three days later the governor signed the measure and the legislature adjourned. The law imposes a tax upon the total cash receipts of every person, firm, corporation, partnership, joint adventure, association, resident of, or doing business in, the state. The taxpayers are classified in five groups as follows: " T h e information upon which this section of the South Dakota study is based was obtained in interviews with seven individuals (five state officials and two trade association officials). See also supra, p. i n n .

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STATES

273

Manufacturers 0.25 per cent Wholesalers .0.25 per cent Live stock producers and marketers . . . .0.5 per cent Recipients of salaries and wages 1 per cent up to $2,000, 1.5 per cent on the excess of $2,000, and up to $5,000; 2 per cent on all income in excess of $5,000. All others 1 per cent

An interesting provision is that every employer is required to deduct at the time of. payment from the salary or wage paid to every person in his employ the tax due on such salary or wage. Perhaps the most confusing feature, however, is the segregation of live stock production and its taxation at a rate of 0.5 per cent. It is clear that the fine distinction between this occupation and "manufacturing" leaves the door open for a tempest of controversy. The provision was the product of a misconception of one of the former members of the legislature, who introduced it with the intention of removing the live stock producers from the all-inclusive group taxed at 1 per cent, whereas the director of taxation, who drafted the measure, had contemplated taxing live stock producers at 0.25 per cent as manufacturers. Thus, in theory, the amendment which was designed to protect the cattle farmer added 0.25 per cent to his tax rate, but in practice the division of taxation is adopting the policy of recognizing all live stock producers as manufacturers, since it is felt that an equitable administration of the law as it stands would not be possible. Introduced as an emergency measure, the tax is none the less designed to replace the state property tax, and although the bill contains a provision calling for its automatic repeal in two years, it is planned to continue the tax as a permanent feature of the revenue system if it proves successful. A companion measure (Chapt. 185, Laws of 1 9 3 3 ) appropriated 4 per cent of that part of the gross income tax revenue going to the general fund (i.e., 2.2 per cent of total gross income tax revenue) for administration of the tax. It also allotted 5 per cent of the total revenue (to come out of the general fund) to poor school districts. The administration had hoped that the bill would command a twothirds vote in both houses, as it could then have taken effect im-

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mediately upon being signed by the governor. Failure to secure the necessary support in the house, however, delayed application of the tax until the first of July. It was during this period, between the close of the legislative session and the time at which the tax took effect, that the opposition showed its greatest strength. True, the Retail Merchants Association had held meetings, interviewed legislators, and sent delegates to represent them at the hearings held on the measure. The five farm organizations,3® which have about one-half of the farmers in the state enrolled as members, also expressed vigorous opposition at the hearings. On the other hand, the way had been cleared for the gross income tax, and there were many factors conducive to its easy passage. In the first place, the necessity of new sources of revenue was too obvious to be ignored. The South Dakota Tax Conference (at which the South Dakota Retail Merchants Association, the Farm Bureau, the Farmers' Union, and the Grange were represented), though favoring retrenchment in governmental expenditure, also conceded that it was necessary to reform the revenue system to provide funds from sources other than the property tax.37 Secondly, there was considerable doubt concerning the effectiveness of the alternatives proposed. In the third place the sales tax principle enjoyed the support of the outgoing governor, and the incoming governor was able to say, without appearing to propose a wholly unfamiliar addition to the tax system, that "the special sales tax plan which has operated so long and with so little hardship on gasoline and cigarettes should be extended even to the extent of a general sales tax or a general tax on the gross receipts of business."48 The outgoing director of taxation endorsed this view, saying As I view the situation, nothing short of a tax in the nature of a turnover or sales tax combined with a tax on salaries, wages, fees, commissions, and incomes from intangibles, will solve the problem for South Dakota. It is too late for half way measures. There are apparent objections to this sort of " T h e South Dakota Farm Bureau (a quasi-official body), the Grange, the South Dakota Farmers' Union (the largest), the Farm Holiday Association, and the Farmers' Relief Association (the latter two are temporary organizations). " T h e y recommended a net income tax, the diversion of gasoline tax revenues, a tobacco tax, an amusement, cosmetic and soft drink tax, and abolition of exemptions from property taxes. 38 United States Daily, Jan. 4, 1933.

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tax, but the fact remains that on a levy so small that it would be unnoticed, it would wipe out a large part of our real estate tax, and I am unable to conceive of any tax that would be as inequitable in operation as our present real estate tax under existing conditions.39 Although no support was received from non-agricultural real estate interests, since they are without an organization and without political strength in this state, the vigorous and unvacillating efforts of the governor secured the passage of the measure. Once the bill had passed, however, the opposition organized, and circulated a referendum petition, which according to South Dakota law must secure the signatures of 5 per cent of the registered voters at the last gubernatorial election. The petitions, which were circulated by the farm organizations and the Retail Merchants Association, obtained 22,000 signatures. Analysis of this total shows clearly that there are more farmer signers than there are signatures traceable to any other group. This, of course, is hardly a startling conclusion in view of the overwhelming proportion of the electorate which this group represents. The granting of the referendum petition would have suspended the operation of the tax until the election in the fall of 1934, since it is doubtful whether the administration would have been eager to incur the expense of a special election. However, on June 30, 1933, the supreme court of South Dakota handed down a 3 to 2 decision denying the referendum petition.40 The denial was based on two grounds. Two of the justices held the view that this was a revenue measure and as such, according to the constitution, could not be referred. A third, though concurring with the decision to deny the petition, based his opinion on the view that this law was of an emergency nature, necessary for the support of the government, and as such not referable. The dissenting justices pointed out a prior decision of the court which had held that, should the mere fact that a measure was of a revenue nature prevent its being referred, the referendum could be virtually annulled by the legislature by including a revenue feature in any or every bill it passed. The day after this decision was rendered, the law went into ef" Bulletin No. 16, D i v i s i o n of T a x a t i o n , p. 20. 40 Stale ex. rel. Botkin v . Morrison, Secretary of State.

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feet. The opposition now bad little hope except for action by the special session of the legislature which was called July 31, to legalize the sale of beer. However, although bills providing for the repeal of the gross income tax were introduced in both the house and senate, they were kept in committee by a 59 to 39 vote in the former body, and a 31 to 12 vote in the latter, and the legislature adjourned on August 5 without taking any action. There is some evidence of a general feeling that, the tax being in operation, it might be well to let it continue to operate and see how it works. Further, any such change in the revenue system would force the legislature to devise some other form of taxation, a task it is reluctant to assume. Although the failure of the referendum petition has weakened the tax's opponents, it has by no means silenced all opposition. On August 8, a case attacking the tax was filed by a Sioux Falls merchant who held that the tax was unconstitutional since it did not bear equally on all classes of property. The state supreme court, however, held the tax valid in so far as it purported to tax the privilege of engaging in business, professions, occupations, etc. (South Dakota v. Welsh, December 1, 1933). Administration of the Tax.—From an administrative viewpoint the South Dakota gross income tax is characterized on one hand by extreme breadth of scope and complexity, and on the other hand by administrative provisions stronger than those of any other state, with important exceptions on two points to be noted below. Thus, although the tax is levied in a sparsely settled agricultural state, and hence will not face all the strains that might be uncovered in a commonwealth of more varied activity, its administration should prove a matter of considerable interest. Its breadth of scope is indicated by the facts that it reaches virtually all gross income of any kind, including wages, salaries, and professional income (whether received by a resident of South Dakota from any source, or by a non-resident from sources within South Dakota), and allows no universal exemption of a stated number of dollars per year. Its complexity is indicated by the use of five rates of tax. The strength of its administrative provisions lies largely in the collection of much of the tax at the source. Although the tax on receipts from personal service is graduated, employers are required

M I D - W E S T E R N STATES

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to withhold it from their pay rolls. Where any individual makes sales of products or commodities in bulk to a regularly established dealer in or buyer of such products or commodities (e.g., elevators, live stock dealers, shipping associations), the dealer or buyer must withhold the tax from the consideration paid. Any department, agency, or governmental subdivision of the state purchasing supplies, etc., must withhold the tax on such transactions. If a taxpayer's liability exceeds an "average" of $10 per month, he must file a monthly return, with payment; otherwise a quarterly return suffices. The two major weaknesses in the law appear to be, first, that by a strict reading of the statute the tax authorities have no power to inspect the books, papers, etc., of any taxpayer unless he has failed to file a return,41 and secondly, that the only penalty, aside from one of 5 per cent for the first 30 days of tax delinquency (plus "costs of collection") and 2 per cent for each succeeding 30 days, is the misdemeanor penalty, which experience in other states indicates is not highly effective. There is no provision for resale certificates, by which the nonretail seller obtains from his vendee assurance, for the tax authorities, that the sale is indeed one at wholesale. Information at the source is specifically provided for in the case of dividend, rental, and other payments. Publicity in the newspapers has proved helpful; the tax authorities have addressed groups of taxpayers in every county in the state, and all the available free time on the radio has been used, although this latter method does not form a relatively important part of the program. Tax forms are available at county auditors' offices, at banks, and at chambers of commerce, and are mailed upon application; but they have not been mailed directly to taxpayers, save upon request. About 40,000 copies of a set of printed rules and regulations, issued in June, 1933, have been distributed through the same channels as the tax forms. It is the duty of local property tax assessors to furnish the central office with a list of all who are subject to the tax, and also all real estate owned by non-residents. It is expected that this task will not " Cf. comments on W e s t Virginia, supra, p. 222.

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greatly burden the assessors, as they are already charged with taking the state census every ten years. E a c h taxpayer is supposed on his own account to register himself annually with the division of taxation (there is no charge for this registration) and to submit also a list of his employees. T h e gross income tax division has thirteen inspectors in the field; some officials in the administration believe there should be twice as many. E a c h inspector covers from four to eight counties. A t the present time, returns are being checked in the central office, and inspectors are given names selected at random and from returns which seem doubtful on their face. WISCONSIN

N o great importance has been attached to the sales tax issue in Wisconsin to date, and the matter has not come to a vote in the legislature. Development of the Fiscal Situation since 1929,42—Wisconsin's state government has been enabled to increase the expenditures of its general fund (in Wisconsin terminology this includes highway moneys but not trust funds) so that they were somewhat higher in 1932-33 than in 1929-30. T h i s has been possible because of a revenue system which has proven remarkably stable in yield, considering the elements of which it is composed. A s in most states, the yield of the motor license and motor fuel taxes has held up well, that of the latter increasing sharply as a result of the doubling of the former 2-cent rate in 1931. In addition, the taxes on public service corporations totaled about the same in 1932-33 as in 1929-30, and the income tax, thanks to the use of the three-year average, a moderate increase in the ordinary rate schedule, and (on 1931 incomes) a h e a v y surtax for unemployment relief, yielded more to the state in 1932-33 than in 1929-30. T h u s the state was able to relinquish the general property tax for 1931-32 and 1932-33 (which had been furnishing less than half as much as the income t a x ) , yet have its tax revenue in the latter year total about the same as in 1929-30. T h e state has borrowed nothing; cash in the general fund has been appreciably depleted. It was necessary for the state thus to increase its total expenditures " F o r sources, see supra, p. 788.

M I D - W E S T E R N STATES

279

because, unlike most state governments, it spent considerable sums on unemployment relief as such. It also assumed certain former local functions, and it increased state aid to localities as to certain items. It should not be inferred that the state has not introduced economies; original appropriations by the 1931 legislature (regular session), not including highway and "revolving" moneys, and unemployment relief expenditures based on the special surtax, were some 20 per cent higher than those for the current biennium. This indicates that in Wisconsin, as in many other states, the most severe strain of the depression may lie immediately ahead, and when 1933-34 (rather than 1932-33) is compared with 1929-30, the picture may be markedly different from that outlined in the preceding paragraphs. In 1934 the income tax returns to the one-year basis in place of the three-year average, which may bring a sharp drop in yield, although a second emergency relief surtax (on 1932 incomes) will temporarily increase it. Since 1929, important changes in the state tax system, as indicated above, have been confined to temporary but sharp increases in the income tax rates, an increase in the gasoline tax, and the (perhaps also temporary) abolition of the state property tax." Meanwhile, total local levies on property did not shrink greatly from 1929 to 1932, in the face of a somewhat greater decline in assessed valuations. How much pressure there will be for new sources of state revenue, such as a sales tax, seems to depend largely upon fiscal factors which, at least through 1933, have not appeared in acute form, but which may do so at any time in the near future. Development of the Sales Tax Issue.**—Although some sporadic agitation for the sales tax has appeared in Wisconsin since 1930, the principle upon which it is based is so repugnant to the prevalent political philosophy of the state that no such tax has ever been very near to enactment. In fact, not until the 1933 regular session did a tax of this type progress so far as to be introduced into the legislature. During that session, three sales tax measures were introduced. The chaiji store tax passed in 1931 (replaced by 1933 law) gave little revenue. " T h e information upon which this section of the Wisconsin study is based was obtained in interviews with six individuals (four state officials, an educational representative, and a university official). See also supra, p. i n n . tt

280

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STATES

Two would have imposed taxes on retail sales, while the third would have abolished both the general property tax and the income tax and substituted for them a turnover tax to be levied and collected by the local authorities. All three of these measures died without serious probability of passage having been threatened. In so far as drastic reductions of expenditure failed to meet the situation, other sources of revenue (notably the income tax) have given the state its necessary support during the emergency which in other states has led to the imposition of sales taxes. The nearest the lawmakers of Wisconsin have come to a sales tax is the emergency occupational tax on chain stores (not including oil stations, the courts have ruled) passed in the regular session of 1933 and approved by the governor on July 25. Under this law all mercantile enterprises owning or managing two or more stores are taxed on their aggregate gross income from retail operations at rates graduated from 0.30 per cent on the first $100,000 to 0.65 per cent on all above $5 million. The tax is levied for the period beginning July 29, 1933, and ending December 31, 1935. As a protection against possible unconstitutionality, the law imposes upon chain stores as an alternative (should the foregoing be invalidated) a schedule of license fees graduated from $10 to $100 per store according to the number of stores operated, this type of tax having been upheld by the United States Supreme Court." Since this law applies only to chain stores and not, as does the Kentucky graduated sales tax, to all retailers, it is not properly to be grouped with the taxes under survey in this study. It is, nevertheless, of interest here because the fact that it is on the statute book and can readily be expanded into a tax of broader incidence brings a sales tax a trifle closer to the realm of probability. The failure of the Progressives during the last four or five years to control the political machinery of the state as completely as they did during the régime of the elder Senator La Follette also makes the possibility of a sales tax somewhat less remote. At least it is true that the conservative element, which had control of the state from 1929 to 1931, and the Democrats, who now control the administration and the * State Board of Tax Commissioners I93I-

of Indiana v. Jackson, 283 U.S. 527, M a y 18,

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lower house of the legislature, would accept the sales tax more readily than would the Progressives. Despite these considerations, it seems necessary to conclude that in Wisconsin the sales tax remains only a possibility. The Progressives are by no means destroyed as a political power, and even if they were, the lessons they have been teaching for many years have been too well impressed upon the electorate to be forgotten very quickly. It is not likely that the mass of the voters would tolerate the imposition of a sales tax with a broad base, at least as a permanent tax, until even fuller utilization had been made of the income tax. The same range of considerations would also tend to restrict the effectiveness of a campaign such as that waged in other states with great success to enact* the sales tax as a substitute for the property tax. If a sales tax should be adopted under the continued pressure of hard times, therefore, it probably would be at most an emergency measure of temporary duration designed to meet specific needs, such as unemployment relief, and not a permanent element in the state's fiscal system.

CHAPTER

REPRESENTATIVE

VIII

FAR-WESTERN

STATES

ARIZONA

A gross receipts tax, chiefly a 2 per cent tax on retail sales, was enacted by Arizona in March, 1933, but was declared unconstitutional. Shortly thereafter a general sales tax, chiefly a 1.5 per cent tax on retail sales, was enacted. It is now in force, and expires February 28, 1935Development of the Fiscal Situation since 1929}—Arizona's sales tax was one of four taxes imposed by the special session of the legislature which met in June, 1933, at a time when new sources of revenue had to be found because the archaic state and county fiscal systems had broken down under a double strain. On one hand, the depression had brought with it an acute need of funds for the relief of unemployment. On the other hand, the normal source of most of the state and local revenue, the property tax, had collapsed, owing to falling valuations and rising delinquencies. As in other states, the agricultural areas were in trouble, but Arizona encountered a special problem in its copper mining companies. In good times these had paid nearly 40 per cent of all state taxes. With the onset of the depression, the production of copper was drastically curtailed, the valuation of the mine properties was reduced sharply (the result, in part, of a vigorous campaign by the mining companies, which brought several successful court actions), and the proportion of the state taxes paid by the copper mines fell to less than 20 per cent of a greatly reduced total. During the first three years of the depression, the state and the localities, especially Maricopa County, which has more than onethird of the state's population, tried to meet the issue by permitting unpaid tax-anticipation warrants to accumulate. Their course of action was justified superficially by constitutional limitations on their ' The information upon which this and succeeding sections of the Arizona study are based was obtained chiefly in interviews and correspondence with four individuals (an editor, a tax official, a trade association executive, and a merchant). See also supra, p. 11 in.

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power to levy taxes to pay off deficits of previous years; but fundamentally they were simply refusing to face the problem. The state deficit was also increased by the necessity of making substantial tax refunds to the copper companies which had paid under protest. Official reports on outstanding warrants are lacking, but the Merchants' and Manufacturers' Association, of Phoenix, said that on June i , 1933, the state had $2.9 million in warrants outstanding and that on June 3, Maricopa County had outstanding $0.4 million in school warrants and $0.6 million in general warrants. Opponents of the administration charge that the deficit was smaller than it appeared, payment of warrants having been withheld unnecessarily so as to force through the new tax program. There is no question, however, that the fiscal affairs of the state and localities were in an extremely serious condition. T o August 1, 1933, according to information supplied by the Federal government, Arizona had received $1.8 million from the Federal government for unemployment relief, $1.6 million representing loans, and the remainder outright grants. Development of the Sales Tax Issue.—Although some effort was made to pass a selective sales tax in the special session which convened late in 1931, a general sales tax did not appear in the legislature until 1933. Four sales tax bills were introduced in the 1933 regular session. One, a senate bill, would have imposed a tax ranging from 2 to 10 per cent upon a long list of "luxuries." The second, introduced in both house and senate, called for a 0.5 per cent tax on sales of necessities of life and a tax of 2 per cent on everything else. The third was a senate bill imposing a 2 per cent general sales tax. The fourth was a general sales tax carrying a rate of 0.5 per cent. The law passed by the legislature in March imposed a gross receipts tax of 0.5 per cent on sales by manufacturers, extractive industries (including farmers), wholesalers, sales of electricity and gas for industrial purposes and irrigation pumps, telephone and telegraph companies, railroads, pipe lines, and bus lines, and a 2 per cent tax on sales of tangible personal property at retail, sales of electricity and gas for domestic and commercial purposes, and the gross income of every person engaging in any business, profession, trade, or calling not otherwise specifically taxed. An exemption of $1,200 was allowed each taxpayer. A majority was obtained for the law only when

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its proponents agreed to permit the simultaneous passage of an income tax and a tax on intangibles. This program was promptly wrecked. Governor Moeur vetoed the tax on intangibles on the ground that it was obviously unconstitutional, a move which his political enemies at once denominated a favor to the "rich" as against the "poor," who were taxed under the sales tax. Resentment ran high enough to cause the circulation of petitions for his recall. The supreme court of the state eliminated the sales tax. Pleading that the legislature had attempted to exempt from the referendum a law which did not have the two-thirds majority required for emergency statutes, a Phoenix druggist brought suit and succeeded in having the law declared unconstitutional. 2 This left only the income tax, and against it was filed a referendum petition on which a vote could not be taken until November, 1934. Called into special session to meet the situation, the legislature fought for three weeks before coming to a decision. The administration and its followers wanted the sales tax, while anti-administration legislators refused to accept it without companion revenue measures. Maricopa County representatives also demanded that the revenue be shared with the counties. In the end, four revenue laws were adopted, all as emergency measures not subject to referendum. One classifies intangible property and taxes the various classes from 1 to 12 mills per dollar of assessed valuation. The second imposes a tax ranging from 1 to 4.5 per cent on personal incomes and from 1 to 5 per cent on corporate incomes and repeals the act of the regular session against which the referendum petition had been filed. The third levies sales taxes on malt, liquor, and tobacco products. The fourth is a general sales tax which imposes the following rates of tax upon gross proceeds: manufacturers and farmers, 0.125 P e r cent; interurban bus lines, 0.25 per cent; extractive industries (other than farming), light and power companies, telephone and telegraph companies, railroads, pipe lines, private car lines, and publishers, 0.5 per cent; retailers, 1.5 per cent on their sales of tangible personal property. The only exemption is gasoline already taxed by the state. Both the sales taxes expire February 28, 1935. The other two taxes 'Cox

v. Stitlts

Eagle

Drug

Co.,

21 Pac. 2d 914, April 29, 1933.

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285

have no expiration date. Revenue from the income and intangibles taxes is to be paid into the general fund, the object of the tax being stated in each instance "to assist in defraying the cost of maintenance of the state government and to lessen the burden in this regard resting upon tangible property." Neither tax is likely to produce an immediate emergency revenue. First payments under the income tax are not due until March, 1934. The intangibles tax, attacked in the courts by the banks as imposing double taxation, has been declared unconstitutional by the superior court, and collections have been halted pending a decision by the state supreme court. Of the revenue from the selective sales tax, 4 per cent is to be used by the tax commission for administrative costs, and 96 per cent goes to the board of public welfare "to provide unemployment and welfare relief." As to the general sales tax revenue, the tax commission receives 4 per cent for administrative costs. Of the sum remaining after this deduction, 15 per cent goes to the governor's relief fund. Of the sum remaining after the second deduction, 25 per cent goes to the counties to retire their outstanding warrants, and 75 per cent to the state general fund. It seems fair to say that neither the agitation for, nor the opposition to, the sales tax was organized as strongly in Arizona as in most of the older states. The pressure which resulted in the imposition of the tax came from a number of sources. Officeholders and tax-spending groups in general favored it as a means of preventing further reductions in expenditure and possibly of canceling drastic reductions already made. They were supported by the owners of large amounts of property, who sought relief from ad valorem taxes. Especially was this true as concerns the mining companies (whose taxes would be further lowered because their purchases and sales have both been greatly reduced during the depression) and the larger property owners in Phoenix, the principal city of the state. There also seems to have been considerable support from those interested in the credit of the state and the localities, especially holders of warrants, which included most of the banks and more important merchants. Farmers for the most part opposed the tax, but they are not very strongly organized. The most effective opposition came from the merchants, especially the druggists and grocers. It is too early to tell whether the sales tax is likely to remain as

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a permanent feature of the Arizona revenue system. During the first few weeks of its enforcement there was much resentment against it, especially among the retail merchants; but this opposition was not well organized and seemed to have little chance of becoming so. Unless the feeling against the tax dies down, there is a lively possibility that it cannot be reenacted in 1935. It is somewhat doubtful, however, whether resentment will continue to be keen if there is widespread adoption of the custom of making allowance for the tax in the mark-up rather than showing it as a separate item, since the consumer by this process is shielded from consciousness that the tax exists. Even as early as September, 1933, there were some reports that the people of the state were becoming reconciled to the tax and hence some prophecies that the law would be reenacted in 1935 without difficulty. Administration of the Tax.—Administration of the tax has been hampered by inadequacy of appropriations for the purpose. For the preliminary expenses inevitable in getting the four new taxes started, the legislature allowed only $15,000. There was also available the unexpended balance of a similar amount appropriated by the regular session for the administration of the laws never put into effect. In addition, the sales tax division of the tax commission will receive 4 per cent of the sales tax revenue. While this percentage is larger than that allotted in most states, the absolute amounts are likely to be comparatively small. For the month of July, 1933, the revenue from the tax was $67,570.57. Collections to September 21 for the month of August were $63,479.14. On the basis of these returns, the commission has established a monthly pay roll of approximately $2,400. The tax authorities estimate that the monthly yield will rise to $100,000 after enforcement is organized and believe that the $4,000 a month given them by this revenue would provide for satisfactory enforcement. Although some field work is being done even on the present basis, it is of necessity rather narrowly limited and would continue to be so even on an income of $4,000 a month. In compiling a list of potential taxpayers, the commission is required by the law to depend upon the county assessors, who are expected to supplement a list already available under a store licensing law, now superseded. There has been some complaint by county

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assessors that they lack the funds necessary to the performance of this function, but the commission believes that the duty will not prove very onerous, as it will consist chiefly of listing those farmers who did not appear on the former rolls. Widespread publicity is being sought, especially for the penalty provisions, in an effort to induce unlisted taxpayers to report voluntarily. As of September 21, there were more than 5,000 accounts on the books of the commission. If the sales tax division's estimates are correct, there should be nearly 8,000. This would indicate that there are more than 2,000 individuals who should be paying the tax but are not doing so. The commission's general policy of enforcement is seemingly to be based on a belief that the function of the tax is to raise as much revenue as possible. This means that the commission will exercise its power to determine what are "casual activities or sales" (which are not subject to tax) in such a way as to discourage returns from those whose sales are so small that their tax will be less than the cost to the state of handling the records. Since the cost of putting an account on the books is estimated as two or three dollars and the cost of keeping an account on the books as something less than fifty cents a month, the policy would seem to exclude all retailers whose annual sales are less than $300. In practice very small retailers are permitted to combine their returns for two or three months, and no return is expected unless the tax payable amounts to as much as one dollar in three months. In the absence of a sizable staff of field men it will be virtually impossible to make sure that the tax is paid by all those who should pay it even under this interpretation of the law, or to ascertain whether the returns which are made are accurate. Even a spot check in the commission's office will be almost impossible, since the return blank provides space for only two items—aggregate sales and tax payable. The policies of the commission in these matters will doubtless be influenced also by the fact that its members are elective officers who must keep the favor of the public. Until late September only two accounts had been found, among the 5,000 on the books, which the enforcement authorities felt should be audited. Rulings on legal points of doubt are being made by an assistant attorney-general, but money is lacking to permit of printing or

F A R - W E S T E R N STATES

288

mimeographing them for general distribution. Even the law itself can be obtained only by purchasing a copy from private printers. Efforts of the Taxpayers to Shift the Tax.—Various schedules have been worked out by merchants for passing on the retail tax to purchasers. N o provision is made for this in the law, which orders merely that no one subject to the tax shall hold out to the public that the tax is not considered as an element in the price to the consumer. The larger merchants adopted the following schedule, which was posted conspicuously in the stores: Sales

Tax

$0.01 t o $ 0 . 1 0

$0.00

0.11 to

0.80

0.01

0.81 t o

1.50

0.02

1.51 to

2.IS

0.03

2.16 to

2.80

0.04

2.81 t o

3.50

0.05

A test of this schedule extending over a period of five weeks in eleven stores (department stores and grocery stores) showed collections ranging from 1.56 to 1.78 per cent on gross sales, as compared with a tax of 1.5 per cent. Druggists have a similar schedule, differing in details. Merchants disagree in their ideas as to whether these schedules will survive long, some of them believing that it will become the custom to conceal the tax in the price rather than to list it separately. In fact, some merchants are already following this procedure. CALIFORNIA

In July 1933 a 2.5 per cent retail sales tax with no exemptions save as to sales of motor fuel otherwise taxed, sales of gas, electricity, and water, and sales of gold bullion, etc., became law. After June 30, i 93Sj the rate becomes 2 per cent. Development of the Fiscal Situation since 1929?—The two years from July 1, 1931 to June 30, 1933 were sufficient to plunge California from a position where the state's general fund had carried a comfortable surplus to the level of a $10 million deficit, which reflected expenditures of slightly more than $40 million above revenues for that biennium. A few tax increases and some reduction in ap' For sources, see infra, p. 6q6.

FAR-WESTERN STATES

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propriations during the first part of the 1933 legislative session only resulted in a budget for 1933-35 which would apparently duplicate the performance of the previous two years, a deficit of $35 million being forecast. At this point the electorate passed the "Riley-Stewart" amendment, which added another $80 million to the state's expenditures for the coming biennium through transferring to it the share of school costs hitherto borne by the counties. Furthermore, the same amendment provided, in effect, that, beginning in 1935, the state would lose some $30 million annually through the abolition of the gross receipts taxes on public service corporations (hitherto levied in lieu of any state or local property tax on their "operative" property, which property was now to be returned to county rolls for local tax purposes). The amendment allowed the state to levy a property tax to the extent of 25 per cent of total appropriations from all state funds, but, except under certain circumstances, limited the annual increase in expenditures of the state to 2.5 per cent, and of the localities to 5 per cent. California's descent into fiscal chaos, apart from the influence of the "Riley-Stewart" amendment, is traceable both to a revenue system whose yield decreased under the impact of the depression, and to a level of biennial expenditure which mounted steadily and appreciably from 1927-29 through 1931-33. Of the four chief sources of general fund revenue—the gross receipts tax on public service corporations, the inheritance tax, the bank and corporation franchise (income) taxes, and the insurance taxes—only the latter maintained a fairly steady yield. The gross receipts tax, however, showed important declines only as to the railroads and street car companies. Comparing 1930-31 (the high point for most of the tax yields) with 1932-33 (partly estimated), one finds the yield of the steam railroad tax cut 35 per cent, of the inheritance tax, 64 per cent, and of the franchise tax, 39 per cent. Meanwhile the legislature made no important changes in the tax system from the end of 1929 through 1932. The 1933 session laid a 3 per cent tax on the gross receipts of contract carriers utilizing motor trucks, revised upward the franchise tax and the taxes on light, power, and telephone companies, amended the inheritance tax,

290

FAR-WESTERN

STATES

and enacted a beer tax. These actions were of minor importance, however, compared to the passage of the sales tax and income tax (the latter being vetoed). General fund expenditures for the 1931-33 biennium were nearly 10 per cent above those for 1929-31, which in turn had been nearly 15 per cent above those for 1927-29. This increase was not the result of any radical change in state and local relationships, nor did unemployment relief expenditure by the state account for it; a bond issue has recently been approved for the latter purpose. The growth of expenditure seems to have been fairly uniform with respect to most budgetary items. The local units were hard pressed by decreases in property valuations, which between 1930 and 1932 approached an average of 20 per cent, the decrease being especially notable as to intangibles. City and county expenditures declined somewhat during this period, but, partly because of the unemployment relief problem, did not drop as fast as revenues. Development of the Sales Tax Issue*—No important sales tax bills were introduced during the 1931 session of the legislature, and hence the battle lines were not drawn until 1933. Even then the decisive dispute was not over the tax itself but over the Riley-Stewart plan. Whether the financial condition of the state and localities would have forced passage of a sales tax in the absence of that plan must remain an open question. Certainly there would have been an insistent demand for new revenue, and the example of other states would have been sufficient to draw the attention of legislators to the sales tax. Furthermore, many of the interests responsible for passage of the Riley-Stewart plan would doubtless have advocated the sales tax as a method of redistributing the burden of taxation, if their broader program had failed. In any event, the Riley-Stewart plan passed, and, while many of those who voted for it were more concerned with reducing their ad valorem taxes than with expressing an opinion as to the desirability of the sales tax, it seems to have been generally known that passage of the amendment would make some sort of 4 The information upon which this and succeeding sections of the California study are based was obtained chiefly in interviews with twelve individuals (six tax officials, and six association officials of whom two represented the teachers and school officials, one the fanners, one the manufacturers, one the merchants, and one the real estate owners and managers).

F A R - W E S T E R N STATES

291

sales tax inevitable. For an adequate understanding of the sales tax as it developed in California it thus becomes necessary to study the history of the Riley-Stewart plan. Of the many organizations which eventually joined to force a revision of the California tax system, the first one of wide scope seems to have been a joint tax committee formed by the California Real Estate Association, the State Land Title Association, and the State Building Owners and Managers Association. Organized in 1928, this committee two years later proposed a number of tax reforms, of which the most important was limitation of ad valorem taxes to 50 per cent of state and local expenditures. It also gave its support to a proposal made by the California County Supervisors Association that the state take over from the counties the burden of supporting the schools and impose a sales tax to provide the necessary revenue. About the same time a program somewhat similar, but proposing the income tax, rather than the sales tax, as the new source of revenue, was drawn up independently by the California Farm Bureau Federation. Disagreements among the various groups favoring the general proposal as to the methods to be used to equalize taxes prevented much progress for this program in the 1931 legislature, but a series of conferences ironed out these differences within a few months and developed a constitutional amendment later known as Proposition No. 9. This provided for a transfer of the school burden from the counties to the state, the funds to be provided by a personal income tax and a selective sales tax, thus lightening the tax on property. Presented to the people as an initiated measure in November, 1932, it went down to defeat by a two-to-one vote, partly because of general opposition to the sales tax it proposed to write into the constitution, and partly because it was opposed by the public utilities and the San Francisco real estate men, but chiefly because it was popularly interpreted (its proponents say misinterpreted) as providing for a substantial increase in school revenue at a time when voters were feeling the pinch of hard times. The nine organizations which favored the plan, including the real estate interests, farmers, teachers, and county officials, were now forced to revamp their campaign. Powerful political support came to their aid when the board of equalization entered the fight. This body had lost most of its power

292

FAR-WESTERN

STATES

in 1929 when collection of the state franchise tax was transferred to a newly created franchise tax commissioner. Being a constitutionally established body, however, the board had remained in existence. Casting about for w a y s to restore itself to power, it found its opportunity in the desires of the various organizations which had backed Proposition N o . 9, combined with the situation that confronted the legislature in January, 1933. Facing financial problems of great difficulty, the legislature looked to the governor for leadership in finding a solution. When the budget he presented proved entirely unacceptable to them, some of the more influential legislators turned for advice to R a y L . Riley, state controller, who had long advocated changes in the state's fiscal system, and Fred E. Stewart, dominant member of the board of equalization. T h e result was the original Riley plan, which included among its provisions a mandatory gross receipts tax, later called by its sponsors a transactions tax. Passed by the senate in its original form, it encountered in the assembly the determined opposition of farmers, merchants, and labor unions, who objected to the gross receipts or transactions tax, and of representatives from the larger cities, who objected to the curtailment of the powers of local units. Space is wanting to describe in detail the subsequent legislative battle, but it lasted until M a y , when the legislators, worn out by repeated efforts to solve the state's financial riddle, adopted a modified Riley plan because it offered an opportunity to shift the responsibility to the people. In the course of their struggle they had turned down five sales taxes of various types. Only one of these advanced so far as to be reported out of committee. This proposed to levy a tax of 1 cent on sales b y retailers from 10 to 50 cents, 2 cents on sales from 50 cents to $1, 3 cents on sales from $1 to $1.50, etc. Sales above $3 would have been taxed 6 cents plus 2 cents for each additional dollar or fraction thereof. As finally passed, the Riley plan retained almost nothing of the original plan except the name, and even that presently became "Riley-Stewart." 5 Having progressed thus far, the legislature recessed until after the election called for June 27, 1933. In the campaign the Riley-Stewart plan was supported by the administration and the legislators, by the board of equalization (which is given very ' For details of the Riley-Stewart plan, see infra, p. 696.

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293

broad powers by the amendment and is to a considerable extent made independent of the legislature), by the various groups which had backed Proposition No. 9 (most of the school teachers as individuals probably favored the plan, but they were not active in the campaign either as individuals or as an organization because of the hostility they had incurred in their fight for Proposition No. 9), and by other important elements such as the public utility groups and the manufacturers. The strenuous support given by these groups proved successful this time, as the proposal carried the state by a majority of nearly 300,000 votes. There was some opposition from retail merchants and labor leaders because the plan made a sales tax almost inevitable. There also seem to have been some individuals who saw the undesirable provisions hidden in the proposal. The opponents, however, were not well organized except in San Francisco, where the Retail Dry Goods Association, despite some differences of opinion among its members, led a fight which defeated the plan locally. Heavy majorities in other parts of the state overcame this adverse vote. When the legislature reconvened after the election, passage of a sales tax was a foregone conclusion. Legal experts, acting at the behest of the state tax officials and a joint legislative committee, had already held hearings in various parts of the state and drawn up a retail sales tax modeled chiefly on that of New York. Labor interests and other "liberal" lobbies fought it, but ineffectively. It was introduced in the senate on July 18, 1933. N o other sales tax bills appeared, and seven days proved sufficient to pass the measure through the legislature. The only serious difficulties encountered were a disagreement between the houses over the rate to be imposed, which was compromised by splitting the difference, the demand of the farm and labor representatives and of the Democratic assemblymen for an income tax to accompany the sales tax, and efforts to insert exemptions of various sorts. The bill went to the governor on July 25 and received his approval July 31, becoming effective immediately. As approved the law requires all persons engaging in business as retailers to obtain permits from the state, and levies upon them a tax at the rate of 2.5 per cent of their gross receipts from the sale of tangible personal property at retail to June 30, 1935, and 2 per cent thereafter. Sales of gold bullion, concentrates, and precipitates by

294

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producers or refiners, sales of gas, electricity, and water, and sales of motor vehicle fuel otherwise taxed are specifically exempted. Retailers are required to collect the tax from consumers "in so far as the same can be done," and the board of equalization is empowered to prescribe the method if it deems such action necessary. Opposition to the sales tax was weak for a number of reasons, among them being the facts that the opponents were poorly organized, that the law went through the legislature too rapidly for the opposition to crystallize, and that the logical opponents of the sales tax were willing to accept it as, in their belief, the least evil they faced. The only comprehensive organization of retailers in the state, the California Merchants' Federation, was new, having been formed in 1932, and was weakened by internal dissension growing out of the long-standing feud between the northern and southern parts of the state. Its membership was drawn from all sections of California, but financial support came chiefly from the larger merchants of San Francisco and Los Angeles, who found themselves unable to work in harmony. Furthermore, the organization soon accepted the sales tax and confined its efforts to advocating the inclusion of provisions for passing the tax on to consumers. Farm and labor organizations were successful in forcing the legislature to pass a personal income tax as the price for their support of the sales tax, but the income tax was pocket-vetoed by the governor. Now that the sales tax is on the books, the prevailing opinion seems to be that it will remain in the California tax system for a long time to come. In this state the sales tax is not, strictly speaking, an emergency measure designed to provide for the relief of distress. It is, rather, part of a general revision of the state's fiscal system. Exactly what has been achieved by that revision remains to be seen. Careful reading of the Riley-Stewart plan suggests that the voters did not fully appreciate what they were approving and may discover in the course of time that they have imposed upon themselves a new type of tax without providing permanent relief for property. B y September, 1933, more than 800 school districts had asked that the board of equalization exercise its power to permit them to exceed the limitations on expenditures imposed by the Riley-Stewart amendments. It is true that the board permitted only 17 districts to exceed the limit, most of these being in the area struck by the recent earth-

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quake in southern California; but only time will tell whether the board will continue to hold the localities in check. There is also some danger that the amendments may automatically divert part of the proceeds of special taxes to the school funds. Discovery of such unexpected results may kill the popularity of the amendments, but they cannot now be very readily repealed. During its first days the sales tax was extremely unpopular, partly because of a feeling that merchants were "profiteering." There was even some talk of initiating a measure to repeal the tax. It is still too early, however, to decide whether public hostility will be permanent or will evaporate after the petty irritations incident to the introduction of any new tax are forgotten. Proponents of the tax count on a sharp upturn in its popularity when its effects in reducing property levies become manifest. It must be remembered, also, that this tax does not expire automatically; it can be discarded only by being repealed, and the repeal must be made over the determined opposition of organized groups which will not willingly permit their tax burden to be increased or their newly acquired rights and powers to be reduced. There doubtless will be future contests over details of the tax and over a state income tax, but even the retail merchants appear to be reconciled to the sales tax as a permanent feature of the revenue system provided they can work out a method of passing it on to the consumer which is satisfactory to them. This, however, they have thus far not been able to do. Since the retailers are almost the only group which can be relied upon to make an organized fight against the tax in a state where labor organizations are not strong, the chances of repeal would seem to be remote if a generally acceptable method of passing on the tax is finally developed. Administration of the Tax.—At the time the field work of this study was completed, the law had just gone into effect, and the first reports from merchants were not due for more than two months. Administration of the tax, under a newly organized sales tax division of the state board of equalization, was thus still in its rudimentary stages. Tentative plans provided for three assistant directors, each presumably a specialist in some field such as economics, accounting, or law, an auditor with a staff of accountants, an office manager in charge of personnel, a controller with a large staff of clerks, bookkeepers, stenographers, and the like, and thirteen district offices

296

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scattered over the state. In each office there was to be a district administrator and (under his direction) a district supervisor

with

whatever staff might be necessary to handle office w o r k and one or more inspectors to care for the outside work. T h e problem of compiling a list of taxpayers was approached through the requirement of the law that each retailer must obtain a permit. Letters of explanation and application blanks were distributed to trade associations, chambers of commerce, city halls, post offices, and county clerks, and as much publicity as possible was given to requests that taxpayers obtain blanks from these sources. I t was planned to supplement this b y having employees of the board of equalization distribute blanks from door to door, at least in the larger centers of population. B y September 19, 1933, 126,950 taxpayers had obtained permits, and b y the end of December, 1933, this number had been increased to about 178,000, of whom about 10,000 or 15,000 had not filed returns for the first period. Sales tax forms will be distributed to all those to whom permits are issued. Policies to be followed in enforcing the law, both as to making sure that all those who are liable for the tax pay it and as to checking the accuracy of returns made b y taxpayers, remain to be formulated. Such policies will probably represent a compromise between the tax administrator's desire for complete enforcement and the politician's desire to make the tax a popular one. T h e form used for returns and the supporting explanatory statements which must accompany deductions should make possible a good spot audit of returns. Officials believe their enforcement funds will be adequate, as the board is to receive all the fees for permits to engage in the business of retailing and 2 per cent of the proceeds of the sales tax. In order to clear up doubtful legal points as quickly as possible, a group of regulations and rulings based on those of N e w Y o r k State w a s issued promptly in mimeographed form. 6 T h e y were supplemented by rulings made on points raised b y individual taxpayers, each ruling being given the widest publicity the authorities could attain through newspapers and trade associations. L a t e in September the entire set was assembled and printed for distribution to interested individuals. Efforts

of the Taxpayers

to Shift

the Tax.—From

this point of

' F o r certain difficulties that arose under this procedure, see infra, p. 573n.

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view California's sales tax is of particular interest because of the token system proposed to enable compliance by the retailer with the provision of the law which requires him to collect the tax from the consumer "in so far as the same can be done" (section 8y 2 ). Retailers will watch the development of practice under this provision, as they are eager to devise methods which are enforceable against competitors for passing on the sales tax to the consumer. A schedule drawn up by the state controller in cooperation with retail associations governed collection in the early weeks of the tax. It provided for the collection of no tax on sales of less than 15 cents, 1 cent on sales ranging from 15 cents to 59 cents, 2 cents on sales from 60 cents to $1.05, 3 cents on sales from $1.06 to $1.49, and so on. Retailers apparently lived up to this schedule with reasonable unanimity. Fearing that as time went on competition for consumer favor would drive storekeepers to include the tax in their general overhead, and possibly to absorb it in part, retail associations insisted that the board of equalization use the power it had been granted (section 9) to prescribe the method of collection. Their demands were reinforced by public hostility engendered by the schedule, which necessarily entailed the collection of more than 2.5 per cent on many individual purchases. In response to this pressure, the board stated that it would permit the use of tokens. As announced in September, 1933, the plan called for the issuance of approximately 90 million aluminum eight-sided coins. This plan was to be financed by the merchants, although the tokens were to be manufactured by the United States Mint in San Francisco under the supervision of the board of equalization and distributed through the banks. Each token was to be worth one-eighth of a cent and therefore good for the tax on a 5-cent item. The tokens could be used only for payment of the tax and were not to be redeemable in either cash or merchandise. As this is being written it appears that there is considerable disagreement among the merchants as to the advisability of this plan, and it may not be tried at all. One other economic aspect of the tax should be noted—the fact that the tax reaches certain business men who ordinarily do not think of themselves as retailers but whose sales are in part classed as retail sales for purposes of this tax. Many manufacturers are find-

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ing to their dismay that a tax they supported, believing that it would reduce their burden, may impose a substantial l e v y on their sales. Tax

Statistics.—The

first

payment

covered

a period of

two

months, and the collections averaged about $4 million a month. OREGON

In M a r c h , 1933, Oregon enacted a gross receipts tax of 2 per cent on retail sales and 0.3 per cent on all others, to expire June 30, 1935, but it was referred to the electorate and decisively defeated July 21, 1933. A special session in December, 1933, passed another sales tax (restricted to retail sales) which will probably be subject to referendum in M a y , 1934. Development of the Fiscal Situation since 1929.7—Oregon's state government slightly increased expenditures for general state purposes and more appreciably increased those for h i g h w a y s for a year or two after 1929, and then curtailed all expenditures s h a r p l y — s o sharply, indeed, that the fiscal machinery existing in 1929 and slightly modified in 1931 appears nearly adequate to meet them. Aside from the highway taxes, the state's chief revenue source from 1929 through 1933 has been the property tax, save in 1932 when it was not levied, on the expectation that the recently enacted personal income, intangibles income, and corporate income (excise) taxes would yield adequate replacement revenue. Although it was possible appreciably to reduce the amount levied under the state property tax from 1929 to 1933, it was not possible to abolish this levy entirely and permanently, and a large part of the yield of the sales tax passed b y the legislature in 1933, but defeated at referendum, was to have gone toward the elimination of the state property tax. T h e important tax developments occurring before appeal to the sales tax were: ( a ) the personal income tax, enacted in 1929, graduated u p to 5 per cent at that time, and up to 7 per cent (with a lowering of exemptions) by the 1933 legislature (meanwhile an initiated measure proposing similar action had been defeated by the voters in 1 9 3 2 ) ; ( b ) the corporation income (excise) tax, with a property tax offset, enacted in 1929 with a 5 per cent rate which was raised to 8 per cent in 1 9 3 1 ; ( c ) a tax on income from intangibles, enacted in 1929 with a 5 per cent rate, declared unconstitutional, and 7

For sources, see infra, p. 758.

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reenacted in 1931 with an 8 per cent rate; (d) an increase in the gasoline tax rate from 3 cents to 4 cents. Aside from these taxes and the property tax, the inheritance and insurance taxes are the only significant tax sources for state general purposes, and the last two play a minor role. The state has been operating recently at a deficit, and consequently has borrowed. Although the state government has been spending nothing directly for unemployment relief,8 there is growing pressure upon it to do so. Both deficit and unemployment relief questions seem to be minor factors, however, compared to the demand that the state leave the property tax entirely to the localities and also increase its aid to those units. This reflects the failure of the property tax to supply the localities with sufficient revenues. The state government itself has not been directly and drastically affected by failure to pay property taxes, as it has first claim on such revenues as materialize, but this in turn has made more critical for the local units the sharp increase in delinquencies. The delinquencies seem to have been encouraged by the action of the legislature in abolishing penalties under certain circumstances and for certain years. Failure to pay taxes may perhaps be traced partly to the facts that assessed valuations were lowered only some 10 per cent between 1930 and 1932, total local levies declining only slightly more. Widespread default on local obligations evidences the strain on local finances. State aid, especially as to schools, has been relatively small in amount, and as an increasingly large proportion of school expenses has been met with depreciated warrants, the partial, or complete, closing of a large number of schools appears imminent. Development of the Sales Tax Issue.9—Efforts of the administration and the legislature to solve Oregon's financial problems by imposing new taxes have been defeated by referenda. In most states which have the referendum procedure the legislature may pass a revenue law as an emergency measure not subject to a referendum. Oregon's legislature has no such power. Consequently, every solution proposed has been subject to immediate overthrow by the 'Highway expenditures have in ' T h e information upon which tained chiefly in interviews with editor and two trade association torney. See also supra, p. i n n .

part been a type of unemployment relief measure. this section of the Oregon study is based was obfive individuals (a tax official, a school official, an secretaries), and from correspondence with an at-

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F A R - W E S T E R N STATES

voters; and the people of the state during the last two years have refused to authorize new taxes of any sort for any purpose. There has been some agitation favoring a sales tax for several years, largely because of the influence of a well-known legislator who advocates it and, more recently, the example of Mississippi. The issue did not develop acutely, however, until the middle of 1932, when the state's unemployment relief committee announced that it had to have more funds and suggested that the money be raised by the state through a sales tax, thus adding its influence to the demands for new sources of revenue coming from local governments and school districts and the insistence of property owners upon tax relief. Late in November, 1932, after the defeat of an initiated measure increasing income tax rates and lowering exemptions, Governor Meier suggested the adoption of a selective sales tax and then transferred his support to a general sales tax as the only way out of the difficulties and the only way of lightening the tax burden on property. A constitutional provision which delays the effective date of all laws until ninety days after adjournment of the session that passes them, and the virtual certainty that the application of any tax passed would be delayed by a referendum, made a special session desirable; but other constitutional difficulties made its convening impossible until just a week before the regular 1933 session was due. A 2 per cent general sales tax passed the house but failed in the senate, and the problem was carried over to the regular session. There, four sales tax measures made their appearance—an independent measure calling for a 3 per cent general tax and three successive versions of the administration measure (drafted by the state tax commission) which called for a tax of 2 per cent on sales at retail, and a rate of 0.3 per cent on sales at wholesale and sales to manufacturers. Farm organizations (especially the Oregon State Grange), labor unions, and retail merchants agitated and lobbied vigorously and effectively against the measure for several weeks. The merchants, however, convinced at a conference with the house committee on revenue and taxation that the state desperately needed new revenue, agreed to support a 1 per cent retail sales tax, provided that it be an emergency tax expiring by limitation, that the passing on of the tax to the consumer be made mandatory, and that the proceeds be used to reduce the state tax on property. The tax

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301

commission rejected this proposal on the ground that the i per cent rate would not produce enough revenue to meet the situation, and under its influence the legislature, in the face of bitter opposition, passed a 2 per cent tax, the house by a vote of 41 to 19, the senate by 19 to 11. As approved by the governor on March 14, 1933, the act imposed a tax of 2 per cent on the gross income derived by persons engaged in business from the sale or use of tangible personal property or service, provided that on gross income derived from the sale of such property or service to dealers for resale and on gross income derived from publishing, the rate should be 0.3 per cent. Sales of building materials to contractors and builders for resale in the form of real estate were specifically taxed at the rate of 2 per cent. The law was to be effective for two years, expiring June 30,1935. Exemptions from the tax included gross sales to the extent of $50 a month, retail sales on motor vehicle fuels upon which a state tax had already been paid, insurance premiums, ordinary salaries and wages received for personal services, and farm products and live stock when sold by the producers to dealers for resale. The tax was to be levied in lieu of ad valorem taxes on tangible personal property, which in Oregon are imposed on merchandise, live stock, farming implements and movable machinery and equipment. Detailed provisions prescribed the division of the revenue between the counties and the state, including $250,000 for unemployment relief. The appropriation from the tax's proceeds for administration set aside "so much of such revenues as may be necessary" without specifying either an amount or a percentage. Knowing a referendum to be inevitable, the legislature, to avoid unnecessary delays, ordered that the bill be referred to the people, at a special election to be held July 2 i , 1933. Vigorous opposition to the tax developed, the most effective blows being struck by the Anti-Sales Tax Federation, an organization set up by the retail merchants, the state grange and the labor unions. It was this organization which advanced the most telling argument used in the campaign—that the measure would shift the tax burden from the rich to the poor by saving the large corporations huge sums on their personal property taxes and permitting them to pass the substitute tax on to consumers. As Governor Meier's firm is the

302

FAR-WESTERN STATES

largest mercantile establishment in the state and pays a large personal property tax, this argument had the additional political advantage of capitalizing a widespread hostility to the administration. The manufacturers of the state, organized in the Oregon Manufacturers Association, also opposed the tax bill although some individual manufacturers favored it in the hope of reducing their real property tax burden. Support for the tax was feeble. The strongest effort in its favor came from the more important property owners, including lumber companies, who stood to gain heavily from a reduction in the tax on real property which the law would make possible. Banks and insurance companies favored it because it would strengthen the credit of the state and localities. Public utilities favored it, but very mildly, because their possible gains from the law were small. The school teachers, who are strongly organized for political action, favored the tax, but their association did not enter into the fight, feeling that it could not afford to incur the ill will of labor and the farmers, who ordinarily support its programs. It also felt that the teachers were in a vulnerable position because they stood to benefit directly from the tax and that in any event it was a lost cause. On the last count, at least, their diagnosis was correct. The measure lost by a vote of 167,512 to 45,603. A retail sales tax was passed by the legislature in the last days of the special session in December, 1933. The vote was close, and many of the members supporting the tax did so, in the words of one observer, as a "duty of despair." The tax will probably be attacked through a referendum. Meanwhile, essential services of the government and especially the schools are almost certain to be badly crippled. Remedies proposed by farm and labor leaders, such as further reductions in state expenditures, heavier taxes on large corporations, and heavy borrowing by the state, are probably not adequate. A new factor has been injected into the situation by the Northwest Association of Trade Executives, one of the vigorous opponents of the sales tax, which is organizing a "pay your taxes" campaign designed to educate the public to the distinction between voluntary and involuntary delinquency and to force the payment of delinquent taxes by those who are able to pay them but refuse to do so.

FAR-WESTERN

STATES

303

UTAH

A retail sales tax of 0.75 per cent, effective June 1, 1933, was replaced by a similar tax of 2 per cent, effective August 4, 1933. There are virtually no exemptions save as to certain commodities otherwise taxed. Development of the Fiscal Situation since 1929.™—Utah's state government has relied upon the property tax to yield between onethird and one-fourth of total state revenue, and although the rate has been increased by about 25 per cent since 1929, the revenue received has declined appreciably. School aid, dependent on this source, has in consequence not been maintained at the level aimed at, and the general fund, too, has felt the results of growing delinquency and the severe cut in assessed valuations, which by 1933 had reached a level nearly 30 per cent below that of 1930. Both the inheritance tax and the income tax have proved only minor revenue sources. Aside from the introduction of the personal income tax and the corporate franchise (income) tax in 1931, the increase of one-half cent in the gasoline tax the same year, and the property tax rate increase noted above, no major change in the fiscal system was made until 1933 when the sales tax was passed, and a few months later increased, to supply money for unemployment relief. Meanwhile the state general fund had accumulated an appreciable deficit, which was funded in 1933. Since the revenue from the new tax goes for a new purpose, ordinary general fund appropriations have had to be decreased more than one-quarter from the 1932-33 level; in addition, the governor has been given considerable power to enforce economies. State revenue for unemployment relief is a method of state aid, as the localities have hitherto been carrying this burden. The pressure for such state aid is apparent from data indicating that in some counties the drop in assessed valuations from 1929 to 1932 was over 40 per cent, while current delinquencies have reached a high figure. Development of the Sales Tax Issue}1—Utah's sales tax reached " F o r sources, see infra, p. 774. " T h e information upon which this and succeeding sections of the Utah study are based was obtained chiefly in interviews with six individuals (a tax official, a legislator, a merchant, and three trade association officials). See also supra, p. 11 in.

304

F A R - W E S T E R N STATES

the statute book in two stages. T h e first was a law enacted b y the regular session of the legislature in M a r c h , 1933, imposing a retail sales tax of 0.75 per cent. T h e second was a law enacted b y the second special session in A u g u s t and approved b y Governor Blood on A u g u s t 3, which amended the first tax in several particulars and increased the rate to 2 per cent. In each instance the measure was passed to provide emergency revenue for the relief of unemployment. Other problems raised b y the depression, especially the fall in assessed valuations and consequent sharp decrease in state and local revenues, were met b y increasing the ad valorem tax rate, b y borrowing, b y reliance upon the Federal government, b y a curtailment of expenditures so drastic that some of the state's institutions, especially its educational institutions, m a y have been crippled, and b y the passage in 1931 of an income tax. T h i s last measure has produced little revenue. While partial explanations of the yield doubtless lie in the provisions of the law and in the depression, there is reason to believe that with respect to the filing fee, at least, the tax is rather widely evaded. Under the law all adults are required to file returns and pay a filing fee of $1, and approximately 150,000 returns have been filed. T h e census of 1930, however, gave Utah 264,498 persons 21 years old and over. T h e apparent evasion and the lowness of the yield offered opponents of the income tax, including most of the large interests of the state, politically effective arguments with which to win the public and the legislature to the sales tax in 1933. Prior to that year, while there had been some agitation for the tax, it had not resulted in the introduction of any sales tax bill into the legislature. W h a t definitely turned the tide was the attitude of the state relief committee formed under the chairmanship of William R . Wallace, president of the U t a h Oil Refining C o m p a n y , to administer funds provided b y the Reconstruction Finance Corporation. L a t e in 1932, this committee sponsored a survey of the sales tax as one of its " m a k e w o r k " projects. Its report, compiled b y A. D . D e w e y , Jr., and V . J. M c K n i g h t , appeared in January, 1933, under the title Report of Sales Tax Investigation and was widely distributed b y the Salt L a k e C i t y chamber of commerce. It dismissed the income tax summarily and confined itself to discussing the relative merits of general, selective, and retail sales taxes. It recommended that the

FAR-WESTERN STATES

305

legislature impose, for a two-year period, a i per cent general sales tax for purposes of relief, estimating that this would produce somewhat more than $2 million a year in revenue. Five sales tax bills were introduced during the 1933 regular session: the first called for excise taxes on various types of business; the second called for a general sales tax at 0.75 per cent; the third proposed a 2 per cent retail sales tax; the fourth proposed a 2 per cent retail sales tax with special rates on tea, coffee, silk and rayon stockings, tobacco, cosmetics, malt, and soft drinks; the fifth proposed a tax of 0.5 per cent on the sale of services and commodities by utilities, amusement enterprises, and restaurants, and on conditional, or installment, sales. Most of the struggle in the legislature was over the type of tax to be adopted, especially over the imposition of taxes on the public utilities, and over the rate to be imposed. Surprisingly little organized support for, or opposition to, the principle of the sales tax appeared. The strongest lobbying organizations favored the sales tax, not so much directly, as by implication, their most direct stand being one of opposition to increases in the income tax rates. The pressure for the sales tax came chiefly from the administration, which needed the revenue for emergency relief and saw this as the most feasible way of getting it. Perhaps the strongest opposition to the sales tax came from the labor leaders, who contended that it was a tax upon the poor. The retailers had no state organization at that time, although the combined influence of the sales tax and the National Industrial Recovery Act has since resulted in steps toward organizing one. Such opposition as the retailers built up collapsed when they early became convinced that a sales tax was inevitable, and they thereafter devoted themselves to insisting that the passing on of the tax by the merchant be made mandatory. Some opposition was offered by representatives of the border counties, whose merchants feared the effects of such a tax upon their sales. The opposition built up was strong enough to force a reduction in the rate below the 2 per cent level requested by the governor. The law as signed by the governor levied a tax of 0.75 per cent upon every retail sale of tangible personal property (excepting malt, which was taxed 5 per cent), upon payments made for all services

306

F A R - W E S T E R N STATES

rendered or commodities furnished for domestic or commercial (but not industrial) consumption by any public utility, upon the amount paid for all meals furnished at places which serve meals regularly to the public, and upon the amount paid for admission to any place of amusement. The only commodities exempted from the retail tax were those already taxed by the state and those sold to the state or local governments "to be used in the exercise of an essential governmental function." Sales of materials and containers to manufacturers were defined as wholesale sales and therefore exempt from the tax. The tax was specifically made one upon the consumer because of a provision in the Utah constitution which limits a tax on income to not more than 6 per cent of the net income. It was feared that a tax on the gross receipts of the vendor would be overthrown under this provision. As a matter of fact, merchants were preparing to litigate the tax at the time it was superseded by a later law. Power was given the state tax commission to fix a method for passing on the tax. Approximately $500,000 a year in revenue was expected from the sales tax, and when the legislature convened in July, 1933, for its second special session the governor succeeded in convincing it that this was inadequate. The ensuing legislative battle was much the same as that which occurred in the regular session, with virtually everyone satisfied that the rates were going to be moved up, and with the fighting chiefly over the amount of the increase and especially over the rate to be imposed against the utilities. The law finally approved in August raised the rates against all four of the classes of business taxed to 2 per cent, except the rate on malt, raised to 10 per cent. The tax on utilities was revised so as to apply to all services of common carriers.and telephone and telegraph companies and to sales of gas, electricity, and heat for domestic or commercial use. The revenue from the tax up to $2 million goes to the governor's relief fund. Any excess over this sum and any unexpended balance goes to the state district school fund, and is to be used to reduce property taxes. Merchants were defeated in a determined attempt to have included in the law a requirement that the tax be collected from the purchaser on each individual transaction by a specified method. The tax commission took advantage of the revision to recommend several changes in terminology intended to remove difficulties discovered

FAR-WESTERN STATES

307

under the first law. These were suggested not so much by experience with the first law, which had been drafted rather hastily, as by the opportunity to think it over during three months. Not enough time had elapsed to permit of an adequate test of the law in practice. For that reason the number of changes was relatively small. The Utah sales tax is not automatically self-repealing and can be taken out of the state's revenue system only by a direct repeal measure. This fact adds to the probability that the tax will remain on the statute book long after the emergency which put it there has passed. The prevailing opinion, even among opponents of the tax, is that this will happen. They reason that the absence of organized opposition to the tax, the presence of strong opposition to the income tax, the growth of the state's need for revenue, and the demand for the relief of property (which has developed slowly in Utah, but is certain to grow) will all contribute to keeping it in existence for many years to come. Administration of the Tax.—Administration of the sales tax in Utah is modeled in general upon the Mississippi system. Basing its estimate upon a survey of Mississippi's costs, the tax commission asked for $90,000 for sales tax administrative expenses during the biennium 1933-35. It was granted $60,000. This will probably not be enough to permit of a very effective administration. A t the time the first law went into effect the commission made no attempt to make the public conscious of the existence of the tax, feeling that the newspaper publicity the tax had received during its passage through the legislature and the attention paid by the press to the regulations issued were adequate. In compiling its list of taxpayers, the commission first estimated from the census of distribution and other sources thai there should be approximately 8,000 names. From various commercial agencies, a list of 10,000 names was compiled, and blanks were sent to all these. The first return was due July 15,1933. Through July 19, 7,291 returns had been received. Two other lists are available as cross checks—one, of those obtaining licenses under the cigarette tax (useful so far as it goes), the other, of those subject to the income tax law. The latter list is probably too cumbersome to be of much use in enforcing the sales tax. In the last analysis non-payment of the sales tax can be eliminated only by field checks. These are facilitated by the fact that each tax-

FAR-WESTERN STATES

308

payer is required to take out a license, for which he pays $2, and which he must display conspicuously. It is also facilitated by a consolidation which put the collection of four taxes formerly administered by the state treasurer under the control of the commission. Even under these conditions, the funds appropriated are too small to permit of a complete check, and the problem will be to find a way to make a partial check as effective as possible in preventing evasion. As to checking the accuracy of the returns made, the commission's plans, in so far as they had been determined in the early stages of the enforcement period, were to rely entirely upon spot audits of returns in its office by individuals familiar with the lines of business covered. When there is evidence of understatement, further checks will be made. On doubtful legal problems, the commission has thus far made its own rulings. Its regulations were first prepared in mimeographed form for distribution to interested persons and subsequently compiled for distribution in printed form. Efforts of the Taxpayers to Shift the Tax.—During the first few weeks of the 0.75 per cent tax, merchants collected it according to a schedule drawn up by the recently organized Utah State Retailers' Association which was as follows: Sale $0.00 0.67 2.00 3.34 4.67

to $0.66 to 1.99 to 3.33 to 4.66 to 5.99

Tax $0.00 0.01 0.02 0.03 0.04

Department store experience with this schedule in the first few weeks showed that it did not produce the full amount due to the state. Grocery stores were compelled to reduce the minimum sale taxable under the schedule from 67 cents to 25 cents. Reports differed as to how faithfully the retailers were living up to their schedule, but it was generally agreed that they would not do so long. For that reason, merchants tried to induce the tax commission to prescribe a stamp, or coupon, system for passing on the tax, but failed. The commission refused to adopt the plan on the ground that it would make the cost of collection excessively high. An attempt to prevent "profiteering" by vendors is made by section s of the present law, which provides that any vendor who col-

FAR-WESTERN STATES

309

lects from the vendees during any taxable period more than 2 per cent of his total taxable sales must remit both the tax and the excess to the commission. Any vendor who violates this provision is liable to fine and imprisonment. How the provision will be enforced remains to be seen. Tax Statistics.—The revenue received in July, 1933, exclusive of licenses paid, totaled $39,877, and in August it increased to $50,018. The effect of the new high rates was shown in the September, October, and November collections, which were, respectively, $134,424, $139,306, and $140,410. The number of returns for the months July to November inclusive was, respectively, 1,200, 1,505, 5,132, 2,813, and 2,304, giving an average tax per return of $33.23, $33.23, $26.19, $49.52, and $60.94. A considerably larger number of separate places of business were represented, the figures for the same months being 1,460, 1,982, 5,825, 3,272, and 2,712. WASHINGTON

A general sales tax with rates ranging from 0.2 per cent to 5 per cent (the retail rate is only 0.5 per cent) was enacted in Washington in March, 1933; effective August 1, 1933, it will expire two years later. Farmers are exempt; also anyone whose tax would be less than $5 a year. Development of the Fiscal Situation since 1929."—State, as well as local, finances were under control through budgeting and other devices during the early part of the depression period. State expenditures and revenues were stabilized and lacked deficits to compel new taxes. However, the load upon property was becoming evident through tax delinquency, bond defaults, and the inability of many communities to carry alone the burden of unemployment. A 1930 constitutional amendment terminated the requirement for uniformity in taxation, and was followed by several acts classifying property. Although increases in total property taxes had not been marked during the past decade, and although the total had declined somewhat since 1929, Washington voters ordered an additional reduction by a 1932 tax limit measure. The previous average tax rate of 60 mills (on a statutory base of 50 per cent of fair value) was in effect lowered one-third by prohibiting the total property levies from 13

For sources, see m/ra, p. 780.

310

FAR-WESTERN

STATES

exceeding a legal maximum of 40 mills, with certain important exceptions. Action to readjust fiscal responsibility for functions then became imperative. While decreases had been and were being effected in budgets, revenue needs outran savings in expenditures. A state income tax (soon declared unconstitutional), and a state occupation tax (sales tax) were enacted. Increased state aid was extended for local schools and county highways. The local property tax for roads was reduced by transferring a certain amount of gasoline tax receipts from the state highway fund, whose state function for the time being is limited to road maintenance. T o pay for emergency relief, the state reversed its policy of debt reduction, borrowed from the Federal government, and authorized the issuance of $10 million of state bonds. Thus, in general, the chief strain in Washington finances, until 1932 at least, appeared in the localities, but soon reflected itself in the state fiscal system following the adoption of the tax-limit measure. Development 0} the Sales Tax Issue.13—Proponents of the 40mill limitation law adopted in November, 1932, by Washington voters admit frankly that it was a forcing measure intended to make the state develop new sources of revenue. Since the income tax voted upon at the same election obviously could not produce much revenue because of its provision for property tax offsets, this meant that what was being forced was in effect a sales tax. Whether the people at large appreciated this may be doubted. Their vote on this issue was not for any tax but against what they regarded as excessive property taxes, their adoption of the 40-mill limitation having come as the culmination of a fight which property owners had been waging for nearly ten years under the leadership of the real estate associations. In the 1932 campaign these associations drafted the law, circulated the petitions, and staged an active campaign to arouse the voters. Supported by the farm organizations, they overcame the opposition of the teachers, who feared the effects " T h e information upon which this and succeeding sections of the Washington study are based was obtained chiefly in interviews with ten individuals (including four tax officials, one school official, three real estate men, and two association officials representing, respectively, the teachers and the merchants). See also supra, p. i n n .

FAR-WESTERN STATES

311

of the bill upon school revenues, and carried the election by a vote of 303,384 to 190,619. When the legislature met in January, 1933, it found itself faced, not only with decreases in the yields of all taxes, sharp reductions of assessments, and a formidable increase in delinquencies, but also with the new statutory limitation on property taxes. The school forces and the county and city officials insisted that the situation created by the 40-mill limitation could be met only by a reorganization of the public education and highway programs under which the state would assume a much larger share of the burden than it had borne previously. The school forces had, in fact, been campaigning for greater state participation in the support of the schools since 1921, and the limitation statute merely gave them another strong argument. In addition, labor interests, particularly in Seattle, were agitating vociferously for unemployment relief by the state, which had been leaving this problem entirely to the localities. The legislators which were called upon to solve these problems were notable in general for their lack of experience. In the house, for example, out of 99 members, 77 were serving their first term. T o care for unemployment relief they authorized the flotation of a $10 million bond issue. To lighten the road burden upon the localities they put the secondary roads under the supervision of the state highway department and abolished the county road and bridge levies. This did not remove the entire secondary road burden from the localities, since the local road district fund continues in existence, but it materially reduced local property levies. Revenue to finance both the bonds and the secondary roads was obtained by diverting 2.4 cents of the 5-cent gasoline tax from the state highways. T o ease the school burden of the localities the legislature substantially increased the aid which the state had been giving them. Part of the revenue needed to finance this program was expected from the graduated income tax which the voters had adopted in November, 1932, by a vote of 322,919 to 136,983 after an energetic campaign by the Washington Tax Equalization Council, an organization representing some fourteen associations, of which the most active were the Washington State Grange and the Washington Education Association. This revenue was earmarked for the schools, but it was

312

F A R - W E S T E R N STATES

greatly limited by the property tax offset provision which the real estate men had demanded as the price of their support. Since the legislature had no power to amend the income tax before 1935 no alternative other than the sales tax presented itself. There had been some desultory agitation for a sales tax since 1921, the demand for it growing in intensity as the pressure upon property increased. In 1930 the Washington Tax Investigation Commission had said the sales tax was the only tax, other than a graduated personal net income tax without exemptions, which could produce sufficient revenue to give property any substantial relief. In 1931 a bill imposing a tax of 1 per cent upon sales of goods, wares, and merchandise had been introduced in the legislature, the proceeds to be used for the reduction of property taxes; but it appeared late in the session, was opposed vigorously by the retail merchants, and got no further than being reported favorably by the senate committee on revenue and taxation. Late in 1932 the tax commission in its biennial report had recommended passage of a retail sales tax to permit of property tax reduction. The tax finally adopted in 1933 was a business activities tax drafted by a group of economists from the University of Washington in consultation with representatives of the various organized business interests. The legislative strategy followed was simple but effective. Two companion measures were introduced—one a selective sales tax imposing very high rates on a long list of "luxuries," the other a graduated occupations tax modeled on the West Virginia law. A roar of protest broke out against the selective tax, virtually every interest affected sending representatives to Olympia to present objections. As an alternative the protestants readily accepted the turnover tax. The opposition of the retailers, who had also opposed the selective tax, broke down when a 2 per cent retail sales tax sponsored by the governor made its appearance. Faced by this threat, they agreed not to oppose the activities tax, provided it was made an emergency measure effective for only two years. This left in opposition only the small anti-administration minority in the legislature and some of the larger business interests in the state, who were demanding economies (in addition to 25 per cent cuts already made in salaries) rather than

FAR-WESTERN

STATES

313

new revenues or who were afraid the new law would impose new heavy taxes upon them. With the tax accepted by the farmers, by some of the real estate operators, and by the retailers, and with the teachers passive on the issue, this opposition was soon overborne. A lively battle developed over the rates to be paid by different activities and over exemptions, but this was settled in due course, and the bill eventually passed the house by a vote of 61 to 26 and the senate by a vote of 26 to 13. After vetoing three sections, Governor Martin signed the bill on March 21, 1933. To prevent a referendum the law was made effective immediately, although the taxable period was not to begin until August 1. Unless action is taken by the legislature, the tax will expire on July 31, 1935. Those responsible for choice of West Virginia's law as a model seem to have been moved by a desire to spread the tax over a wider base than would be reached by a retail sales tax, and by an erroneous belief that the absence of important litigation in West Virginia during a period of twelve years indicated the legal soundness of such a tax. They apparently were not familiar with the fact that West Virginia has made few field checks under its tax law, a fact probably sufficient in itself to account for the absence of litigation.14 As it passed the legislature the law classified business activities into five "separate and distinct functions." This was done with the intent of offsetting the advantage a turnover tax gives the integrated, as compared with the non-integrated, enterprise. Each function was taxed as shown in Table X I I I , the taxpayer to pay the appropriate rate for each function he performed. Originally there seems to have been some effort to reason out logical rates according to various principles, but whatever scientific character the first schedule may have had was soon destroyed, as the rates were ultimately fixed more in accordance with the political influence of the interested parties than with economic principles. For example, extractive industries were to be assessed a fairly high rate on the theory underlying the severance tax that the state should be recompensed for the loss of its natural resources, but these industries were strong enough to force reduction of the rates to 0.3 per "Supra, p. 222.

314

FAR-WESTERN STATES

cent. The i per cent rate for oil and natural gas is apparently explained by the fact that no oil and virtually no gas are produced in Washington. TABLE XIII TAX RATES, WASHINGTON GENERAL SALES TAX BILL, AS PASSED BY LEGISLATURE Function

Per cent

Extractive function: Oil and natural gas producers All others except agriculture (classified as manufacturing) Manufacturing and/or producing function: Farmers Manufacturers Wholesaling and/or jobbing function Function of retail distribution Function of performing and rendering service: Banks, trust companies, etc Stock brokers and security houses Steam railways Electric interurban railways, street railways and urban bus systems Light and power companies Telephone and telegraph companies Water companies, except irrigation companies and districts Manufactured gas companies Express companies Car companies Passenger and freight highway transportation companies All other public service companies and utilities Finance companies Amusements (excepting concessions at agricultural fairs) Agricultural fairs Outdoor advertising Publishing Radio broadcasting Societies of authors, composers, and publishers, who collect license and/or service fees All persons engaged in business not otherwise taxed, including the sale of services

i.oo 0.30 o.io" 0.25 0.20 0.50 0.40 2.00 1.50 0.50 3.00 3.00 3.00 2.00 2.00 2.00 1.50 1.50 2.00 1.50 0.20 1.00 0.25 1.00 5.00 o.6o"

" Vetoed by the governor.

Governor M a r t i n further weakened whatever logic the rates had b y vetoing the 0.1 per cent tax on farmers and the 0.6 per cent catchall tax imposed upon businesses not otherwise taxed. T h e second veto

FAR-WESTERN

STATES

31S

apparently resulted from pressure by building owners and managers, who felt this would tax rents and so wipe out the property tax relief. These vetoes greatly broadened the list of exemptions, which also includes sales by non-profit organizations, the income of insurance companies, and sales to Federal and state institutions. In addition, to preclude the handling of very small returns, the law provides that no return shall be required of the taxpayer unless his tax for a year totals $5 or more. The legislature gave public utilities the right to pass their tax on to consumers as a separate charge, but the governor, responding to widespread protests, vetoed this provision. Of the revenue produced by the tax, $10,000 is to be appropriated to provide for any refunds which may be made, $50,000 is to be used to reimburse the state general fund for an appropriation made to cover preliminary expenses of administration, and $450,000 is to be appropriated for costs of administration during the biennium. Revenues over these amounts are to be used for the schools up to a maximum of $12,500,000 a year. Any excess over $12,500,000 goes to the state general fund. Having been passed as an emergency measure, the sales tax law is not subject to a referendum. However, after the legislature adjourned, the act became involved in a snarl of litigation which prevented its going into effect for several weeks and resulted in the overthrow of the income tax law. Three legal actions were involved: first, a suit to enjoin enforcement of the income tax brought by a large group of business men led by the Seattle chamber of commerce; second, a "friendly" suit between the tax commission and the state auditor, designed to fix the status of the sales tax, in which opponents of the law were permitted to intervene as friends of the court; and third, a suit by a group of municipalities to enjoin the section of the sales tax which makes municipally-owned utilities subject to the tax. All three turned upon the interpretation of a constitutional amendment adopted in 1930 which defines property as "everything, whether tangible or intangible, subject to ownership." The contention of the contestants of the laws in the income tax case and in the case sponsored by the commission was that both taxes were property taxes under this definition and that property taxes must be levied at uniform rates for each class of property. The municipally-owned utili-

316

FAR-WESTERN STATES

ties raised an additional point that if these taxes are property taxes, such utilities are exempt because under another section of the constitution the state cannot tax municipal property. A decision on the issue was delayed all summer by the inability of the state supreme court to reach an agreement on the income tax case. Four justices favored upholding the lower court, which had ruled income to be property under this definition, and four favored overruling the lower court, while the ninth justice, with the deciding vote, was ill and unable to sit. Under these circumstances the court postponed action on both the income tax suit and the "friendly" sales tax suit until rehearing could be held before the full court. In August the ill justice resigned. His successor was appointed promptly and the rehearing was held on August 25, 1933. On September 8 decisions were handed down, one holding that the income tax is a property tax within the meaning of the constitutional amendment and consequently invalid; the other holding that the business activities tax is an excise tax not affected by the amendment and consequently valid. As this is written the action of the municipalities is still pending, and the law is also being contested by radio broadcasting companies, telephone companies, and railroads. Administration of the Tax.—Because of the litigation over the tax, preparations for its enforcement were stopped temporarily in August. Prior to that time some work had been done toward compiling a list of potential taxpayers. Approximately 33,000 names were obtained from a mailing bureau, but of these only about 28,000 turned out to be usable. Attorneys for the tax commission also did much work on rulings and regulations. As soon as the decision of the supreme court was announced, work on the administration of the tax was resumed. The list of names already compiled was supplemented by consultation with trade associations and reference to lists in other state departments. In order to obtain correct names, addresses, and business classifications, the commission, early in September, 1933, sent to each name on the list a form requesting such information as was required together with a pamphlet of instructions. It was also planned to employ a staff of field men to conduct a state-wide canvass in order to bring in the names of persons not reporting and to assist taxpayers in so far as was necessary during the early days of the law's administration.

F A R - W E S T E R N STATES

317

The time for making the first return was extended by the commission to October because of the litigation. Tax Statistics.—Collections during the period from October 19 to 3 i , 1933, totaled $481,707.41. In November, 1933, $451457.19 was collected, and during the period from December 1 to 26, 1933, $293,332.26. The active file showed toward the end of December a list of 7,661 monthly taxpayers, 9,000 quarterly taxpayers, and 12,510 annual taxpayers. The data above include no figures as to the municipalities, telephone companies, railroads, and radio companies, who are contesting the tax.

PART THREE

T H E R E A C T I O N OF T A X P A Y E R S THE SALES T A X A STATISTICAL

STUDY

TO

CHAPTER

IX

R E A C T I O N OF T A X P A Y E R S I N N E W YORK S T A T E Large-scale statistical studies of taxpayers' reactions to a given levy have in this country been almost entirely confined to analyses of the base and the yield (e.g., the Federal Statistics of Income), the use of official tax base and tax payment data to demonstrate some point in the theory of incidence (e.g., The Shifting and Effects of the Federal Corporation Income Tax, by the National Industrial Conference Board in 1928), and the collection of financial data from large firms to indicate how their immediate tax burdens might change with a proposed change in the tax law (e.g., the public utility studies by a special tax commission in California in 1929). In few instances have reactions of taxpayers themselves been studied. The only cases of this kind of which the writer is aware are the questionnaire study by the National Industrial Conference Board in connection with its report noted above, and the recent report made by the University of Mississippi, where Professors Bell, Guyton, and Sackett undertook a pioneer piece of research in studying the reaction of Mississippi business men to the new sales tax. 1 The study covered some 900 retailers, wholesalers and manufacturers by means of questionnaires distributed by representatives of the University, and was of material assistance in suggesting points of inquiry for the present survey. The staff engaged in the present project has attempted to discover, by a store-to-store canvass, the reaction of retailers, wholesalers, and manufacturers in New York, Illinois (chiefly Chicago), and Michigan (chiefly Detroit) to the sales taxes recently enacted in those states. The major questions concern the pricing policy of the taxpayer and other actions or opinions which he has taken or formed in the face of a tax which, the legislators presume, he passes on to his customers. No conclusive discoveries as to the ultimate incidence of the sales tax can be claimed for this survey, but it is hoped that one of its results will be to assist in developing an increasingly careful ' Mississippi's General Sales Tax—How It Works. January, 1933.

322

REACTION

IN NEW

YORK

and circumstantial treatment of the problem, and it is felt that the data here presented reveal certain significant reactions of those who are subject to the tax. While the three states noted above are not the only ones which have recently adopted sales tax measures, it was felt that the selection of New York, where a x per cent sales tax was in operation, Illinois, with a 2 per cent tax, and Michigan, with a 3 per cent tax, would be fairly representative of most of the experiences arising out of existing sales tax laws in the United States. The data were obtained by direct personal canvass on the part of field workers during the months of July and August, 1933. More than 30,000 complete returns, each answering from 30 to 40 questions, were filed.2 It is hoped that the experiences and results obtained from this survey will mark the beginning of a more extended series of inductive surveys in the field of public finance. The present study aims to present the immediate effects which sales tax legislation has produced in a number of important sections of the country. Such legislation is comparatively new, and the effects which have been found thus far represent an extremely brief period of experimentation under the tax. A similar study, or one designed to supplement the present one and covering substantially the same territories or business establishments at a later time, would probably offer some extremely interesting comparisons or contrasts. An explanation of certain technical details is necessary, to indicate more precisely the nature of the survey, and the following six paragraphs are devoted to a summary of the most important of such matters. The reader who may care to examine in some detail the procedure ' For the most part, field workers were drawn from the ranks of college and university students, graduates, teachers, engineers, and school principals. The field workers in Illinois were drafted with the aid of the personnel manager of the University of Chicago, and in Michigan in cooperation with the personnel manager of the University of Michigan. In New York State the staff consisted of students and graduates of Columbia University, New York University, City College, Syracuse University, Harvard University, Massachusetts Institute of Technology, and of members—both graduate and undergraduate—of the Bureau of Economic Research of Brooklyn College. Mechanical tabulation of the results was handled by the International Business Machines Corporation. Although virtually the entire staff of the present sales tax study assisted in one way or another in this statistical survey, the task rested primarily on the shoulders of Dr. Shere and Dr. Spengler, the former chiefly in Illinois and Michigan, the latter chiefly in New York State.

REACTION

IN NEW

YORK

323

followed in the conduct of the survey is referred to Appendices A, B, C, and E. s In organizing and carrying out the project, there developed a considerable number of valuable experiences, as well as difficulties, and it is with the thought that it may be of possible aid to those who may follow in the pursuit of similar studies that this supplementary information is presented. A large section of New York State is covered by the results presented in the present chapter.4 Chicago and the Rock Island-Moline district, in Illinois, are the subjects of Chapter X. Finally, answers obtained in Detroit and the border town of Monroe are given in Chapter XI. The Illinois and Michigan studies cover a sample which approximates 20 per cent of the number of firms engaged in most of the chief lines of business in Chicago and Detroit, and 40 per cent in Moline, Monroe, and Rock Island. In the New York study it was possible to cover virtually all lines of business, those reached by the Illinois and Michigan surveys being covered in New York on the same 20 per cent basis, the other businesses, on a 10 per cent basis. All the tables in this chapter, referring to New York, represent, unless otherwise noted, approximately a 10 per cent sample of the number of units in each class of business included, in the area studied. For most of the classes covered, however, this 10 per cent sample has the same reliability as a 20 per cent sample, being derived by dividing a 20 per cent sample in half. This procedure was followed because of the fact that, as indicated above, it was necessary to obtain a 20 per cent sample for these types of business in order to have results comparable with those of the Illinois and Michigan studies;* yet to mix the 20 per cent and xo per cent New York samples would be to give undue weight to certain lines of business. For several tables this factor is of little or no importance, and there the 20 per cent and 10 per cent samples are used in combined form, the footnote to the table indicating the absolute number of firms in the sample. The "type of business" tables relating to retailers include 60 ' Infra, pp. 667-91, 794 ff. 4 For a statement as to the areas covered, and the probable representativeness of the sample with respect to the entire state, see the footnote infra, p. 347, and Appendix C, infra, pp. 688-91. * T h e last section of Chapter II, without presenting the New Y o r k 20 per cent results in detail, draws on them in order to compare N e w Y o r k City, Chicago, and Detroit.

324

REACTION

IN

NEW

YORK

varieties of retail business, grouped, for convenience in tabulation, into 38 categories; and those relating to manufacturers and wholesalers include some 320 varieties of business.' The classification of a given firm as retailer, or wholesaler or manufacturer, was based on what the firm considered itself to be, as judged by the usual standards of the trade (no distinction is made between manufacturers and wholesalers; the two classes are to be considered as combined in one group). The term "wholly exempt" means that at the time the survey was conducted the business firm, for one or more reasons, was not taxable on any of its sales. The terms "partially exempt" and "partially taxable" (used interchangeably) mean that the firm was taxable on part, but not all, of its sales. The term "taxable," used alone, refers to the aggregate of firms partially taxable and fully taxable. The term "exempt," used alone, refers only to firms wholly exempt. Ellipses ( . . . ) indicate zero. When percentage figures specifically refer to statements made by business firms, the percentages are in terms of all business firms reporting on the particular question. For the sense in which the terms "shifting" and "absorbing" are used, the reader is referred to a subsequent section.7 Where the word "shifting" is used without being qualified by such terms as "part of the tax" or "all of the tax," it refers to the aggregate of those two categories. B y a "tax-free" state is meant one in which, at the time of the survey, no sales tax of the type covered in this study was in force. Thus Pennsylvania and Vermont are referred to as "tax-free," although the former collects a low-rate mercantile license tax based on sales, and the latter collects a graduated retail sales tax which is of virtually no significance in connection with the recent sales tax movement. The reader may, to a certain degree, compare the results shown in the tables for New York, Illinois, and Michigan, but this must be ' T h e s e numbers refer t o the 10 per cent sample. T h e 20 per cent sample covered a smaller n u m b e r of lines of business. In the captions referring t o t y p e of business, the grouped types of business are usually referred to in terms of product t o economize space, b u t in some instances it is necessary, f o r the same reason, t o refer t o them in terms of t y p e of establishment, e.g., "department stores." N o significance is to be a t tached to this n o n - u n i f o r m treatment of terminology. ' Infra, pp. 358-59-

R E A C T I O N IN NEW Y O R K

325

done with caution, in view of important differences in the laws.' Those tables which show results by type of business are so arranged that, for most of the items covered, comparison among the three states is possible as concerns retailers." This cannot be done with the tables listing manufacturers and wholesalers by type of business; the methods of obtaining a representative sample, and the results achieved, resulted in a grouping substantially different in New York from that in Illinois and Michigan. S U M M A R Y OF F I N D I N G S OF F I E L D S T U D Y I N N E W Y O R K S T A T E

There is here presented a summary of the findings of the field study covering certain areas of New York State as described above. 1. Only one-third of all business establishments in New York State, it is estimated, are taxable under the sales tax. 2. Retailers, as a class, pay more of the tax than do manufacturers and wholesalers, although in certain individual lines of products this is not true. 3. Department stores and chain stores are the largest individual tax paying units in the state, and are responsible for perhaps more than one-fourth of the sales tax revenue of the state. 4. The majority of tax returns probably consist of those which involve very petty tax liabilities on the part of enterprises having high percentages of partial exemptions. 5. Exclusive of revenue coming from department store or chain store outlets, from 25 to 50 per cent of the tax revenues from retail establishments are probably paid by automobile dealers, furniture stores, dealers in lumber and other building materials, fur dealers, coal and ice companies, and electrical appliance stores. 6. The printing, paper, stationery, machinery and appliances, metals, building materials, men's clothing, and furniture lines probably account for more than half of the sales tax revenues derived from manufacturers and wholesalers. 7. Stores with sales in excess of $20,000 annually are estimated * Certain comparisons are drawn in the summary in Chapter I I above. * It should be noted, however, that in the New York tables the item "clothing" includes "tailors," shown separately in the Illinois and Michigan tables, and the item "general stores" includes "five-to-ten-cent stores, etc.," likewise shown separately in the Illinois and Michigan tables.

326

R E A C T I O N IN NEW Y O R K

to account for approximately 75 per cent of the sales tax revenues received from retailers. 8. An average of only 24 per cent of all taxable retailers interviewed stated that their policy was to shift part or all of the tax. 9. Among the taxable manufacturers and wholesalers interviewed, more than 50 per cent reported that the tax was fully or partially shifted. 10. Certain retail lines appear to have been more successful in shifting the tax than others. More than 50 per cent of all automobile dealers, coal and ice companies, department stores, dealers in lumber and other building materials, electrical appliance stores, and garages, subject to tax, stated that they shifted part or all the burden to their customers. 11. Ability to shift the tax was declared by a greater proportion of large taxable firms than of the smaller firms. 12. Comparing retail stores which have a low margin of profit on unit sales with those having a relatively high margin, a greater percentage of the former group reported shifting the tax than of the latter. 13. The percentage of taxable retailers stating that they shifted the tax was greater in the interior counties than in the border sections of the state. 14. The percentage of taxable firms reporting that they shifted the tax was smaller in New York City than in any of the other major areas of the state. 15. Although proximity to tax-free areas was said to result in some difficulties in shifting the tax in certain border towns, the number of such cases relative to the total was small. 16. In towns very close to the border and connected by good state roads to some near-by community in a tax-free state, the percentage of retailers reporting that they were shifting the tax was even less than the low percentage found in New York City (these towns, however, did not comprise a "major area" in the sense used in paragraph 14 above). 17. Very few large retail shopping centers exist along the borders of tax-free states surrounding New York State except in the environs of New York City and Buffalo. Consequently, little direct competi-

R E A C T I O N IN NEW Y O R K

327

tion is offered by dealers in these states to New York retailers who are subject to the sales tax. 18. Except in bulky goods or in the products of local handicraft, the geographical location of manufacturers and wholesalers was found to have little relation to the percentage reporting ability to shift the tax. 19. Almost half of the manufacturers and wholesalers were selling merchandise outside of New York State; no such sales are taxable. Less than 56 per cent of such producers, however, sold as much as one-fourth of their merchandise outside of New York State, and only 21 per cent conducted three-quarters or more of their business outside of the state. 20. Almost all of the business men did not consider the loss of business to competitors in other states a serious factor in the operation of the New York 1 per cent sales tax. 21. There was a noticeable time lag between the original imposition of the sales tax and the beginning of a movement on the part of taxpayers to shift the tax. 22. Lack of understanding of the law, inexperience with the operation of the measure, and hesitancy in applying new price policies seem to account largely for the fact that many business men, according to their own statements, absorbed the tax. 23. Many concerns changed their policies of handling the tax after it was imposed. 24. There were more cases of firms changing from a policy of absorbing the tax to one of shifting the tax, than there were of the reverse procedure. 25. Many business houses did not expect to continue their existing policy with respect to shifting or absorbing the tax during 1934. Most of these firms professed to be absorbing the tax. 26. The process of adjustment on the part of business men to a tax-shifting policy is probably more prolonged during periods of low and uncertain price levels than in more active periods of rising prices. Where the tax results in serious impairment of net profits, there has been more evidence of shifting the tax at an earlier date. 27. In cases in which only a nominal tax payment was involved, there was evidence of a considerable lag in the development of a price

328

REACTION IN NEW Y O R K

policy designed to shift the tax, and in some instances the tax will, perhaps, never be shifted. 28. T h e reasons most commonly given b y business men for absorption of the tax w e r e : customer resentment, severe competition, and inability to place the tax on low-priced merchandise. 29. T h e s e factors were not only cited as obstacles which forced absorption of the tax, but were also reported as being the most important difficulties encountered b y those who said they shifted the tax. 30. In retail lines in which keen price competition prevailed, or in which there was extremely narrow price higgling on the part of customers, it was reported to be almost impossible to shift the sales tax. 3 1 . T h e percentage of taxable firms reporting the practice of shifting the tax decreases as one passes from the relatively good neighborhoods to those which are obviously poor, or slum, areas. In the latter districts, certain types of retailers reported that it was practically impossible to shift the tax. 32. M u c h deliberate evasion of, and open defiance to, the tax was found b y field workers in the poorer neighborhoods. 33. Of the retailers, manufacturers, and wholesalers who reported that they were shifting the tax in full or in part, the majority stated that they were shifting the whole tax. 34. T h o s e w h o reported shifting the whole tax were chiefly establishments charging 1 per cent to the nearest cent on each sale. 35. M o r e than a third of the retailers who stated that they shifted the tax reported that they could shift only part of it. 36. A b o u t one-fourth of the manufacturers and wholesalers who stated that they shifted the tax reported that they could shift only part of it. 37. In those cases among retailers in which a uniform addition for the tax was not imposed on all sales, the general practice was to place a higher burden of the tax upon high-priced goods, and upon goods for which prices were not well known or widely advertised. 38. W h e r e the tax upon sales of low-priced goods was shifted, the practice was usually to add to the price more or less than the tax rather than the exact amount of the tax to the nearest cent. 39. N o important distinction is to be drawn between the relative additions for the tax made in the case of cash and credit sales. 40. W h e r e a distinction between cash and credit sales was made,

R E A C T I O N IN NEW Y O R K

329

retailers in general placed a greater addition for the tax on cash sales, while wholesalers and manufacturers showed a tendency to penalize credit sales. 41. Retailers tended to depart from uniformity of procedure in allowing for the tax on various sales to a greater extent than did manufacturers and wholesalers. Both of the last two classes preferred, on the whole, to charge the flat i per cent tax to the nearest cent on all sales. 42. In general, manufacturers and wholesalers preferred to quote the tax separately on their invoices, whereas the majority of retailers who shifted the tax favored inclusion of the tax charge in the quoted price. 43. Neither retailers nor manufacturers and wholesalers used definite "tax schedules" to an appreciable extent in shifting the sales tax. Several chain stores and large companies having branches in other states reported the use of such schedules or bracket systems in certain other states having sales tax laws, but not in New York State. 44. Reduction of wages and lowering of rentals were among the other methods cited by concerns in their attempt to recoup the sales tax. These methods were, however, relatively unimportant in terms of total numbers in the sample. 45. Other burdens associated with the sales tax in New York State were the additional costs of recording taxable sales and calculating the tax, and the extra trouble involved in separating taxable from non-taxable sales. 46. From 5 to 10 per cent of all taxable and non-taxable business establishments covered in the survey reported that they had encountered increased costs of doing business because of the requirements set up by the law in connection with the maintenance of proper accounting records. 47. A majority of taxable and exempt wholesalers and manufacturers were not obtaining from vendees the resale certificates (provided for in the sales tax law), in which the vendee states that he is buying for resale, and not for use or consumption. 48. In general, although the operation of the tax, apart from the burden of the tax itself, had increased the cost of doing business of a considerable number of firms throughout the state, such increases in cost, for most business establishments, were trifling, relative to

330

R E A C T I O N IN NEW Y O R K

volume of sales. In a few instances, however, these increases in cost were reported to have exceeded the amount of the tax charge. 49. A fair degree of uniformity was found between reports of consumers who declared they paid the sales tax in certain retail outlets and the replies of dealers relating to tax shifting policies. However, a few important exceptions are to be noted. 50. In those lines of business in which virtually all retailers stated that they shifted the tax by concealing it in the quoted price, very few consumers seemed to know whether or not the tax was being shifted. 51. While the existing sales tax was far from popular, it had a surprising degree of support from retailers. A very small percentage of retailers (less than 2 per cent) favored a higher retail sales tax measure on the ground that a higher tax could be shifted more readily. 52. The manufacturers' sales tax (presumably as a Federal levy), was proposed by retailers as the most popular substitute measure for the retail sales tax. 53. A large number of manufacturers and wholesalers supported the proposal of a Federal manufacturers' sales tax, although a majority favored the present retail sales tax. 54. The support of the sales tax as a temporary measure came primarily from up-state retailers having a patriotic sense of duty to the state in time of stress. A majority of these retailers opposed the tax as a permanent measure. 55. Next in popularity to the manufacturers' sales tax, among retailers and among taxable manufacturers, came a higher progressive income tax, owing to the theory that as a permanent measure this would tax those most able to pay. 56. Little favor was shown to an increase in the real estate tax as an alternative to the sales tax. FIRMS S U B J E C T TO T H E TAX

Unlike the Illinois and Michigan sales tax laws, that of New York contains exemption provisions sufficiently broad to make of considerable importance an inquiry concerning the type and number of firms who must pay the sales tax. Before entering into a description of the reaction of the taxpayers, the present chapter will present some data in answer to the question: Who are the taxpayers? The

R E A C T I O N IN NEW Y O R K

331

word "taxpayers" is here used in its legal sense, denoting those who are held responsible by the state for payment oí the sales tax. The ultimate taxbearer may often be the consumer, but this aspect of the problem is treated in a later section.10 The paragraphs immediately to follow will attempt to summarize and classify those types of business establishments which must, in the first instance, at least, pay the sales tax in New York State. The analysis would be simple if the New York State sales tax were a tax on all retailers. However, the tax applies, not to retailers as such, but to sales. The law specifically taxes personal property sold "at retail" in New York State, except receipts from the sale for human consumption of food products specifically mentioned in the law, motor fuels, gas, steam, water, and electricity. Sales to the state and to political subdivisions of the state, and those that involve interstate commerce are also exempt. A universal exemption decreasing from $1,250 to zero, per quarter, as the size of the firm increases, is also allowed. Establishments Which Sell at Retail.—The retail sale or "sale at retail," according to the law, is "a sale to a consumer or to any person for any purpose other than for resale in the form of tangible personal property."11 Obviously, this includes, as taxpayers, all establishments that are engaged in selling commodities to final users, and brings within the taxable group not only retailers, but also wholesalers, jobbers, importers, manufacturers, and other selling organizations. Moreover, large numbers of retail outlets conduct a business which consists mainly of the sale of services, and many others sell to customers who resell the merchandise; such sales are not taxable. Consequently, many business units are not subject to the tax, and of the remainder, not all bear a like burden with reference to total sales. According to the 1929 census of retail distribution, there were about 190,000 retail stores in New York State. In addition, there were some 57,000 manufacturers and wholesalers, or a total of approximately 247,000 units which might be reached under a general sales tax. Of these, a large number would not have to pay any tax under the present New York law. 10 Infra,

pp. 358 ff. " Sec. 390 (e). For a discussion of this concept, see infra, pp. 581-94.

332

REACTION

IN

NEW

YORK

Retailers Who Are Exempt.—Among the retail stores, the first group which is obviously exempt from the tax is that which dispenses nothing but certain food products. A distinction must be made between food stores which deal exclusively, or almost exclusively, in the exempt food products, and those which deal in part in taxable products. Of the former class, the census reported the following units for New York State: Bakeries

i,934

Fruit and vegetable stores

D a i r y products stores

i,666

Meat markets

E g g and p o u l t r y dealers Fish markets

735 1,637

6,61 o 10,060

M i l k dealers

714

Other exempt food stores

532

To the extent that retailers in these lines of business depart from the narrowly defined scope of operations which the designations indicate, by supplementing their stock of merchandise with products not specifically exempt, they expose themselves to the tax, should their volume of retail sales of such products exceed the exemption of a stated sum. However, the extent of departure from the exempt category in this group is so slight that, for practical purposes, all stores listed above may be considered wholly exempt. Their total number is 23,888. None of them is included in the sample covered by the present study. This leaves a remainder of 163,190 stores.12 On the basis of the sample of over 10,000 retailers studied in the field survey in selected areas of New York State, the conclusion is that more than half of these remaining stores are exempt. A classified list of sixty varieties of retailers, including practically every important line of retail business, made up the sample. Approximately 10 per cent of each class were studied in the geographical areas covered by the investigators. In several selected lines, 20 per cent samples were taken. If these be included, a total of over 15,000 retail stores were brought under observation. For all of these, taken collectively, the results show that at least 50 per cent are completely exempt. These average results do not tell the complete story. A glance at Table 1 will reveal the wide variation in exempt and taxable status " T h e census includes 2,939 printing, plumbing, and custom tailor shops in its retail classification of 190,017 establishments. In the present study, these shops have been classified in the manufacturing category, thus reducing the total retail units based on census figures t o 187,078. Subtraction of 23,888 f r o m the last figure leaves a remainder of 163,190 stores.

TABLE I EXEMPT AND T A X A B L E RETAILERS: NEW YORK STATE (By Type 0] Business) TOTAL NUMBER T Y P E o r BUSINESS

IN SAMPLE

Automobiles (new) Automobiles (used) Automobile parts, etc. Books Children's wear Clothing Coal and ice, etc. Confectionery Cotton piece goods, etc. Delicatessens Department stores Drugs, etc. Dry goods Electrical appliances Florists Furniture, etc. Furs Garages and gasoline stations General stores Gifts and novelties Groceries Hardware House furnishings Jewelry Leathergoods Lumber, other building materials, etc. Men's furnishings, etc. Millinery Musical instruments, radios, etc. Opticians Paints and glass Restaurants Shoes Sporting goods; toys Stationery Tires Women's apparel Unclassified

136 34 211 41 62 168 163 1,003 33 329 37 769 292 71 165 275 79 543 225 83 1,076 366 31 259 42

TOTAL, ALL TYPES

NUMBER WHOLLY EXEMPT

PERCENTAGE WHOLLY EXEMPT

NUMBER PERFULLY OR CENTAGE PARTIALLY FULLY OR T A X A B L E PARTIALLY TAXABLE

129

7 7 100 14 3 25 33 615 9 303

5 21 47 34 5 15 20 61

59 143 130 388

27

24

88 65 21 63 51 46 480 "S

ir 22 30 38 19 58 88 Si 51 92 21 26 46

42

987 76 8 119 12 6

92

27

26 37 68r 227 50 102 224 33 63 110 41 89 290 23

95 79 53 66 95 85 80 39 73 8 100 89 78 70 62 81 42 12 49 49 8 79 74 54 71

29

140 30 210 115 129 60 112 146 261 43 554 44 416 124

94 90 72 60 61 72 14 90 80 44 60 86 57

5,5o6

5i"

94 233 160 214 98 'SS 1,044 291 54 1,252 73 484 218

45 85 38 43 898 30 li 698 29 68 94

6 10 28 40 39 28 86 10 20 56 40 14 43

10,863

5,357

49"

23

27 HI

88

° These percentages apply to the sample, thus relating to the aggregates of 10 per cent samples taken in various parts of the state, and not weighted by census figures for the whole state. When individual percentages for each line of business are applied to census totals, the percentage of exempt retailers in the above categories is 56. When the data are weighted on a geographical basis, the percentage for the state as a whole becomes 53. See Table 9, infra, p. 347, and Appendix C, pp. 688-91, for weighting method.

334

R E A C T I O N IN NEW Y O R K

for different classes of business. Among the stores dispensing food, but not included in the completely exempt category presented above, the following high percentages of complete exemption were found: confectioners, 61 per cent; delicatessens, 92 per cent; grocery stores, 92 per cent; restaurants, 86 per cent. These stores, taken collectively, accounted for more than 50 per cent of all wholly exempt units reported in the sample, although they represented fewer than one-third of the total number of units included in the study. Another 22 per cent of all reported exempt retail establishments were made up of garages and gasoline stations, and stationery and cigar stores. The former were exempt from the tax chiefly because their major revenues were derived from the sales of gasoline or of repair- service, both of which are non-taxable under the statute. The latter show such high percentages of exemption because most of them were small establishments whose volume of business fell below the minimum subject to tax. Reference to Table 1 will show that the majority of these retailers were exempt; of the garages and gasoline stations, 88 per cent were exempt, and of the stationery and cigar stores, 56 per cent were exempt. Among the other establishments on the exempt list, the lines of business which were most prominent were automobile parts and supply stores, drug stores, dry goods stores, fur shops, furniture stores, general merchandise and five- and ten-cent stores, and hardware, jewelry, and musical instrument and radio stores. B y applying the percentages shown in Table 1 to the census figures for New York State, one obtains an estimated 115,025 retail establishments exempt from the tax. Conversely, the number of returns which the tax commission might be expected to receive from retailers, on a 1929 basis, is 72,144." Bases of Retail Exemption.—It has been noted that more than half of the wholly exempt units reported in the survey were selling exempt food products. This does not signify, however, that all these units would have been taxable had this exemption been removed. More than one-fourth of such food stores reported that their gross sales were below the taxable level, and hence they were exempt on two counts. Table 2 presents the various bases of exemption reported by " S e e infra, pp. 669-71, for comment concerning the reliability of data derived from the census figures.

REACTION IN NEW YORK

335

each line of business represented in the study. Inasmuch as some establishments may be exempt on several grounds, the number of reported reasons for exemption exceeds the number of exempt stores. The totals in this table present an interesting frequency distribution of the replies. The most common cause cited for exemption was "low revenue." Strictly defined, this means either that the establishment had gross sales under $833 for the two-month period ending June 30, 1933, or that, after deducting non-taxable sales from the total, the balance subject to tax would fall below that figure. Firms with taxable sales for this period greater than $833 but less than $1,666 were partially taxable. After low revenue as a basis of exemption, there come, in order of frequency, sales of food, services, gasoline, and articles for resale, interstate sales, and sales to branches or divisions of the government. The last three grounds for exemption constitute less than 1 per cent of all reasons given. In the food group, in addition to the four major lines of business previously presented, a substantial number of drug stores dispensing ice cream and light lunches were exempt from the tax. Stationery and cigar stores had also gone into this business to a certain extent. The five- and ten-cent stores were handling an increasingly larger stock of foodstuffs, in addition to a lunch counter service which some of them maintain. Gasoline stations fell into this category because some of them were operating refreshment stands where food was served. General merchandise stores, especially in the rural districts, carried a miscellaneous stock which included foodstuffs. In connection with this group, it may be of interest to note that not all confectionery stores were exempt on account of food sales. Some of them were specializing exclusively in candy or in soft drinks, both of which are subject to tax. Among those exempt on account of gasoline sales were five- and ten-cent stores, general merchandise stores, and grocery stores. Most of these establishments were outside of the large cities and were doing a general merchandise business including the sale of motor fuel and oils. The service group may be divided into four major categories: Automobile and mechanical repair service, clothing fitting and repair service, household service, and personal service. In the fur

TABLE 2 BASES OF COMPLETE EXEMPTION—RETAILERS: NEW YORK STATE" (By Type of Business) W H O L L Y E X E M P T ON A C C O U N T OF NUMBER T Y P E OF B U S I N E S S

S A L E S OF

EXEMPT

WHOLLY EXEMPT

WHOLLY BECAUSE

FOOD

CASO-

SERV-

LINE

ICES

OTHER'

OF LOW REVENUE

Automobiles (new) Automobiles (used) Automobile parts, etc. Books Children's wear Clothing Coal and ice, etc. Confectionery Cotton piece goods, etc. Delicatessens Department stores Drugs, etc. Dry goods Electrical appliances Florists Furniture, etc. Furs Garages and gasoline stations General stores Gifts and novelties Groceries Hardware House furnishings Jewelry Leather goods Lumber, other building materials, etc. Men's furnishings, etc. Millinery Musical instruments, radios, etc. Opticians Paints and glass

7 7 100

14 3 25 33 615 9 3 en m

w S H g *> S

« r c» mTS3 4 I .O "c 60•g-S C A rt a> !1 2 S.9 £ £ S « I l a s-g S I s s a & s .g • ) O 2 5 rt JJ 2 H eVá 2 S'a & s fcjgJ E 3 Ò3.2 3 3 rt < mu u 1 ( J1U Ù P Q Û O W E U. foO O o o n»

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394

REACTION IN NEW

YORK

collect more than a part of the total levy. Fewer than 2 per cent passed the burden of the tax backward by obtaining larger discounts from wholesalers and manufacturers. Automobile dealers, dealers in automobile parts, clothing stores, coal and ice companies, fur stores, furniture stores, lumber dealers, millinery shops, musical instrument and radio shops, shoe stores, and women's apparel stores were particularly notable for charging the full amount of the tax to their customers on each sale. Those lines of business which, for the most part, were contented with collecting only part of the tax include department stores, dry goods stores, drug stores, general merchandise and five- and ten-cent TABLE 3 0 METHODS EMPLOYED IN SHIFTING ENTIRE TAX

RETAILERS:

NEW YORK S T A T E " (By Type of Business) N U M B E R R E P O R T I N G P O L I C V OF S H I F T I N G ENTIRE TAX T Y P E OF B U S I N E S S

BY:

ADDING E X A C T AMOUNT

ADDING MORE THAN

OF T A X (TO N E A R E S T

T A X (TO N E A R E S T

C E N T ) ON E A C H S A L E

C E N T ) ON SOME S A L E S

TOTAL

AND L E S S OR N O N E ON O T H E R S

Automobiles (new) Automobiles (used) Automobile parts Books Children's wear Clothing Coal and ice Confectionery Cotton piece-goods, etc. Delicatessens Department stores Drugs, etc. Dry goods Electrical appliances Florists Furniture, etc. Furs Garages and gasoline stations General stores Gifts and novelties

66 10 24 2 6 27 71 2 i i i 12 6 9 i 35 9 12 i 4

11 2 9 i 5 8 2 4 6 23 8 5 2 '5 i 5 10 2

77 12 33 3 11 35

73 6 i i 7 35 14 14 3 50 10 17 11 6

• Based upon 10 per cent samples taken in various parts of New York State. See supra, P- 3 2 3-

REACTION

IN

NEW

395

Y O R K

TABLE 30 (Continued) NUMBER REPORTING POLICY OF SHITTING ENTIRE T A X B Y : T Y P E OF BUSINESS

ADDING EXACT AMOUNT ADDING MORE THAN OF TAX (TO NEAREST TAX (TO NEAREST CENT) ON EACH SALE CENT) ON SOME SALES AND LESS OR NONE ON OTHERS

Groceries Hardware House furnishings Jewelry Leather goods Lumber and other building materials Men's furnishings, etc. Millinery Musical instruments, radios, etc. Opticians Paints and glass Restaurants Shoes Sporting goods; toys Stationery Tires Women's apparel Unclassified TOTAL, ALL TYPES

3 10 1 9 5 33 9 14 27 3 14

5 24 1 6 5 9 7 11 1 11

TOTAL

8 34 2 15 5 38 18 21 38 4 25

20 2 15 11 52 28

2 3 22 6

29 2 17 14 74 34

556

241

797'

9

' Total reporting policy of tax shifting was 1,257. Of these, 460 shifted only part of the tax.

stores, hardware and house furnishings stores, and men's furnishings shops. About 70 per cent of the manufacturers and wholesalers who reported that they were shifting the tax declared that they were able to charge the full 1 per cent on individual invoices. Only about 7 per cent of these taxpayers said they shifted the full amount of the tax by varying the rate on different merchandise. The balance received only part of the sales tax levy from their customers. The outstanding feature of Table 31 is that it shows no special industrial class which behaved very differently from the others with reference to the shifting process. This is in contrast to the conclusions in connection with the retail group. Most manufacturers and wholesalers seemed to be able to shift the full levy, and their general policy was to attempt to

REACTION

396

IN N E W

YORK

d o this. I n 3 0 p e r c e n t of t h e cases t h e y were u n s u c c e s s f u l , a n d h e n c e s h i f t e d o n l y p a r t of t h e t a x , or m a d e u p the loss b y c h a r g i n g it on other

sales.

A n o t h e r w a y o f e x a m i n i n g t h e s e d a t a is t o c o n s i d e r t h e c o n c e r n s w h i c h s a i d t h e y s h i f t e d p a r t or all t h e t a x , b u t w h i c h did n o t c h a r g e t h e exact tax

( t o t h e n e a r e s t c e n t ) o n e a c h sale. H o w , s p e c i f i c a l l y , d i d

they handle the tax? TABLE

31

METHODS E M P L O Y E D IN SHIFTING ENTIRE

TAX—MANUFACTURERS

AND WHOLESALERS: NEW YORK (By Type of

STATE"

Business)

REPORTING POLICY OF SHIFTING ENTIRE T A X B Y : T Y P E OF B U S I N E S S

ADDING EXACT

ADDING MORE THAN

AMOUNT OF TAX (TO

TAX (TO NEAREST

NEAREST CENT) ON

CENT) ON SOME SALES

EACH SALE

AND LESS OR NONE

TOTAL

ON OTHERS

Advertising goods Automobile bodies Automobile parts A w n i n g s and cordage Barbers' supplies Building materials Calculating machines Chemicals, grease Clothing (men's) Clothing (women's) Coal, coke and ice Confectionery Containers and boxes Curtains and drapes D r y goods Electrical appliances Engraving Farmers' supplies Furniture and carpets Furs Glass and clay products Grocers (wholesale) Hardware H a t s , C a p s (men's) H e a t i n g and ventilating House furnishings

11

II

2

I

14

I

IO

3 15 10

3 45 11

3 48 11

3 8 1

3 10 1 11

9 2 1 1 26 S 3 11

I

2 1 2 28 6

I

3 12

3 2

I

7

I

16

I

4

I

I

I I

4 3 1 8 17 S

• Based upon 10 per Cent samples taken in various parts of New York State. See supra, P- 323-

R E A C T I O N

IN

N E W

397

Y O R K

t a b l e 3 1 (Continued) REPORTING POLICY OF SHIFTING ENTIRE T A X B Y : T Y P E OF BUSINESS

ADDING EXACT

ADDING MOKE THAN

AMOUNT OF TAX (TO

TAX (TO NEAREST

NEAREST CENT) ON

CENT) ON SOME SALES

EACH SALE

AND LESS OS NONE

TOTAL

ON OTHERS

Jewelry Leather goods Machinery and equipment Meat packing Men's furnishings Metals and metal products Millineiy Motion pictures and films Paints and varnishes Paper and paper products Pharmaceutical supplies Piece goods Plumbers' service and supplies Printing and publishing Professional equipment Radio and musical instruments Restaurant and hotel supplies Rubber goods and tires Shoes Sporting goods and toys Stationery Tobacco products Women's specialty goods Unclassified TOTAL, ALL TYPES

4

S 2 21

2

19

IS

13 1 3 15 16 2 4 IS 78 9 2 6 4 2 i 13 i 3 2 413

1

3 17 18 5 4 18 84 9 2 6 5 2 i 13 i 3 2 42

455

'Total reporting policy of tax shifting was 606. Of these, 151 shifted only part of the tax.

Among the retailers who said they shifted the tax, more than half of the dealers fell into this group which did not charge the exact tax on each sale. Some of these dealers succeeded in collecting only part of the tax. Out of all replies from retail outlets interviewed throughout the state, more than 1,000 were to the effect that the tax was shifted either by means of a variable rate or by devices which yielded less than the aggregate sales tax. What, then, could these establishments do? Table 32 presents an array of replies received from such dealers. Fifteen different varieties of answer were ob-

398

REACTION

IN N E W

YORK

tained, and in many cases individual concerns reported two or more methods of handling the tax. This accounts for the large number of aggregate replies. Some interesting conclusions may be drawn from this table. In the first place, it appears to have been a fairly widespread practice, wherever feasible, to add, for goods having high prices, a tax charge equal to, or more than, the true tax, rather than to add a smaller sum. Another favorite policy was to single out goods not having widely advertised or well known prices and to charge as much of the total tax burden as possible against these goods—usually an amount greater than i per cent of the sales price. Although the full tax was said to be passed on in the case of certain low-priced merchandise, the more frequent practice was to add either more or less than the tax in such instances. An article selling for 10 cents, for example, bears a tax of one mill. As a result, the tax (to the nearest cent) cannot be added to the price in this case, inasmuch as the tax is less than one-half cent. Therefore, less than, or in fact, no tax is charged in such instances. On the other hand, where the price is raised to eleven cents, it is obvious that more than the tax (to the nearest cent) is collected. There seemed to be little distinction between the handling of cash and credit sales, except that a slight tendency to place a greater amount of the tax burden on cash sales was apparent. In both cash and credit transactions in which shifting occurred, the practice was, in general, to collect the full tax if possible, and if not, to collect a larger, rather than a smaller, amount. Table 32 also presents similar data with reference to the practices of some 350 manufacturers and wholesalers.26 A striking difference between the policies of these enterprises and those in the retail field is that in the former group there was not so great a tendency to charge more than the full amount of the tax. In general, it would appear that the majority of the manufacturers and wholesalers in this category are here, not because they departed to any great extent in their price policies from the prevalent policy of charging the full tax on all sales, but because they were only partially successful in this policy, and hence recovered only part of the tax. However, it is to be noted that M Here again, as among the retailers, multiple methods of handling the tax which were reported account for the larger aggregate number of replies.

REACTION

IN

NEW

399

Y O R K

of all groups in which the tendency on the part of the manufacturers to charge more than the tax was present, the high-priced articles and those whose prices are not well known bore the chief part of the burden. Also, credit sales seem to have borne a larger relative part of the tax burden than cash sales. A majority of the retailers preferred to include the tax in the quoted price, rather than to quote the tax as a separate charge. SomeTABLE

32

METHODS EMPLOYED IN SHIFTING T A X WHERE E X A C T AMOUNT OF ( T O N E A R E S T C E N T ) IS N O T A D D E D T O E A C H S A L E — R E T A I L E R S MANUFACTURERS AND WHOLESALERS: NEW YORK (By

Type

of

TAX

AND

STATE

Goods) AMOUNT ADDED

T Y P E OF GOODS

EXACT AMOUNT o r TAX (TO NEAREST CENT)

Sold b y Retailers: Having high dollar value 284 Having low dollar value 79 N o t having well known prices 142 Sold on credit 139 Sold for cash 149 Sold b y Manufacturers and Wholesalers: Having high dollar value 90 Having low dollar value 50 N o t having well known prices 65 Sold on credit 85 Sold for cash 68

LESS THAN THE TAX

MOKE THAN THE TAX

TOTAL

65 120 32 19 28

374 129 299 89 91

623 328 473 247 268

12 8 4 6 3

39 17 26 12 7

141 75 9s 103 78

° Based upon data relating to 15,194 retailers and 7,311 manufacturers and wholesalers in N e w York State. See supra,

p. 323.

what more than a third of the retailers who said they were shifting and who reported on this question favored quoting the tax separately. This practice was widespread in the case of lumber dealers, coal dealers, and furniture, clothing, millinery, shoe, radio, and cigar stores. Manufacturers and wholesalers, in general, indicated a preference for a separate listing of the tax, chiefly through the device of adding it as a 1 per cent charge to their invoices. Not only does this afford a simple means of calculating the tax, but it forms a valuable part of

400

REACTION IN NEW Y O R K

the records if evidence of tax liability is demanded b y the state. A smaller percentage preferred the inclusion of the tax in the quoted selling price, in order to reduce customer antagonism. V e r y few firms, in fact, less than 4 per cent of taxable retailers and not more than 1 per cent of all taxable manufacturers and wholesalers, made public use of tax schedules, or " b r a c k e t systems," for computing the tax on merchandise sold. Automobile dealers, coal companies, and clothing merchants accounted for more than half of the reported schedules. In effect, the "schedules" used in N e w Y o r k State appear to have been simply printed lists of prices including the sales tax of 1 per cent to the nearest cent. In the case of automobile dealers, schedules had been prepared b y the manufacturers which consisted of price tables showing the new net amount which had to be added to factory prices in order to arrive at delivered prices. In addition to freight and charges for accessories, the sales tax was then included in this differential. T h e difficulty of imposing the tax on low-priced goods caused many concerns to abandon the idea of making arbitrary schedules for the imposition of the tax on such merchandise. T h e ease with which a 1 per cent tax may be calculated on goods selling at one dollar or more may account in part for the lack of such schedules among the majority of firms visited. Some concerns which are already subject to Federal taxes, such as those on furs and cosmetics and the processing taxes, had formulated schedules which included the state sales tax, together with these other charges. Another 5 per cent of all taxable enterprises asserted that they belonged to associations which were preparing certain tax schedules, and that they hoped for a general understanding among members of the associations with regard to the practice of shifting of the tax on a mutually accepted basis. T h e druggists comprised more than onethird of the business men who replied in this fashion. Confectioners, hardware dealers, stationers, men's clothing stores, and dealers in coal, ice, and lumber, and furniture stores gave similar answers. T h e druggists, confectioners, hardware dealers, and stationers were chiefly retailers of low-priced merchandise who had experienced difficulty in shifting the tax. It is primarily among such stores that a mutual understanding as to tax shifting policies might be helpful. During the

R E A C T I O N IN NEW Y O R K

401

field work of this study, however, little evidence of the actual existence of such schedules was discovered. Other Methods of Reducing the Tax Burden.—As noted above,27 "shifting" has been taken to mean passing part or all of the tax on to consumers. Instead of this method of passing the tax burden on to someone else (or in addition to it), a few establishments chose to use other means. In particular this situation was detected in the drug and cosmetics business, where direct price increases were declared to be almost impossible. Among the devices suggested were reductions in operating costs (by reducing the pay of employees, or by dismissals), and reductions in overhead costs, through decreases in real estate rentals. These two methods formed approximately half of the various answers received. Several dealers frankly admitted that such economies had been occasioned by the increasing load of taxation in general and not exclusively by the sales tax. Others maintained that they did not think of resorting to such tactics until forced to do so by a sales tax which they could not bear as an added burden, however low the rate. Isolated answers, such as "economizing on electricity" and "cutting down on services previously rendered gratis to the customers" were also given. One dealer said that he had quit the practice of giving trading stamps for premiums to his customers, and that this saving had just about compensated for the sales tax. In all, about 225 out of a total of approximately 7,500 taxable retailers in New York State admitted to these various practices. Other Burdens Associated with the Tax.—Supplementing the amount of the tax itself as a burden to the producer, distributor, or consumer are the various costs involved in meeting the requirements of the sales tax law. As Table 33 shows, n per cent of the taxable retailers interviewed, and 3 per cent of the exempt retailers interviewed, on the 10 per cent sample basis, stated that they had experienced increased record-keeping costs as a result of the sales tax. Table 33 also shows the lines of retail business which reported the greatest number of cases of increased record-keeping costs, and those which experienced the most difficulty in segregating taxable from nontaxable sales. There appears to be a fair amount of correlation between these two sets of data. In other words, one of the most im* Supra, p. 359.

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442

R E A C T I O N IN I L L I N O I S

18 for the Rock Island-Moline retailers (Tables 46, 48, and 50). It is interesting to observe, in comparing the tables for the 3 per cent and the 2 per cent tax, that the manufacturers and wholesalers changed their practices less than the retailers and, secondly, that the greater reversal in policy took place in the border cities of Rock Island and Moline. Under the 3 per cent tax, the policy of shifting only part of the tax was followed by only 6 per cent of the Chicago retail firms and 5 per cent of the manufacturing and wholesaling firms reporting on the question (Table 46). Under the 2 per cent tax, the corresponding percentages rise slightly to 10 (retailers) and 7 (manufacturers and wholesalers), as shown in Table 48. In Rock Island and Moline 4 per cent of the retailers reporting pursued this policy under the 3 per cent tax and 16 per cent did so under the 2 per cent tax, as shown in Table 50. These data indicate that, as a general rule, in the interior cities at least, firms choose between the policies of shifting the entire tax and shifting none of it. There are few cases of compromise where only a part of the tax is shifted except in the border cities where, under a lower rate, this practice seemed to replace to some extent the policy of shifting all of the tax. That the smaller firms experience greater difficulty in shifting the tax is clearly demonstrated in Tables 46, 48, and 50. Under the 3 per cent tax, of the retail firms reporting, 42 per cent of those having estimated annual sales of $5,000 or under, and 61 per cent of those having estimated annual sales of $5,000 to $9,999 adopted the policy of shifting the entire tax; and 49 per cent and 68 per cent, respectively, adopted the policy of shifting either the entire tax or part of the tax; whereas at least 70 per cent of the number of reporting firms in each of the larger size-of-business classes reported the policy of shifting the entire tax, and if to these firms are added those with a policy of shifting only part of the tax, the percentage rises to 76. Likewise, under the 3 per cent tax, of the manufacturing and wholesaling firms reporting, only 27 per cent of those with estimated annual sales of $5,000 or under, and only 46 per cent of those with estimated annual sales of less than $25,000 adopted the policy of shifting the entire tax (when to these are added those firms whose policy was to shift part of the tax, the figures become 27 and 54, respectively) , whereas in each of the larger size-of-business classes at

R E A C T I O N IN I L L I N O I S

443

least 72 per cent reported the policy of shifting the entire tax. The difficulties of the smaller retail firms appear to have been accentuated under the 2 per cent tax by comparison with what they were under the 3 per cent tax. Only 19 per cent of the retail firms with estimated sales of less than $5,000 and only 30 per cent of those with sales of $5,000 to $9,999 adopted the policy of shifting the entire 2 per cent tax; when to these are added those firms whose policy was to shift part of the tax, the percentages become 26 and 40, respectively. In contrast, in each of the classes with estimated sales of $10,000 or over, at least 36 per cent of the reporting firms pursued the policy of shifting the entire tax, and at least 9 per cent more, the policy of shifting only part of the tax. The experience of the small manufacturer or wholesaler, however, by comparison with the larger units, does not appear to be substantially different under the 2 per cent tax from what it was under the 3 per cent tax. The remarkable shift in policy on the part of the Rock IslandMoline retail firms between the 3 per cent and the 2 per cent tax and the relative status of the small business under each of the taxes in this border area are shown in Tables 50 and 51. Another interesting point brought out in the following tables (47, 49, 51) is that wherever the firms did decide to shift the entire tax they did not, except in very few cases, resort to complex plans of adding more than the tax to some sales and less to others in accordance with what the market could bear or any other carefully worked out principle. On the contrary, the tax'was added, in the vast majority of cases, as a uniform percentage charge to the nearest cent either with, or without, the public use of schedules. Under the 3 per cent tax, 52 per cent of the Chicago retail firms reporting a policy of shifting the entire tax made public use of schedules, only 3 per cent varied the percentage rate charged on sales, and the remainder added the tax by a uniform percentage charge without the public use of schedules. Of the Chicago manufacturing and wholesaling firms, only 9 per cent made public use of schedules, only 1 per cent varied the rate, and the remainder added the uniform percentage charge without the public use of schedules (Table 47). Under the 2 per cent tax, there was a decrease in the public use of schedules among the Chicago retail firms shifting the entire tax, the percentage being only 34. Eight per cent varied the percentage rate charged on sales, and the

444

REACTION IN ILLINOIS

remainder added the tax by a uniform percentage charge without the use of schedules. A somewhat similar change in policy under the 2 per cent tax, as compared with that under the 3 per cent tax, may be seen among the manufacturers and wholesalers; almost all of those who shifted the entire tax did so by uniformly charging 2 per cent to the nearest cent, without the public use of schedules (Table 4 9 ) . Under the 3 per cent tax, the use of the schedule was more extensive among the smaller firms with sales of less than $20,000 than among the larger units, but this difference became less marked under the 2 per cent tax, as indicated in Tables 47 and 49. A n analysis of the type-of-business tables shows some significant differences in policy, especially with reference to the change that occurred when the 2 per cent tax superseded the earlier one. In 1 3 of the 27 groups of business investigated, as shown in Table 52, 75 per cent, or more, of the number of retail firms in the sample adopted the policy of shifting all of the 3 per cent sales tax, or the policy of shifting at least part of it. These groups were as follows: dealers in automobiles (new), ready-made clothing stores, dealers in coal and ice, etc., department stores, drug stores, dry goods stores, dealers in rugs and other floor coverings, five- and ten-cent stores, dealers in lumber and other building materials, men's furnishings stores, stores selling musical instruments, radios, etc., shoe stores, and women's apparel stores. Several others were just below this percentage (Table 5 2 ) . Under the 2 per cent tax, on the other hand, in but three lines of business does one find that as many as 75 per cent of the number of establishments in the sample adopted either of these policies. These were: dealers in automobiles (new), five- and tencent stores, and women's apparel stores (Table 5 4 ) . T h e sharpest reversals in policy, as may be gauged by comparing Tables 52 and 54 (column 8 ) , occurred in the following: hardware stores, grocery stores, department stores, dry goods stores, and bookshops. Under the 3 per cent tax one finds only one line of business—automobile services—where half, or more, of the number of firms declared that they absorbed the entire tax burden; whereas under the 2 per cent tax the list has grown to include 9 of the 27 lines listed in Tables 52 and 54, although more garages appear to be at prespnt collecting part of the tax than was the case under the higher rate.

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Q

REACTION

IN I L L I N O I S

491

upon negotiations with the taxing authorities to determine more definitely the taxable status of their receipts. The manufacturers and wholesalers subject to the tax appear to be the more perplexed. This is shown in Table 77. Time at Which, and Manner in Which, Business Men Became Aware of Sales Tax.—The political battle and the jostling for position by the several economic groups in Illinois which attended both the passage and the test of constitutionality of the first sales tax had thoroughly aroused the merchants to the progress of sales tax legisTABLE 77 D I F F I C U L T Y IN D E T E R M I N I N G T A X A B L E S T A T U S OF R E C E I P T S — R E T A I L E R S , AND M A N U F A C T U R E R S A N D W H O L E S A L E R S : CHICAGO A N D ROCK I S L A N D - M O L I N E " (2 Per Cent Tax) MANUFACTURERS AND

RETAILERS

TOTAL

WHOLESALERS WHOLLY EXEMPT

Number reporting difficulty Total sample Percentage of total sample that reported difficulty

7 340

PARTIALLY OR FULLY TAXABLE

TOTAL

WHOLLY EXEMPT

PARTIALLY OR PULLY TAXABLE

TOTAL

226 4,906

233 5,246

12 758

40 »68

5» 1,026

285 6,272

5

4

2

is

5

5

• Data are for an approximate 20 per cent sample for Chicago and 40 per cent for Rock Island-Moline. See supra, pp. 424-25.

lation, which they followed currently in the press. Administrative machinery has been provided for a check on the business men with a view to obtaining a complete file of accurate returns. The difficulties of this task are apt to arise more from the indefiniteness of the law itself and from the unwillingness of the business man to comply therewith than from a general lack of realization of what the broad requirements of the act may be. In Tables 78 and 79 data are presented to show that nearly all business men heard of the passage of the 2 per cent tax within the first week after its enactment, from either newspapers or business associates. Attitude toward the Sales Tax.—The present retailers' occupa-

492

R E A C T I O N

IN

I L L I N O I S

tion tax is not, on the whole, a popular one, but sales taxes in their multifarious forms polled more first choices among the Chicago business men than any other type of tax. The high number of votes in the third and fourth choice categories for the real estate tax," presented in Table 80, indicates how extremely distasteful the raising of property rates would be to the business community. Both the personal income tax and, more particularly, the income tax on business were given more first ratings than the present occupation tax, but these did not exceed the number of first choices for all kinds of TABLE 7 8 TIME AT WHICH FIRMS FIRST LEARNED OF TAX

RETAILERS,

MANUFACTURERS, AND WHOLESALERS, TAXABLE AND EXEMPT: CHICAGO AND ROCK ISLAND-MOLINE" {2 Per Cent Tax) T Y P E OF F I R M

W E E K I N J U L Y , 1 9 3 3 , D U R I N G W H I C H F I R M S FIRST

TOTAL

L E A R N E D OF T A X

SAMPLE

FIRST

SECOND

THIRD

AFTER

NO

WEEK

WEEK

WEEK

THIRD

REPORT

WEEK

Retailers Manufacturers and wholesalers TOTAL

Si°7S

63

8

38

62

5.24

990

19

6

4

7

1,026

6,065

82

H

4»

69

6,272

" D a t a are for an approximate 20 per cent sample for Chicago and 40 per cent for R o c k Island-Moline. See supra, pp. 424-25.

sales taxes taken in the aggregate. Choices for sales taxes other than the "present sales tax" are included in the "other taxes" column in Table 80. Income taxes, especially the personal income tax, appear to be a good second choice in Chicago. Each reader may supply his own weights for the first, second, third, and fourth choices, respectively, and on that basis draw his own conclusion as to the prevailing opinion of business men on taxation. No procedure which might here be undertaken could serve as a satisfactory appraisal of the precise indications of the statistical material presented in Tables 80 and 81, " I t is of course recognized that the "real estate tax" is in Illinois an integral part of the general property tax, but for several reasons it was desired to focus attention on the real estate problem—hence this form of question.

REACTION

IN

493

ILLINOIS

but the general drift of opinion is unmistakably for some form of sales tax, with income taxes second in favor. In taxation the principles of proportional representation may not be strictly applicable. As a matter of fact the choices were called for chiefly as a mechanism for bringing the business men's attention to bear upon the sales tax problem for the duration of the interview. In general, the retail sales tax is regarded with favor by the manufacturing and wholesaling executives, always provided that the law can be so framed as to exclude all their receipts from its scope, TABLE 7 9 SOURCES FROM WHICH FIRMS FIRST LEARNED OF TAX—RETAILERS, MANUFACTURERS, AND WHOLESALERS, TAXABLE AND EXEMPT: CHICAGO AND ROCK ISLAND-MOLINE" (2 Per Cent Tax) T Y P E OF FIRM

SOURCE

TOTAL '

NEWS-

BUSINESS ASSO-

TAX

OTHER

AUTHORI-

SOURCES

NO REPORT

CIATES

TIES

S3S

49

114

n

988

82

II

3

3

1,026

5.979

617

117

26

6,272

PAPERS

Retailers Manufacturers and wholesalers TOTAL

SAMPLE

4,991

60

5.246

* Data are for an approximate 20 per cent sample for Chicago and 40 per cent for Rock Island-Moline. See supra, pp. 424-25. For explanation of internal inconsistency, see note, supra, p. 424.

whereas the retailers are more favorably disposed towards some manufacturers' or wholesalers' tax. The respective attitudes of retailers and manufacturers and wholesalers with reference to the retailers' occupation tax are clearly marked in Table 80. Every business man, whether manufacturer, wholesaler, or retailer, strives to remove the scene of battle with the customers to some other stage of the distributing process, because, as has been demonstrated," customers' resentment furnishes the most persistent resistance to recouping the tax through price increases. Even though the price to the ultimate consumer might be enhanced by a sales tax imposed at the "Supra, p. 475.

494

R E A C T I O N

IN

I L L I N O I S

point of manufacture rather than in the last stage of distribution, it is possible that the amount of sales resistance on account of the tax would be less, because the retailer could turn the resentment of the purchaser upon the seemingly mythical manufacturer, whereas in the case of the retail tax the customer becomes suspicious of the retailer. The manufacturers and wholesalers, on the other hand, naturally enough wish to escape the necessity of making a series of price adTABLE 8 0 P R E F E R E N C E AMONG T A X E S — R E T A I L E R S , M A N U F A C T U R E R S , A.VD W H O L E S A L E R S , T A X A B L E AND E X E M P T : CHICAGO" (2 Per Cent Tax) PRESENT

HIGHER

PERSONAL

INCOME

OTHER

SALES

REAL

INCOME

T A X ON

TAXES6

TAX

ESTATE

TAX

BUSINESS

TOTAL

TAXES 5 , 0 5 9 R E T A I L E R S , OF W H O M 8 3 4 D I D N O T R E P O R T

First choice Second choice Third choice Fourth choice

822

116 281 923

495

916 1,296

1,743

1,274 1,621 922 206

9°3 1,489 1,071 322

1,110 166 230 25

4,225 4.052 4,062 3,592

1 , 0 1 2 M A N U F A C T U R E R S AND W H O L E S A L E R S , OF W H O M 1 2 9 D I D N O T REPORT

First choice Second choice Third choice Fourth choice

420 128

23

66

136

152

118

45°

86 241

83

341

35

883 811

" S

330

15

758

271

59

86

7

720

T O T A L : 6 , 0 7 1 FIRMS, OF WHOM 9 6 3 DID NOT REPORT

First choice Second choice Third choice Fourth choice 0 6

1,242 623

347

139

1,545 I ,962

,°75

I,047

1,052

1

1,414

2, ' 9 3

265

989

1,730 1,401 408

I ,193

201 245 32

5.108

4,863 4.820 4.312

Data are for an approximate 20 per cent sample. See supra, pp. 424-25. For details see infra, p. 495

justments. This they can avoid under a retailers' tax, because the pressure for larger discounts from middlemen is negligible. Of the 268 manufacturers and wholesalers not exempt from the tax, only 2 stated that they had been forced to give retailers or other middlemen larger discounts to facilitate their adjustment to the 2 per cent Illinois tax. In Rock Island-Moline, border twin-cities in direct compe:ition with Davenport, Iowa, sales taxes, especially the retailers' tai, are

R E A C T I O N IN I L L I N O I S

495

decidedly less popular with the merchants than in Chicago. The data upon which this generalization is based are supplied in Table 81. It may well be that, if as large a sample of Illinois merchants were investigated outside of Chicago as were investigated within, the difference of opinion indicated in Tables 80 and 81 would be substantiated, but perhaps mitigated somewhat by the influence of the interior section of the state. Certainly it is not difficult to find an explanation for this difference of opinion between a large metropolitan area and trade center like Chicago and a small border city of a few tens of thousands of people competing with a city of almost equal size where no sales tax is collected. In the interpretation of Tables 80 and 81 it would be substantially correct for the reader to substitute for "other taxes" the concept of a variety of sales taxes, because 822 of the retailers selected the manufacturers' sales tax; 189 the wholesalers' sales tax; 7 a retailers' tax with foods exempt; and 214 included either the Federal sales tax, luxury taxes, stamp taxes, or in lesser numbers some one of a miscellaneous group of taxes among the "other taxes" preferred. Of the manufacturers and wholesalers, 53 declared themselves in favor of a manufacturers' sales tax, 18 were for a wholesalers' sales tax, and 34 others scattered their preferences among the following miscellaneous taxes: personal property tax, poll tax, stamp tax, luxury tax, income tax, inheritance tax, and a Federal sales tax. The brief experience which Illinois has had with sales taxes apparently has not affected the opinions of the business public on tax matters, as indicated in Table 82. Some confessed a change in viewpoint during the interval between the initiation of the 3 per cent sales tax and the second (2 per cent) tax, but for the most part there has been strict adherence to a fixed scale of values on matters of taxation. Whatever change occurred was presumably in the direction of conversion to some sort of sales tax, since that is the general tenor of the data submitted in Table 80. There is no way of ascertaining whether the drift was actually in that direction, for, of course, it is conceivable that prior to the enactment of the first sales tax the business men were even more favorably disposed toward that form of taxation than would appear from the data of Table 80. It is difficult to reconcile the data in Table 81 with the figures for Rock IslandMoline in Table 83 in their general implications. In Table 81 the

R E A C T I O N IN ILLINOIS

496

Rock Island-Moline merchants place the sales tax low in their scale of tax preference, whereas in Table 83 as many as 72 of the 201 establishments favor the sales tax as part of the regular revenue system of the state of Illinois. Can it be that the business men are not yet clear on what taxes they like least? Many more manufacturers and wholesalers favored the sales tax as part of the regular revenue system of the state, to replace part of the property tax, than as a tax only for emergency relief purposes, TABLE 8 1 PREFERENCE AMONG TAXES—RETAILERS, MANUFACTURERS, AND WHOLESALERS, TAXABLE AND EXEMPT: ROCK ISLAND-MOLINE" (2 Per Cent Tax) PRESENT

HIGHER

PERSONAL

INCOME

OTHER

SALES TAX

REAL ESTATE TAXES

INCOME TAX

TAX ON BUSINESS

TAXES1

TOTAL

1 8 7 R E T A I L E R S , OF W H O M I D I D N O T R E P O R T

First choice Second choice Third choice Fourth choice

3

3 11

105

31 HI

88 72

11

68 I

29 107

44

49 I

9 0

2

184 188 188 185

1 4 M A N U F A C T U E R S AND W H O L E S A L E R S , OF W H O M 1 D I D N O T R E P O R T

First choice Second choice Third choice Fourth choice

2

7

6

S

14

1

13 14

7

2

5

6

7

S

I

13

TOTAL: 201 FIRMS, OF WHOM 2 DID NOT REPORT

First choice Second choice Third choice Fourth choice

5 ...

3 II

33

93 77

118

112 74 11 I

29 114

ss

49

2 10

2

198 201 202 198

• Data are for an approximate 40 per cent sample. See supra, pp. 424-25. ' For details, see supra, p. 495.

whereas among the retailers the reverse was true. Very few of the firms wanted a higher sales tax, and about 60 per cent of the retailers wanted lower rates. Most of the manufacturers and wholesalers wanted neither a higher nor lower rate, thus indicating their contentment with the 2 per cent tax. These points are illustrated in Table 83. Several reasons were given for favoring a higher or lower sales tax. Of the 161 opinions14 recorded in favor of a higher rate, 99 conM T h e data in this paragraph were compiled through a special hand tabulation, and the total does not check with the machine-tabulation total in Table 83.

f

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41

» (J pa ö rt »-•S.S B «S •S 1-® fi O. g S a So -w Mu ea}»-w »-T 3 —« 0>S" i// îlt —i M mVC4 ( ^-.* -»OIm« « J 2Í C« s ç ja S ff «-> « M

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ES

£

•fl s a a et C d M rt et O

522

REACTION

IN

MICHIGAN

continue to use the 17-cent schedule or, what amounts to the same thing, charge 3 per cent to the nearest cent. A few will absorb the tax and still fewer will attempt to increase their receipts by varying the rate of the charge imposed on account of the tax. The apparent stability in policy with reference to the sales tax price practices is illustrated in Table 99. If there has been any change in policy it has been away from either absorbing the tax or collecting only a part of the tax, and in TABLE TYPES

OF

GOODS

ON

TAXABLE

98

WHICH

MORE

FIRMS:

DETROIT

THAN

TAX

AND

WAS

ADDED

MONROE

ALL

0

NUMBER o r FIRMS REPORTING M O R E T H A N T A X ADDED

TOTAL NUMBER ~

T Y P E OF G O O D S

ON SOME SUCH GOODS

Having high dollar value Having low dollar value N o t having well known prices Sold on credit 6 Sold for cash

102 93 124 84 135

ON A L L SUCH NOT S P E C I F I E D GOODS

3 1 4 2 2

or

FIRMS

REPORTING

WHETHER. ON

MORE THAN

SOME OR A L L

T A X ADDED

... 4 4 1 4

105 98 132 87 141

0 D a t a are for an approximate 20 per cent sample for Detroit and 40 per cent for Monroe. See supra, p. 500. ' Approximately 1,000 taxable retail firms and virtually all of the taxable manufacturing and wholesaling firms in the sample reported thilt some or all of their sales were made on a credit basis.

the direction of charging more of the tax to the customer. This is illustrated in Table 100. An analysis of the nature of the anticipated changes from present price policies shows that this tendency to charge more and more of the tax to the consumer is to be continued, because nearly all of these anticipated changes were in the direction of raising prices to the consumer, either by imposing a straight 3 per cent charge or through the adoption of some schedule. Estimated Results of Policies with Respect to Shifting.—In the preceding chapter there are explained the reasons for an attempt to discover the results of any given policy of shifting. 7 The same type ' Supra, p. 4 J i .

REACTION

IN

523

MICHIGAN

of question asked in the Illinois study was used in Michigan; that is, all firms were asked what percentage of the total tax they believed they were actually shifting. Out of 1,417 retail firms which answered the question and which believed they were in fact shifting more than 50 per cent of the tax, 275 put the percentage at 100; 748, at from 75 to 100; and 394, at from 50 to 75. In addition, 332 firms stated that they collected less than half the amount of the tax. Although these data can be only roughly indicative, they suggest that many firms believed the 17-cent schedule was not recouping for them the full amount of the tax. This may be due in part to the manner in TABLE PERMANENCE

OF POLICY

WITH

99

RESPECT

TO T A X

RETAILERS, MANUFACTURERS, AND DETROIT AND

T Y P E OF FIRM

SHIFTING—TAXABLE

WHOLESALERS:

MONROE"

POLICY IN UNDECIDED EFFECT CONNO ANTICIPATE ON NO TINUOUSLY REPORT CHANGE IN CHANGING REPORT SINCE POLICY POLICY

TOTAL SAMPLE

JULY I, ig33 Retailers Manufacturers and wholesalers

1,964 108

2 ...

129

144

5

8

2 ...

2,184 114

TOTAL 2,072 2 134 152 2 2,298 " Data are for an approximate 20 per cent sample for Detroit and 40 per cent for Monroe. See supra, p. 500.

which large amounts of their sales clustered within certain price ranges; since the tax was charged only to the nearest cent, the merchant may have lost a half cent, or less, more often than he gained it. There is also to be considered the difficulty of adhering rigidly to the schedule under the influences of competition. Tax Shifting Reported by Business Men as Consumers.—Nearly all of the business men interviewed reported that they had to pay the tax as a separate item when making purchases in other stores. Of the 2,541 individuals covered in the sample, 2,419 so paid the tax, 49 did not know whether or not they paid the tax, and 15 did not report. More than 800 found the practice of charging the tax applicable

REACTION IN MICHIGAN

524

to all types of commodities without any discrimination whatsoever. Others mentioned drugs, clothing, groceries, hardware, and gasoline as the commodities concerning which it was most frequently noticeable that the merchant was reimbursing himself for the sales tax payment to the state. SOME EFFECTS

UPON

BUSINESS

FIRMS AND

CONSUMERS

Degree of Tax Consciousness Among Consumers.—When the sales tax bill was before the legislature, the chief concern of the merchants seems to have been to provide in the law the precise method of passTABLE

IOO

CHANGE IN POLICY W I T H R E S P E C T TO T A X SHIFTING RETAILERS, AND MANUFACTURERS AND DETROIT AND

TAXABLE

WHOLESALERS:

MONROE"

NUMBER OF FIRMS WHICH, SINCE JULY I, 1 9 3 3 , H A V E ABANDONED THE POLICY OF: T Y P E OF FIRM

— SHIFTING PART OF THE

NO

TAX OR SHIFTING ALL

SHIFTING

No RF.PORT

TOTAL SAMPLE

OF THE TAX

Retailers Manufacturers and wholesalers TOTAL

126

70

10

2,184

2

1

...

114

10

2,298

128

71

0 Data are for an approximate 20 per cent sample for Detroit and 40 per cent for Monroe. See supra, p. 500.

ing the tax to the consumer. Their first position was to make the use of some schedule compulsory for all units, as is done in North Carolina.8 The purpose of such a mandatory provision was to assure fair trade practice with reference to the sales tax. The proposed mandatory schedule, in the opinion of the attorney-general, would have jeopardized the constitutionality of the tax. Section 23 of the Michigan law was the compromise for which the various merchants' associations appear to be mainly responsible. According to this section, " N o person engaged in the business of selling tangible personal property at retail shall advertise or hold out to the public in any * Supra, pp. 194-98.

R E A C T I O N IN M I C H I G A N

525

manner, directly or indirectly, that the tax herein imposed is not considered as an element in the price to the consumer. Nothing contained in this act shall be deemed to prohibit any taxpayer from reimbursing himself by adding to his sale price any tax levied hereunder." That is, a merchant may absorb the tax, but if he does so he must not advertise this fact. The sales tax practice was to be kept out of business competition. Secondly, the merchant is definitely permitted to pass the tax to the consumer, although it was not made mandatory that he do so. The sales tax has been favored in many quarters only on the condition that the public become tax conscious thereby. The Retail Merchants Association of Detroit was definitely against the practice of concealing the sales tax by a general marking up of the price. Its position is disclosed in the following extract from an official communication of June 9, 1933: While we wanted the general consuming public to be very conscious of any tax that they might be paying so that because of the nuisance of it, they would want to do away with it, nevertheless the use of tax stamps, coupons, tokens or other means of paying the tax would prove to be such a burden to the stores, particularly in the handling of low priced merchandise, that our Committee was agreed that we did not want to handle the tax in any form that would involve the use of stamps, etc. Obviously, if the tax is buried in the price its tax-conscious effectiveness is lost. A few firms use schedules only for the purpose of determining the tax mark-up, which is then concealed in the price and not quoted separately. On the whole, this practice is rare, so that it is probably not erroneous to conclude that the extent to which schedules are in use, as already shown by Tables 91 and 93, is a fair index of the degree of tax consciousness. As a further check on whether the consumers were made aware of the tax payment, the establishments were questioned as to whether they clearly quoted the tax to their customers. The results follow in Table 101. The general indications are that in Michigan the individual in the vast majority of cases was reminded of the sales tax as frequently as he had occasion to make purchases, even though no formal schedule was used. Some proponents of the tax have been able by force of logic to couple the merits of tax consciousness with that of conven-

REACTION IN MICHIGAN

526

ience, but the Michigan administrators, like those in Illinois, have not been favorably impressed with sales tax practices which make the consumers tax conscious at the expense of the popularity of the sales tax. However, it appears that there has been no such pressure by the Michigan administration to induce merchants to abandon the practice of quoting the tax separately as has been the case in Illinois. 9 Difficulties Encountered in Attempting to Shift the Tax.—Customers' resentment was the most frequently mentioned difficulty encountered by merchants in attempting to shift the tax to their TABLE

IOI

E X T E N T OF C H A R G I N G T A X A S S E P A R A T E I T E M — R E T A I L E R S ,

AND

MANUFACTURERS AND WHOLESALERS: DETROIT AND MONROE" N U M B E R OF FIRMS SHOWING, OR C L E A R L Y Q U O T I N G , T A X AS A S E P A R A T E I T E M , T O : T Y P E OF F I R M

Retailer Manufacturer or wholesaler TOTAL

~

T O T A L SAMPLE OF

CASH CUSTOMERS

CREDIT CUSTOMERS

TAXABLE FlRMS

1,816 87

888 66

2,184 114

1,903

954

2,2G86

• D a t a are for an approximate 20 per cent sample for Detroit and 40 per cent for Monroe. See supra, p. 500. 6 Approximately 1,000 taxable retail firms and virtually all of the taxable manufacturing and wholesaling firms in the sample reported that some or all of their sales were made on a credit basis.

customers. The majority of firms reported that their customers were annoyed by the imposition. Low dollar value goods present a special phase of the problem and make it difficult for the merchant to adjust his prices to the sales tax, to the nearest cent. When goods sell for a few cents it is impossible, without fractional-cent devices, to collect the sales tax, and if whole cents are added to the price, the increase, relative to the basic price, is so great that sales become impossible either because of the competitive situation or on account of curtailment of consumption. Concerns selling low dollar value goods exclusively have as yet found no satisfactory solution to the problem of shifting. When such sales constitute only a portion of the total, the device of raising the 'Supra,

pp. 430-33.

REACTION

IN

527

MICHIGAN

price of selected articles may be resorted to, although this practice was seldom admitted. The sellers of high dollar value goods also experienced trouble in passing the tax to the purchaser because in this case the amount of the tax, though only 3 per cent of the basic price, was very conspicuous when quoted as a separate item. The general forces of competition also made it difficult for the business units to collect the tax, especially since no uniform practice was made mandatory in the law. Finally, vendors of commodities having customary, nationally advertised, or well known prices found the sales tax embarrassing. The above points are further illustrated by the data in Tables 102 and 103. TABLE

I02

D I F F I C U L T I E S ENCOUNTERED IN ATTEMPTING TO SHIFT THE T A X — R E T A I L E R S : DETROIT A N D MONROE" (Total sample of taxable retailers = 2,184) REASON FOR DIFFICULTY

Customers'resentment Low dollar value of merchandise High dollar value of merchandise Well known or customary prices Severe competition Other reasons

FIRMS REPORTING FIRMS REPORTING NO SHIFTING SHIFTING OF PART OF TAX OR ALL OF TAX 103 45 20 35 61 ...

i>5° 2 608 109 246 349 45

TOTAL

1,605 653 129 281 410 45

0 D a t a are for an approximate 20 per cent sample for Detroit and 40 per cent for Monroe. See supra, p. 500.

Loss of Business Ascribed to the Sales Tax.—About one-third of the Detroit retail firms and nearly one-half of the Monroe retail firms interviewed ascribed a loss of business to the sales tax, as shown in Table 104. Less than one-fourth of the manufacturers and wholesalers reported this result. Loss to out-of-state competitors was particularly frequent in Monroe, and even in Detroit it was reported among an appreciable number of firms, although there appears to be a considerable number of cases where customers change their customary place of making purchases, not because they are thereby able to shake off the tax, but because it affords them an opportunity to give expression to their irritation. In more cases, however, the shuf-

R E A C T I O N IN M I C H I G A N

528

fling about of customers among the retail outlets is caused by variations in practices of handling the tax. Some of the establishments felt that, while they lost no business for any of the reasons detailed in Table 104, the higher prices necessitated by the sales tax hampered expansion of their sales volume. The relatively greater loss of business in Monroe results from the fact that this city does not possess the same drawing power as a trade center as does a large city like Detroit. Also, because of its proximity to the Ohio boundary, it becomes particularly vulnerable to the effects of price differentials occasioned by the sales tax. Although it TABLE 1 0 3 DIFFICULTIES ENCOUNTERED IN ATTEMPTING TO SHIFT THE T A X — MANUFACTURERS AND W H O L E S A L E R S : DETROIT AND MONROE" (Total sample of taxable manufacturers and -wholesalers = 114) R E A S O N FOR D I F F I C U L T Y

FIRMS REPORTING

F I R M S REPORTING

N O SHIFTING

SHIFTING OF P A R T

OF T A X

OR A L L OF T A X

TOTAL

CUSTOMERS' RESENTMENT

1

42

43

SEVERE COMPETITION

1

11

12

OTHER REASONS

1

12

13

0

Data are for an approximate 20 per cent sample for Detroit and 40 per cent for Monroe See supra, p. 300.

was possible to study only one border situation, there can be little doubt that such places are especially subject to pressure from the sales tax. In Table 104 it may also be observed that a large percentage of manufacturing and wholesaling establishments lost business to outof-state companies. As was explained in another section of this study, their sales in bulk to domestic concerns which neither remanufacture nor resell the goods are subject to the tax, whereas similar sales made by out-of-state companies are tax-free on account of interstate commerce. Ohio manufacturing and wholesaling firms have been able to cut into the Michigan markets formerly dominated by local units. It is impossible to state just how extensive has been this dislocation of trade. At least the evidence in Table 104 is not in conflict with the prevailing opinion that it is of some importance. Monroe was supposed to be losing its trade primarily to Toledo,

REACTION IN

MICHIGAN

S29

Ohio. Therefore 268 Toledo retail firms of the types shown in Table 105 were asked whether they experienced any increase in trade, after the enactment of the Michigan sales tax, which they could attribute to that legislation. Thirty-nine Toledo manufacturers and wholesalers were also asked this question, but only one (type of business not recorded) reported that it had profited at the expense of its Michigan competitors, whereas, as Table 105 shows, more than 10 per cent of TABLE

I04

LOSS OF BUSINESS ASCRIBED TO T A X — R E T A I L E R S , MANUFACTURERS

AND

AND

WHOLESALERS:

AND

DETROIT

MONROE"

N U M B E R o r FIRMS ATTRIBUTING L O S S OF B U S I N E S S TO S A L E S T A X

Loss or

BUSINESS

— RETAILERS

MANUFAC;

Detroit Total reporting loss of business No report Business reported lost to: Mail-order houses Other out-of-state companies Competitors who absorb tax Other competitors No report Total Sample

Monroe

Total

TOTAL

TURERS AND

SAMPLE OR

WHOLESALERS

T A X A B L E FIRMS

686 92

31 2

717 94

26 2

743 96

S3

6

59

:

60

SS

29

84

19

103

371 287 93 2,119

2 3

373 287 96

381 291 101

65

2,184

8 4 S 114

2,298

• Data are for an approximate 20 per cent sample for Detroit and 40 per cent for Monroe. See sufira, p. 500.

the retailers thought that they were able to trace some of the increase in business after July i , 1933, to the operation of the Michigan sales tax. Of the 268 retail firms, 154 noticed an increase in sales volume after July 1, 1933, compared with the winter of 1932 and spring months of 1933, and 165 observed an improvement over the corresponding period of 1932. None of the firms attributed all of these increases to the Michigan sales tax, but 30 felt that some of the increase could be traced to it. The distribution of 28 of these 30 firms over the various types of business is given in Table 105, from which it

R E A C T I O N IN

5.30

MICHIGAN

appears that gain in business was reported most frequently (in relation to the total sample) among dealers in automobiles, department stores, furniture dealers, and men's furnishings shops. Twelve of the Toledo merchants felt that they obtained some of the Michigan business because people resented a 3 per cent tax; two thought it accidental, in the sense that Michigan people who happened to be in Toledo might make purchases with the Michigan tax in operation which they might not have made without the existence of the sales tax; and eight retailers pointed to the great saving which could be TABLE GAIN

IN

BUSINESS

MICHIGAN

SALES

BY

TOLEDO,

TAX"

105

OHIO,

MERCHANTS,

RETAILERS,

AND

AND

ASCRIBED

TO

MANUFACTURERS

WHOLESALERS

(By Type of Business) T Y P E OF B U S I N E S S

RETAILERS

MANUFACTURERS

ALL UNITS

AND W H O L E S A L E R S

Agricultural implements and machinery Automobiles (new) Automobiles (used) Automobile parts, etc. Automobile batteries Automobile parts Automobile services Books Clothing Ready-made clothing Tailors Coal and ice, etc. Department stores Drugs, etc. D r y goods Furniture, etc. Furniture, upholsterers Rugs, other floor coverings, etc. 0

TOTAL

NUMBER

TOTAL

NUMBER

TOTAL

NUMBER

SAMPLE

GAINING

SAMPLE

GAINING

SAMPLE

GAINING

BUSINESS

BUSINESS

BUSINESS

ON ACCOUNT

ON ACCOUNT

ON ACCOUNT

OF MICHIGAN

OF MICHIGAN

OF MICHIGAN

SALES T A X

SALES T A X

SALES T A X

4 10 4

... 3 ...

... ... ...

... ... ...

4 10 4

5 4 7 1

... ... ... ...

1 4 1 ...

... ... ... ...

6 8 8 1

5 21 9 30 4

... ... ... 6 2 ...

... 6 4 ... 3 3

... ... ... ... ...

5 6 25 9 33 7

9

3

4

...

13

1

...

...

1

...

D a t a are for an approximate 20 per cent sample. See supra, p. 500.

REACTION IN MICHIGAN TABLE T Y P E o r BUSINESS

Furs Garages General stores Five to ten, etc., stores' Other general stores Groceries Hardware Jewelry Lumber, other building materials, etc. Men's furnishings, etc. Musical instruments, radios, etc. Shoes Women's apparel TOTAL® 6 c

105 (Continued)

RETAILERS

TOTAL SAMPLE

MANUFACTURERS AND WHOLESALERS

3

27

2

i 72 10

A L L UNITS

NUMBER TOTAL NUMBER TOTAL NUMBER GAINING SAMPLE GAINING GAINING SAMPLE BUSINESS BUSINESS BUSINESS ON ACCOUNT ON ACCOUNT ON ACCOUNT OF MICHIGAN OF MICHIGAN OF MICHIGAN SALES TAX SALES TAX SALES TAX

3 27

531

2

I

4 i

7

i

10 2

2

5 5

i

4

3

75

I

i

10 8

2

12

3

I 2

7 6 15

3

307

31'

i 2

i

12

3

3

268

30e

39

IE

I

None of this class included in sample. Discrepancies are due to failure to classify the business in the recording or tabulation.

made on the purchase of high dollar value items. T h e chief reasons given b y Toledo retailers for their failure to attract M i c h i g a n business were, in order of f r e q u e n c y : " t o o far f r o m state line," "business is local in character," and "unit sales are s m a l l . " T h e chief reasons given b y Toledo manufacturers and wholesalers were that sales b y Michigan manufacturers and wholesalers were not affected b y the tax (this, for reasons explained elsewhere, is only partly t r u e ) , and that they had no Michigan territory. In T a b l e s 106, 107, and 108 the data on loss of business reported b y Detroit and Monroe firms are grouped b y t y p e of business. Lines of retail business in Detroit where loss of business was reported in more than one-third of the cases (one-third being the approximate average for the sample as a whole) were those of agricultural implement dealers, dealers in automobiles and automobile batteries, etc.,

e 2 § a i §

M

•

í h 2

¡5 o

U

w

s

a n

:^

I

a s Si •
,' E «S ' e a b e •§ C T3 o o O C -o £ e 5 3 3 c o O 3 < < o W c* 3 g- 2 b ^ < < G i O O O

Io o° 3 s sT-S a O in bC U) C

e

3

^ «

•H

«

r*5

«

f )

! OS

H

•

s & e o) a

« a

. 0 o to

8 »J ri

H

M

379 1,692

268 MANUFACTURERS AND WHOLESALERS, OF WHOM 1 5 D I D NOT REPORT

First choice Second choice Third choice Fourth choice

120

41 33 45

4 23 42 "3

39 79 61 21

74

16

56 71 25

20

10

3

253

219 217 207

TOTAL, 2 , 5 4 1 FIRMS, OF WHOM 1 9 5 DID NOT REPORT

First choice Second choice Third choice Fourth choice

692 418 224 461

75

329

219

103

548

617 20J

162

967

800 231

584

2,346

1,031 112 104

2,076

35

1,899

1,596

• Data are for an approximate 20 per cent sample for Detroit and 40 per cent for Monroe. See supra, p. 500. 6 For details, see supra, p. 543.

in Table 1 1 4 . Also those who, according to Table 116, prefer neither a higher nor a lower rate were presumably satisfied with the present 3 per cent levy. Not all the business men were willing to state their reasons for their preference for a higher or a lower sales tax. Of the 38 who stated their reasons for favoring a higher tax rate, 29 looked to a corresponding decrease in other taxes, 5 found the sales tax easier to pay than other levies, 2 stressed the requirements for emergency

R E A C T I O N IN TABLE CONTINUITY OF P R E F E R E N C E MANUFACTURERS,

MICHIGAN

545

115 AMONG

TAXES—RETAILERS,

AND W H O L E S A L E R S ,

E X E M P T : DETROIT AND

TAXABLE

AND

MONROE" MAKUTAC-

RETAILERS

TURERS AND

ALL Finns

WHOLESALERS

Held same opinion as at present on relative merits of different taxes before sales tax became effective No report Total Sample

1,607 200 2,273

201 16 268

1,808 216 a,541

° Data are for an approximate 20 per cent sample for Detroit and 40 per cent for Monroe. See supra, p. 500.

relief, i considered the tax more equitable than others, and 1 would have a balanced budget. Those who were hostile to an increase in the sales tax rate gave the following reasons: 182 considered a higher rate "unfair"; 1 7 2 did not believe it could be passed to the consumer; 130 opposed higher taxes on necessities or foodstuffs; 65 thought it would be too burdensome to business; 52 feared waste; 21 anticipated a decrease in consumption; 10 considered the tax a nuisance; and 8 felt the higher rate to be unnecessary. Of those who favored a rate lower than 3 per cent, 149 did so because they thought TABLE 1 1 6 ATTITUDE TOWARD SALES TAX—RETAILERS, WHOLESALERS,

MANUFACTURERS,

T A X A B L E AND E X E M P T : D E T R O I T AND

AND

MONROE*

MAKUFACRETAILERS

TURERS AND

ALL FIRMS

WHOLESALERS

Favor sales tax as part of regular revenue system of state, to replace part of property tax Favor sales tax only for emergency relief purposes No report Prefer higher sales tax rate Prefer lower sales tax rate No report Total Sample

898

162

729

66 10 8

59 155

1,362 59 2,273

137

10 268

1,060 795

69 163 I,499

69

2,54I

" Data are for an approximate 20 per cent sample for Detroit and 40 per cent for Monroe. See supra, p. 500.

546

R E A C T I O N IN MICHIGAN

it would make for better business conditions, and 112 had the interests of the consumer uppermost in mind. Four favored the lower rate because it would be easier to absorb. Field Workers' Remarks on the Sample.—In the opinion of the field workers, of the 2,204 retail establishments interviewed in Detroit, 878 were located in neighborhoods which might be rated as good, 946 in fair neighborhoods, and 380 in poor neighborhoods. Of the 2,204 individuals interviewed, 1,250 were of native white gentile stock, according to the field workers' judgment, 191 were Italian, 366 were Jewish, 86 were German, 22 were colored, and 289 were of various other racial origins. The replies of the great majority (1,945) were rated as reliable; the answers on 206 returns were of questionable reliability and on 53 returns it was definitely felt that the truth was withheld either deliberately or through ignorance of the facts, but there was not sufficient evidence to warrant elimination of these returns from the tabulation.

PART

FOUR

LEGAL ISSUES IN S T A T E SALES T A X A T I O N

CHAPTER

XII

PERSONS'TAXABLE Objects of the Study.—Judging merely from the internal evidence of the sales tax statutes and regulations, one would be justified in inferring that the sales tax movement among the states has developed very recently and that there have been few, if any, attempts to improve the expression of a legislative intent often obviously confused. It is apparent in the documents themselves that the laws have been passed in a time of turmoil, either rushed through the legislature at top speed, or mutilated even to the point of internal inconsistency by the stress of pressure from conflicting interests; in many instances blind reliance has been placed on phraseology already existing in the sales tax law of some other state. This is said, not so much by way of criticism, as in explanation of the contents of this chapter and the manner in which they are arranged. Given the situation as above summarized, it seemed advisable to have four chief objectives in describing and analyzing the legal aspects of the sales tax: first, to state quite briefly the contents of the laws and regulations; second, to point out certain inconsistencies or ambiguities therein; third, occasionally to suggest ways in which these might be remedied; and fourth, to suggest points at which litigation might arise, in spite of carefully drafted phraseology. Throughout this chapter the point of view is taken that special emphasis should be given to problems which are new in the sense that they have not been extensively litigated under other tax laws. Hence the problem of distinguishing between a wholesaler and a retailer, for instance, is considered in even more detail than that of interstate commerce. Furthermore, in the distribution of emphasis among the numerous problems, there has been kept in mind the possible reactions of taxpayers and administrators under rates much higher than those now in effect. A retail sales tax of i , or even 2, per cent will not greatly alter the state and local fiscal system of any commonwealth; if proponents of the tax expect to see it some day playing a major role in this field, they must be prepared to face problems which

sso

PERSONS T A X A B L E

would arise under a rate of, say, 5 or 10 per cent—problems about which one does not care to trouble if the rate is low. T h e treatment of transfer of ownership in containers (e.g., packing cases) is a case in point. Finally, by the use of maqy references to specific types of business and the transactions involved therein, an attempt is made to show the true complexity of the wide field covered by the sales tax. In view of the considerations above, this section has been drafted in a manner designed to appeal primarily to administrators, lawyers, and others whose chief concern must be with the daily application of the tax law to specific problems. Some of the broader social implications of these legal aspects are considered in the summary on pages 81-99 above. Contents of the Study.—The statutes (and the regulations or rulings wherever they have been issued) discussed in this section are those of Arizona, California, Illinois, Indiana, Michigan, Mississippi, New York, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Utah, Washington, and West Virginia. Unless otherwise noted, reference to the Illinois statute is to the 2 per cent tax; 1 to Mississippi, to the 1932 law; 2 to North Carolina, to the 1933 law; 3 to Utah, to the 2 per cent tax 4 (although in most points the later Utah law parallels the earlier one); and to West Virginia, to the 1933 law." The Pennsylvania statute lapsed as of February 28, 1933, and the North Dakota statute was voted down at the polls; they are spoken of, however, in the present tense, for convenience in exposition. For tax rates, the reader is asked to turn to the several state studies on pages 111-317. It was found inadvisable to attempt to treat exhaustively of the various administrative provisions concerning time and method of making returns and payment, hearings, litigation, penalties, etc. A certain amount of information on these points will be found in the detailed studies referred to above, and in the table on pages 40-60 above. In preparing this section, a reading of the statutes and regulations has been supplemented by interviews and correspondence with the legal officials and tax administrators in several states. In this chapter and the following two chapters, there will be in turn discussed: the groups of taxpayers affected, the measure of the 'Supra, pp. 227-28. 'Supra, pp. 304-6.

'Supra, pp. 166-67. 'Supra, pp. 213, 215-19-

'Supra, p. 189.

PERSONS

TAXABLE

SSI

tax, and exempt transactions, particularly those involving constitutional questions. The present chapter will consider the application of the various statutes to persons engaged in business and those not so occupied, and the questions involved in the definition of, and the distinction between, these groups; the provisions for persons engaged in the sale of property, the inquiry being directed toward ascertaining the meaning of "sale" and of "property"; the provisions made for various specific activities which involve the sale of personal property, including those carried on by extractors, manufacturers, and distributors at wholesale and retail; the problems involved in the integration of these functions; the application of the tax to persons engaged in rendering services, including transportation, communication, advertising, radio broadcasting, amusement, and financial services {e.g., banks and insurance companies), business services {e.g., factors and brokers), and professional and various miscellaneous services, including labor; the status of .capital returns, including rentals, interest, and dividends; the question of barter; and, finally, the receipt of miscellaneous proceeds, including insurance, gifts, prizes, rewards, bequests, etc. The discussion will then turn, in Chapter XIII, to the measure of the tax, involving consideration of the taxability of credits, cash, and trade discounts, freight payments, refunds, and various other pricing adjustments; and the provision for measuring the tax by some value of the goods sold, other than that shown by their sales price Chapter X I V will consider questions involved in ascertaining sales constitutionally excluded from the tax base, including sales in interstate commerce, sales beyond the jurisdiction of the taxing authority, and sales to federal agencies; and, finally, the exemptions expressly provided for. There will also be a brief consideration of some of the difficulties arising under the state constitutions. For convenience the term "sales tax" is used throughout this section, although it should be noted that some of the taxes in question are of so broad a scope that they can be considered as reaching "gross income" or "gross receipts," and although in some jurisdictions official circles prefer a different name owing to certain legal circumstances {e.g., the "occupation tax" in Illinois).6 • For a discussion of terminology, see supra, pp. 3-4.

552

PERSONS

TAXABLE

STATUS OF NON-BUSINESS ACTIVITY AND SIGNIFICANCE OF BUSINESS

Provisions of the Statutes.—Only Pennsylvania, New York, and Indiana may with confidence be asserted to include within the scope of their sales tax laws the recipients of non-business income. Pennsylvania 7 imposes the tax upon "sales of tangible personal property," New York 8 upon "the privilege of selling tangible personal property at retail," and Indiana9 upon the gross income of all residents of the state and that derived from intrastate sources by non-residents. Although the Pennsylvania tax might be thought applicable only to business receipts in view of the provision that the department of revenue is authorized to examine the books "and to investigate the character of the business of any vendor"; although "at retail" in the New York law might conceivably refer to a course of business activity, especially in view of the fact that the clause which prohibits advertising the absorption of the tax refers to a "person engaged in . . . business"; 10 and although the Indiana rate provisions are apparently applicable only to persons engaged-in a series of enumerated businesses or "in any business or activity," it is not likely that these ambiguities will require the serious consideration of anyone, other than, perhaps, the drafters of new legislation. Failure expressly to rule out non-business receipts may cause trouble in Oklahoma and North and South Dakota. The Oklahoma law levies the tax upon sales at retail. 11 The vagueness of this phrase, combined with the fact that the other activities taxed are generally business in nature (amusements, light and power, telephone and telegraph, broadcasting) and the specific provision for a tax on the sale of food by restaurants, etc., "or other dispensers," may be sufficient to outweigh the influence of a contrary construction of similar language by the tax commission in New York. North Dakota, 12 likewise, imposing the tax upon "sales of tangible personal property and . . . of professional services," further provides for several "deviations" from the general rate, usually confined to businesses ("dealers" in gasoline, soft drinks, and tires) and labels the appended schedule of rates "Business Taxed." A unique difficulty is presented by the South Dakota statute, 13 entitled "The Gross Income Tax Law," which 'Sec. 3; cf. Sec. 13. 'Sec. 391. *Scc. 2; cf. Sec. 3. 10 Sec. 391. " S e c . 4. " S e c . 3. " S e c . 1 (g). In an opinion filed December 1, 1933, the South Dakota Supreme Court

PERSONS

TAXABLE

553

defines gross income to mean that "passing in any transaction of business . . . and from trade, business, commerce, sales1* and the value proceeding . . . from the sale of tangible property . . . and all receipts . . . by reason of the investment of capital of the business engaged in," and apparently limits each rate provision to persons either engaged in a specified business or in any business, trade, profession, or calling. The fruitlessness of guessing at the interpretation of language such as this is apparent. The South Dakota 18 and West Virginia16 laws impose (as does also the Indiana law) 17 the tax upon persons engaged in any occupation or calling; Mississippi includes those subject to its privilege tax laws, and North Dakota those selling professional services.18 While salaried employees and wage-earners are probably not covered by a provision for persons "engaged in" a particular "business," since such employees, etc., do not directly receive its income, the fact that a course of activity as well as a pecuniary motive is involved may justify the omission of South Dakota and West Virginia from the non-business group, even though these jurisdictions tax wages and salaries. The remaining statutes clearly restrict the tax to "business" activity, but leave the phrase undefined or give it only a vague significance. The California provision,19 which forms a part of most of the definitions in the other laws, is as follows: " 'Business' includes any activity engaged in by any person or caused to be engaged in by him with the object of gain, benefit or advantage, either direct or indirect." Mississippi20 and Washington" use substantially this language but add, "sub-activities producing marketable commodities used or consumed in the main business activity." West Virginia,22 providing for activities engaged in with the object of gain or economic benefit, similarly includes the "production of raw materials or manufactured products which are used . . . in the main business. . . Arizona,23 omitting the reference to sub-activities, adds to the California proviheld the tax valid in general, but restricted its application to gross receipts accruing from business, occupations, etc. Hence the tax does not apply to isolated non-business sales or to rentals, dividends, etc., accruing merely by reason of the private or personal use of one's own property. State of South Dakota v. Welsh. 14 Italics ours. " S e c . 2 (d), (e). " S e c . 2 (h), (i). "Sec. 3 ( f ) . "Activity" is the term used. "Infra, p. 617. "Sec. 2 ( d ) . " S e c . 1. "Sec. 1 ( 7 ) . " S e c . 1. " S e c . 1 (g).

SS4

PERSONS

TAXABLE

sion, "but shall not include casual activities or sales." Michigan,24 using the same language as California, adds that the term: " 'sale at retail' shall not include an isolated transaction in which . . . property is sold" where such sale is not "made in the ordinary course of repeated and successive transactions of a like character . . ." Illinois" simply excludes isolated or occasional sales by a person not holding himself out to be engaged in the business of retailing. The North Carolina and Utah laws do not contain a definition. Possible "Non-Business" Activities.—Various types of activity likely to cause difficulty in interpreting these provisions may be classified as follows: ( i ) passive receipt of income (by holding companies, lessors without power of supervision, stockholders, members of jointstock associations and business trusts, limited partners, recipients of royalties, cestuis of private trusts); (2) non-profit activities (by clubs, racing stables, trade organizations, including cooperative marketing associations); (3) isolated as against continuous activities; (4) sub-activities; ( 5 ) operation of the business by trustees, receivers, or executors. Passive Receipt of Income.—Since West Virginia and South Dakota provide for the taxation of unspecified business activity, this group of problems will be encountered in those two states. According to the United States Supreme Court, "doing business," for purposes of the federal corporate excise tax, requires something more than the mere passive receipt of money. Thus, a corporation organized to hold title to realty and lease it is not subject to the tax when receiving and distributing a fixed rental.29 On the other side of the line, however, is a holding company which, apart from the receipt and distribution of dividends, pledges the held stock to secure a bond issue, the proceeds of which are turned over to the operating company, invests surplus funds, votes the stock, and performs various activities incident to the financing.27 In Mississippi, the business of leasing real property is provided for as one of those subject to the state privilege tax. But since here,28 as in Arizona,29 "engaging" 24

Sec. 1 (d); cf. Sec. 1 (b. 1). Sec. 1. K Zonne v. Minneapolis Syndicate, 220 U.S. 187, 31 S. Ct. 361 (1910). '"Edwards v. Chile Copper Co., 270 U.S. 452, 46 S. Ct. 345 (1926). 28 Sec. 1. »Sec. 1 (i). 15

PERSONS

TAXABLE

sss

is defined in the sales tax statute to include the exercise of corporate or franchise powers, little difficulty should be found in applying the tax to a corporation organized to manage and lease realty which simply receives and distributes the rental. Where a large stockholder devotes a substantial proportion of his time to the management of the corporation, so that the corporation becomes, in essence, the agent of the taxpayer for the carrying on of the taxpayer's business, the Supreme Court has indicated that a loss incurred by reason of the sale of stock might possibly be said to occur in a "trade or business regularly carried on" and be, therefore, deductible as such.30 There is at least a possibility that this doctrine will be carried over into the sales tax field to render taxable dividends received by a stockholder involved, to the extent indicated, in the corporate affairs. Certainly the stockholder is engaged in an activity with the object of gain. It is likely, however, that in general, administrative officials will be content with taxing the receipts to the corporation. Similar considerations are applicable to partnerships, joint stock associations, and business trusts, clearly "groups or combinations acting as a unit" and hence to be regarded along with corporations as single taxpayers under the express provisions of most of the statutes. The element of double taxation, present more often than not in general sales taxes, is not material. Recipients of royalties from patents, copyrights, records,81 etc., while clearly receiving compensation for business or professional services, seem to be subject to the tax only in so far as their activities in a particular tax period affect the amount of income received in that period. It is interesting to note that the South Dakota regulations,32 largely copied from those of Indiana, expressly provide, as does Indiana,33 that the receipt of income by a corporation by reason of its holdings in another corporation is taxable, although the South Dakota rate provisions are limited to business activities or employments, and those in Indiana are not. Non-Profit Activity.—In the observations above, emphasis has 30 Holding the required circumstances not present and the loss not deductible in the manner indicated, Dalton v. Bowers, 287 U.S. 404, S3 Sup. Ct. 205 (1933); Burnet v. Clark, 287 U.S. 410, S3 Sup. Ct. 207 (1933). SIZimbalist v. Anderson, 38 F. (2d) 57 (C.C.A. 2d 1930). M S. D. Regs., Q. 24. " Inf. Bull., Q. 23.

556

PERSONS T A X A B L E

been put on the degree of activity necessary to bring the taxpayer under the "business" category. T h e presence or absence of a profit motive, indicating an "economic" activity, m a y also be of importance. T r u e , W e s t Virginia is the only state which, in defining "business," refers specifically to economic gain or benefit, but there is little doubt that the phrase "gain benefit or advantage, direct or indirect," as used in other statutes, will be construed to refer only to economic or profit-seeking activity, if for no other reason than that "business" is being defined. T h e reference in the M i c h i g a n regulations 34 to taxable transactions as those " o u t of which gain or profit is the o b j e c t " seems to be in accord with this view. T h u s administrative officials face the difficulty of distinguishing vocations from avocations. Although the facts that the enterprise has been operated at a loss over a long period of years, that other activities occupy a substantial portion of the taxpayer's time, that no place of business is maintained, and that the taxpayer depends upon other activities for his livelihood are all material, none is controlling." T h e status of cooperative marketing and consumers' associations is likewise troublesome in this connection. In Indiana and Washington, organizations not operated for profit or operated " f o r the benefit of the c o m m u n i t y " are exempt; elsewhere, the business restriction must be relied on if such concerns are to be considered exempt. C o operative associations operating at cost are perhaps to be distinguished from other mutual, educational, or eleemosynary institutions not engaged in an economic activity. T h e two states just mentioned also specify that no part of the income of the organization involved is to inure to the benefit of any stockholder or private individual. 38 It seems clear that a cooperative group is engaged in an activity with the object of benefit or advantage to its members; part of its income certainly inures to the benefit of private individuals. It may be necessary to distinguish between a consumers' cooperative and other marketing groups, for although the former, as an entity, is involved in selling, its members are engaged in buying. T h e marketing association sells at a profit from the point of view of cost to its members, whereas the consumers' group sells as near to cost as possible con" M i c h . Prelim. Regs. (June 30, 1933), p. 4. " S e e Comm'r Int. Rev. v. Widener, 33 F (2d) 833 (C.C.A. 3d 1929). " See Infra, pp. 657-58.

PERSONS T A X A B L E

557

sistent with its success. Accumulation of a surplus in either case may be held to bring the association squarely within the statute. It has been recently decided, moreover, that a cooperative marketing association is a "business or commercial" corporation under the bankruptcy law.37 College publications, athletic contests, book stores, clubs, fraternity houses, employees' restaurants, and sales to employees of the product dealt in at cost, seem clearly non-business in character, assuming profit is not an objective; but the tendency of these enterprises to build up surpluses for various reasons may lead to a contrary result in many cases. The Illinois regulations,38 have ruled that fraternity houses are taxable when engaged in the business of serving meals to persons other than members. Isolated as against Continuous Activities.—Only Arizona, Illinois, and Michigan clearly provide by statute that a continued course of activity is essential to the maintenance of a business. The California regulations,39 however, duplicate the Illinois provision. Since the cases are replete with definitions of "business" in terms of sustained activity, 40 there is little doubt that the other jurisdictions, with the possible exception of South Dakota, will follow suit. The thankless job of distinguishing between isolated transactions and businesses, undertaken by the federal courts in numerous income tax cases, must now be assumed by state tribunals. The frequency with which the transactions occur, and, as in the case of profit and non-profit enterprises, the amount of time devoted and the extent to which the transactions are relied upon for income are material factors. 41 Dealings on stock and commodity exchanges have been, and will be, prime sources of difficulty. The requirement, in Illinois by statute and in California by regulation, that the taxpayer affected represent himself as engaged in the business seems to necessitate the maintenance of a place of business and will probably not be generally applied. Accommodation sales and sales of goods for their junk value will 37Schuster

v. Ohio Farmers' Co-op. Milk Ass'n, 61 F (2d) 337 ( C . C A . Ohio 1932). Sp. R. 68, filed in Office of Dept. of Finance, Springfield, Illinois, Sept.-Oct. 1933. 39 Calif. Regs., Sec. 2. •"See Klein, Federal Income Tax (1929), Par. 18: n ; Cadwalader v. Lederer, 273 Fed. 879 (E. D. Pa. 1921) ; Mente v. Eisner, 266 Fed. 161 (C.C.A. 2d 1920); Elliott v. Comm'r Int. Rev. 15 B.T.A. 494 (1929). " Idem. 38

SS8

PERSONS

TAXABLE

be classified according as a continued activity or direct relation to concededly business operations is, or is not, made out. Single joint ventures may well be included, depending upon the time involved in consummating the transaction. Sub-Activities.—This phrase is intended to include situations in which, for example, an extractor manufactures his own equipment or operates a transportation system, or in which a manufacturer produces his own raw materials, which are either consumed or resold in different form, etc. Since a determination that the subsidiary activity is, or is not, a business is intimately related to the problem of overlapping classifications, hereinafter considered,42 this subject will be there treated. Sales by Receivers and Others.—In Indiana 43 the tax authorities have ruled that the operation of a business by a receiver, other than for the purpose of liquidation, results in taxable gross income. The distinction is, of course, not based on the presence, or absence, of a sustained course of activity, since the Indiana law reaches nonbusiness income. More significant in the present connection is the Illinois "special rule"*4 on this matter, which is to the effect that where receivers, executors, and administrators continue to operate a business which involves the sale of personal property at retail, they must pay the tax. This ruling is applicable whether or not liquidation is involved or the receiver has been appointed by a federal court, the only requirement being that the sales be made in the ordinary course of business. Since the officials referred to may be said, for purposes of taxation, to stand in the place of the individual or entity represented, the Illinois provision does not seem to be open to objection. A somewhat similar problem is involved in connection with sales by pawnbrokers, warehousemen, pledgees, mortgagees, and by judicial authority generally, and other transactions in which either a court order or a security device is involved. The Illinois regulations contain a statement to the effect that the sale of forfeited personal property at retail by pawnbrokers is included within the tax. The regulation assumes that title passes to the pawnbroker on the date of default. The law, however, seems generally to be to the contrary, since the situation is held to involve a true pledge in which the ° Infra., pp. 606-10.

" Inf. Bull., Q. 65.

" 111. Regs., Sp. R. 49.

PERSONS T A X A B L E

559

pledgee's rights extend only to the privilege of sale for the satisfaction of his obligation.45 Technically, the pledge is simply a bailment for security.48 It is possible to argue that a sale executed to realize on a lender's security is not sufficient to establish the lender as a person engaged in the business of selling personal property. It seems to follow that the other sales of the character under consideration are to be similarly treated, whatever may be said of banks, mortgagees, warehousemen, etc., whose security sales involve a significant volume of activity. 47 Recovery in an action for the conversion of goods appropriated without the vendor's consent might possibly be included in a retail sales tax, though no specific rulings are available on this point. The effect of the presence of a court order does not necessarily seem to render the transaction something other than the transfer of title to property for a consideration. Since the "sale," however, is not of the type ordinarily made in the course of business activity, a decision that the proceeds of this sale are not to be included in taxable income may be expected in most sales-taxing jurisdictions. SALES

Sources of Difficulty.—The imposition of a tax upon, or measured by, the proceeds of "sales" requires a definition of that term. There seem to be three sources of difficulty: i . The distinction between "sales" and other transfers, including conditional sales, bailments, leases, chattel mortgages, pledges, trust receipt transactions, the delivery of goods on approval "or on sale or return," and gifts. (Although contracts for labor and materials are similarly to be distinguished from "sales," the peculiar nature of this problem renders separate treatment desirable.) It is important to consider in this connection not only whether a given transfer is, for example, a bailment or a conditional sale (this type of difficulty may arise in any state, and may possibly be affected by the wording of the sales tax statute), but also whether a sales tax law will be interpreted to reach any one or all of the above transfers, assuming " Hanna, Cases and Materials on Security (1932), 161, 163, published in Chicago by the Commerce Clearing House, Inc. " Hanna, op. cit., at 115. " Indiana has ruled that sales of collateral result in taxable gross income to the vendor. Inf. Bull., Q. 72.

560

PERSONS T A X A B L E

that the nature of the transfer has been clearly defined. For purposes of discussion of this latter problem, the statutes have been segregated into three groups, depending upon the language used in defining "sale," as noted below. 2. Determination of the point of time at which a given taxable transfer is, for tax purposes, consummated, and hence, whether or not it falls within the taxing period. 3. The distinction between a sale and a contract for labor and materials. General Provisions in the Statutes and Regulations.—In considering the types of transfers to which the various taxes apply, the statutes, as has been indicated, will be divided into three groups, which for convenience may be called the "closed transaction" type, the "transfer of ownership" type, and the "any transfer" type, as follows: 1. Mississippi, 48 Washington,49 and West Virginia50 provide that every closed transaction shall constitute a sale; the Arizona 51 and Utah 52 laws contain similar language but add, respectively, that conditional sales are to be treated as credit sales, and that "sale" is to include credit and installment sales. 2. Michigan 83 and North Carolina54 declare that a sale involves a transfer of ownership, and that conditional and installment lease sales or other transactions where title (in North Carolina, title and/or possession) is retained as security are to be included. The Illinois statute5* provides, similarly, that a sale involves the transfer of title and includes transactions in which a security title is retained. The Michigan tax commission has ruled that credit sales are to be "construed to mean sales on open accounts, title retaining contracts, [curiously] chattel mortgages, etc." 56 The regulations of Indiana and South Dakota 564 contain provisions which are, in effect, similar to the Illinois definition, neither of the statutes having referred to this matter. 3. The California, 57 New York, 58 North Dakota, 59 and Penn"Sec. I. "Sec. I (s). "Sec. 1 (d); sec. 13. "Sec. 1 (b). "Sec. 404 (8). "Sec. 1. Ind. Inf. Bull., Q. 4; S. D. Regs., Q. 4. "Sees. 2 (b); 9. "Sec. 390 (c).

"See. 1. "See. 1 (b. 1). "Mich. Regs., p. 7. "Sec. 2.

PERSONS T A X A B L E

S61

sylvania 80 laws provide broadly that "any transfer . . . in any manner or by any means whatsoever . . ." constitutes a sale. California and New York expressly refer to conditional sales in the same clause, the former adding in a subsequent section that credit sales are. to include conditional sales, lease contracts, and other deferred payment transactions. The Pennsylvania Department of Revenue" 1 has announced that the tax is applicable to the full contract price of conditional bailment and installment sales. Although the Oklahoma statute does not define "sale," the explanatory section simply stating that a sale shall mean a sale at retail, the tax is expressly imposed upon "the sale . . . by conditional sales contracts or by partial payment or installment payment plan." Sales "upon approval" are said not to be taxable in the event that the goods are returned within a reasonable time and the consideration refunded.82 Distinction between Sales and other Transfers.—Before entering into the discussion of the types of transfers which may possibly be included within the various provisions described and the difficulties involved in distinguishing among them, the following should be said in connection with the distinction between "sale" and "conditional sale." In view of the fact that a conditional sale, upon final payment, becomes a sale, the difficulty involved might seem to turn upon the point of time at which the transaction is consummated, rather than upon the types of transfers to be included in a provision for sales. It should be noted, however, that a determination that sales include conditional sales necessarily means that the tax applies at the time of transffer of possession rather than of title, and hence eliminates the former question, since a conditional sale cannot be taxed as such upon the ultimate transfer of title: the transaction is then no longer conditional. Comparison of the Closed Transaction Statutes.—In those jurisdictions which use the "closed transaction" language alone (i.e., without referring to conditional sales), it is likely that the existing common law or statutory significance of "sale" is incorporated into the tax law. Whether, therefore, a tax imposed on sales applies to conditional sales will depend on the law of the particular jurisdiction in " S e c . i. " Release, Dept. of Revenue, Harrisburg, Pa., Oct. 4, 1932. " O k l a . Regs., Sees. 4, and 5 (8), p. 9.

562

PERSONS

TAXABLE

which the question arises. Those states which have already passed upon this question in the interpretation of other sales taxes have held that conditional sales are included.43 In Washington, however, there is no such decision, and the cases are not clear on the nature or extent of the property interest which passes to the purchaser under a conditional sales contract." It may be supposed that if the beneficial ownership is held to be transferred on the delivery of possession, as in West Virginia under the Uniform Conditional Sales Act, and, probably, in Mississippi under cases which recognize that a salable property interest passes on delivery,65 the transaction will be held a sale within the meaning of the sales taxing law. Where the tax is held to apply to conditional sales, either by judicial construction, as is possible in Washington, Mississippi, and West Virginia, or by express statutory provision both in the "closed transaction" type of statute and in the others, difficulty will be encountered in distinguishing between conditional sales on the one hand, and transactions camouflaged as bailments, leases, licenses, consignments, chattel mortgages, and pledges on the other hand, and, furthermore, in determining the nature of transfers on trust receipt, whether conditional sale, bailment, or chattel mortgage.86 T h e definition of conditional sale, contained elsewhere in the Arizona laws and referred to in the tax statute, specifically includes the bailment or lease of goods which involves the payment as compensation of a sum substantially equivalent to the value of the goods and the duty or privilege of the bailee or lessee to become the owner, and thus covers the bailment lease transaction prevalent in Pennsylvania. Although the reference to "installment" sales in the Utah law is at least ambiguous, a subsequent section67 provides that in the case of conditional sales the tax accrues as payments are received. This of course does not determine that delivery of possession prior to the effective date of the statute, followed by payments during a tax period, renders said payments taxable. The statute also contains a distinctly novel provision68 to the effect that in any case in which " S e c . 58 H.L.R. 1043 (1928). "Cj. Holt Mfg. Co. v. Jaussaud, 132 Wash. 667, 223 Pac. 35 (1924) with Kuhn Ambrose, 171 Wash. 528, 18 P (2d) 485 (1933). "Cf. Oppenkelmer v. Telhiard, 123 Miss. 111, 85 So. 134 (1920). " H a n n a , (note 45, supra), pp. 200 ff. " S e c . 5. "Sec. 2(g).

v.

PERSONS

TAXABLE

563

goods are leased or the right to possession transferred, and the tax would apply to said transfer if an outright sale were made, the lease is to be considered a sale and the tax is to be paid upon the rentals received. It will be noted that the tax is not imposed upon the lease but upon the sale of the goods: it seems to follow that a lease entered into prior to the statute will not be included within the tax as to rentals received thereafter, the transaction being closed on transfer of possession. Comparison of the Transfer of Ownership Statutes.—In view of the specific provisions made in these statutes for conditional sales, and the generally applicable discussion in the preceding paragraph, no further mention will be made of this problem. The status of chattel mortgages, however, clearly exempt in the preceding group of statutes, may cause difficulty. North Carolina and Illinois refer to the transfer of ownership or title; Michigan, simply to the transfer of ownership. Although technically a chattel mortgage involves a transfer of title, the first two statutes cover transfers, respectively, to "purchasers and consumers," appellations not suitable to chattel mortgagees, and the third involves the transfer of "ownership," a concept substantially different from that of mortgage. It is therefore difficult to justify the ruling of the Michigan authorities that credit sales include chattel mortgages,USa and the doctrine will almost certainly not be extended to other states. The peculiar reference in the North Carolina law to transactions in which "title is ultimately to pass . . . and although possession is retained for security" deserves mention since it apparently contemplates a sale in which both title and possession are retained as security. Although a transfer of this type is not inconceivable, the provision will probably find little application and seems to be the result of careless draftsmanship rather than design. Comparison of the Any Transfer Statutes.—The next group of statutes, interpreted literally, includes chattel mortgages, pledges, leases, etc., since each of these represents a transfer for a consideration. It is obvious that the language was not so intended. There is a possibility, however, that transactions close to the border line may be included here though held not covered by the more conventional '"* Mich. Regs., p. 7.

PERSONS

564

TAXABLE

definition. T o illustrate, a California court*9 has held that a transfer of personal property involving a $2,500 down payment and 17 monthly $400 payments, with an option to purchase at $800, constitutes a lease; but the breadth of the sales tax definition may well induce a more realistic attitude. On the other hand, the same definition may induce a less realistic attitude, inasmuch as the sale of property combined with a privilege of repurchase reserved to the seller may be held a sale though actually a chattel mortgage. There may be a tendency to find that consignments utilized as a security device constitute sales rather than agency transactions. The New York 70 and Illinois71 tax authorities have ruled that an agent in possession, selling for an undisclosed principal, including lienors as well as factors, is taxable as the seller. Although third parties may regard the agent as the owner, the fact that he is under a duty to remit the proceeds in cash or credits to his principal seems clearly to establish an agency relationship, at least for purposes of a tax imposed upon the proceeds of sales. Although it seems to follow, from the New York and Illinois rulings, that the undisclosed principal is not taxed upon receipt of the proceeds, since his agent has been "deemed to be the owner," and there is in fact only one sale, the authorities may have discovered two taxable transfers. With this should be compared the Indiana and South Dakota treatment of consignments, hereinafter considered.72 The New York regulations73 have also expressly indicated that the lease of personal property is not taxed. The California statute, it will be recalled, includes "lease contracts and other deferred payment transactions." Since a bona fide lease might be said to involve compensation for the value of the leasehold paid in installments, the above provision, clearly intended to cover conditional sales which are otherwise labelled, may be difficult to confine within the intended scope. Application of the tax to conditional, bailment and installment sales in Pennsylvania, apparently including bailment leases (and thus probably inconsistent with the holdings of Pennsylvania courts74 " Wellman v. Conroy, 50 Cal. App. 728, 194 Pac. 728 (1921).

" N . Y. Regs., Art. 32. " N . Y. Regs., p. 35" Commonwealth

"111. Regs., Sp. R. 5.

n

Infra, p. 565.

v. National Cask Register Co., 271 Pa. 406, 114 Atl. 366, 117 Atl.

439 (1921); Beecher, "The [Pa.] Emergency Relief Sales Tax," 37 Dick. L. Rev. 100, " 5 (1933)-

PERSONS T A X A B L E

56$

to the effect that a foreign corporation which has leased personalty to residents with options to buy has its property invested in the state) will undoubtedly be sustained in view of the clear analogy between these transactions and conditional sales: the presence of an option to buy, exercisable for a nominal consideration in the case of a true bailment lease, is indicative of the initial intent of the parties that title ultimately pass." Adoption of the Illinois definition by the South Dakota and Indiana tax departments will probably not encounter important criticism. The provision for the taxation of sales on consignment, in Indiana by statute76 and in South Dakota by administrative ruling," may cause difficulty. The former declares that " 'gross income' shall include the proceeds from the sale of any property handled on consignment by the taxpayer" and the latter that the "receipts" from goods handled on consignment are to be included in gross income. Although "receipts" might conceivably refer to commissions, it is probable that gross proceeds were intended. It is interesting to note that the Indiana tax director has ruled that "a taxpayer dealing in grain as a . . . commissionman . . . will be taxed upon his gross earnings.'" 8 The fact that a consignee has possession, however, may serve to justify the classification. It is not clear whether the consignee will be taxed as one rendering a service or engaged in selling goods, although the latter seems more probable. Neither the North Dakota statute nor such administrative material as has there been published, throws light on any of these problems. Since the courts have recognized, however, that the retention of title may be for security only,79 and since those cases which have passed upon the application of sales taxes to conditional sales have held them subject to the tax,"0 there is little doubt that North Dakota would have followed suit had the tax been put in operation. Similarly, it was to be expected that delivery of possession in conditional sales, and transfer of title in sales, would mark the completion of the transaction. Point of Time at Which a Taxable Transfer Is Consummated.— Collection of the tax with respect to a particular transaction not only " S e e Void, Sales (1931) Sec. qs, p. 273. "Sec. 1 (f). " S . D. Regs., Q. 17. " I n f . Bull., Q. 54. n Braufman v. Bender, 58 N . D . 165, 225 N.W. 69 (1930). "Carter v. Slavick Jewelry Co., 26 F. (2d) 571, 58 A.L.R. 1043 (1928).

PERSONS

566

TAXABLE

involves a determination that the transfer is of the sort to which the statute applies, but also a decision that the transfer took place within the taxing period. North Carolina provides by statute that sales are to be reported with reference to the time of delivery.81 Although the Oklahoma law provides, in the case of conditional sales, that the "tax shall be paid upon the whole of the sales price at the time such contract is entered into,"*2 it is not likely that the contract to sell is thereby rendered taxable: delivery of possession will probably be determinative here as elsewhere. This view has been informally adopted in Michigan83 and Oklahoma84 by the assistant attorneygeneral and the attorney to the commission, respectively. In Illinois, on the other hand, it has been ruled that the statute taxes sales with reference to the transfer of title or ownership, except in the case of conditional sales, where delivery of possession is the determining factor.85 The Pennsylvania authorities, by declaring that, since in most cases title passes on delivery, sales are to be returned as of that date, impliedly have assumed a like position with respect to sales: the status of conditional transfers seems likewise to be the same in view of the ruling with respect to the types of transfers included. The regulations in New York,86 confined in this respect to conditional sales, refer to the passing of title, conditionally or otherwise, as causing subjection of the transaction to the tax; delivery of possession, therefore, consummates the transfer. At common law, and under the Uniform Sales Act, it seems fairly clear that a sale is consummated in the transfer of title. In respect to the closed-transaction and transfer-of-ownership type of statute, there seems to be little justification for any other ruling, and those of Pennsylvania and Illinois are apparently so intended. Contrary rulings in Michigan and Oklahoma87 (although the Oklahoma statute is in neither of the groups referred to, it is similar in that no change is made in the common law definition of sale) are, therefore, of doubtful validity. The North Carolina provision for reporting sales with reference to the time of delivery may run into constitutional difficulty. Since the tax is imposed for the privilege of selling, the statute is made to 81

Sec. 404 (10). " Interview with tax official. " Interview with tax official.

82

Sec. 4. "111. Regs., Art. 17.

" I n t e r v i e w with tax official. * N. Y. Regs., Art. 13.

PERSONS

TAXABLE

567

operate retroactively with respect to a contract of sale executed prior to the effective date of the statute, although delivery takes place thereafter. It is, perhaps, advisable to point out that in the case of those statutes which use the closed transaction language the theory of statutory construction which gives independent significance to every word or phrase in a statute might find in the reference to closed transaction an indication that the passing of title does not complete the sale, since that meaning would be conveyed by "sale" alone. Hence delivery or payment in addition may be held essential. Since credits are not taxed until collected in Mississippi,88 this view is likely to prevail there. In the others, the question is open. The any-transfer type of statute, by providing for a substantial modification of the common law definition of sale, raises a peculiar problem which is likely to be solved, not by exploration of the many types of transfers to which the statute might conceivably refer and an investigation concerning the point at which each is consummated, but by a judicial construction of this definition which will approach more or less closely the common law view. There is a possibility, however, that even if the statute is to be limited to sales, the provision for any transfer will mean to a court that the legislature intended the taxable transfer to be regarded as complete on the delivery of possession, tangible personal property having then been transferred. Distinction between a "Sale" and a Contract for Labor and Materials.—Even if one assumes the ownership of goods has been transferred, problems remain as to the necessity for, and the tests to be applied in, distinguishing between sales, on one hand, and contracts for labor and material, on the other, since in many states the latter transactions are either completely non-taxable or taxable only with respect to the materials. This distinction between a sale and a contract is not developed in the laws and regulations themselves, but is essential in a critical approach to the problem, as a statute restricted to sales presumably does not apply to contracts for labor and materials. Not all transfers which involve services, however, are thereby rendered contracts for labor and materials rather than sales. Transfers of personal property which are preceded, accompanied, or M

Infra,

p. 626.

568

PERSONS T A X A B L E

followed by the rendering of services (labor) may be classified as follows: 1. Transactions in which the labor or service is performed prior to the transfer, and in the production of the article. These transactions may be subdivided into those (a) in which the cost of the materials used is an important element compared to the labor cost, as in most manufacturing and (b) in which the labor or service cost is far greater than the cost of the materials, as in some publishing or in artistic or professional productions. 2. Cases in which the labor or service is rendered at the time of, or after, the transfer, with or without the rendering of service involved in prior production. These cases may be subdivided into those (a) in which the article, although in the case in question sold with an accompanying service, is quite frequently sold without such service, as, e.g., radios, and (b) in which such an independently marketable commodity is not involved, as in the application of hair tonic, installation of heating systems, general repairs: a few drops of hair tonic, a mass of materials, pieces of pipe or wood are not customarily sold as such, although, of course, it is conceivable that they might be. These two groups of cases may be further subdivided into those in which the property transferred is attached to the purchaser's personal or real property, or to his person, and those in which this factor is not present, as in the sale of meals. In groups i (a), i (b), and 2 (a), a distinction should be noted between the transfer of goods which although concededly capable of independent sale are in fact suited only to the wants of an individual purchaser (e.g., a set of false teeth), and sales of generally marketable commodities. Each of the four groups will be discussed in turn, in the following paragraphs. Transfer of Goods Whose Production Has Not Involved a Relatively Large Labor Cost.—In connection with the first type of transfer noted above—transactions in which the cost of the materials used is an important element compared to the labor cost—it may be noted that all the statutes, with the exception of North Carolina, expressly disallow the deduction of the cost of materials used and labor or service performed. Although this provision, literally applied, would result in the taxation of all the transactions referred to above, and is

PERSONS T A X A B L E

560

hence to be considerably qualified, it is at least effective to classify as sales (taxable), transfers of produced goods. This problem is not likely to be substantially affected by the fact that, prior to the Uniform Sales Act, it was held in jurisdictions adhering to the so-called New York rule that a contract for the sale of future goods was not a contract to sell within the Statute of Frauds and hence did not have to be in writing.8® Although it might be urged that the original New York rule was generally applicable and the change introduced by the Sales Act limited to the Statute of Frauds, the provision referred to at the beginning of this paragraph means nothing unless it applies to manufacturers' sales.90 The Uniform Sales Act, however, which is enacted in ten of the fifteen important sales-taxing jurisdictions,91 excludes from the operation of the Statute of Frauds manufactured goods for which there is no market apart from the individual purchaser. Although this provision might seem of little importance for sales taxation, and although there is little doubt that these transactions represent sales for most other purposes, this Statute of Frauds provision is of special significance since it is the result of an adoption of the Massachusetts rule in accordance with which these contracts were broadly said to be for labor and materials and not for sale.92 In California, for example, which follows the Massachusetts view and has not adopted the Uniform Sales Act, the problem is a real one, since the language used in prohibiting the deductions for service cost is too inclusive to be applied without some qualification, which may quite possibly find its inspiration in the indicated common law principles. Such regulations as have dealt with this matter have uniformly held that the rendering of services in the production of an article does not alter the subsequent transfer's character as a sale, except in those cases in which the cost of the service is disproportionately great. Transfer of Goods Whose Production Has Involved a Relatively Large Labor Cost.—The second group of transactions—those in which the labor or service cost is far greater than the cost of the ma" I . Williston, Sales (1924) Sec. 55, p. 91. " S e e Beecher (note 74, supra, p. 564). at 111. " It is not law in California, Mississippi, North Carolina, Oklahoma, and West Virginia. K See Williston, p. 50.

570

PERSONS

TAXABLE

terials, although the labor or service is performed prior to the transfer—typically involves the performance of professional services such as those rendered by abstractors of title, architects, artists, attorneys (preparation and transfer of deeds and other documents), dentists, oculists, opticians, optometrists, pharmacists, physicians, and veterinarians, and the sale of newspapers, periodicals and books, correspondence school courses, wire and ticker tape service, and credit information, etc. The following rulings93 have been issued, or informal statements made, by administrative officials in this connection. In Illinois, abstractors of title and architects have been expressly held not to sell their documents or drawings; artists are taxable in New York, but not in Illinois; dentists do not sell tangible personalty in New York, California, Illinois, and Utah, but do in Pennsylvania and probably in Michigan; oculists, optometrists, and opticians are taxed on the value of glasses, lenses, etc., in Arizona, New York, California, and Utah, but not in Illinois; pharmacists sell prescriptions compounded in Arizona, Illinois, New York, and Pennsylvania; physicians and veterinarians are not taxed in Illinois, as to medicines, etc., used incidentally in the performance of services; newspapers are sold in Illinois (but newsboys are not taxed, since they are not engaged in business), Indiana, and Pennsylvania, but not in Michigan; the sale of advertising service is held not to involve a sale of tangible personalty in Illinois; books are sold in Michigan; correspondence school courses sell tangible personalty in Illinois, since printed matter of all kinds is property (compare the rulings of this jurisdiction on abstractors, architects, and especially artists). It should be noted that the inclusion of one transaction in any particular jurisdiction does not necessarily imply the exclusion of others, since those specified are simply the ones which have been expressly covered in regulations and informal interviews, often in answer to specific questions. Furthermore, each of the transfers referred to is presumed to have been accompanied by the rendering of the service customary in the usual course of the activity involved. In England, it has been held that a contract involving the transfer " A r i z . : Interviews with tax officials; Calif.: N. Y. Regs. Applicable to Calif. Sales Tax, p. 19, 23; 111.: Sp. R . 2, 12, 17, 21, 32, 52, 7 1 ; Mich.: Interview with tax official; N.Y. Regs.: Arts. 30, 31, p. 45, 46; Pa.: Interview with tax offical; Utah Regs.: Arts. 14. IS-

PERSONS

TAXABLE

57t

of paintings by an artist, or of false teeth by a dentist, is a contract to sell within the Statute of Frauds.94 Although the printing of a book or the preparation of a deed is not so held, it is there expressly said that the relative cost of the service and materials is not to be the criterion, the attorney-deed case being disposed of by a statement that the paper and ink are obviously [?] not sold.95 The modification of this view by the Uniform Sales Act is limited to goods not generally marketable, which, it will be noted, excludes most professional services. Although this material is relevant, it is by no means controlling on these questions. The regulations referred to are not only not uniform, but are inconsistent within themselves, in particular jurisdictions. New York and California, for example, will tax an artist on the sale of drawings, or an oculist on the sale of glasses which he has prescribed and ground, but not a dentist on the sale of inlays or false teeth which he has prepared. Again, it is difficult to justify a practice which taxes pharmacists who compound prescriptions and at the same time exempts opticians who grind lenses, or one which exempts architects, and taxes the sale of newspapers; but these practices are followed in Illinois. If the sale of drawings is taxed, there seems to be no basis for exempting the preparation of documents by public stenographers, of deeds by attorneys, or of plans by architects, although with respect to the latter, the contrary has been indicated in a relatively recent New Jersey Statute of Frauds case.96 The distinction drawn in Michigan between sales of newspapers and sales of periodicals seems to be not only irrational, but exceedingly difficult to apply in the case of weekly and monthly publications. These difficulties, and others subsequently considered, arising in Michigan and Illinois, illustrate the uselessness of general rules, contained in the regulations of both these states, which rely on the "incidental" character of the goods or service to determine the applicable classification. There seems, furthermore, to be no particular justification for the classification generally, since a tax imposed on sales of tangible personal property does not necessarily imply that an article whose value primarily is derived from the art of the producer is ex" See Williston (note 89, supra, p. 569), at 89. " S e e Lee v. Griffin, 1 B. and S. 272, 278, 121 Eng. Rep. 716, 718 (1861). " Gerber v. Weinstein, 6 N. J. Misc. 284, 141 Atl. 3 (1928).

572

PERSONS

TAXABLE

eluded. It is conceivable, first, to tax all producers on total receipts, irrespective of the art involved, or second, to segregate the value of the materials and the services, taxing only the former, or third, to attempt classifications based on the "primary" character of the goods or service. The impracticability of the last two seems to leave the first as the solution easiest to apply, productive of the most revenue, and not contrary to the wording of the statute. Transfer of Goods Where Labor Element Enters at Time of Transfer: Goods of a Type and in Amounts Often Transferred without Such Labor.—There are certain articles which, upon sale to the ultimate consumer, are usually—but not necessarily—accompanied by the rendering of some service by the vendor, as in the sale and installation of a radio set. The problem then arising is whether or not that part of the gross receipts representing compensation for the labor of installation should be taxed. With certain qualifications to be noted below, the answer is in the negative. In contrast to the labor used in producing an article, this labor becoming a part of the article through the legal doctrine of accession, the labor of installation must be considered as an element entirely separate from the article installed, and as being sold separately. Among all the statutes, only that of California attempts to deal with this problem. First defining "gross receipts" as the total sales price, including the price of any services that are parts of sales, without any deduction on account of service cost, it adds that the term "gross receipts" does not include the amount received for labor or services used in installing (remodeling or repairing) the property sold. The regulations of the several states are relatively uniform, specifically mention electricians, plumbers, garagemen, and undertakers, and contain several general rules. Arizona, Illinois, and Utah,®7 in the case of installation of parts by garagemen, impose the tax on the total amount received both for the service of installation and for the parts, except that the latter two jurisdictions will not tax the amount received for the service element, if this is billed separately. In the case of undertakers a "Ariz.: Interview with tax officials; Calif.: Explanatory Statement, Sec. 4 (Service Charges); 111.: Sp. R. 8, 10, 47; Utah: Interview with tax official; W. Va.: Interview with tax official.

PERSONS T A X A B L E

573

similar stand is taken by Michigan, North Carolina, and Oklahoma; California, which exempts the service element, makes, however, no provision for separate billing, Illinois states that if no separate billing is made the tax shall be imposed on the fair value of the goods, to be computed at twice their cost price, and West Virginia apparently has considered taxing no part of the undertaker's receipts (this would seem not to be justified). Picture framers, however, are taxed on total gross receipts in Illinois. New York has formulated a general rule (copied by California88 and Utah), applicable to all installations, whereby the nature of the invoice or account determines the taxability of the compensation received for services, the tax applying to the service element only in the event that the two items are not segregated.*9 Such a requirement, running contrary in many cases to established practice, might be viewed on one hand as in violation of statutes which do not provide for the taxing of services under any circumstances, or on the other hand as an essential administrative device for ascertainment of the fair sales price of the articles sold. The substitutionary provision in Illinois is more readily justifiable, though open to a similar objection if the estimated sales price is grossly inaccurate. According to the Pennsylvania regulations,100 when contractors, builders, electricians, plumbers, painters, paper hangers, garagemen, etc., install articles on, or incorporate them in, real estate or personal property belonging to others, they do not sell such articles, and hence no part of their gross receipts from such transactions is taxable. A subsequent ruling in the same state,100* however, taxes plumbers on the transfer of goods to ultimate users (even though transferred in connection with an installation), providing the plumber has given a certificate of resale when purchasing the goods. In Indiana, contractors "sell" the "materials" used where the building is erected, curiously enough, for a stipulated sum;1®1 contractors in Arizona, however, do not. " One of several examples whereby California, through copying verbatim certain New York regulations, ran counter to the statutory provisions. " C a l i f . : N. Y . Regs. Applicable to Calif., p. 18; N. Y . Regs., Art. 26; Utah Regs., Art. 11 (final paragraph). ""Statement on Emergency Relief Sales Tax Act, Dept. of Rev., Aug. 31, 1932, p. 3. 1W* Release, Dept. of Rev., Sept. 21, 1932. ""Inf. Bull., Q. 41 (a).

S 74

PERSONS

TAXABLE

A complicating factor is introduced, as to those jurisdictions which do not tax the sale of real property, where the article installed is attached to real property, becomes itself real estate, and is transferred by accession, rather than by sale. Pennsylvania 102 rules that if a contractor buys building materials, builds a house therefrom, and then sells the house, he does not sell the building materials as personal property, and hence pays no tax (the sale of the materials to him constituting the taxable retail sale). Although not noted in the regulations, an additional reason for non-taxability in such case rests on the doctrine of accession. Transfer of Goods in Which Labor Element Enters at Time of Transfer: Goods of a Type and in Amount Not Usually Transferred without Such Labor.—The final group, closely related to the one just considered, is the most complex, and includes transfers of personalty which range from that involved in shampoos, lubrication, cobbling, general repairs, and house painting to the installation of heating systems, generators, air-conditioning equipment, sprinkler systems, etc. As to statutory treatment of this question, it will be recalled that the California statute expressly exempts the price received for labor and services used in repairing and remodeling the property sold. Also significant is the Arizona statute, which classifies restaurateurs as engaged in the rendering of service. Although Oklahoma and Utah expressly tax the sale of meals, the reference is to this point alone, and hence the problem of definition or classification is not solved by this action. Specific rulings seem not to fall into any well defined groups. They may, however, be listed as follows: 103 Arizona and Illinois indicate that garagemen are to be taxed on materials used in the performance of service, but Pennsylvania rules to the contrary; California, Illinois, and New York have ruled that cobblers are not to be taxed on materials used (California officials, however, have elsewhere asserted the general taxability of materials and parts used, including, specifically, grease and oil). Arizona, Illinois, and Michigan hold barbers 103

Statement, p. 3. ""Ariz.: Interview with tax officials; Calif.: N. Y. Regs. Applicable to Calif., pp. 1 3 - 1 7 ; 111.: Sp. R. 0, 10, 11, 13, 22, 30, 31, 36, 37, 43, 46, 48, S3. 54; Mich.: Interview with tax official; N. C.: Release, Dept. of Rev., July 1 1 , 1 9 3 3 ; N. Y.: Arts, iq, 21, 23, 24, p. 44; Okla.: Regs., Sec. 5 (2), (4), ( 1 0 ) ; Pa.: Statement, p. 3 (Consumers); U t a h : Regs., Art. 12.

PERSONS

TAXABLE

575

and beauty shops not taxable on materials used. Arizona exempts photographers and engravers, Illinois does not tax photo-finishers or tinters, but taxes photostat sales. Although New York holds alteration charges to be compensation for services rendered and hence not taxable, Oklahoma includes in the tax base alteration or adjustment charges essential to the completion of the sale. Indiana, as already indicated, has decided that a building contractor sells materials, but Arizona and Pennsylvania have ruled to the contrary, and North Carolina rules that sales to the contractor are at wholesale, which may or may not imply that the contractor sells. Illinois has gone into great detail in taxing materials used by upholsterers (except tacks, glue, etc.), by fur and garment repairers (except buttons and thread), and by blacksmiths, but exempts materials used by sign painters, tire and tube repairers and vulcanizers, harness, jewelry and curtain repairers, by those performing greasing jobs and those printing on another's paper, and by automobile painters and refinishers. Oklahoma rules generally that when parts and materials are sold in connection with the performance of a service, the tax applies only in the event that a stock of such articles is kept for sale, and cites for example a doctor operating a drug store. New York, California, and Utah rely upon the form of the contract, declaring that where the labor and materials are furnished for a lump sum, there is no sale of the materials, these being taxed only if furnished for a distinct price. The analogous installation provision, previously referred to, includes fixtures, not salable independently. California, however, as has been noted, also declares (in another set of regulations) that the sale of parts and materials is taxable irrespective of the method of billing—the two sets of regulations being apparently inconsistent in this respect. New York and California, further, provide that hospitals are taxed on the sale of goods separately sold and that in the case of cost-plus contracts the percentage plus, although based on the cost of the materials and supplies, is in no case taxed, as it represents compensation for services. It is likely that at common law and under the Uniform Sales Act, apart from the sales of meals (as to which the cases are in sharp conflict), none of the transactions mentioned involves a sale of materials, etc., title to the property passing by accession rather than by sale. The dearth of text material or readily available case law indi-

576

PERSONS TAXABLE

cates the truth of the statement recently made that "no one would maintain that a bootblack is engaged in the sale of goods.""" Sales tax commissioners, however, apparently have so maintained. T h e usual legal significance of a sale is, of course, not necessarily embodied in a statute containing distinct definitions. " A n y transfer" or even "the transfer of title" may be construed, by disregarding case law, to include the bootblack and the garageman. It will, however, be difficult to distinguish between the barber who is uniformly not taxed and the garageman who is, or the repair man whose taxability depends on the words he has used. Five courses seem open to administrative officials. T h e first would be to define "sale" to include the transfer of any tangible personal property, irrespective of its character or quantity, taxing either the gross proceeds or the value of the goods. T h e second would be to rely on the customary practice of the trade in either segregating or including in a lump price the goods and services rendered, or to rely upon the nature of the particular agreement. A third possibility would be to declare generally that the transfer is taxable unless the goods are incidental to the service, and to settle each individual difficulty as it arose. Fourth, it would be possible to adhere to existing case law, exempting probably all these transactions. A fifth course would be to impose the tax only in the event that the seller represented himself as engaged in selling, independent of the service, the goods used in the particular case. Although each of these plans has had some recognition, complete consistency, probably the ultimate desideratum in these cases, is rare. PROPERTY

Having determined that the taxpayer is engaged in the required degree of activity and that the transaction in question constitutes a sale, the tax official must direct his attention toward ascertaining the nature of the subjects of taxable sales. The difficulties involved result from the necessity of distinguishing between, first, real and personal property, second, tangible and intangible personalty, and third, the foregoing and goods, wares, and merchandise, articles of commerce, or commodities. Real versus Personal Property.—A See Beecher (note 74, supra, p. 564), at iog.

wealth of common law prec-

PERSONS T A X A B L E

577

edent may be cited in this connection, including* cases involving, in legal category, taxation, the Statute of Frauds, descent and distribution, dower, priorities, liens, etc., and, factually, fixtures, mineral leases, perpetually renewable chattels real, crops, easements, licenses, riparian rights, etc. Necessity for the classification arises in several situations: in the determination of taxable sales in which the sale of personalty alone is subject to tax, or in which different rates are applicable, or in which sales at wholesale are defined to mean sales for resale in the form of tangible personal property. The New York regulations,103 containing the only administrative definition of the phrase, declare that realty consists of land, and improvements the removal of which would damage the freehold. Although there is no doubt that this factor is frequently determinative in fixture cases, certain chattels, removable without damage, may become real estate in accordance with the intent of the parties.10* Tangible versus Intangible Personalty.—More difficult is the distinction between tangible and other forms of personalty. The applicable statutory material is as follows: The Michigan law,101 which imposes the tax on sales at retail of tangible personal property, provides that such sales at retail include sales of electricity for light, heat, and power, and of natural and artificial gas. New York defines tangible personal property to mean corporeal personal property,108 while in the Oklahoma statute it is said to consist of goods, wares, or merchandise.10* The regulations contain several interesting provisions. In Oklahoma the statutory provision is explained only by stating that the terms tangible personal property and goods, wares, and merchandise have definite legal meanings.110 New York illustrates its definition of tangible personal property by referring to furniture, clothing, machinery, equipment, live stock, vehicles of all kinds, works of art, and everything which is neither real property nor intangible personalty.111 Pennsylvania 1 " and Illinois11* provide that tangible personal property means all goods, wares, merchandise and commodities of all kinds, and that intangibles are stocks, bonds, and promissory " • N . Y . Regs., Art. 5. ""Walsh, Real Property. ""Sec. 390 (d). ' " S e c . 4, n N . Y . Regs., Art. 5. , u Statement, p. 1. "•III. Regs., Art. 15, and Sp. R. 27.

' " S e c . 1 (b. 2). "*Okla. Regs., Sec. 5 (a).

578

PERSONS

TAXABLE

notes, etc.; Illinois further provides that tangibles consist of things that may be touched, felt, observed, are capable of being possessed or realized, and consist of substances that may be taken out of the ground and reduced to possession and conveyed by pipe lines or other means, measured and sold, and similar substances that may be produced mechanically, chemically, or otherwise and so conveyed and sold, including specifically electricity, gas, and water. Indiana has pointed out that bonds and notes are intangible. Pennsylvania has ruled that water, gas, and electricity, not popularly considered tangible personal property, are not within the scope of the statute. 114 New York 1 1 5 has illustrated the significance of intangibles by referring to book accounts, stocks, bonds, mortgages, notes, evidences of debt, theater tickets, dinner tickets, railroad and boat tickets, and admission tickets of all kinds. Apart from questions concerning property whose value is primarily attributable to the art involved in its production, the major difficulties seem to involve the status of ( a ) electricity, gas, steam, water, and air products, and (b) things which represent tangible personalty. (a) Although it requires no argument to establish that electricity, etc., are tangible in any reasonably comprehensive definition of that term, much can be said for the contention that a statute referring to sales of tangible personal property is not intended to include them. T h e decision reached in a particular jurisdiction will turn upon what evidence can be adduced concerning the actual legislative intent and, perhaps, the economic status and general tax liability of the particular litigant. (b) Bills of lading and warehouse receipts represent the title to specific ascertained goods; meal tickets, contractual rights to delivery, gift certificates, and trading stamps or coupons represent a right to obtain title to as yet unascertained goods. Although it seems clear that transfer of the latter right does not involve a sale of tangible personal property, the treatment to be accorded negotiation of documents of title presents some difficulty. Assuming that a financing agency in a particular jurisdiction is held to take more than a securiFormal Opinion N o . 75, A t t y . Gen.. N o v . i q , 1932. "* N . Y . Regs., Art. 5.

m

PERSONS

TAXABLE

579

ty title or that the division of property interests is not recognized, nevertheless, by the weight of authority, the transfer of a discounted bill of lading to the buyer does not constitute the bank a seller of the goods for purposes of contractual liability.116 It does not seem necessarily to follow that the bank does not sell for purposes of the sales tax: the phrases "any transfer in any manner," and "any transfer of title," cover a wide field. It is to be noted that by negotiation the bank may transfer for value an unimpeachable title to the goods to a bona fide transferee. Since the bank is clearly not engaged in selling goods, either as a business or in isolated transactions, if a sale is held to be present at all, the determination will refer to a sale of intangible personal property. Where the statute117 provides for a tax on tangible personal property (except bonds or other evidences of indebtedness or stock, or except bonds or stock), application of that distinguished phrase inclusio unius exclusio alterius might conceivably induce a holding to the effect that tangible personalty and intangibles not expressly excepted were taxable subjects of sale. 1 " Choses in action, franchises, patents, and copyrights are some of the forms of property that would be included. Certainly in a doubtful case in which, for example, an ambiguous oil lease contract seems to involve at the same time an interest in realty, a sale of oil, or an incorporeal franchise, the doubt might be resolved in favor of taxability. "Goods, Wares, Merchandise," etc.—Several statutes create classifications distinct from those included within tangible and intangible personal property. Indiana 118 imposes the tax on persons engaged in the business of wholesaling or retailing "tangible commodities." The taxing clause of Oklahoma120 refers to tangible personal property, consisting of "goods, wares or merchandise. . . ." The South Dakota statute 121 refers to the sale of articles and commodities of trade, commerce, and production; the rate clause specifies commodities or merchandise. Although "sale" in the North Carolina law122 is 116 Void (note 75, supra, p. 565), P- 33°' " A r i z . : Sec. 2 (d) ( 1 ) ; Miss.: Sec. 2 ( c ) ; W . V a . : Sec. 2 ( c ) . "" T h e statute, by including within the intangibles t o which the tax is not to apply only bonds or stock, etc., m a y be construed thereby to imply t h a t all other intangibles are excluded f r o m the exempt classification. " ' S e c . 3 (b) (c). Sec. 4. '"Sees. 1 (h), 2 (b). ' " S e c . 404 (4), (6), ( 7 ) . (9)-

580

PERSONS

TAXABLE

defined to include the sale of tangible personal property, the definitions of retail and wholesale merchants refer indiscriminately to articles of commerce and merchandise. The Uniform Sales Act defines goods to mean all chattels personal other than things in action and money, including emblements, industrial growing crops (i.e., which require cultivation, as wheat and cotton), and things, attached to the land, which are to be severed prior to sale.12* The Statute of Frauds provision, 124 however, refers merely to the sale of goods, or choses in action, although the analogous clause, existing prior to the Uniform Sales Act and in jurisdictions which have not adopted this act, covered goods, wares, and merchandise. The latter phrase was almost uniformly held to include securities.12® The term "goods" has generally been held to include foreign money, 136 tug boats, 127 and water supplied in pipes. 128 In the latter decision the court referred to water as constituting a commodity as well as goods. Finally, it has been held that a vessel is not an article of commerce.12® The possible distinctions between goods on one hand and merchandise on the other, between these two and commodities, and between all the foregoing and tangible personal property are likely to become important in such special cases as involve the sale of electricity, water, gas, steam, air products, vessels, foreign money, securities, fixtures, good will, animals, contraband goods, patents, copyrights, leaseholds, etc. T o illustrate: although a vessel is probably included in "goods," which has been said to be a term almost as broad as "personal property," it does not seem covered by the terms "commodities" and "merchandise"; electricity, although perhaps a tangible commodity, does not seem to be included in "merchandise." Y e t "merchandise" has been broadly defined to include any article of traffic bought and sold for a profit. 180 Patents and copyrights are incorporeal personal property, and although they are neither goods nor choses in action, they might conceivably be included in the term "articles of commerce." ,aSec.

,M Sec. 4 ( 1 ) . 76(1). I Wflliston (note 506, supra, p. 569), Sec. 67. m Idem, Sec. 66 (b). m Cf. Rivara v. Stewart, 119 Mic. 73, 195 N. Y . Supp. 841, Aff'd 241 N. Y . 259. 149 N. E. 851 (1922). 1K Canavan v. Mechanicville, 229 N. Y . 473, 128 N. E. 882 (1920). "" The Conqueror, 166 U. S. n o , 17 Sup. Ct. 510 (1897). ' " S e e Mellilz v. Sunfield Co., 103 Conn. 177, 129 Atl. 228 (1925). m

PERSONS

TAXABLE

SSI

DISTINCTION BETWEEN WHOLESALERS AND RETAILERS

Provisions of the Statutes.—The distinction between sales at retail and wholesale seems to turn upon either the disposition of the goods made by the buyer or the character of the business activity of the parties concerned. The statutory definitions group themselves accordingly. Pennsylvania181 and North Dakota" 2 define "taxable vendors [retail]" to mean persons who sell to consumers or to other persons for any purpose other than resale; the Oklahoma law 1 " refers to persons who sell for any purpose other than resale; Illinois144 provides for sales for use or consumption and not for resale in any form as tangible personal property; the language is slightly modified in New York,145 and California,14® where reference is made to sales to a consumer or for any other purpose than resale in the form of tangible personal property, and in Michigan,147 which speaks of a sale to a transferee for consumption or use or for any other purpose than for resale in the form of tangible personal property. The North Carolina law144 provides that a wholesaler is one who buys articles of commerce and sells to merchants for resale, a merchant being defined simply as any person subject to the tax. A sale for resale to one not a merchant, however, is taxed at the retail rate. A subsequent provision to the effect that a sale by a wholesaler to a nontaxable retailer is subject to the retail tax, seems to be merely repetitious. The statute also provides that the sale of mill machinery and accessories or the sale of machinery to manufacturing industries, and the sale of cotton and tobacco by any other persons than producers for processing or manufacture shall be at wholesale, and that the sale of articles in any quantity for any use or purpose other than for resale shall be at retail. Arizona defines a retail sale as one for use or consumption, and not for resale, and transposes the phrases to cover wholesalers. The remaining statutes rely either partially or completely upon the character of the vendor's or vendee's business. West Virginia149 and Mississippi140 define wholesaler to mean a person doing a regularly u,

Sec. Sec. "'Sec. "Sec. 1,4

2. 1. 1 (b. 1). 1.

m

Sec. Sec. '"Sec. ""See.

m

2. - S e c . 3. 390 (e). « S e c . 2 (c). 404, (3), (4), (S), (6), (7). 2 (c).

582

PERSONS

TAXALLE

organized wholesale or jobbing business, known to the trade as such, and selling only to licensed retail merchants or jobbers. West Virginia adds "or to others in wholesale quantities and at wholesale prices" but makes no express provision for retail sales. 141 In general, the statute provides for a tax on sales, and excepts therefrom sales at wholesale, to which a different rate is applicable. Washington, 1 " disregarding the character of the vendee, defines wholesalers or jobbers as persons doing a regularly organized jobbing business, known to the trade as such, or any firm doing a similar business as defined by the tax commission, and, in expressly imposing the tax on retailers, refers to "sales at retail or other than as a wholesaler or jobber." South Dakota 143 duplicates the Mississippi provision but includes, specifically, persons engaged in acquiring and assembling a commodity by purchase from others for purpose of resale and marketing or shipping the same in bulk, adding, however, that only such activities are covered as are "wholesale" in character as the term is ordinarily used or understood. The rate provision, unique in this respect, confines the wholesale tax to that portion of the business which comes directly into competition with similar interstate business.144 Retail sales and all other sales not included within the provisions for manufacturers and live stock dealers are covered by "any business" in the catch-all clause. Although Utah14® also substantially repeats Mississippi's language, it adds "for other wholesalers, for the purpose of resale" and in a subsequent clause excludes from the wholesale category "sales by wholesalers to users or consumers, not for resale." A retailer is defined as a person doing a regularly organized retail business in tangible personal property, known to the trade and public as such, and selling only to the user or consumer and not for resale. Retail sales, however, are also said to include all sales except wholesale sales. North Dakota, 146 providing conversely that all sales not made for resale are for use, also deals, as does Utah, with the subject of sales of materials to manufacturers. The former declares that all such sales are for use, the latter that they shall be deemed at wholesale, including the container, labels, and shipping cases used. The Indiana statute defines neither of these terms. 143 Sec. 1 (h). Sec. i. '"Sees, i (Q) ; 2 (2) (d). Sec. 2 (b). For a discussion of this point see infra, p. 594. ' " S e c . 2 (c), (d), (e), (f). , 4 , Sec. 3.

141

144

PERSONS

TAXABLE

583

Disposition Test.—Turning first to the problems involved in administering the "disposition" test, one finds the following classification helpful: 1. Cases in which the expressed intent of the purchaser at the time of sale, relating to the disposition expected to be made, differs from the actual event. 2. Cases which concern the necessity for, or the essential characteristics of, a subsequent transfer of possession in determining whether a particular purchase had been for use or for resale, (a) The article is consumed in the production of another commodity, without becoming a part thereof (such as coal used by a manufacturer), in the sale of a commodity (such as electricity in a retail store), or is "used" over a period of time in either production or sale (such as the use of machinery or fixtures), (b) The commodity is resold as a chemically identifiable ingredient in the thing sold {e.g., perfume in soap), as a severable part of the article sold {e.g., bumpers on a car), or in a different form or shape, but with the same chemical constitution {e.g., logs resold as lumber). 3. Cases in which, although the transfer of possession is not disputed, it is not clear that there is a resale, (a) The article is used and then only technically resold in a transaction in which the vendee neither uses nor resells the article (as, for instance, shipping cases "sold" by a manufacturer [shipper] to a wholesaler, or by a wholesaler to a retailer), (b) It is transferred for a consideration not definitely linked with the transfer (as in the case of check books or premium merchandise) or given away to induce sales or to create good will (such as the giving of samples, gift offers, etc.). (c) The article is first used and later resold for further use. (d) An article is resold in a non-taxable transaction. The regulations, many of which have dealt in detail with these problems, and the appropriate statutory material are analyzed below in connection with each of the indicated subdivisions: 1. California, 1 " New York,148 and Illinois149 have ruled that in cases in which a purchaser executes and delivers a certificate of resale to his vendor but subsequently consumes the property in" 7 N. Y. Regs. Applicable to Calif., p. 6, 7. N. Y. Regs., Arts. 9, 10. "* 111. Regs., Sp. R. 23.

584

PERSONS TAXABLE

volved, the sale for resale, which has now become a sale for consumption, is, nevertheless, taxed to the purchaser, conclusively presumed to have sold at retail, and not to the vendor. It follows that, if at the time of the consummation of the sale the purchaser intended to consume the commodity but subsequently decided to sell, the initial transaction nevertheless involved a retail sale. Whether statutory authority can be found for imposing a retail sales tax upon a consumer or upon one who has sold for resale is a difficult question to answer. The rulings made, however, do indicate, and no other interpretation seems possible, that the taxable status of the transaction must be determined as of the date of its consummation. Generally speaking, the intent of the parties will be clearly established by the business activity involved. In New York and Pennsylvania, for example, where the retail tax is applicable to isolated sales, the problem is more difficult. 2 (a). Since the statutory distinction is between sales for resale and all other sales, it seems clear that these transactions are retail, and the relevant administrative rulings have uniformly so indicated. New York, 150 California, 151 Illinois," 2 Pennsylvania, 153 and Michigan" 4 have declared, in effect, that articles consumed in manufacturing, producing, or processing (so-called "expendable production items") are sold at retail to a consumer, even though utilized in the production of a commodity for sale. Although the North Carolina statute, as has been pointed out, restricts sales at wholesale to those made to merchants (sales taxpayers) for resale, the tax authorities have announced their intention to disregard this provision and to rely entirely upon their determination in each case as to whether or not the sale is made in a wholesale manner, at wholesale prices, on a wholesale basis, in wholesale quantities, in competition with distinctive similar products in the state of the seller and in other states, etc. 155 The sale of parts to operators of fleets of four cars or less is at retail, taxed at 3 per cent; when five or more cars are operated, however, the transaction is subject to the 0.04 per cent wholesale tax. The specific provision for application of N. Y. Regs., Art. 20. N. Y. Regs. Applicable to Calif., p. 12. 111. Regs., Art. 2. Statement, p. 2. ' " M i c h . Regs., p. 5. F o r the confusion resulting f o r a time over this question, see supra, p. 257. Releases, Sales Tax Division, D e p t . of Revenue, J u l y 11, 1933.

PERSONS T A X A B L E

S8S

the wholesale tax to the sale of machinery and accessories to manufacturers has been somewhat vaguely construed to include all articles of merchandise used in manufacturing industries as part of their operation and connected therewith. Some extra-legal justification may be found for these more or less obvious violations of the statute by way of an inference of legislative intent drawn from the reason for the distinction between wholesalers and retailers and the disparity in rates. If this reason is conceded to be the relative mobility of the former and the ease with which they may deprive the state entirely of revenue by shifting their locale to a neighboring state, the same reason is applicable to all those "doing business in the wholesale manner" irrespective of the purchaser's disposition of the goods. Since the question is an open one in many states and since application of the retail tax to manufacturers of machinery and other large-scale business activity has encountered much aggressive opposition,15* the argument, tenuous as it is in comparison with the relative unambiguity of the phrase "for consumption and not for resale," is worthy of consideration. Thus chemicals used in treating a commodity composed of resold ingredients might conceivably be said to be for resale. The provision in the Utah statute which renders manufacturers' purchases of ingredients or component parts of their finished product sales at wholesale will probably be construed to render the purchase of "expendable production items" taxable at the retail rate by reason of the express reference to "resold" ingredients. The distinction, generally clear, between an article resold as an ingredient and one completely consumed is troublesome in connection with the sale of seed, feed, chemicals sprayed on fruits and crops, and other substances, similarly used for their effect on production, which remain as an unessential ingredient. Since the question has apparently been made to depend upon the physical presence of the substance in the resold article, chemical analysis, a novel device, perhaps, to be used in classifying taxpayers, should be determinative. Of the jurisdictions applying the "disposition" test, Illinois, 1 " the Supra, pp. 233, 237, 257. Regs., Sp. R . 19, 60. New Y o r k ( N . Y . Regs., Art. 29, and p. 4.5) has ruled that a sale of feed for animals is taxable; but this ruling was in connection with the extent of the food exemption, and did not specifically discuss the problem here considered. mIU.

586

PERSONS

TAXABLE

only state which has officially passed on any one of the foregoing questions, has ruled that the sale of feed for use in feeding live stock or poultry which are used exclusively for marketing purposes is at wholesale, but that in case the live stock or poultry are employed or consumed for any other purpose the sale is at retail; the sale of seed for use in growing agricultural products is at retail. More recently, it has been decided in Illinois that hatcheries or baby-chick producers who sell their products "for home consumption or for use in producing eggs" are subject to the tax on the receipts so derived. No inconsistency has apparently been observed between this ruling and that which renders non-taxable the sale of poultry feeds for use by the purchaser in producing poultry and poultry products "for market exclusively...." If this latter regulation be on the theory that the feed so used becomes a part of the finished product and is therefore resold (and no other theory seems tenable), it is difficult to understand the justification for holding that the chicks do not similarly become part of the eggs. The fact that the production "for market exclusively" in the ruling on poultry feed is omitted in the regulation for baby-chick producers renders barely possible an interpretation which confines the latter ruling to production for consumption by the producer and thus avoids the difficulty. Informally, officials of Arizona158 and Oklahoma"® have respectively indicated that the sale of hay feed to packing houses for live stock and of feed to dairymen is at retail; sales of feed to poultrymen and dairymen are held not taxable in California,180 however, as being at wholesale. Whether feed is consumed in production or resold as an ingredient in the finished product seems to defy analysis; not chemically indentifiable in the thing sold, this commodity seems according to one view to be incorporated within the article sold, and in another, to be consumed in its production. The problem becomes still more difficult when the animal fed is used for breeding or hatching purposes. In this respect, it is likely that the Illinois distinction is a sound one. Although, biologically speaking, it might be contended that agricultural products are simply grown seed, whence the latter is clearly purchased for resale, the loss in identity is likely to be sufficient to sustain a finding that the seed is consumed in production. The purchase of live stock for fattening ""Interview with tax official. ' " I n t e r v i e w with tax official.

'"Interview with tax official.

PERSONS T A X A B L E

587

and sale seems to involve a wholesale transaction: the animal purchased clearly "goes into" the finished product. With respect to the status of chemicals and other substances used as referred to above, a diversity of administrative views is probably to be expected. It is to be noted that the situation involves a final use by the grower or manufacturer followed by a technical resale of a substance which the purchaser would as soon be without. This problem, apparently identical with that involved in the use of containers, is hereinafter considered.161 Since there seems to be a more intimate connection between an article and a commodity consumed in its production than between that article and one used in its distribution, there is a possibility that an administrative tribunal or a court, seeking to exclude as many large-scale "mobile" businesses from the operation of the tax as possible, will hold that while the latter instance involves a retail transaction within the meaning of the statutory provision "for use and not for resale," the former is so closely tied in with the resold commodity as to require a different result. Although the administrative rulings which have distinguished between commodities consumed in production and those resold as ingredients are not directly applicable, there is little doubt that in general they will be construed as if they were and so enforced. A distinction might conceivably be drawn between a machine which, with respect to each particular resale, is not appreciably "consumed" and coal, for example. New York 102 and California, 163 however, provide in detail that machinery, tools, bolts, and other equipment, furniture, fixtures, supplies, stationery, etc., when sold for use in factories or business establishments, are "consumed" and not "resold." 2 (b). What has already been said seems sufficient to indicate that all the transactions in this group involve sales for resale. It may be suggested, however, that the exigencies of a particular situation might well give rise to a need to tax some, but not all, transactions of the character indicated. It would then be by no means impossible to defend an argument that "sale for resale" referred only to businesses which are non-productive in a physical sense; jobbers, for example. Infra, p. 588. N . Y . Regs. A p p l i c a b l e t o C a l i f . , p. 1 1 .

"= N . Y . R e g s . , A r t . 18.

588

PERSONS

TAXABLE

3 (a). This problem has been dealt with officially in New York, 1 " California,Utah, 1 «* Illinois,1"7 and Pennsylvania. 1 " In the first two, containers which reach the possession of the ultimate consumer, as, for example, tooth-paste tubes, cans, wrapping paper, bottles, etc., are sold by the consumer's vendor, and hence are not taxed when sold by the maker of the tubes, etc., to the manufacturer. On the other hand, shipping cases, cartons, burlap bags, etc., which do not reach the possession of the ultimate consumer, but are used by the immediate purchaser {i.e., the manufacturer or producer) are sold at retail to him. It will be noted that in the former case the sale of the wrapping paper or container along with the goods it encloses is taxed (i.e., sale of wrapping paper, along with the groceries it encloses, by retailer to ultimate consumer), whereas in the latter case an exactly similar sale (sale of packing case, along with the groceries it encloses, by manufacturer to retailer) is not taxed. Yet the cost of containers seems to be just as clearly included in the manufacturer's sales price in the latter example as it is in that of the retailer's price in the former example: in both cases the final use is followed by a technical sale of that which the purchaser does not use. Here, a distinction may perhaps be made between clothes boxes or wrapping paper on one hand, and tooth-paste tubes on the other, in the latter case the container being quite definitely used by the consumer. If the theory of the New York commission is to be accepted, i.e., that a final use followed by a technical transfer of title does not result in a taxable sale, consistency seems to require that the sale of wrapping paper be taxed to the retailer's vendor although containers used by the consumer may justifiably be otherwise treated. Package inserts, including advertising material and direction sheets, are similarly considered to involve a final use by the producer, although a technical resale is involved. Although under the Utah statute sales of packing cases, etc., to manufacturers are at wholesale and exempt, the tax commission has adopted the New York ruling on the question of containers to which the ultimate consumer obtains title. The difficulties introduced by the fact that the consignee may either consume the packing cases or resell them for their junk value are 1,4

N. Y. Regs., Art. 16. ' " U t a h Regs., Art. 11. ' " S t a t e m e n t , p. 2.

,M

N . Y. Regs. Applicable to Calif., p. 7. "'111. Regs., Sp. R. 1.

PERSONS TAXABLE

589

considered below in connection with cases in which the purchaser's use is followed by a resale. In respect to stationery, commercially used, the final use is similarly followed by a transfer of possession which must necessarily be for a consideration. The cases seem to indicate fairly clearly that title to the letter or document passes to the recipient, although the particular juxtaposition of words or style remains the property of the author. The significance of this proposition, of course, varies with the mobility of large stationery houses. A general exodus of these concerns might well induce a holding that the maintenance of a business office involves the sale of stationery. A different approach has been adopted in Illinois. The authorities have ruled that a sale of containers to a purchaser for use in connection with a service or with the sale of tangible personal property is to be deemed a sale at retail unless the purchaser, in selling, makes an extra charge for the container either as a separate item or as a part of the sales price. Since the reference is to the purchase of containers (in contrast to the purchase of containers plus contents) followed by resale in connection with the sale of a commodity, it seems clear that the sale of bottled goods, for example, by a manufacturer to a wholesaler, is a sale of the bottles at retail when an extra charge is made for the bottles as part of the sales price, although the wholesaler, in reselling, likewise makes an extra charge. Moreover, since the cost of production is generally included in the sales price, it is difficult to conceive of situations in which either the original purchaser of the containers or the tax authorities will be able to establish that a separate charge is, or is not, made and included in the price. Although price and shipping tags, advertising matter, labels, and name plates may be included in that group of commodities which is used and then transferred, a like rule is not applicable. It is held that these articles are purchased at retail by the vendor of the property involved, for the reason that they do not form an integral part of the property sold. Tooth-paste tubes seem to be an integral part of the tooth paste sold, although the regulations, treating containers indiscriminately, apparently have reference to transactions in which the container is not sold, this perhaps being the inference to be drawn when no separate charge is made. Pennsylvania has solved the difficulty by providing that its retail

590

PERSONS

TAXABLE

tax does not apply to the sale of containers used in packing or shipping goods made or sold by the buyer. An ice-cream vendor, for example, presumably sells to his ultimate consumers the cartons and paper bags used, even though a separate charge is not made. It would seem to follow that a shipper is taxed on the packing cases he uses, when these are retained by the consignee. The regulations must, of course, comply with the relevant statutory provisions. Since there is little doubt that in all the cases referred to a transfer of title to tangible personal property for a consideration is present, there seems to be no substantial justification for the distinctions drawn and classifications introduced in California, Illinois, New York, and Utah. It should be borne in mind that the Pennsylvania rule, consistently applied, involves not only the question of taxation of the sale of packing cases to the shipper but of stationery, chemicals, and other substances used as indicated above, to the person generally thought of as the purchaser for consumption. The resulting exemption of the manufacturers of these articles is probably in accord with the clear, if unexpressed, intent of most of the statutes to tax appreciably only those businesses confined to a local market. 3 (b). In cases in which tangible personal property is apparently given away, such as check books, premium merchandise, prizes, etc., it seems fairly clear that there is again, from the legal point of view, a transfer of title to property for a consideration. Check books are "given" in return for the deposit of money; merchandise, for the purchase of a certain amount of goods and preservation of the premium certificates; prizes, for the particular competitive activity involved, etc. Even under the more restricted definition of "sale" contained in the Uniform Sales Act, which refers to a transfer of title to personal property for a consideration called the price, and which provides that the price may be made payable in any personal property, there are clear indications that this distinction is between real and personal property and not between personal property and services or any other form of consideration.109 The New York regulations, however, hold that an organization employed by banking institutions to give away clocks, leather wallets, etc., for the purpose of stimulating new ac'""Williston (note 89, supra, p. 569), at p. 317.

PERSONS

TAXABLE

591

counts is the ultimate consumer of these articles. 170 That there is literally a transfer in any manner or by any means whatsoever for a consideration {e.g., the opening of a new account) seems too clear for argument. It might, however, be pointed out that the indicated ruling probably stems from the attitude of the New York officials toward situations in which the transfer of title to goods is not motivated by the receipt of the sales price, previously referred to in the case of containers. When a manufacturer gives away samples and receives in return no legal consideration of any sort, it would seem clear that a resale is not involved and that his purchase is at retail. In New York it appears that if a manufacturer purchases certain materials on a "resale" basis, but subsequently uses some of such materials to make up samples given away gratis, he must pay the tax on the fair retail selling price of the materials so used.171 T o be distinguished here are situations in which, a new article having been sold, a defective part is subsequently replaced by a new part; since the consideration for the replacement must be the original sales price, only one taxable sale seems to be involved, and the New York commission has so ruled. 172 3 (c). Although many activities seem to involve a sale for use followed by a resale of the used commodity at its junk value or for further use, the statutes seem not to have provided for such cases. The purchasers of machinery, vehicles, equipment of all sorts, fixtures, etc., contemplate use and resale. The statutes refer to sales for use or for any other purpose than resale. The existence of a twofold purpose seems clear. The solution of the difficulty appears to lie in discovering what would have been the intent of the legislators had the matter occurred to them. It is likely that both sales will be held to be at retail: "use" seems to imply a gradual deterioration and hence, perhaps, to contemplate resale at the reduced valuation. Interesting at this point are rulings in New York17® and Illinois 174 which have indicated that the sale of demonstration cars to salesmen followed by resale when the particular model has outlived its " • N . Y. Regs., p. 36. Interview with tax officials. This is, of course, merely an example of the resale c e r t i f i c a t e p r o b l e m . S e e supra,

N . Y. Regs., p. 36. "'111. Regs., Sp. R. 35m

p p . 583-84.

" ' N . Y. Regs., p. 36.

592

PERSONS

TAXABLE

usefulness involves two retail sales. The second sale is held exempt in Illinois, however, as an occasional or casual transaction. Similar considerations might be held applicable to the use by shippers of packing cases, followed by a transfer of title to the consignee. If the latter customarily resells the cases for their junk value, the shipper originally purchases at retail and sells at wholesale; if the consignee destroys or uses the cases, the shipper both purchases and sells at retail. 3 (d). The statutes in California, Illinois, Michigan, and New York and the regulations in Pennsylvania indicate that the resale of tangible personal property in any other form than as tangible personal property brings the prior sale within the retail category. This proposition applies to cases in which the property is used in the erection of a building, in the installation of such fixtures as are in their nature or by reason of the parties' intent real property, or in which the property is used in the production of personal property, not included within the local definition of tangible personal property, as, for example, gas or steam in Pennsylvania. Commodities utilized in the production of exempt articles are probably, nevertheless, purchased for resale, unless there is a provision, as in North Carolina, for taxing at retail a sale for resale to a non-taxable retailer. In jurisdictions which do not refer to a sale for use and not for sale in any other form as tangible personal property, there is no certainty that the Pennsylvania position will be followed. A sale for resale in the form of realty might well be held at wholesale. The argument for this view is strengthened by the inference to be drawn from failure to make the express provision thought essential elsewhere. Test by Character of Vendor's or Vendee's Business.—In the second group of statutes, which rely on the character of the vendor's or vendee's business for the distinction between wholesale and retail sales, the problems, although less complex, are likely to be troublesome in many cases. It will be recalled that the Indiana statute defines neither wholesale nor retail. The tax authorities have issued the following definitions: 1 " A jobber is one who buys and sells in bulk to dealers. A wholesaler is one who, dealing in merchandise, '"Inf. Bull., Q. 10, II, 12.

PERSONS TAXABLE

593

sells in large parcels, generally in original packages, bought or purchased from the producer or manufacturer, and whose sales are to jobbers or retail dealers. A retailer is one who, dealing in merchandise, sells to the consumer usually in small packages or in quantities smaller than those in which he buys. The reference to merchandise is unfortunate in view of the fact that the statute, in imposing the tax on wholesalers and retailers, covers tangible commodities and in view of the strong possibility that the two phrases may include different articles. With respect to the definition of jobber, the reference to dealers, which has been held to signify persons who buy to sell again, seems to result in the adoption of the more conventional definition: a sale for resale. Although the sale must be in bulk, the common practice in many lines for jobbers to sell to retailers in quantities of three and six probably deprives the word of substantial significance in this connection. But when sales are made in relatively large quantities to consumers, it is likely that the phrase will cause the transaction to be considered wholesale, even to the extent of controlling an apparently contrary implication arising from the term "dealers." The sale of coal to a manufacturer, who is certainly not a dealer in coal, will probably be construed as wholesale. This seems to follow from the definition of retailer, for although the coal dealer is likely to sell to manufacturers in smaller quantities than those in which he buys, he certainly does not sell in small quantities, and hence cannot be considered a retailer. On the other hand, however, it should be noted that the rule applied in the first group of jurisdictions could easily be enforced in Indiana in complete consistency with the regulations. The South Dakota regulations176 duplicate the Indiana definition of wholesaler and jobber (adding to the former "or to the state or its legal subdivisions in wholesale quantities"), although the statute contains a detailed and substantially different definition. There is no doubt, of course, that the statute controls. The reference made to the assembling of articles for sale, which is in many cases apparently indistinguishable from manufacture, is not of particular importance in view of the restriction, immediately following, that this activity is included only when wholesale in character "as such term is genS. D. Regs., Q. 13, 14, is, P- 13-

594

PERSONS

TAXABLE

erally used and understood." The definition of this term and of "regularly organized wholesale business known to the trade as such," utilized in Washington, Mississippi, and West Virginia, as well as in South Dakota, will necessarily involve a more or less arbitrary discretion on the part of the tax commissioner. The specification previously found helpful in West Virginia, but dropped from the present law, to the effect that if they are to be included at least one traveling salesman must be employed by wholesalers to bring them within this category, has apparently received no further recognition. The express discretionary authority given to the tax commissioner in Washington, 177 limited by use of the word "similar" (see page 582 above), is not likely to add much to the discretion involved in interpreting "regularly organized" and "known to the trade." In connection with the requirement, contained in the South Dakota, Mississippi, and West Virginia laws, that sales at wholesale be made to licensed or registered retailers, it will probably become important to determine which activities may lawfully be included within the retailers' license tax, a problem probably not hitherto particularly pressing. The Mississippi tax commission has announced in an official opinion that a retailer sells for consumption or use. 178 It is held, however, that a sale of groceries in large quantities to a planter who apparently resells for consumption is not a sale at wholesale, since the planter, though he pays a license tax, is not a licensed retail merchant. 1 ™ There remains to be considered the restricted applicability of the low wholesalers' rate in South Dakota to those businesses "which come directly into competition with similar interstate businesses." Questions will arise here as to whether the commodities sold must be identical or simply capable of being substituted one for the other, as in the cases of different types of meats, confections, etc.; whether a wholesaler and manufacturer of the same commodity are directly in competition; whether the competition must be partial or entire, and, if partial, whether allocation is essential, etc. " ' S e c . 1 (9). " " L e t t e r to Leigh W a t k i n s , J r . , State T a x C o m m . , Sept. 27, 1 9 3 2 , filed in office of State T a x C o m m . , J a c k s o n , Miss. " " L e t t e r to A. H . Stone, State T a x C o m m . , Oct. 3 1 , 1Q32, filed (note 178, supra).

PERSONS

TAXABLE

595

MANUFACTURERS

In the six states which provide a distinct rate classification for manufacturers and in North Carolina, which specifically exempts manufacturers' sales from its wholesale and retail sales tax, difficulties will be encountered in distinguishing between manufacturing and other activities not specifically covered elsewhere in the statutes. The provisions applicable to manufacturers are identical in most respects, but contain several interesting variations. Provisions of the Statutes.—Indiana,180 Mississippi, 181 and Washington 182 impose this tax upon every person engaging or continuing [within the state (this phrase is not included in the Indiana provision)] in "the business of manufacturing, compounding or preparing for sale, profit or use, any article or articles, substance or substances, commodity or commodities." The West Virginia 183 law goes along with this language as far as "use," referring, however, to "commercial use," and then adds "either directly or through the activity of others in whole or in part, any article, substance or commodity . . . [plurals omitted] or electric power not produced by public utilities taxable under other provisions of this section." The South Dakota statute" 4 substantially duplicates the former provision, adding, however, "processing" to "manufacturing, compounding or preparing," and defines the term "manufacture" in a distinct provision. This clause virtually copies the rate provision as far as "use" and adds "either as a finished or partly finished product, any article, substance, product or commodity, the production of which the manufacturer is [jfc] calculated for sale at wholesale or for further processing and manufacture." 185 Substitution of "has" for "is" seems necessary to give this latter clause a clear meaning. The Arizona provision186 is substantially different from all the foregoing, and refers to every person engaged in the business of "manufacturing, compounding, packing, preserving, processing or preparing for sale, profit or commercial use, agricultural and horticultural products, including livestock grown and produced for sale, profit or commercial use and any product article, substance, commodity . . . [plurals omitted] not inSec. 3 (a). Sec. 2 (b). ' " S e c . 2 (a).

' " S e c . 2 (b). ' " S e c . 2 (a).

" S e c . 2 (2) (b). ' " S e c . i (i).

PERSONS

596

TAXABLE

eluded within . . , (c)." The latter reference is to the provisions covering mining, quarrying, smelting, producing oil, natural gas or other mineral products, compounds or combinations, and felling and producing timber.187 The North Carolina188 exemption is as follows: "It is not the purpose of this section to impose a tax upon the business of producing, manufacturing, mixing, blending or processing any articles of commerce. . . ." The relatively few regulations issued in connection with this problem will be considered where relevant to the discussion. The inquiry seems to resolve itself into a consideration of whether particular activities are included, without reference to analogy or rational classification. Although the cases are crowded with general definitions, none is particularly helpful. That adopted in the Indiana regulations189 and virtually duplicated in South Dakota 190 is typical: A manufacturer is "Any taxpayer who is engaged in the business of fabricating raw material by hand, art or machinery into forms, convenient for use or engaged in the business of producing things, articles or objects from matter which has already been subjected to artificial forces or to which something has been added to change its natural condition." Although the above definition admirably covers the manufacture of cigarettes or shoes, it seems to include also landscape painting and restaurants (fabrication of raw or processed materials into forms convenient for use). Examples oj "Manufacturing" as Shown by Court Decisions.— A fairly representative list of activities which have been troublesome in the enforcement of other tax statutes containing a reference to manufactures is as follows: refining, pasteurizing, preserving fruit, evaporating fruit, kiln drying, cleansing, bleaching, dyeing or finishing fabrics or a combination of these, purchasing in bulk, repacking and selling in containers, roasting coffee, assembling the component parts of machines or other objects involving little or no adjustment or substantial alteration, canning, blending coffees or teas, felling timber and selling it as crude logs, cutting up and selling natural ice, preparing floral decorations, operating bakeries and restaurants, compounding prescriptions, producing artistic works (painting, sculp,81

Sec. 2 (c) ( i ) . "'S. D. Regs., Q. 12.

""Sec. 404 (9).

" I n f . Bull., Q. 16.

PERSONS

TAXABLE

597

ture, etc.), publishing, job printing, constructing roads, buildings, bridges, or ships, slaughtering and selling live stock, generating or producing and selling electricity, gas, steam, or water (the last involving, perhaps, various purification processes), crushing or processing extracted minerals, manufacturing another's materials, and the leasing or holding of stock by a holding company in a concededly manufacturing business. Although the cases previously referred to are not determinative, even in the jurisdiction in which decided, both because of the difference in the wording of the respective statutes (manufacture, alone, was referred to, not compounding, preparing for sale, processing, blending, etc.), and because of differing policy considerations (the issue generally involved a statutory provision for the exemption from taxation of property employed in manufacturing, for the purpose of encouraging this activity), a brief reference to several of the decisions may be interesting. It has been held that the roasting of coffee, refining of sugar, and preservation of fruit involve manufacturing, but that the pasteurization of milk and the cleansing, bleaching, starching, and smoothing of fabrics do not; and that those assembling staves into barrels, involving a heating process, or assembling parts of umbrellas, requiring cutting, slotting, and grooving, are not engaged in manufacturing, although those engaged in assembling the parts of fountain pens, demanding skilled labor and processing, are so engaged. Under the Federal manufacturers' excise tax, it was held that the purchase in bulk of cold cream and sale in small bottles constituted manufacturing, although a state court thought otherwise as to spices and baking powder. The small baker and retail seller of bread does not manufacture, although the larger cracker, cake, and bread concern does. The cutting and sale of natural ice does not involve manufacture, although preparation of artificial ice does. The preparation of asphalt compounds, used in paving, and the erection of bridges are held to require manufacture; the publisher of books and the job printer are manufacturers, but the publisher of a newspaper is not a manufacturer; the making of suits to order is not a manufacturing process, even though sixty employees are kept and machines used; generation of electricity is not manufacturing, but production of illuminating gas is; quarrying and crushing stone,

598

PERSONS

TAXABLE

constructing a ship, and collecting and furnishing water do not involve manufacture, nor is the lessor of a factory or a corporation holding its stock a manufacturer. 1 * 1 The significance of the variations in the statutes noted above is not always clear. The West Virginia reference, however, to electricity not sold by a public utility and to operations by or through the activity of others (lessors, holding companies?); the mention of "processing" in South Dakota, of packing and preserving agricultural and horticultural products and live stock growing in Arizona, and of mixing or blending in North Carolina will solve in each case several difficulties, elsewhere troublesome. The ubiquitous reference to "preparation for sale" will probably be generally disregarded, since it is difficult to conceive of any activity involving the sale of personal property which it does not include. It should be pointed out that the express provisions for mining, and light and power and other utilities in Washington, Mississippi, West Virginia, and Arizona leave those particular issues important only in South Dakota. The Washington1®2 provision for publishing and the fact that the rate applicable to manufacturers and wholesalers in Indiana and South Dakota is the same should also be noted. Provisions of the Regulations.—The regulations may be briefly disposed of. In Mississippi the crushing of oyster shells and processing of other by-products of a canning factory, kiln drying, and the assembling and bolting of wagons (for the purpose of determining what manufacturing occurs after the effective date of the statute) constitute manufacturing. 193 The making of sandwiches, compounding of prescriptions,1®4 installation of water and heating systems, preparation of trimmings by undertakers195 and of floral decorations by florists, and the cutting of lumber into different lengths19® are all held to be included within the broad language of the North Carolina exemption. In Indiana, laundries, dry cleaners, and job printers dealing directly with the consumer are taxed at x per cent, apparently 10 A. L . R . 1273 ( 1 9 2 1 ) . " " S e c . 2 (2) (ec). ** Letters to B a y V i e w Crushing C o . , J u l y 14, 1932, J. A . M i n n i c b , J u l y 14, 1932, L i n d s e y W a g o n C o . , A u g . 8, 1932, filed (note 178, supra, p. 594). " N . C . Regs., Rule 1 1 . ' " R e l e a s e s b y Dept. of R e v e n u e , J u l y 12, 1933. '•"Releases b y D e p t . of Revenue, A u g . 1, 1933. m

599

PERSONS TAXABLE

being included either within the retail provision or within the provision applicable to "any business," but newspaper publishers, laundries, and dry cleaners selling "indirectly" are taxed at 0.2 5 per cent, which brings these activities within either the manufacturing or wholesaling provisions. 197 The Indiana rulings, it will be observed, are not very clear. Most of the controversial questions seem to have been left untouched. Some order may be introduced into the apparent chaos of many apparently unrelated problems by distinguishing between those difficulties which are more or less questions of degree, e.g., the roasting of coffee and pasteurization of milk, the assembling of automobiles and of umbrellas, etc., and those which are, perhaps, questions of kind, e.g., the generation of electricity, the supplying of steam, water, and gas, and painting, publishing, etc. There seems to be no substitute, with respect to the former, for the exercise of a fairly arbitrary discretion by the tax authorities, limited only by the respect due to the wording of the particular statute. As to the latter, it is likely that in most cases they will be excluded from the scope of a provision for manufacturers in accordance with the popular understanding of the term. MINING, LOGGING, AND FISHING

Provisions of the Statutes.—The statutory provisions are as fol1 8 lows : In West Virginia * the tax is imposed upon every person engaged within the state in the "business of producing for sale, profit or commercial use any natural resource products." Distinct rates are provided for coal; limestone or sandstone, quarried or mined; oil; natural gas; blast furnace slag; sand, gravel or other mineral product, not quarried or mined; timber; and other natural-resource products. The Washington law 199 reaches every person engaged in "the business of mining and producing for sale, profit or use any coal, oil, natural gas, metals, limestone, sand, gravel or other mineral products and/or felling and producing timber for sale, profit or use and/or seining, trapping or catching fish, shell fish, or other sea foods or products for sale, profit or use"; a reference is also made to "all other extractive products not herein covered or mentioned." 400 In ' " I n f . B u l l . , Q . 5 8 , 59-

'"Sec.

2

'"Sec.

"Sec.

2 (2)

2 (2)

(a).

(a). (a)

(vii).

600

PERSONS

TAXABLE

Indiana the rate .provision applicable to manufacturers also includes "the business of mining and/or producing for sale, profit or commercial use any oil, natural gas, stone, coal, sand, gravel or other mineral product, or felling and producing timber for sale, profit or commercial use." Arizona201 provides for a tax on "Mining, quarrying, smelting or producing for sale, profit, or commercial use any oil, natural gas, limestone, sand, gravel, copper, gold, silver or other mineral product, compound or combination of mineral products, or felling and producing timber for sale, profit or commercial use." The Mississippi 202 provision, practically the same as that contained in the Indiana law. is hereby quoted in so far as is necessary to indicate the minor variations, which may quite possibly become significant: "the business of mining and producing . . . any oil, natural gas, limestone, sand gravel, or other mineral product, or felling and producing timber " Failure expressly to cover these activities, of course, does not mean that the income derived is exempt. There is no doubt that they are included within the "any business" provision of the South Dakota law203 and, in all probability, within retail and wholesale sales taxes. The North Carolina law, 204 however, specifically exempts the sales of products of "forests or mines when such sales are made by the persons or members of their immediate families or by employees forming a part of the organization of persons who produce such products in the original state or condition of preparation for sale," but says the tax "shall apply to the resale of such products." The Oklahoma statute, 2 " 5 in a superfluous provision, exempts "the sale of oil, gas, or other minerals for resale and/or for manufacture and resale." Although the language of these statutes seems to be relatively clear and easy to apply, some difficulty may be found ( a ) in defining precisely the substances to be included within other mineral, natural resource, or extractive products and ( b ) in outlining the distinction, if any, which is to be made between minerals on the one hand, and mineral products, compounds, and combinations on the other, or between mining, producing, mining and producing, and mining and/or producing. Sec. 2 ( c ) ^ Sec. 4°S-

(i).

!0! 301

Sec. 2 ( a ) . Sec. 5 .

103

Sec. 2 ( e ) .

PERSONS

TAXABLE

601

Treatment of Unspecified Minerals, etc.—Although a reference to mining or to minerals does not clearly include oil, gas, stone, or other products of openwork activity, all the statutes specifically cover these substances. Whether mineral "products" include processed ores, etc., implicit in the inclusion of blast furnace slag in the West Virginia provision, will be considered in connection with the discussion of the significance to be attributed to "producing." The West Virginia provision for "other natural resource products" is not technically inconsistent with the exclusion of agriculture, horticulture, and grazing from the tax which the statute imposes on the sale of tangible personal property, since the former tax is on production and the latter is on sales. It is not likely, however, that a production tax on agricultural products was intended. Yet the activities to be included within agriculture, horticulture, and grazing are by no means clear, as, for example, poultry raising, landscape gardening, fur trapping, etc., and since these are undoubtedly covered by "natural resource products," if that phrase is not to be narrowly limited by its context, the distinction between the sales of natural-resource products, which are taxed, and sales by persons engaged in agriculture, horticulture, and grazing, which are exempt, may prove troublesome. The similarly broad reference to "other extractive products" in the Washington statute is especially important in view of the fact that the provision taxing those engaged in "growing or raising . . . any article, substance, commodity, product, or crop" was vetoed.206 "Extractive" has been defined to include "agricultural, pastoral and mining pursuits, the cutting of lumber, etc."207 Even on the assumption that the statute as a whole clearly indicates that "extractive products" was not intended to include "articles, substances, commodities, products or crops, produced, grown or raised," the status of live stock, which does not seem to be covered by the objects mentioned, and of dairy products, which seem to be neither produced, grown, nor raised, is still not clear. It is interesting to note at this point that in the case litigated in Washington to test the constitutionality of its occupation tax, the attorney-general defended the lack of uniformity alleged to have been introduced by the veto, by ^ Sec. 2 (2) ( b a ) . T h e provision is printed with the statute, the v e t o being referred to in the margin. X1 Webster's Unabridged Dictionary.

602

PERSONS

TAXABLE

arguing that agricultural products are included within the provisions for the wholesale and retail sale of tangible personal property.203 Extracting versus Manufacturing.—The West Virginia law refers to "producing"; the Washington and Mississippi statutes, to "mining and producing"; the Indiana provision, to "mining and/or producing"; and the Arizona law, to "mining, quarrying, smelting or producing." Neither coke, artificial gas, nor a diamond ring is mined, probably, but all seem to be mineral products which have been produced. Reading all the statutory provisions literally, it seems to follow that production and sale of the articles mentioned, assuming that the mining is done by another, are included within the West Virginia, Indiana, and Arizona statutes but not the others, since the taxpayer does not mine and produce. The obvious duplication and consequent inconsistency involved in the making of separate provisions for the production of minerals and manufacturing need hardly be pointed out. The safest solution, and that probably most in accord with the legislative intent, seems to be to disregard entirely the reference to "producing," a solution which may readily be justified by the inference to be drawn from the fact that none of the statutes, in dealing with specific minerals, refers to processed ores, with the exception, of course, of West Virginia, which taxes blast furnace slag. The suggestion made, however, does not seem to reconcile the inconsistency between the Arizona provisions for manufacturing and for the production of mineral compounds and combinations. It will be necessary, therefore, to discover in the regulations for that state the dividing line between mineral compounds and combinations on one hand, and such things as patent medicines (composed of minerals), steel, iron, and all other finished metals, on the other hand, and to exclude the mineral compounds and combinations from the provision for manufacturing. Somewhat similar considerations seem to be applicable to the provisions made for "felling and producing timber." It will be necessary to determine the point at which the production of timber ceases and the manufacture of lumber or of finished products begins. It seems fairly clear that the transformation of trimmed logs into lengths of lumber, moldings, or window sashes involves an activity not included 208 Relator's Brief at 84, Yantis and Brodie, Attorneys for Relator, 207 Washington Natl. Bank Bldg., Olympia, Washington.

PERSONS

TAXABLE

603

in "felling and producing" timber, if the latter term is to be given any distinctive significance. Noteworthy here is the proviso included in the Mississippi law20® to the effect that "only persons engaged principally in the business of buying, logging and selling timber for commercial purposes" shall be required to pay the tax. Although this language is significant also for its effect on the problem of overlapping classifications and subactivities (see pages 606-10 below), the reference to logging, which is defined as felling trees, cutting them into logs, and transporting them to sawmill or market, seems to indicate the meaning to be attributed to felling and producing. With reference to fisheries, specifically provided for in Washington and included within "other natural resource products" in West Virginia, little can be added, except possibly a reference to the provision in Washington for "other sea foods or products," which is likely to give rise to the usual difficulty. AGRICULTURE, HORTICULTURE, AND STOCK-RAISING

Provisions of the Statutes.—Of the eight jurisdictions which deal expressly with one or all of these activities, six provide for exemptions and two, South Dakota and Indiana, for application of the tax. The South Dakota law210 imposes the tax upon every person engaged in "the business of producing, feeding, buying, selling or marketing live stock, and operating regularly in such production, buying, selling or marketing, either exclusively or as a part of a general business operation, upon such of their business as shall be confined to the raising, producing, feeding, buying, selling or marketing of livestock." Agricultural and horticultural receipts will of course be included within the "other business," or catch-all clause. T h e Indiana statute includes, in the same section which provides for mining and manufacturing, persons engaged in the business "of agriculture including the producing of livestock, poultry, eggs or any other product of the farm, orchard, garden or greenhouse." Pennsylvania 211 and North Dakota 212 provide that "the term 'vendor' shall not include farmers who sell their own farm products." The North Carolina 213 exemption is applicable to the initial sale of "products of farms" by the producer or members of his family or a™Sec.

210Sec.

m

1 : 2 (a). Sec. 2.

213

2 (c). Sec. 405.

211

Sec. 2.

604

PERSONS

TAXABLE

producing organization. T h e specific reference to farm products in the Oklahoma law seems superfluous, as it exempts only sales for resale, and the Oklahoma tax is restricted to retail sales. 214 Mississippi 215 exempts "sales made by persons who produce live stock, poultry and other products of farm, grove or garden, whether said sales be made by the producer, or members of his immediate family, . . . in the original state or condition of preparation for sale, and sales of fertilizers, seeds, boxes and/or crates, for use in preparing agricultural products for market." T h e West Virginia 216 "sales" provision simply excludes persons engaged in the business of horticulture, agriculture, or grazing. T h e provision in Arizona, quoted above in connection with the discussion of manufacturing, seems to be unusually ambiguous, since it is not clear whether farmers or those engaged in manufacturing farm products are referred to. "Agricultural Products" versus "Farm Products," etc.—Where only " f a r m products" are referred to, as in Pennsylvania, North Dakota, and North Carolina, several difficulties present themselves. A farm might be defined as a tract of land devoted to agricultural purposes. Broadly speaking, agriculture includes farming, horticulture, forestry, and also butter and cheese making, etc. In this connection the Pennsylvania officials have informally indicated that cheese and live stock are farm products but that poultry, forest products, and manure are not. 217 An official opinion in Mississippi declares that forest products {e.g., resin) are not farm products. 218 Although it is likely that the Pennsylvania and Mississippi attitude toward forestry will be followed, the reason for the distinction in the former of these jurisdictions between live stock and poultry, or between cheese and manure, is not apparent. This lack of rationale, furthermore, leaves the status of milk, eggs, fruits, and flowers unsettled. T h e Mississippi and Indiana laws refer specifically to farms, orchards, or gardens. It seems likely that the language will be held to have intentionally excluded forest products. Butter, cheese, and eggs are not clearly included in the phrase used (eggs, however, are ex2,5 Sec. 4 ( c ) . 216 Sec. 2 ( c ) . Sec. s. Interview with tax officials. 218 Letter to Newton Naval Stores Company, July 12, 1932, filed (note 178, supra, p. 594)214 217

PERSONS

TAXABLE

60S

pressly referred to in the Indiana law), although fruits and flowers are. The exemption by West Virginia of horticulture, agriculture, and grazing leaves similar problems unanswered, since agriculture, which includes the other two, must be narrowly construed in order to lend meaning to the use of the three terms. It will be noted that only West Virginia and Indiana refer to agriculture. Since this term is more inclusive than "products of farms, orchards, or gardens," which, in turn, is broader than "farm products," it is not to be expected that uniformity will prevail in the solution of these questions, although it is possible that the three phrases were used with similar intent. Reference to persons engaged in agriculture as distinct from the sale of farm, orchard, or garden products, introduces a new type of difficulty. The performance of such agricultural services as are involved in blasting tree stumps to make a clearing, spraying fruits and plants, threshing wheat, and in irrigation projects, might well be included in the Indiana provision, since the specific activities there mentioned are introduced by "including," which does not necessarily exclude others. The point may not be important in West Virginia, since none of the indicated occupations clearly involves the sale of tangible personal property, from which category those engaged in horticulture, agriculture, and grazing are excepted. The detailed provision for live stock producers in South Dakota is chiefly interesting for the looseness in draftsmanship, which, by use of the disjunctive, seems to include, for example, the purchase of live stock for use in manufacturing, the tax presumably to be applied to that part of the gross receipts which is attributable to the purchase. It is interesting to note that the exemption of fertilizer in Mississippi has been ruled not to include insecticides, since exemptions are to be strictly construed, though both commodities stimulate growth,219 and that the manufacture of fertilizer is taxed, although the sale thereof is not.220 This latter problem is considered in detail in a subsequent section.221 218

Letter to A. H. Stone, State Tax Comm., Jan. 21, 1933, filed (note 178, supra, p.

594)220 Letter to Leigh Watkins, Jr., Jackson, Mississippi, July 28, 1932, filed (note 178, supra, p. 594). See infra, p. 609. For further details concerning the South Dakota live stock provision, see supra, p. 273.

606

PERSONS

TAXABLE

OVERLAPPING CLASSIFICATIONS

Treatment of Single Taxpayer Clearly Included in Two or More Groups.—A given concern may be engaged in extracting naturalresource products, in manufacturing them, and in then selling them at wholesale or retail. Inasmuch as most of the statutes taxing extractors or manufacturers as such make the occasion for the tax the act of extracting or producing, and in addition levy a tax on sales at wholesale and retail, it is important to consider whether an integrated concern pays but one tax (e.g., on retail sale, at the rate specified for such sales) or two or more taxes (e.g., on the act of extracting, on the act of manufacturing, and on the sale at retail—each at the respective rate). Four of the six jurisdictions in which this problem is important attempt to deal with it by statute. Of these, Washington, Mississippi, and West Virginia provide for plural taxation in some cases and not in others, while Arizona seems simply to select the particular rate group in which the integrated concern is to fall. The South Dakota and Indiana laws make no mention of this matter. The three states first mentioned above provide that, if the integrated concern sells at retail, it pays the retail tax on the full retail sales price in addition to the manufacturers' and/or extractors' tax.222 Thus a firm extracting and manufacturing a product worth (on a wholesale basis) $2,000, and retailing it for $3,000, pays three taxes —extractors', manufacturers' and retailers'—though in some cases there may be doubt as to which of the figures in the above example would be used as the base for the first two taxes. However, an important exception should be noted in Mississippi, where manufacturers need not pay the extractors' tax except as to oil or gas (provided the extracted material is processed, etc., into the manufactured article, and not "used" or "consumed"). This, which alone would favor integrated concerns, is counterbalanced by the provision that extractors (again excluding extractors of oil or gas) selling to manufacturers pay no tax on such sales.223 Indeed, since there is here no restriction on the use to which the material extracted is put, integrated concerns are placed at a disadvantage in so far as the ex222 223

Washington: Sec. 2 (6); Mississippi: Sec. 2 (g); West Virginia: Sec. 2 (i) (par. 3). Sec. 2 (h).

PERSONS

TAXABLE

607

tracted product is used or consumed in the manufacturing process rather than processed. Both the Mississippi 2 " and West Virginia 2 " statutes provide that when a manufacturer sells for extra-state delivery the gross income derived thereby is included within the manufacturing excise, and no tax is imposed for the privilege of selling. This apparently means that in the example given above, for instance, assuming the retail sale to be extra-state, the manufacturer would pay the manufacturing excise on $3,000 instead of on $2,000, and pay no retail tax whatsoever. If on the other hand he sold for $2,000 (at wholesale, instead of retail) he would, of course, pay the manufacturing excise on $2,000. If, instead of selling at retail, the firm sells at wholesale, in none of the three states, under any circumstances, is the wholesalers' tax levied in addition to the manufacturers' and/or extractors' tax. It should be noted that whether the sale is at retail or wholesale, one who both extracts and manufactures the article is in these three states taxed once under the extractors' tax, and again under the manufacturers' tax, aside from the exceptions noted for Mississippi. As implied above, one who is subject to any provisions of the tax other than those for extractors and who also engages in extracting and then himself "uses" or "consumes" the products thus extracted, must, in the three states noted, pay the extractors' tax as well as any other tax to which he may be liable.224 The above summary is based on specific provisions in the statutes of these three states, and these provisions, in so far as they subject a firm to a retail tax, seem to be inconsistent with the general language contained in two of these statutes to the effect, in Mississippi,227 that nothing in the statute is to be construed to require the use of any gross income in the measure of the tax imposed for the privilege of selling that has been included in the tax levied upon extractors or manufacturers and, in West Virginia, 228 that gross income included within the measure of the tax imposed upon extractors and manufacturers, except in the case of oil or gas, shall neither be added nor deducted in computing the tax levied under the other subdivisions m

35 Sec. 2 (g) (par. 3). Sec. 2 (i) (par. 4). ""Washington: Sec. 2 ( 5 ) ; Mississippi: Sec. 2 (g) (par. 4 ) ; West Virginia: Sec. 2 (i) (par. 5). Sec. 2 (g) (par. 1). ""Sec. 2 (i) (par. 2).

608

PERSONS

TAXABLE

of the statute. In both states, for example, manufacturers selling at retail are taxed twice. T h e provision in the Washington law22*" that persons exercising two or more of the privileges included within the subdivisions covering extractors, manufacturers, wholesalers, and retailers are to make returns on account of all the functions engaged in, values to be determined in accordance with uniform rules prescribed by the commissioner, may perhaps be regarded as inconsistent with the provision exempting sales by manufacturers to wholesalers, retailers, and manufacturers. Arizona 229 alone provides that an extractor or manufacturer who sells at retail pays only at the retail rate and that, in the case of all other sales, the section applicable to the particular activity involved (extracting or manufacturing) controls. There is also a requirement that persons included in two or more of the classifications covering manufacturers, extractors, those engaged in motor transportation, and in retail selling are to make separate returns. 230 T h e exemption of manufacturers and producers in North Carolina and the fact that the tax applies to manufacturers and producers selling independently through retail stores, manufacturers' agents, or peddlers have been considered in connection with a previous discussion. 231 It will have been observed that the provisions referred to are concerned primarily with overlapping between extractors and manufacturers on one hand, and wholesale and retail sellers on the other, and between all activities and extracting. N o provision is made for integrated activity involving manufacturing and railroad operation, for example, or any other combination of two or more of the substantial number of specific activities included within the scope of the Mississippi, West Virginia, and Washington laws which are taxed at different rates. T h e broad language of the West Virginia statute, which excludes income included in a manufacturers' or extractors' tax from all other subdivisions, will find a limited application here. In all cases in which integrated concerns are held divisible for purposes of tax collection, problems of valuation face the respective tax commissions, upon whom discretion is uniformly conferred by the 22"*

2211 Sec. 5. Sec. 2 (4). Sec. 6. As respects retail sales, compare Sec. 5. 231 Supra, pp. 596-98; infra, p. 610. 280

PERSONS

TAXABLE

609

statutes. With respect to a manufacturer selling at retail, the only ruling in Mississippi indicates that the manufacturers' tax is to be applied to the prevailing price at which the product is usually sold at the time the production process ends (in most cases, the wholesale price), and that upon sale at retail the additional tax is to be imposed upon the gross retail sales price. 232 T h e nature of the provisions which vest in the commissioners authority to fix values is worthy of comment. T h e Washington, West Virginia, and Mississippi laws contain specific clauses extending authority in the case of persons engaged in extracting 233 who are otherwise taxed; in addition Washington2®4 provides for valuation where two or more activities in the extractors', manufacturers', wholesalers', and retailers' groups are involved, and Mississippi, 235 in the case of sales by extractors, other than of oil, or natural gas, to manufacturers. Some of the laws do not refer specifically to valuation in connection with sales by extractors or manufacturers at retail, although all impose a double tax. T h e gaps left in these provisions, however, will probably be filled readily enough by construction of the general authority conferred on the commissioners or administrative boards in these states to enforce and administer the act and to prescribe necessary rules and regulations. 236 In the absence of express statutory provision, tax officials in Indiana and South Dakota will be compelled to choose between plural and singular taxation of integrated activity. T h e tax director in Indiana, having ruled that persons engaged in agriculture or in operating a greenhouse and selling at retail are taxed at i per cent, has apparently adopted the latter. 237 Taxpayers Who May or May Not Be Considered as Falling in Two or More Groups.—In the remaining jurisdictions {i.e., those which tax only retail sales) the problem is primarily that of distinguishing between producers and distributors for consumption in large quantities on one hand and those engaged in retail over-thecounter distribution on the other. It has been strenuously argued ^ L e t t e r to A. H. Stone, State Tax Comm., Jackson, Miss., Dec. 13, 1932, filed (note 178, supra, p. 594). 233 See note 226, supra, p. 607. 231 Sec. 2 (4). 235 Sec. 2 (h). 236 Mississippi: Sec. 17; Washington: Sec. 24; West Virginia: Sec. 22. 237 Inf. Bull., Q. s i .

PERSONS

610

TAXABLE

in Michigan and Illinois,*** for example, that coal-mine operators selling for consumption are not included in the retail sales tax. The Michigan authorities, as previously indicated, have returned to their original stand and have rejected this contention, despite the legislative concurrent resolution."9 Support for the position taken by the coal mine operators, noted above, is thought to be found in Winter v. Barrett, 352 111. 441 (1933), where the court, at one point, said that a producer selling at retail was not within the retail classification as to which uniformity had to be observed—"the right to sell is an incident to the right to manufacture or produce." The same opinion, however, subsequently points out that the statement quoted refers to producers selling occasionally to consumers and that the situation "is different. .. with the producer of farm products and produce, such as vegetables and the like, who not only conducts the business of producing such produce of which sales generally may be an incident, but who also conducts the business of selling his produce only to consumers at retail." The language seems to indicate that a substantial percentage of sales for consumption is sufficient to compel the inclusion of the producer within the "retail" category, a requirement not unlike that imposed by the clause limiting the tax to those engaged in the business of retailing. The regulations in California, New York, Illinois, and Pennsylvania, as noted above,240 have thus far held to the view that final use or consumption by the purchaser is the sole test to be applied, irrespective of the vendor's economic function or the quantity in which the goods are sold. North Carolina exempts those manufacturers and extractors who do not sell through separately maintained retail stores, manufacturers' agents, or peddlers. THOSE ENGAGED IN RENDERING SERVICE

The activities here involved present considerably less difficulty than those previously considered. This section will therefore be devoted primarily to a description of the relevant statutory material, raising such incidental problems as suggest themselves, and will cover in the indicated order the following services: transportation, telephone and telegraph, advertising, publishing, amusement, finance (by banks, insurance companies, etc.), contracting, and misResults of interview.

Supra, p. 257.

'"Supra,

pp. 583-84.

PERSONS T A X A B L E

611

cellaneous (including services rendered by professional men and salary and wage earners). Transportation.—Eight of the nine jurisdictions which have not limited the tax to the sale of tangible personal property have subjected this service to the tax in some form or other; only Oklahoma has not. Significant variations in the scope of the various imposts will be noted. The Indiana law,241 the most broadly applicable, imposes the tax on the gross income of one operating a steam and/or electric railway; street-car line; motor vehicle, steam or motor boat, or other vehicle for the transportation of freight, express, and/or passengers for hire; or a pipe line for the transportation of any commodity for hire. The Mississippi statute,242 less extensive, taxes every person owning and/or operating a street railway, or operating a railway, for the transportation of freight and/or passengers for hire; operating a sleeping-car or palace-car business, or an express business transporting freight and/or passengers; operating a pipe line for transporting oil or natural or artificial gas; and operating motor vehicles on the public highways between fixed termini or over a regular route. In Arizona,243 levy is made upon every person transporting for hire persons or property by motor vehicle, or freight or passengers by railroad, or operating a pipe line for transportation of oil or natural or artificial gas; or operating private car lines. The West Virginia "Gross Sales and Income Tax Law"2*4 applies only to the operation of street, interurban, and electric railways; a distinct article is devoted to the "Transportation Privilege Tax Law,"245 which contains a property and net income as well as gross income tax and is hence not within the scope of this chapter.246 Utah247 levies its tax upon the amount paid to common carriers, municipal or private, for all transportation service, providing, however, that the tax is not to apply to intrastate movements of freight and express or to street railway fares. Since the interstate movement of freight or express cannot be taxed owing to constitutional restrictions, passenger receipts alone apparently are included. Although « S e c . 3 (d). Sec. 2 (d) (pars. 1, 4, 6, 7, 8, 9). " S e c . 2 (b) (1), Sec. 2 (c) (4) (s) (6). Sec. 2 (d). " " A r t . 12-A. See supra, p. 218. **See supra, pp. 3-5. " ' S e e . 4 (b) ( 1 ) .

612

PERSONS

TAXABLE

the general provision of the North Dakota statute 248 is worded to apply only to the sales of tangible personal property and of "professional" services, the appended schedule (a part of the statute) of "Businesses T a x e d " refers to railroad and sleeping-car companies. 249 Few difficulties have apparently been encountered in enforcing these taxes, since the only ruling available is one by the Mississippi authorities, 250 to the effect that a railroad is to include within the measure of its tax only its distributive share of charges for freight moving over more than one railroad. Other problems may be encountered in determining whether airplanes are covered by "other vehicle" in the Indiana statute; whether, in the same jurisdiction, the operation of taxicabs or the leasing of cars with, or without, chauffeurs is included; whether the owner and lessee of a railroad are both included in Mississippi ("owning and/or operating"); or whether contract carriers are covered by the provision for those operating motor vehicles over a regular route. T h e operation of a fleet of delivery trucks by a producer or vendor, or the maintenance of a pipe line by an extractor of oil or gas, involve, of course, the questions of overlapping considered in the preceding section and there indicated not to have been anywhere provided for. 251 In Utah, the provision for common carriers is literally applicable to carriers by airplane, boat, or motor, although the statute may, or may not, have been so intended. Finally, it should be mentioned that all the activities considered are taxed in South Dakota, being included within the catchall clause;: " A n y business, trade, profession or occupation." service is expressly taxed in Telephone and Telegraph.—This Oklahoma, Indiana, Washington, Mississippi, and North Dakota.2®2 Although the point is arguable, there is little doubt that a telegraph company is not engaged in selling tangible personal property. T h e provision in the West Virginia law which imposes the tax on persons engaged in any public service or utility business expressly excepts telephone and telegraph companies as well as railroad, railroad car 2i9 Page 7. Sec. 3. Letter to Mississippi Export Rr. Co., Aug: 3, 1932, filed (note 178, supra, p. 594). 251 Supra, p. 608. 252 Indiana, Sec. 3 ( d ) ; Mississippi: Sec. 2 (d) (par. 3 ) ; North D a k o t a : Schedule 1, p. 8; Oklahoma: Sec. 4 (pars. 4, 5 ) ; Washington: Sec. 2 (e) ( v i ) ; W.Va., Sec. 2 (d). 248 20

PERSONS TAXABLE

613

and express companies, pipe lines, water carriers by steamboat or steamship, and motor vehicle carriers, which are covered by its "Transportation Privilege Tax Law." A subsequent subdivision levies the tax on "any service business or calling not otherwise specifically taxed." Technically, telephone and telegraph companies, not being otherwise taxed, are included, although practically speaking they will probably be held exempt. It may be pointed out that the Mississippi law is in terms applicable to persons owning and/or operating a telephone or telegraph business for messages from, through, in, or across the state. Interstate messages are, nevertheless, clearly to be excluded for obvious constitutional reasons. Advertising and Publishing.—Washington263 imposes the tax upon persons engaged in outdoor advertising. Newspapers and advertising agencies are specifically included within the privilege tax law of Mississippi and hence within its gross income tax. They are also included in the schedule of "Businesses Taxed" in North Dakota, and, presumably, within the general language of the South Dakota law.™4 The publication of newspapers, periodicals, and magazines is expressly taxed in the Washington285 and Arizona 254 statutes. Whether publishing necessarily involves the sale of tangible personalty has already been considered.257 The status of advertising service in this respect, held in Illinois, as noted above,258 not to involve the sale of personal property, will probably be the same elsewhere, although the contrary has been unofficially indicated in Indiana.25® Radio Broadcasting.—This activity is specifically provided for in the statutes of Oklahoma,290 Washington,2®1 and West Virginia (amusements clause), 262 is perhaps to be included within the general provision for "amusements" in the schedule appended to the North Dakota statute, and is covered by "any business" in the South Dakota law. The chief difficulty to be apprehended results from the fact that most broadcasting involves interstate commerce, which is, of course, exempt from state taxation, and from the practical im**Sec. 2 (2) (eb). ""Sec. 2 (2) (ec). Supra, p. 570. " I n t e r v i e w with tax official. »'Sec. 2 (2) (ed).

See supra, pp. 552-53. "* Sec. 2 (c) (7). **Supra, p. 570. ""Sec. 4 (par. 6). Sec. 2 (g).

614

PERSONS TAXABLE

possibility of distinguishing between receipts derived from the station's interstate and intrastate activities. Amusements.—Oklahoma imposes the tax on all sales of tickets or admissions to places of amusement and athletic events j2®* Washington,264 on persons engaged in the business of operating a theater, silent or talking moving-picture theater, athletic contest, exhibition, dance, fair, carnival or other place of recreation or amusement; and West Virginia, 2 " on the business of operating a theater, opera house, moving-picture show, vaudeville show, amusement park, dance hall, skating rink, race track, or any other place at which amusements are offered to the public; the North Dakota schedule includes circuses, carnivals, and other amusements, specifying several others. The Mississippi privilege tax laws include bowling alleys, billiard halls and fortune tellers, but, according to the list compiled in the office of the commissioner, in compliance with the exemption in the gross income tax2** of businesses required to pay the tax under the Amusement Tax Law, amusement parks, street carnivals, circuses, merry-gorounds, motion picture shows, skating rinks, and street fairs are not taxed. In Utah,267 provision is made for a tax on the amount paid for admission to any place of amusement, entertainment, or recreation, including "seats and table reserved or otherwise"; and the general South Dakota provision is applicable. The distinction between (a) concerts and art exhibitions, (b) theaters and night clubs, or restaurants, (c) dance halls and dancing "schools" to which a nightly admission is charged, (d) museums and law libraries, (e) steamboat excursions, sightseeing trips, or airplane rides, and transportation, ( f ) the privilege of using gymnasia, pools, tennis courts, etc., separately billed or included in a lump-sum charge, and hotel accommodations, (g) race-track admissions and the net receipts of parimutuel machines or totalizators, (h) the renting of pleasure cars, fishing boats or canoes, and taxicabs, and (i) circulating libraries and the sale of books, may prove troublesome. It will be noted, of course, in each of the comparisons made above, that although the first mentioned businesses seem to be more or less clearly amusements and the second clearly not, the line between the two is vague. ** Sec. 4 (par. 2). '"Sec. 2 (f).

2M 3,1

Sec. 2 (2) (ea). "»Sec. 2(g). Sec. 4 (d); Sec. 2 (i).

PERSONS T A X A B L E

615

Four of the statutes refer to a "place" of amusement or a place at which amusements are offered. It seems difficult to ascertain whether the "sale" of steamboat excursions and the use of fishing boats or of pleasure cars involve the operation of either a place of recreation or a place where recreation is offered to the public. Financial.—The Indiana288 statute applies to persons engaged in the business of operating any bank, trust company, building and loan association, insurance or casualty company, small-loan company, or any other business of a similar nature; the Washington2*® law, to the operation of national"'' or state banks, trust companies, mutual savings banks, building and loan or savings and loan associations, industrial loan companies, security houses, and finance companies lending money on retail sales or discounting conditional sales or other sales contracts; West Virginia271 simply imposes the tax on those engaged in the business of banking. The Mississippi privilege tax law applies to industrial loan, Morgan-plan and Morris-plan companies, to those lending money at more than 20 per cent, to commercial credit companies, insurance companies, foreign banks and trust companies acting as local administrators, credit unions, pawnbrokers, security dealers and title guaranty companies. The North Dakota "schedule" includes foreign banks acting as administrators, etc., commercial credit companies, industrial banks, installment banks (the schedule does not distinguish between national and state banks, although the former are clearly non-taxable), industrial and title insurance companies, money lenders on personal security or otherwise, note brokers, pawnbrokers, and title-guaranty companies. The nature of a "banking business" in West Virginia or "business of a similar nature" in Indiana may cause difficulty. It has been held " Sec. 3 (e). In Sec. i (g), the statute provides that in "the case of banks, trust companies, building and loan associations, brokers, finance companies, dealers in commercial paper, and persons engaged in the business of lending money or credit, the term 'gross income' shall be deemed to mean gross earnings in respect to that part of the total gross income . . . which is derived from the businesses and activities enumerated in this subsection." It would be interesting to discover what other significance could be attributed to the gross earnings of a bank, for example, than its receipts as such. Income otherwise derived presumably would be included in the appropriate rate classification. 269 Sec. 2 (2) (e) (I, II, X I I I ) . ""Italics ours. See supra, p. 85, and infra, p. 648. Sec. 2 Ctt.

616

PERSONS

TAXABLE

that a department store engaged in receiving money on deposit, paying interest, and returning the principal on demand in money or goods is engaged in the banking business,272 but that the mere discounting of notes and commercial paper, exclusively for purposes of investment, or the negotiating and guaranteeing of mortgage loans are not banking operations.273 It is not clear whether surety or bailbond concerns are included in a general reference to insurance companies. Similar problems of definition, too detailed for consideration here, will probably arise in connection with each activity specifically mentioned. Contracting.—West Virginia,274 Mississippi,275 and North Dako278 ta provide for a tax on the business of contracting. "Contracting," as defined in the Mississippi privilege tax law, involves the construction or repair of buildings, streets, bridges, heat and power systems, etc., the cost of which exceeds $3,000. Although this sum is of course not controlling in West Virginia or North Dakota, it will still be necessary to draw a line between ordinary small repairs and substantial alterations and construction. Furthermore, since anyone who enters into a contract is engaged in contracting in the broad sense of that word, the specialized significance in which it is utilized will require careful definition. The vagaries involved in distinguishing between independent contractors, presumably referred to here, and employees or servants will necessitate an examination of the cases in the particular jurisdiction. Generally speaking, it may be said that the amount of supervision and control exercised by the other party and the fact that the taxpayer is engaged in what is generally regarded as an independent occupation, and not the form of the compensation or the fact that one party or the other furnishes the materials and assistants will be determinative.277 Other Services, Including Those Rendered by Professional Men and Employees.—Certain general provisions are applicable here. The West Virginia statute includes in one classification "any service business or calling"278 and in another "any business, profession, trade, McLaren v. State, 141 Wis., 577, 124 N. W. 667 (1910). Chase and Baker Co. v. National Trust and Credit Co., 215 Fed. 633 (N. D. m , 1914). " ' S e e . 2 (e). ™ S e c . 2 (e). Schedule i, p. 6. m 39 C. J. 1315. ""Sec. 2 (h). Note the absence of a comma between "service" and "business"; the former word is here used as an adjective. m

PERSONS

TAXABLE

617

occupation or calling," except horticulture, agriculture and grazing; 270 the South Dakota law refers to "any business, trade, profession or occupation,"280 providing separately for those compensated by wages and salaries, a graduated, tax being imposed.281 In Indiana,282 reference is made to "any business or activity not [previously] enumerated . . . including . . . the gross income from professional services, personal services. . . ." In North Dakota, the law applies to gross receipts from the sale of "professional" service,283 specifying such activities as those carried on by abstractors, accountants, advertising agencies, attorneys, auctioneers, brokers, commercial and collection agencies, detectives, dog trainers, employment agents, insurance adjusters and agents, messengers, physicians, real-estate agents.284 Mississippi, of course, includes those subject to its privilege tax laws, which covers those referred to in the North Dakota law and many others. The perplexities involved in distinguishing between the rendering of service and the sale of goods, arising in cases where a service is connected with the transfer of goods and where it is difficult to tell whether the taxpayer is acting as agent or vendor, have already been mentioned. It should be noted that the vendor is taxed on gross proceeds and the agent on commissions. The status of those selling a travel service or of ticket "brokers" is especially interesting in this connection. Although a distinction is possible between those engaged in a trade, profession, occupation, or calling, and employees or laborers, the cumulative effect of the words used seems pretty clearly to indicate inclusion of any employment or activity embarked upon for gain or profit. That a more or less consistent course of activity is required, however, is clear from the frequency with which these words are defined in the cases as "regularly carried on," "regular business," "usually engaged," "habitual," etc.28* Although it has been specifically said that occasional acts will not constitute an occupation, it is probably not essential that the activity involved engage all, or most of, the taxpayer's time—the degree of regularity required cannot, of course, be expressed in a general rule. " S e c . 2 (i). **Sec. 2 (e). "'Sec. 3 (f). Supra, p. 552. " " q C. J. i i o i , 1103, M. 37 ( b ) ; cf. Commonwealth 6, QS Atl. 915 (1915).

»'Sec. 2 (d). " S c h e d u l e 1. v. Wilkes-Barre Ry. Co., 251 Pa.

618

PERSONS T A X A B L E

It will have been noted that all the jurisdictions referred to include the professions. No distinction, however, is made between those and other more plebian occupations, although the South Dakota reference to services which are paid for in wages and salaries and those otherwise compensated will be troublesome in this connection, as well as generally. Salesmen's commissions are to be distinguished from those paid to a factor or broker. Although a yearly retainer received by an attorney probably represents a salary, one graduated in proportion to the amount of litigation handled might cause difficulty. The distinction between compensation and advances for expenses is not always clear. The regulations in Indiana246 and South Dakota 287 have indicated that traveling expenses paid by the taxpayer and refunded by the employer are not to be included in gross income, but money advanced for expenses, as to which no accounting is required, is taxable unless it is demonstrated to the satisfaction of the tax authorities that the money was actually used to defray necessary traveling expenses. Living accommodations and bonuses are probably to be included; pensions, however, raise a more difficult question. THOSE RECEIVING INVESTMENT

INCOME

Rentals.—The statutes of five states, Indiana,288 Mississippi,289 290 South Dakota, Washington, 291 and West Virginia,292 define gross income to include, among other things, all receipts, actual or accrued, by reason of the investment of the capital of the business engaged in [the Indiana law is not restricted to business capital], including interest, discount, rentals?** royalties, fees, or other emoluments, however designated. Indiana includes "all funds from the investment of capital, and all receipts from any source whatsoever." 294 The South Dakota statute298 provides for a tax on the gross income of "every person, located in, or296 engaging or continuing in any business . . . within this state." The Mississippi privilege tax law subjects to the tax persons "operating a taxicab, U-drive-it, or other forms of renting motor vehicles (for transportation of persons for Inf. Sec. "" Sec. "'Sec. ""Sec.

381 S. D. Regs., Qs. 28, 29, p. 15. Bull., Q. 27, 28. M Sec. 1 (par. 8). i(f). 1 (g). But see note 13, supra, p. 552. 1 (6). " S e c . 1 (par. s). ^ Italics ours. 3 (f). * Sec. 2 (e). ""Italics ours.

PERSONS

TAXABLE

619

hire)"; persons operating hotels or warehouses, places for storing or parking cars; persons renting bicycles and/or motorcycles; persons leasing cash registers, typewriters, adding machines, mimeographs, dictaphones, protectographs, calculating machines, frigidaires, lighting systems, washing machines, burglar alarms, automatic sprinklers, computing scales, waterworks plants, checkrooms, coldstorage plants; persons buying, selling, or exchanging gas, oil, or other natural resource leases. The North Dakota "schedule" includes the sale or lease of adding machines, cash registers, calculating machines, mimeographs; the operation of cold-storage plants, warehouses, hotels, auto garages; the leasing of gas and oil; and storage. A reference in the schedule to dictaphone, graphophone, refrigerator, and talking-machine dealers and to washing machines may, or may not, include rentals. South Dakota and West Virginia presumably cover leasing by their provisions for "any business." (See pages 616-17 above.) Whether or not the mere leasing of property, of whatever value, constitutes the doing of business has already been considered; it apparently does not.2®7 The sum of rentals involved and the amount of attention devoted to supervision and collection will probably be the material factors in the establishing of a business activity. The fact that the definition of sale in terms of "any transfer . . . for a consideration" literally includes a lease has also already been noted.298 The specific occupations referred to in connection with the North Dakota and Mississippi laws speak for themselves, with the exception of the "dealers" provision in North Dakota. There remains to be considered the significance to be attributed to the gross income definition noted at the beginning of this section, and utilized so frequently. For example, the attempt seems to be not only to tax manufacturing, as such, at a specified rate, but to include in that tax all income, no matter how derived, and therefore rentals, so long as it may be said to be by reason of the investment of the capital of the business. B y a literal reading, of course, if the capital of one business were invested in another independently taxable activity, the income earned in the latter would have to be included within the income received by the former, especially in view * Supra, p. 554.

"* Supra, pp. 563-65-

620

PERSONS

TAXABLE

of the reference to "receipts . . . however designated." Thus, a wholesaler, who withdraws money from his wholesale business and invests it in, say, residential income-producing property, in South Dakota, will have difficulty in determining whether to apply the "wholesalers" or the "general" rate of tax to income from such property. The regulations in South Dakota, 299 duplicating those in Indiana, are to the effect that gross receipts include rents, royalties, fees, commissions and other emoluments, however designated. The attorney to the commission in Mississippi, however, has indicated that taxable manufacturers' receipts do not include "rentals, royalties or other receipts derived from invested capital in the manufacturing establishment . . ." on the ground that the tax is not imposed on the investment of capital.300 Whether this reference is to the tax on manufacturing or constitutes a contradiction of the definition of gross income, is not clear. Interest and Dividends.—The statutes mentioned in the foregoing section are applicable here. The specific occupations noted in connection with the rendering of financial services are also to be considered here in view of the large proportion of their income which is made up of these items. The South Dakota law301 provides that interest accruing after the effective date of the statute on any indebtedness, loan or deposit of money, and discounts charged shall, on collection, constitute gross receipts. It is hardly likely that the difference between "gross receipts" and the "gross income" which is the measure of the tax of "persons located in" South Dakota will render the former provision nugatory for absence of an applicable rate; the looseness in language is, however, worth noting. The regulations, in addition to the ruling noted in the preceding section, declare that interest and dividends are taxable.302 There seems to be no justification for the decision as to dividends, since neither dividends nor capital returns are generally included in the definition of gross income. It should be mentioned, finally, that some difficulty may be found in distinguishing between interest payments and compensation for services or the sales price of goods: in usury cases, " Q . 3, p. i i . But see note 13, supra, p. 552. Letter to Leigh Watkins, State Tax Comm., Aug. 31, 1932, filed (note 178, supra, P- 594)301 Sec. 1 (g), fourth sentence. " S . D. Regs., Rule 2. 305

PERSONS

621

TAXABLE

bonuses and fictitious fees of all kinds are frequently held to be in fact payments for the use of money; penalty provisions for delayed payment may be said to involve a payment for retention of the purchase money, and therefore interest. THOSE RECEIVING MISCELLANEOUS

RECEIPTS

The receipt of property in form of gifts, insurance, prizes, rewards, compensation awards, trusts, assignments for creditors, capital contributions, paid-in surplus, stock dividends, and the borrowing and return of money, including the sale of bonds and negotiation and endorsement of notes, is clearly not taxable in any jurisdiction, with the possible exceptions of South Dakota and Indiana.304 The purchase and sale of stock by a corporation at a profit, a like transaction in the case of bonds by the debtor, the collection of judgments, and sales on execution, foreclosure and otherwise by court order, involve difficulties of the character considered in connection with the concept of sale,304 the nature of business activity, 306 and the concept of taxable subjects of sale.306 The South Dakota law excludes from taxable gross income the receipts from "payment of any obligation for borrowed money, whether such obligation be evidenced by note, bond, or other instrument, or not, and the withdrawal of deposits. . . ."®°7 It also excludes "receipt of money or property by assignment for the benefit of creditors or as trustees upon the creation of a trust, or the pledge of property for security . . . [the] receipts of capital by a corporation, co-partnership, firm or joint adventure, or contributions to capital by the members of any other organizations [except as to] . . . sums received in excess of the amount of such capital. . . . "30S "Proceeds accruing or proceeding from subsequent transactions in the stock of such corporations or organizations, or in the interests of shares of the members of any organization shall be taxable."30® The proceeds of life-insurance policies, contracts paid on the death of the insured, policy loans, cash surrenders, the return of premiums, gifts, bequests, *" A communication from West Virginia indicates, however, that the reference to "activity" in the definition of "business" may quite possibly be construed to include the receipt of dividends or income of any character. "'Supra, pp. 561-67. '"Supra, pp. 552-59. x" Supra, pp. 576-80. " " S e c . 1 (g), fifth sentence. ""Sec. 1 (g), sixth and seventh sentences. ""See. 1 (g), eighth sentence.

622

PERSONS

TAXABLE

and inheritances, and accident-, health-, and compensation-insurance payments or damages received on account of personal injuries and sickness are specifically exempted.310 The Indiana statute exempts the proceeds of life policies and contracts payable on the death of the insured.511 With respect to the types of insurance not mentioned and the other items referred to above, the intent of the Indiana law is not clear. The tax is, initially, imposed upon the entire gross income of residents of Indiana and of nonresidents who derive income from intrastate sources. The rate provisions, however, refer only to the specific business provided for and to the "gross income of every person engaged in any business or activity . . . " including . . . [the clause has been quoted above]. 312 Assuming that a gift, bequest, or the proceeds of insurance are not received in the course of a business or activity, no tax seems applicable, since the imposition of a tax without specifying its amount means nothing. The tax authorities have ruled specifically that gifts or inheritances are not taxable. 313 This may be either by reason of the reference to "activity" in the final rate provision or because the definition of gross income includes neither of these items. The latter is more likely since the authorities have likewise decided that neither the receipt nor the lending of money results in taxable income. 3 " However, they have declared interest payments and dividends taxable, 315 although if the definition of gross income is to control, there is no authority for taxing these receipts, since neither is covered by the definition. In connection with the possible confusion between the borrowing of money and sale of intangibles (notes or bonds), the tax authorities have ruled that the negotiation of notes by one not the maker, and the sale of bonds in any case, result in taxable income.319 Informally, the authorities have sought to bolster an attempt to distinguish between the making of notes, not taxed, and the issue of bonds, taxed, by including with the latter only long-term financing.317 Although there seems to be no statutory authority for the distinction made, the proceeds of bonds repurchased and sold might justifiably be held taxable. With respect to insurance proceeds, the authorities have distinguished mInfra, m m

p. 660. I n f . Bull., Q. 66, 67. I n f . Bull., Q. 47, 48.

'"Infra, p. 660. Inf. Bull., Q. 37. Interview w i t h tax official.

su

'"Supra, p. 618. Inf. Bull., Q. 3, 22.

3,5

PERSONS T A X A B L E

623

between that used to replace or restore property damage and that otherwise applied; only the latter is taxable.518 The status of stock repurchased and sold has not been considered. The detailed and relatively unambiguous provisions of the South Dakota statute are not clear on the question of resold bonds, on the rate to be applied to transactions in the stock of corporations and other organizations, on the nature of said "transactions," and on the status of prizes and rewards. THOSE ENGAGED IN BARTER

The statutes in Arizona, 1 Mississippi, 820 Utah,821 Washington,822 and West Virginia828 define sale to include "the exchange of properties as well as the sale thereof for money." California,824 North Dakota,82® Pennsylvania,32* and New York827 refer to "any transfer, exchange or barter." Illinois828 defines "sales price" to mean the consideration valued in money, whether received in money or otherwise, including cash, credits, services, and property of every kind or nature, and requires the seller to determine the value of the property received, subject, of course, to revision. The Michigan law8"* declares that "gross proceeds" may consist of "credits, property or other money's worth." Oklahoma810 defines sale to mean a sale at retail for "money or any other valuable consideration." "Gross income" is defined in South Dakota831 to be "the aggregate sum in value, or its equivalent, passing in any transaction of business, as compensation for personal service, and from trade, business, commerce, sales and the value proceeding or accruing from the sale of tangible property, . . . or service, or both. . . ." The Indiana statute332 defines gross income to mean gross receipts in each of the instances referred to in South Dakota. North Carolina,888 alone, clearly restricts the tax to "monetary consideration." The primary difficulty seems to center around the fact that articles taken in part, or full, payment are technically "sold." The New York regulations384 declare that the exchange of property involves ™*Inf. Bull., Q. so. "Sec. i (d). Sec. i (b); cj. Sec. 4 (a). m Sec. 1 (s). Sec. 2(b). "Sec. 2. ** Sec. 3qo (c). Sec. 1. Sec. 3. "'Sec. 1 (g). ™ Sec. 404 (8). N. Y. Regs., Art. 3. 131

""Sec. Sec. ""Sec. *"Sec. "Sec.

i (Par. 6). 1. 1. 1 (c); cf. Sec. 1 (b. 1). 1 (f).

624

PERSONS

TAXABLE

two taxable sales. Consistently, it would seem to follow that in the case of automobile or radio trade-ins, two taxes are applicable, except that the sale to the dealer is probably for resale. The statutes in West Virginia,335 Indiana,33® and North Carolina337 and the regulations in Illinois338 provide that the sales price of articles previously accepted in part payment is not to be included in taxable income if the value of the article was included in the sales price of the new article which was sold. Illinois adds that the tax applies if the resale price is greater than the article's trade-in value. Although it might seem to be implied that the trade-in was originally not taxable to the "purchaser," the problem is not of major importance in these jurisdictions, since in each only the business of selling property is taxed. It has been informally indicated in Utah that while trade-ins theoretically result in taxable sales, no tax will be enforced in practice.339 The assumption that nonbusiness sales are taxable should be compared with the earlier discussion of that problem.340 The Oklahoma regulations341 contain a statement to the effect that the sales price is taxable, whether paid in money, or partly in money and partly in property. Although the language literally involves the application of a two-fold tax, it is not clear that the statement was so intended. The ambiguous provision in the South Dakota statute has been unofficially construed to mean that in an ordinary exchange no tax is applicable but that when the property in exchange is worth ten dollars or more (apparently an extraordinary transaction) the property so given constitutes the equivalent of cash, and two taxable sales result.342 There seems to be no statutory authority for the distinction made: "equivalent" seems to include all cases of barter. Although a difference might popularly be supposed to exist between cases in which the transaction was entirely in kind and those in which one party paid partly in money, it being impossible to distinguish vendor and vendee in the former and possible, though theoretically unjustifiable, to regard the payer of money in the latter instance as a purchaser solely, the absence of doctrinal support for this position will probably result in its general rejection. "'Sec. i. "'Sec. i (f). •"111. Regs., Sp. R. 15. '"Interview with tax official. 311 Okla. Sales Tax Law and Regs., Sec. 3 (a). Interview with tax official.

331 3,0

Sec. 404 (11). Supra, pp. 552-54.

PERSONS

TAXABLE

625

The exchange of property for exempt goods has been considered in Mississippi and held not to affect the taxability of the non-exempt commodities.343 It is possible to argue that application of the tax thereby decreases the value of the exempt property and indirectly results in the imposition of a tax upon the exempt goods. It will be noted that the group of statutes first mentioned refers to the exchange of "properties." This seems to exclude the payment for property in services as well as the exchange of services. It should not be too difficult, however, to read "properties" in a broader sense, in view of the probable absence of an intent by the legislature to make the indicated distinction. With respect to "receipts" in the Indiana law, there seems to be no reason why that term should not be construed to include everything received. The tax director has accordingly defined sale to mean a transfer of title to property for a fixed price in money or money's worth. 3 " Letter to A. H. Stone, State Tax Commissioner, Nov. 8, 1932, filed (note 178, supra, p. 594). Inf. Bull., Q. 4.

CHAPTER

XIII

M E A S U R E OF T H E T A X This chapter will consider various problems arising in determining the amount of tax base, and there will be discussed in turn credits, trade and cash discounts, freight and delivery costs, refunds and price adjustments, inclusion of the amount of the tax in taxable receipts, and market value. CREDITS

For convenience in treatment, the relevant statutes may be grouped as follows: those which ( i ) expressly exclude from the tax accounts receivable or other credits (Illinois, 1 Mississippi,2 South Dakota,8 and Utah 4 ), (2) include these obligations but provide for a privilege of extending the time to pay until collection (Michigan,® California,8 Arizona,7 and North Carolina*), (3) draw no distinction between cash and credit transactions (New York, 9 Pennsylvania, 10 Washington,11 West Virginia, 12 and North Dakota 1 3 ), and (4) do not explicitly cover the situation (Oklahoma and Indiana). 1. Although the Illinois statute defines "selling price" to include "credits," it is subsequently declared that "In the case of charge and time sales the amount thereof shall be included only as and when payments are received by the seller." Utah, similarly defining sale to include installment and credit sales, provides that in the case of a sale on credit, or when the price is payable in installments, or in a conditional sale, the tax is to be paid proportionately upon each payment. The Mississippi law provides that credit sales are not taxable prior to collection, although, curiously enough, a previous sentence grants, on application, "an extension of time for the payment of taxes due on . . . credit sales." In South Dakota, "gross income" does not include credits receivable where "credit is extended for the 'Sec. 1. * Sec. s (par. 5). 'Sec. 13. '"See. 1. " Sec. 2.

'Sec. 5. • Sec. 1 (c), Sec. 6. " Sees. 404 (10), 408. "Sec. 1 (6) (8).

'Sec. i (g). " Sees. 2 (f), q. ' Sees. 390 (b); 3Q1. "Sec. 1.

M E A S U R E OF T H E

TAX

627

whole, or any part of the consideration proceeding from any business transaction." 2. After providing that "gross receipts" includes "credits," the California statute confers upon taxpayers a privilege to report cash and credit sales separately and, on application, to obtain an extension of time for the payment of taxes due on credit sales. Thereafter the tax is to be paid as collections are made. Presumably, accounts uncollected at the date of expiration of the statute will have to be included in the final return, since the reference is to taxes "due" on credit sales. The Arizona extension provision is identical. Although this statute does not expressly refer to credits in the definitions of "gross income" or "gross proceeds of sales," the phrase used: "the value proceeding or accruing," seems clearly to cover accounts receivable. The Michigan provision is slightly different. "Gross proceeds" having been defined to mean "the amount received in money, credits," etc., taxpayers, in a later section of the statute, are given permission, on application, to prepare "returns on the basis of cash actually received . . . until further order of the board." This latter phrase is clearly important in connection with the taxability of accounts collected after the statute expires, in view of the absence of a reference to the fact that an extension as distinguished from nonliability is involved, and of a regulation to the effect that annual returns are to include "gross sales." The North Carolina statute not only duplicates the Mississippi provision referred to above, but defines "gross sales" to mean "the sum total of all sales . . . reckoned at the price at which such sales were made, whether for cash or on time, and if on time, the price charged on the books for such sales . . ." This provision, apparently inconsistent with the later language to the effect that "in no event shall the gross proceeds of credits sales be included . . . until collection . . ." has been construed by the tax authorities to give the taxpayer an option similar to that contained in the other statutes described." 3. "Receipts" in New York and "gross income" in Pennsylvania and North Dakota are expressly defined so as to tax "credits." Although the New York statute provides that the commissioner may, by regulation, permit a conditional vendor to report sales when the M

N. C. Regs., R. 5.

628

MEASURE

OF T H E

TAX

payments become due rather than at the time the contract of sale was entered into, the regulations14 extend a privilege to report the installments as they become due or1* are paid. In Washington, "gross income" and "gross proceeds of sales" are defined in terms of the "value proceeding or accruing," although "receipts . . . by reason of the investment of the capital of the business engaged in" must be "actually received." The West Virginia provision is interestingly varied in that "gross income" is held to mean gross receipts received as compensation for services and from trade, business, commerce, or sales, and the value proceeding or accruing from the sale of property, and all receipts by reason of the investment of business capital. "Gross proceeds of sales" is defined as "the value actually proceeding" from the sale of property. The apparently indiscriminate use of "receipts" and "value accruing" seems to indicate that accounts receivable are taxable, since the former term is at least ambiguous and the latter is frequently used expressly for the purpose of distinguishing credit from cash transactions. 4. The Indiana tax is imposed upon gross income, defined to mean "gross receipts" 17 and the Oklahoma levy is simply upon the gross proceeds of sale: 18 no definition is added. The provision in the Oklahoma statute, previously referred to in connection with the treatment of conditional sales,19 seems to indicate that to this extent, at least, credits, i.e., unpaid installments on conditional sales, are taxable. The Indiana regulations,20 on the other hand, indicate that as to conditional sales the tax accrues only as payments are received. A like divergence may be expected, therefore, in the treatment of credits generally. It is interesting to note an informal ruling in Oklahoma to the effect that credit sales are to be included in returns without deduction for bad debts on the ground that it was not, in the opinion of the commission, the function of the state to enter into partnership with private enterprise.21 Where credits are not taxed, some difficulty may be experienced in distinguishing between cases in which the consideration is simply the obligation of the purchaser and those in which the seller receives as payment some form of commercial paper. It will be noted that in M Italics outs. " N. Y . Regs., Art. 13. " S e c . 4"Supra, p. 561. " Interview with tax official.

" S e c . 1. " Inf. Bull., Q. 4.

MEASURE OF THE TAX

629

the latter case the obligation of the purchaser for the price of the goods is discharged, his liability remaining only in connection with the note or draft delivered. Whether credit is extended or a "credit" is involved seems to be a fairly debatable question. A more or less similar problem may arise when the vendor accepts some form of security in addition to the purchaser's promise to pay. It has been ruled in Indiana,22 for example, that when the property is mortgaged for the purpose of sale, in order to avoid the tax, the gross consideration is taxable to the vendor. If this ruling is duplicated in South Dakota (as so many have been), where the statute provides that credits are not taxed until collected, thereby implying that the tax does apply on collection, the decision will result in a double tax on a single sale. With reference to financing or carrying charges involved in credit transactions, the Illinois tax authorities" have decided that these are not to be included within the proceeds of sales. A like position has been unofficially adopted in Arizona." Both apparently regard the charges involved as compensation for a service, or the loan of money, perhaps, and hence not covered by the respective statutes. In these states no distinction has been made, although one is possible, between cases in which these charges are included in a lump sum sales price and those in which the items are separately billed. TRADE AND CASH DISCOUNTS

The statutes of Arizona,28 California,84 Indiana,27 Mississippi,2* South Dakota," and West Virginia30 provide in substantially identical language that cash discounts allowed and taken are not to be included within the tax. Although trade reductions are not specifically provided for, it is likely that they will be similarly treated, since the discounted sum represents even more clearly the actual selling price. The New York regulations state that trade and cash discounts taken are not to be taxed, although the statute makes no specific provision for either trade or cash discounts.31 The North Carolina law " I n f . Bull., Q. 46. "Interview with tax official. "Sec. 2 ( f ) . "Sec. 1, Par. 10. "Sec. 1.

"111. Regs., Sp. R. 3. "Sec. 1 (h). "Sec. i ( f ) . "Sec. 1 (g). " N . Y. Regs., Art. 7.

M E A S U R E OF T H E T A X

630

defines gross sales in terms of the "price at which such sales were made . . . without allowance for cash discount."82 Of the other jurisdictions in which this deduction is not legislatively provided for, it has been informally asserted in Oklahoma that the deduction would be allowed.33 A similar ruling may be expected elsewhere, despite general language common to all the statutes except those of North Carolina and Utah, to the effect that no deduction is to be allowed for "any other expense whatever" and the possibility of argument that the discount is the price paid or the expense incurred by the seller for procuring immediate payment. Where the discount allowed and taken is not for cash but involves, for example, the giving of a trade acceptance or other paper more satisfactory than the purchaser's simple promise to pay, the interpretation of statutory provisions referring specifically to cash discounts presents a somewhat similar difficulty. It should be pointed out that in the event that the deduction of cash discounts is disallowed in any particular jurisdiction, it will be a simple matter to bill the goods at the lesser sum and provide a penalty for delayed payment. Trade allowances may be similarly dealt with. Adjustments made on account of damaged goods, delayed delivery, etc., will be considered in connection with the discussion of refunds. 34 FREIGHT AND DELIVERY

COSTS

law3*

The Arizona provides that in the case of extractors and manufacturers the "selling price shall be reduced by the amount of the actual freight paid by the taxpayer, from the place of production to the place of delivery, when such freight is included in the sale price of such products." The Mississippi statute36 differs somewhat, containing distinct provisions for extractors and for manufacturers. As to the former, it is enacted that "the actual freight paid by the taxpayer . . . to place of delivery, shall be deducted from the gross proceeds of sale, if and when the same is sold on a delivered price." With respect to manufacturers, "the actual freight charges prepaid by the taxpayer, or included in the invoice price, . . . to the place of delivery, shall be deducted in determining the value of such manu" Sec. 404 ( 1 0 ) .

" I n t e r v i e w w i t h t a x official.

" Sec. 8.

"Sees. 2(a), 2(b).

34Infra,

pp. 632-33.

631

M E A S U R E OF T H E T A X

factured products to be used as the measure of the tax imposed in this section." Finally, the definition of "gross income" in South Dakota" adds a proviso to the effect that "upon the sale of any property or commodity, delivered out of the state, the freight or transportation cost, actually paid thereon, shall not be deemed gross income." In the absence of statutory provisioii, the tax authorities in California,38 New York, 8 * Utah,40 Illinois,41 and Oklahoma 42 have dealt with this subject by regulation. In New York, and by verbatim duplication in California and Utah, the ruling is that the "determining factor in the consideration of this question is whether the purchaser pays the delivery costs and charges [freight charges are specifically said to be subject to the same rule] as a separate item or whether they are absorbed by the seller as a service cost or an expense of doing business." Illustrations are given of shoes sold with or without delivery at the same price, sales of coal at distinct prices at the yard "and delivered," and cases in which provision is made that the purchaser is to pay the freight and deduct it or repay the freight prepaid and entered as a separate item by the seller. It will be noted that the illustrations involve either a single price for both over-the-counter and delivered merchandise or separate billing, neither of which is necessarily related to the question as to whether the seller is absorbing, or the purchaser is paying, the freight. Thus, in the event that all the seller's goods are sold at a delivered price and competitive price scales indicate that the seller is adding the freight charge, the tax will apply to the gross price, although the seller is not absorbing the cost of shipment. Since, however, the tax may, and probably will, be avoided by separate billing, practical administration of the tax will generally involve the deduction of delivery costs separately itemized or provided for. Illinois has accordingly ruled that the form in which the charges in question are billed is determinative. Nice problems may arise in connection with the interpretation of price terms based on delivery from a single point, where the shipments are in fact made from various other places. In this respect the express provision in both the regulations referred to, that the term "f.o.b. point of shipment" is not controlling, will find "Sec.

i

(g).

" N. Y.

Regs. Applicable to Calif., p.

Y . Regs., A r t .

17.

"Utah

Regs., Art.

" 111. R e g s . , S p . R .

25.

"Okla.

Regs., Sec. 5 (d)

" N .

11. (7).

20.

632

MEASURE

OF

THE

TAX

frequent application. Oklahoma has ruled that "no deductions are permissible for usual and necessary overhead expenses, or any other expenses which may have been incurred prior to such sales, including freight or other transportation charges. . . ." It will have been observed that the legislative provisions described are substantially different from those administratively decided upon. Freight .charges are uniformly deductible in the specific instances provided for, irrespective of the manner of billing. It remains to be seen whether a similar rule will prevail in regard to wholesalers and retailers in Arizona and Mississippi. The question is also open, in the latter state, with respect to the interstate deliveries of manufacturers and extractors and, of course, in those jurisdictions which have not passed upon the matter by either statute or administrative ruling. At this point it is interesting to note the ruling of the attorney to the commission in Mississippi to the effect that manufacturers operating their own delivery service are not entitled to deductions: a distinct company must be involved. No reference, however, was made to the "separateness" of the charges. Whether a subsidiary corporation will comply with the requirements made, not clear in the issued opinion, is obviously of some importance. The regulations in California, New York, and Illinois seem to indicate that independent operation of the delivery service is not necessary. REFUNDS AND PRICE A D J U S T M E N T S

Arizona, 43

California, 44 Illinois,4® Indiana,46 Michigan, 47 MissisNew York, 49 South Dakota, 50 and West Virginia 51 provide that the refunding in cash or credits of the sales price of returned goods renders that amount deductible from the proceeds of sales or gross income. The regulations in New York 52 have gone further and allow the deduction of price adjustments for defects in the merchandise sold. In Utah,®3 where the statute does not refer to refunds, readjustments are, without restriction, said to be deductible and to include specifically "discounts, rebates, bonuses, etc." Finally, the New York commission has decided®4 (and California agrees)®5 that sippi,48

u Sec. i (h). "Sec. 2 (f). " Sec. 1 (f). " Sec. 1 (c). 50 Sec. 1 (g). "Sec. 391. 52 N. Y . Regs., p. 35. 53 Utah Regs., Art. 27. " N . Y . Regs. Applicable to Calif., p. 1.

"Sec. 3 (par. 11). " S e c . 1 (par. 10). "Sec. 1. 5 1 N . Y . Regs., Art. 3.

M E A S U R E OF T H E

TAX

633

if goods are repossessed pursuant to an agreement made at the time of sale, "the unpaid amount of credit extended" is deductible, although the attorney to the commission in Oklahoma has expressed a contrary opinion in this regard, the regulations54 providing that "repossession shall have no effect or bearing upon the original sale, which is taxable to the vendor." The New York ruling, apparently contemplating only conditional sales, not only assumes that the tax has been paid upon the gross sales price as of the date of delivery of possession, but does not seem to have considered the fact that in a great many instances the value of the repossessed goods will be equal to the balance due. In such a case, one might argue that the seller has indeed received full payment for the original sale, and hence should not be allowed any reduction of tax liability with reference to that sale. This view, of course, regards the same article as being both sold and a means of payment for its own sale. This can be upheld as reasonable in view of the fact that the beneficial ownership in the article passes to the vendee on delivery of possession. Furthermore, in accordance with the provisions of the Conditional Sales Act, the goods under certain circumstances, on repossession, will be sold as on the foreclosure of a chattel mortgage. If this sale is "at retail" and it is held that the peculiar nature of the transaction as part of, and contemplated by, the original conditional sale does not affect its taxability, so that an additional tax is imposed, the ruling referred to is justified. There remains to be mentioned the possibility of difficulty in distinguishing between refunds for returned goods, either for failure to comply with the contract specifications or in accordance with an option provided for, and resales. The particular definition of sale in the jurisdiction involved and the fact that the person receiving the refund or return of consideration will frequently not be in a group taxable under the statute should be borne in mind in this connection. INCLUSION OF THE AMOUNT OF THE TAX IN TAXABLE RECEIPTS

Since many of the statutes specifically require that the vendor shall add the amount of the tax to the sales price, and since elsewhere the tax is likely to be added in the normal course of business, it becomes important to inquire whether the tax so added is to be "Okla. Regs., Sec. s (9).

634

M E A S U R E OF THE T A X

included in taxable gross proceeds. The California law87 declares that the sales price "shall be deemed to be the amount received exclusive of the tax hereby imposed; provided, that the retailers shall establish to the satisfaction of the board that the tax imposed hereunder had been added to the sale price and not absorbed by the retailer." Utah"8 defines "purchase price" to mean "the price to the consumer exclusive of any tax imposed by the federal government or by this act." The North Carolina commissioner decided that, in view of the duty imposed upon the taxpayer to pass on the tax, the measure of the tax would be 97 per cent of gross sales59 (although carried out several places this figure should be 97.087 + ). The New York 40 and Illinois regulations,61 however, specify that no deduction is to be allowed for this purpose, New York on the ground that it is immaterial to the commission whether the taxpayer passes on or absorbs the tax, although the statute does prohibit advertising its absorption, and Illinois because the tax is simply to be included in the cost of doing business. Although it might be supposed that inclusion of the amount of the tax in the taxable receipts depends upon whether the particular statute requires that the tax be passed on to the consumer, since it would not be proper to tax the vendor on receipts which he was apparently collecting for the state, it should be noted that the tax is generally imposed for the privilege of doing the taxpayer's business, i.e., is imposed on the vendor; that, since price fixing is not involved, the statutory requirement simmers down to a prohibition against advertising absorption of the tax; and that the retailer or vendor, not the consumer, is liable for the tax. It seems to follow, therefore, that the tax is a cost of doing business or engaging in a particular activity, to be included in any levy measured by the receipts of that business or activity. It will have been observed that the North Carolina commission alone has, without express statutory authorization, permitted the indicated deduction. Since, however, those subject to the sales tax are not likely to complain, and since the remedy for other taxpayers would be simply to compel collection of the entire tax without probable benefit to the litigants, the commission's ruling is not likely to be called into question. "Sec. 2 (f). *°N. Y. Regs., p. 38.

"Sec. 2 (i). "111. Regs., Art. i*.

" N . C. Regs., R. 2.

MEASURE

OF T H E

TAX

635

It is interesting to note that the California statute requires a showing that the vendor has not absorbed the tax, whereas the Utah law does not contain such a provision. This showing may probably be made by express invoice provision, although taxpayers anxious to absorb the tax and at the same time to exclude its amount from taxable receipts will have little difficulty in preparing proper invoices. Examination of the taxpayer's books with an eye to ascertaining his cost of production and/or of distribution, the only ultimate check, will probably be impractical in most cases. MARKET

VALUE

Although, generally speaking, the statutes are concerned simply with the contract or invoice price of goods sold or service rendered (apart from the question of cash or credit), there is at least one instance in which this amount is not the proper measure of the tax. Several states, either to avoid as far as possible the restrictive effect of the commerce clause or for other appropriate reason, have measured the tax, not by the gross receipts of a particular activity, but the value of the articles produced. Thus Mississippi, Washington, and West Virginia provide, in almost identical language, that, as to extractors and manufacturers, the amount of the tax shall be equal to the value of the articles produced as shown by the gross proceeds derived from the sale thereof by the producer, multiplied by the rates variously provided for.*2 In South Dakota 63 a similar provision is applicable only to manufacturers. Each of these jurisdictions, and Arizona also, adds that the measure of the tax is the value of the entire production in the state regardless of the place of sale or the fact that delivery may be made to points outside the state.84 Finally, they each declare substantially as follows: "in determining value as regards sales from one to another of affiliated companies or persons or under other circumstances where the relation between buyer and seller is such that the gross proceeds are not indicative of the true value of the subject of sale, the tax commission shall prescribe uniform and equitable rules for determining the value "Mississippi: Sec. 2(a), (b); Washington: sec. 2 (2) (a), ( b ) ; West Virginia: sec. 2(a), (b). "Sec. 2 (a). "Arizona: Sec. 2 (c); Mississippi: Sees. 2(a), 2(b); Washington: Sees. 2 (2) (a), (b); West Virginia: Sees. 2 (a), (b).

636

M E A S U R E OF T H E

TAX

upon which such privilege tax shall be levied, corresponding as nearly as possible to the gross proceeds from the sale of similar products of like quality or character by the other taxpayers where no common interest exists between the buyer and seller, but otherwise under similar circumstances and conditions.'" 5 Where the parties are dealing at arm's length and interstate commerce is not involved, there seems to be no need to distinguish, for example, between the Indiana tax, which is upon the gross receipts of manufacturers' and extractors' sales, and taxes measured by the value of the goods produced as shown by gross proceeds. There is the possibility, however, that a tribunal, faced with the fact that gross proceeds include not only the value of the goods but delivery or freight expenses and possibly carrying charges, may feel itself bound to hold that these items are deductible, although their decision may be to the contrary with respect to distributors to whom the language described is not applicable. Apart from this matter, however, the major item of interest in this connection is the test to be applied in determining just when the sales price is not indicative of the value of the goods and the nature of the "uniform and equitable rules" for valuation which the various tax authorities are to prescribe. With respect to affiliated corporations, it is not likely that control by one corporation of the policies and prices of another based on majority stock ownership will involve the "common interest" referred to, since each corporation is under a duty to its minority stockholders as well. Where all the stock of one corporation is owned by another, it is to be noted that, although the price fixed in many cases will not represent the value of the goods, there will be occasions on which it will, a fact contrary to the assumption of the language quoted. The precise point at which majority control shades into that community of ownership which renders the interests of the small minority coincident with that of the substantial owner, will hav6 to be determined on the particular facts of each case. The language is broad enough to include situations, other than those involving a common interest, in which the sales price is not to be relied on as a measure of value. Forced sales by producers " A r i z o n a : Sec. 4; Mississippi: Sec. : ( b ) ; Washington: Sec. 2 ( 3 ) ; West Virginia: Sec. 2(b).

M E A S U R E OF T H E T A X

637

involved in financial difficulties, good-will sales, situations in which prices are cut ruinously to drive out particular competitors, and transactions in which goods are given to well known purchasers for the advertising involved, are perhaps worth mentioning in this connection. It should be noted, however, that in all the cases but the last mentioned, the price received represents the value to the seller of the particular quantity of goods at a particular time. If it should be suggested that the value referred to in these statutes is that created by a normal market, it would follow that an identical product, produced more efficiently by one of two producers and therefore sold by him at a lower price, nevertheless would have a single value applicable to both producers. Since this consequence was obviously not intended, differentials in price induced by more efficient operation seem to be similar in character to those resulting from financial difficulties or price wars. This seems to argue that only community of interest is sufficient to call into operation this provision of the statutes. Thus, although the reference in the first part of the provision to "other circumstances" seems to imply that there are some, the subsequent language "where no common interest exists," is as restrictive as the argument above made. The uniform rules for valuation to be prepared by the respective commissioners will cause difficulty, especially with respect to fluctuating markets and in the numerous cases in which there is no single market. It may be that uniform rules will be impossible and each situation will be left to be determined according to its own particular facts. The statutes, it will be noted, refer only to production. Sales to affiliated entities by wholesalers or retailers are nowhere provided for except generally in connection with overlapping classifications (e.g., sale of coal by a wholesaler to an affiliated manufactory). The regulations in New York 68 and Illinois,67 ruling that sales between affiliated corporations are taxable, do not restrict the controlling character of the sales price as the measure of the tax. " N . Y. Regs., p. 36. " 111. Regs., Sp. R. 38.

CHAPTER

XIV

EXEMPTIONS RECEIPTS T A X - E X E M P T UNDER T H E FEDERAL

CONSTITUTION

Sales in interstate commerce, sales made beyond the jurisdiction of the taxing state, and sales to the Federal government and its instrumentalities are tax exempt, irrespective of the provisions made in the various statutes. The lack of uniformity, however, even in these provisions, and the constitutional problems raised which are peculiar to the sales or gross income tax must be considered. Interstate Commerce.—Apart from the general exemption of receipts protected by the Federal Constitution in Arizona, 1 California," Illinois, 2 New York, 8 and Washington,3" receipts derived from interstate commerce are specifically exempted, to the extent required by the commerce clause, by Illinois,4 Pennsylvania, 5 Arizona, 6 Mississippi,7 Washington,8 and Indiana." Only the Mississippi and Indiana laws expressly include commerce with other nations within the exemption, although the Pennsylvania reference to "sales as are not within the taxing power of this Commonwealth under the Commerce Clause" covers foreign commerce. The group of statutes already described 1 " which impose the tax upon production, providing expressly for application of the tax, although an interstate shipment is involved, should be borne in mind in this connection. Those regulations which have considered this question have confined themselves chiefly to the definition of interstate sales. In New York the general rule, inferable from the illustrations given, 11 is that a contract of sale which contemplates an actual interstate shipment of goods is interstate and hence non-taxable. The facts that title passes on delivery to the carrier and that the duty of the vendor is then completed are held immaterial. Utah 12 seems to have accepted the New 'Sec. 7. 'Sec. 390(b). •Sec. 3. 'Sec. 5. " N. Y . Regs., Art. 14.

"Sec. s(a). " S e c . s. 'Sec. 7. "Sec. 6 (a). 11 Utah Regs., Art. 6.

2 Sec.

2. 'Sec. 2. 'Sec. 2 (d) (par. 10). 10 Supra, p. 595.

EXEMPTIONS 3

639

1

York view. Illinois' and Pennsylvania, * on the other hand, have ruled that the tax does not apply to sales in which the seller is obligated under the terms of the agreement to make physical delivery of the goods sold from a point in the state to a point outside the state or vice versa, and, although it may have been intended to extend the exemption to the seller whose duty was performed by delivery to the interstate carrier, the language seems inapt for this purpose. This ambiguity is not present in Mississippi, where it has been definitely asserted that if the seller's duty ends on delivery to the carrier, the tax may be collected." The cases seem to be in line with the New York rule, however.16 The New York commission has also ruled that when the delivery is made from one point to another in the state but the course of the transit involves incidentally an interstate run, the sale is intrastate and taxable, and the cases, although there is some conflict, apparently so hold.17 It is provided, further, that where goods are shipped directly from a factory outside the state to the ultimate consumer in the state, the latter having purchased from a local retailer, the latter sale is in interstate commerce. If, however, the same contracts are made, but the shipment is first to the retailer and then to the consumer, the former, but not the latter, transaction is interstate. Since Pennsylvania has encountered difficulty in distinguishing between brokers and vendees, both of whom contract for direct interstate delivery from their vendors or principals to the ultimate purchaser,18 it has there obviously been assumed1 that an interstate shipment of this character is "broken" by the transfer of title from the out-ofstate shipper to the local vendor and thence to the local consumer, rendering the latter sale taxable. Under the New York doctrine, this problem does not arise; the direct delivery is determinative in each case. The United States Supreme Court having indicated, as noted above, that the passing of title during an interstate shipment is not 14 "111. Regs., Art. 5. Release, Dept. of Revenue, Sept. 8, 1932. " L e t t e r to L. W. Richardson and Co., Columbus, Miss., Aug. 8, 1932, filed (note 178, Chapt. X I I , supra, p. 594). " C / . Dahnke-Walker Mill Co. v. Bondurant, 257 U. S. 282, 42 S. Ct. 106 ( 1 9 2 1 ) ; Lemke v. Farmer's Grain Co., 258 U. S. 50, 42 S. Ct. 244 (1922). " G a v i t , The Commerce Clause (1932 Principia Press, Inc., Bloomington, Indiana), Sec. 62 (d). ,s Interview with tax official.

640

EXEMPTIONS 19

important, the fact that the retailer does not take title until arrival of the goods in the taxing state does not seem to affect the interstate character of the second sale. A somewhat similar problem arises in connection with gas, electricity, and oil, where the distributor, the taxpayer in question, imports the particular product in pipes or conduits which lead directly to the ultimate consumer, acting locally only to alter pressure, for example, or to measure the product sold. It seems to be held here that the activity of altering pressure does,20 but that of measuring does not,21 break the interstate shipment, whence distribution at an altered pressure is locally taxable. In this connection, it has been ruled in Mississippi22 that cotton shipped to a concentration point within the state and there sold to a cotton buyer and then either sold locally or in interstate commerce is, as to the latter, continuously in interstate transit, resulting in the non-taxability of the original sale. The Supreme Court has reached a similar decision with respect to a like shipment of oil.23 It is interesting to note that even a break of over twelve months in an interstate transit has been held not to render the intrastate shipment from the storage point to destination taxable in Mississippi.24 A question has been raised in California with respect to the sale of gasoline, free alongside ship, to persons operating ships in foreign commerce.25 In view of the recent decision of the Supreme Court upholding the validity of the South Carolina tax on the sale of gasoline to an interstate air transport company,26 the question seems to have but one answer. The state's power to tax activities carried on prior to the commencement of the interstate transaction is further exemplified in connection with the taxes on production. Whether the rul19

See note 16, supra, p. 639. East Ohio Gas Co. v. Tax Commission of Ohio, 283 U. S. 465, 51 S. Ct. 499 ( 1 9 3 1 ) . State Tax Commission of Mississippi v. Interstate Natural Gas Co., 284 U. S. 41, 52 S. Ct. 63 ( 1 9 3 1 ) . 22 Letter to A. H. Stone, State Tax Comm., Sept. 19, 1932, filed (note 178, Chap. X I I , supra, p. 594). 23 United. Fuel Gas Co. v. Hallanan, 257 U. S. 277, 42 S. Ct. 105 ( 1 9 2 1 ) . 24 Letter to A. H. Stone, State Tax Comm., Jan. 26, 1933, filed (note 178, Chap. X I I , supra, p. 594). 25 Files, Calif. State Board of Equalization, Sacramento, Calif. 28 Eastern Air Transport v. South Carolina Tax Comm., 285 U. S. 147, 52 S. Ct. 341 20 21

(1932)-

EXEMPTIONS

641

ing of the attorney to the Mississippi commission, however, that failure to sell prevents accrual of the tax,27 will result in the transformation of a production into a sales tax, with the accompanying exemption of production for interstate shipment, remains to be seen. The view taken seems to be inconsistent with a tax upon production, measured by subsequent sale. Destruction of the produced goods, prior to sale, eliminates a tax on sales; it should not affect a tax on production. In any event, it will be necessary to heed the warning of the Supreme Court in the opinion which sustained the constitutionality of the former West Virginia tax on the production of natural gas for interstate delivery, that interstate values must not be considered ; 28 freight expenditures, therefore, must be deductible. It is interesting to note the argument made in a suit brought in South Dakota to enjoin the enforcement of the Gross Income Tax Law that this deduction does not validate the tax, an argument made without adverting to the West Virginia case.29 Although it has been said that the Indiana tax, which is imposed directly on gross receipts, was designed to render taxable the receipts of interstate commerce,30 precisely the opposite result seems to have been obtained. With the exception of a gross receipts tax in lieu of a property tax and, possibly, one upon the franchise of a domestic corporation, it seems to be thoroughly settled that a tax upon or measured by the gross receipts of an interstate business is invalid. 31 In Indiana, nevertheless, it has been informally indicated that there will be taxed the gross income of all residents and the receipts from intrastate sources of non-residents, irrespective of the presence of interstate commerce.32 A like attitude may be adopted toward the provision for taxing telephone and telegraph companies on messages transmitted "from, through or to" the state, although the commerce clause seems to be clearly prohibitive. It has, however, been ruled that the interstate receipts of carriers are not to be included in the tax.33 "Letter to A. H. Stone, State Tax Comm., Dec. 20, 1932, filed (note 178, Chap. XII, supra, p. 594). 28 Hope Natural Gas Co. v. Hall, 274 U. S. 284, 47 S. Ct. 639 (1926). 28 Plaintiff's Brief, South Dakota, ex. rei. Botkin v. Welsh, at p. 97. Filed Sept. 18, 1933, Supreme Court, South Dakota. Interview with tax official. 31 Gavit (note 17, supra, p. 639), Sees. 175, 185, 194 (h). "Interview with tax official. " I n f . Bull., Q. 68.

642

EXEMPTIONS

As the state may tax activities prior to the beginning of the interstate transaction, so it may reach those occurring after the interstate transit has ceased. Resale, even in the original package, is taxable,' 4 therefore, and the New York commissioner has so ruled.34 When, however, an interstate sale is followed by an installation or assembling or other service which is locally taxable, it will be necessary to discover the line which exists between minor installations which are held intrastate and construction or assembling which is said to be "intrinsically interstate."36 A similar difficulty arose in Mississippi where a linen service, rendered across state borders for the benefit of a Mississippi resident, was ruled taxable in Mississippi on the ground that the income was derived from the leasing or renting for use of the clean towels, etc., which was clearly intrastate.37 No mention was made of the fact that the cost of the interstate delivery must necessarily have been included in the gross receipts. A problem not considered in any of the regulations, but likely to arise frequently, especially in connection with department, or other large retail, store sales, is that presented by the purchase of an article followed by interstate delivery not contemplated by the contract of sale. Thus, if a half-dozen books are purchased and the purchaser then requests an interstate delivery, and if the transfer of title preceded the shipment and the contract did not contemplate delivery, it would seem that the sale is taxable. On the other hand, if a radio is bought by an out-of-state purchaser, the fact that radios are almost invariably delivered by the vendor renders possible a holding that an interstate shipment was contemplated, even though title passed prior to the beginning of the interstate transit. The distinction, therefore, seems to be between transactions which involve the sale of articles customarily delivered and those which do not involve such sales. There is a possibility, however, that a sales tax on retailers whose sales contain a very small percentage of interstate commerce transactions may be held not to burden interstate commerce. " Sonneborn Bros. v. Cureton, 262 U. S. 506, 43 S. Ct. 643 (1923). " N . Y . Regs, Art. 14. M Gavit (note 17, supra, p. 639), Sec. 69. "Letter to A. H. Stone, State Tax Comm., March 9, 1933, filed (note 178 to Chap. X I I , supra, p. 594).

EXEMPTIONS

643

It will be recalled that the provision in South Dakota for wholesalers is applicable only to that portion of the business "which comes directly into competition with similar interstate business." All others presumably will be taxed at i per cent rather than 0.25 per cent. It might be argued that this relaxation of a burden in favor of persons competing with interstate dealers is a discrimination against interstate commerce and, hence, invalid. Jurisdiction.—Under the due process clause of the Federal Constitution, a state may not tax persons, property, or activities over which it does not have jurisdiction. The general language of the statutes described in the preceding section exempting receipts which may not be reached under the Federal Constitution is of course applicable here. More interesting, however, are the specific provisions" for "extra-state" sales made in the laws of Arizona, Mississippi, South Dakota, Washington, and West Virginia, and for taxing the gross income of residents, wherever earned, in I n d i a n a " and, possibly, in South Dakota. 40 The statutes of North Carolina, North Dakota, and Pennsylvania have no relevant provisions. Each of the first five jurisdictions noted above provides as to manufacturers and extractors, and in South Dakota, as to manufacturers, wholesalers and live stock dealers, that the "measure of this tax is the value of the entire production in this state, regardless of the place of sale or the fact that delivery may be made to points outside the state." They also provide that if products are shipped out of the state, without prior sale, the tax is to be measured by the value of the production immediately before shipment. The jurisdictional question arises only, of course, in the event that the Mississippi ruling41 is followed, and a sale held essential to the accruing of the tax. If, therefore, the tax is construed as one imposed upon sale rather than production, it will be necessary to determine, apart from the question of interstate commerce, what proportion, if any, of the proceeds of a sale may be taxed by a state in which the goods are produced and in which part, all, or none, of the selling negotiations take place, when the transfer of title occurs outside the state, or the " Cited in connection with the discussion of valuation, supra, p. 609. 41 Supra, p. 641. Sec. 2. " S e c . 2.

n

644

EXEMPTIONS

goods are outside the state at the time of an intrastate passage of title." Two types of Supreme Court cases are relevant. It seems to be established that death duties may be collected only by the state in which the property has a legal situs at the time the transfer takes place: 4 * in connection with tangibles, real or personal, this situs is their physical location; as to intangibles, it is the decedent's domicile unless a business situs has elsewhere been created, or some other reason develops for holding that the intangibles have another situs. Thus, an art collection in New York is not subject to a Pennsylvania decedent's estate tax although the decedent was domiciled in Pennsylvania, and various activities essential to the transfer of possession must necessarily have been performed there.44 On the other hand are interstate commerce cases in which it is held that each state may, even as to non-residents, tax that proportion of the taxpayer's net income which is reasonably shown to have been earned within its borders." Since, however, these latter cases are equally applicable in theory to the inheritance tax situation which involves, as does interstate commerce, acts taking place in two jurisdictions (although the cases have apparently never been so construed), and since estate taxes and sales taxes are both excises and thus formally similar, it seems likely that in the illustration noted above, for example, New York, and not Pennsylvania, may collect the sales tax, assuming a sale between Pennsylvania residents. This attitude, it may be noted, has been informally adopted in Pennsylvania46 and in Indiana.47 The latter jurisdiction, however, presents a substantially different problem. The Indiana statute48 provides that the tax "shall be levied upon the entire gross income of all residents of the State of Indiana, and upon the gross income derived from" intrastate sources by non41 The occurrence of the transfer of title outside the state is intended to refer to the final act essential to the consummation of the contract of sale. It is possible to argue that transfer of title can take place only where the property is, since only the jurisdiction of the situs can protect ownership: acceptance of this contention strips the transaction of extra-state contacts and obviously solves the difficulty. "Frick v. Pennsylvania, 268 U. S. 473, 45 S. Ct. 603 (1925). "Idem. 45 Underwood. Typewriter Co. v. ^Chamberlain, 254 U. S. 113, 41 St. Ct. 45 (1920). 44 41 Interview with tax official. Interview with tax official. * Sec. 2.

EXEMPTIONS

645

residents. As has already been indicated, a state may levy a net income tax upon a non-resident as to income earned within the state.4* It has also been recently held that a resident taxpayer may be compelled to include, in his state net income tax return, income earned in another jurisdiction.50 The court indicated, as ground for its decision, that the tax was "apportioned to the ability of the taxpayer to bear it, is founded upon the protection afforded to the recipient of the income by the state in his person, in his right to receive the income and in his enjoyment of it when received."51 A gross income tax, unlike one imposed upon net earnings, has no necessary relation to ability to pay, both because losses are not deductible and because profits do not necessarily increase in proportion to gross sales, and may not involve protection of the taxpayer's right to receive and enjoy the income, since there may be none. His person, however, is protected. It seems impossible to tell whether this, or some one factor, or all of the factors, relied upon in the opinion, is, or are, essential to the validity of the statute. Certainly it seems strange for Indiana to impose a tax upon a person who, for example, owns a business in Ohio, takes no part in its management, and receives no income from it.62 The South Dakota law43 levies the tax upon "every person . . . located in or transacting business in the State of South Dakota, or receiving a gross income, as defined in this Act . . . with respect to his or its entire gross income, as defined herein . . . from all property owned and from every business, trade, profession or occupation carried on in this state by persons not residents of this state." By reading "and" before "from," it seems that the provision reasonably distinguishes between the income of residents and non-residents; otherwise, the tax is limited to non-residents. The sentence following that quoted, introduced by "But," also provides that non-residents are to be taxed only on income earned within the state. Apart from this matter of draftsmanship, gross income is defined, as has been noted, " See note 45, supra, p. 644. "Lawrence v. State Tax Commission, 286 U. S. 276, 52 S. Ct. 556 (1932). " Idem, 286 U. S. at 281, 52 S. Ct. at 557. " The relatively rare instances in which, although no income is received, a net income tax accrues because of the restrictions on deductible expenditures in fact made, may nevertheless be sufficient to eliminate the distinction between gross and net income taxes. " Sec. 2.

646

EXEMPTIONS

to reach only income derived from businesses, occupations, and the investment of business capital. The definitions of gross income in South Dakota and Indiana differ in that the phrases "passing in any transaction of business" and "of the business engaged in" following the language referring to returns " b y reason of the investment of capital" are omitted in Indiana. The South Dakota regulations, however, blandly ignore these distinctions and proceed upon the theory that a gross income tax is provided for.54 Dividends, for example, are held taxable without qualification.55 It should be noted that the rate provisions applicable to manufacturers, wholesalers, and live stock dealers and "any business" refer to persons engaged "within this state" in the respective businesses. The "general" provision also covers every person "located" in the state. Although the provision for wages and salaries uses the words "located in," the preposition has, curiously, been left without an object. There is no similar restriction in the Indiana law. Federal Instrumentalities.—California, Illinois, and New York, as already indicated, provide generally for the exemption of sales or businesses which the state is prohibited from taxing under the Federal Constitution. The Arizona,56 Michigan, 57 Mississippi,58 Washington,58 and Utah80 laws contains similar general language, but Arizona and Washington also specifically exclude from the scope of the tax sales made to the United States government, its departments or agencies, and Michigan, Mississippi, and Utah sales to the United States. It should be recalled here that the Washington statute specifically imposes the tax on national banks, an acknowledged Federal agency. The Indiana,61 North Carolina,42 Pennsylvania, 93 and South Dakota64 statutes contain only specific provisions. In Indiana there are exempted salaries, pensions, and other emoluments paid by the United States or any of its agencies, and interest or earnings paid on bonds or other securities issued by the United States or its agencies to the extent that the state is prohibited, by the United States Consti" The regulations in defining gross income fail to include the phrases "passing in any transaction of business" and "of the business engaged in." " S. D. Regs., Q. 23. " Sec. 7. " Sec. 4 (b). " S e c . 2 (k). " S e c . 5. " S e e . 6. 0 Sec. 3. " Sec. 6 (a), (c). " Sec. 405- S e c . 4 (e), (f).

EXEMPTIONS

647

tution, from imposing a tax on such salaries, pensions, emoluments, interest, or earnings; and income derived from sales to the United States government, its departments, or agencies to the extent that taxation of such incomes is forbidden by the United States Constitution. In North Carolina and Pennsylvania no tax is imposed on sales of merchandise ("tangible personal property" instead of "merchandise," in Pennsylvania) to the Federal government or its agencies ("agencies" omitted in Pennsylvania), including (in North Carolina) agencies for distribution in public welfare or relief work. The South Dakota statute exempts interest on obligations and securities of the United States, salaries, wages, and other compensation received from the United States by officers or employees thereof, and pensions and compensations from the United States where the same is specifically exempted by law. In North Dakota 65 there is a curious clause exempting sales made to the United States government under the commerce clause of the Constitution of the United States. The laws of Oklahoma and West Virginia do not include a relevant provision. The regulations contain several interesting elaborations on the statutes. The department of finance in Illinois, rendering specific the general language of the statute, has announced9® that sales to the Civilian Conservation Camps, the United States Post Office, veterans' hospitals, and other agencies or departments directly under the control of the Federal government are exempt. On the other hand, sales to patients, or to concessionaires in, Federal hospitals and to contractors who have lump-sum contracts with the Federal government for the construction of real property are taxable. Sales by a cafeteria operated by a Federal post office, whether employees are served or not, are not taxed, since these sales are "made directly by the United States government." The rulings of the attorney to the Mississippi commission differ materially from those of Illinois with respect to the status of sales to lump-sum contractors: it has been decided that sales of gravel which is used in the construction of a veterans' administration house are not taxable.®7 In line with this attitude, it has been further held that sales of automobiles to a Federal Land "Sec. 3"III. Regs., Sp. R. 40. "Letter to A. H. Stone, State Tax Comm., Oct. 18, 1932, filed (note 178, Chap. X I L supra, p. 594)-

648

EXEMPTIONS

Bank** "for use in the performance of its functions" and the income of national banks derived from leasing an office building are exempt." The fact that the contractor is paid by the state with moneys allotted by the Federal government is not sufficient, however, to invoke the constitutional inhibition.70 In New York the commission has simply announced that sales by, or to, the United States are referred to in the statutory provision." A position difficult to sustain is the one adopted in U t a h " where, though sales of goods to the United States to be used in the exercise of an essential governmental function are exempt, the tax is said to apply to all sales by the Federal government. The South Dakota regulations73 have added a general provision to the specific language of the statute to the effect that the act is not to be construed to impose any tax upon any instrumentality of the Federal government. There are unofficial reports in Washington to the effect that the national banks are willing to subject themselves to the tax in view of the fact that the "savings-and-loan group" are taxed.74 That some difficulty was contemplated by the legislature in this respect is indicated by the specific provision for lifting the tax on all savings and financial institutions if the national banks should successfully oppose the levy. 75 In Arizona, the assistant attorney-general has ruled that sales to Indians on Indian reservations are exempt, the Indians being wards of the government.70 Several of these regulations are at least of doubtful validity. The ruling in Illinois rendering non-taxable sales made by a cafeteria operated by the Federal government to non-employees and in Mississippi exempting the income of national banks derived from leasing an office building are to be compared with a case holding that the state of South Carolina, engaged in selling intoxicating liquor, was subject to a Federal excise tax, the activity being deemed nongovernmental in character.77 It should be noted, however, that there is ** Letter to A. H. Stone, State Tax Comm., Nov. 9, 1932, filed (note 178, Chap. X I I , supra, p. 594). " L e t t e r to A. H. Stone, State Tax Comm., Jan. 6, 1933, filed (note 178, Chap. X I I , supra, p. 594). w Letter to A. H. Stone, State Tax Comm., Dec. 6, 1932, filed (note 178, Chap. XII, supra, p. 594). " N. Y . Regs., Art. 8 (4). " U t a h Regs., Art. 5. " S . D. Regs., R. 12. M Interview with tax official. " Sec. 30. ™ Interview with tax official. " Soutk Carolina v. United States, 199 U. S. 437, 26 S. Ct. n o (1905).

EXEMPTIONS

649

no necessary analogy between the "instrumentality" limitations on the Federal and state governments. In this connection, the language in the statutes of Arizona, Michigan, and North Carolina and in the regulations of New York, apparently exempting all sales to the Federal government, irrespective of a possible non-governmental purchase, should be noted. It should be mentioned that the clear immunity of sales to the Coast Guard, etc., does not seem to depend on the fact that the tax has been, must be, or may be passed on to the consumer. It has been held that the Mississippi tax imposed on the privilege of distributing gasoline, when sought to be collected in respect of sales made to the Federal government for use of the Coast Guard and veterans' hospitals, was to that extent invalid, although it was conceded that the distributor had not sought to collect the tax from the government.78 This, however, is to be compared with a more recent case in which it was attempted to apply the Federal tax on manufactured articles to the sale of motorcycles to a Massachusetts municipality, and the hand of the tax collector was stayed, the court asserting that the tax was passed on to the municipality." The dissenting opinion of Mr. Justice Stone was devoted to the proposition that the question as to whether any tax is passed on depends "upon considerations so various and complex as to preclude the assumption a priori that any particular tax at any particular time is passed on."80 A distinction, therefore, between statutes which prohibit absorbing the tax and those which do not is not impossible. In reference to contractors engaged in Federal projects, the Illinois ruling seems to be in accord with the cases. It has been held, for example, that the Federal income tax may validly be applied to the income of a consulting engineer derived from supervision of state public works, expressly on the ground that the engineer was an independent contractor and not an employee of the state government." It should be noted, further, that there is nothing to prevent the contractor from using the gasoline or gravel, etc., on other than state contracts. A showing that the tax involved a real burden on the exercise of the governmental function involved might affect this position. No such showing was made in the case of the consulting engineer. "Panhandle OH Co. v. Knox, 277 U. S. 218, 48 S. Ct. 451 (1927). n Indian Motorcycle Co. v. United States, 283 U. S. 570, 51 S. Ct. 601 (1931). " N o t e 70) supra; 283 U. S. at 581, 51 S. Ct. at 605. "Met calf and Eddy v. Mitchell, 269 U. S. 514, 46 S. Ct. 172 (1925)-

650

EXEMPTIONS

Although a sale to a governmental agency is exempt as in fact taxing the purchase and thus directly affecting the exercise of a governmental function, there is no doubt that these agencies are subject to taxation which does not touch a governmental activity. It was argued in connection with the Federal tax on the sale of manufactured articles to a municipality that the tax was, in fact, imposed on the manufacture and hence was valid as applied.82 The court held that the language of the statute was an attempt to reach the initial sale, implying, therefore, that a tax clearly imposed upon the privilege of production may be collected although the produced articles are sold directly to the state (or in connection with a state tax, to the Federal) government. There is no doubt that the Mississippi tax is, by the language of the law, imposed upon production, as are several others previously described. The Mississippi rulings, however, as previously noted,83 have indicated that the tax will not be collected in the absence of a sale. If the indicated ruling were reversed and the tax consistently enforced as one imposed upon production, recent authority upholding the validity of a tax upon a valid subject, measured in part by the income of copyright and royalties,84 might also be brought to bear in this connection as sustaining the applifcation of a "production" tax to the proceeds of sales to the Federal government (although copyrights have since been held not Federal instrumentalities).85 OTHER EXEMPTIONS

Exemption of a Stated Sum.—Five states, Indiana,8® Michigan,®T Mississippi,88 New York,89 and West Virginia,90 provide an exemption of this character. In Michigan the taxpayer may deduct $600 annually from his taxable gross proceeds and a proportionate part thereof, in the event that the privilege taxed is exercised for a fractional part of the year. Although the statute provides that "upon filing monthly returns provided for [required] in this act, a twelfth part of the deduction granted in this section may be claimed . . ." the regulations"1 declare, in heavy type, that "your attention is called to the fact that 83 " S e e note 79, supra, p. 649. Supra, p. 641. " Educational Film Corp. v. Ward, 282 U. S. 370, 51 S. Ct. 170 (1930). "Fox Film Corp. v. Doyal, 286 U. S. 123, 52 S. Ct. S4& (1932). " Sec. 5. Sec. 4 (a). " Sec. 4 (ee). "Sec. 392. "Sec. 3. " Mich. Regs., p. 6.

EXEMPTIONS

651

the B O A R D hereby rules that the $50.00 deduction must be made each and every month." T h e Indiana and Mississippi provisions are similar, except that the amount specified is, respectively, $1,000 and $1,200, and quarterly, as well as monthly, returns are referred to in connection with the allocation of the y e a r l y exemption. T h e N e w Y o r k and Mississippi laws, however, are different. In N e w Y o r k receipts of $1,250 for any quarter-year period are exempt. In the event that the taxpayer's receipts are greater than this amount, but less than $2,500, the amount of the exemption is determined b y subtracting $1,250 from the gross receipts and deducting the remainder f r o m $1,250. In other words, for e v e r y dollar b y which the taxpayer's receipts exceed $1,250, his exemption is reduced, until, of course, the $2,500 figure has been reached. T h e statute adds, finally, that " I n case the period of return is less than a quarter year, the exemption herein provided shall be prorated." In no case, however, is the tax less than $1.50 if the quarter's taxable receipts are more than $1,250. T h e W e s t Virginia provision is also graduated to some extent. F o r those taxpayers who are engaged in a service business or calling or in an activity specifically provided for, an exemption of $25 in amount of tax is provided. For the rest, however, covered b y " a n y business, profession, trade, occupation or calling not included in the preceding subdivisions," an exemption of $6 in amount of tax is provided, plus an exemption of $4 in the case of a married person living with a dependent spouse and of $2 for each additional dependent. T h e maximum exemption, however, is $24. T h e provision f o r prorating in the event that the taxed privilege is exercised for a fractional part of the y e a r is apparently applicable only to the first group, as is also the significant provision allowing only one exemption to any one person, irrespective of the number of privileges exercised. T h e chief difficulty in the application of these provisions seems to center around the status of taxpayers whose receipts for a particular quarterly, or monthly, tax period exceed the exempt amount, but whose annual receipts are less. T h e Michigan ruling, referred to above, results in the imposition of a tax upon a person whose receipts for the y e a r are $500, for example, if the income was received in one month. It has been unofficially indicated in Indiana, 9 2 however, that " I n t e r v i e w w i t h tax official.

652

EXEMPTIONS

the exemption will be adjusted on an annual basis, whence a tax paid on, e.g., $900 in the first quarter, will be refunded at the end of the year if no further taxable income is received. It should be noted that this problem concerns only annual exemptions; the quarterly provision in New York obviates the difficulty, unless the tax commission, in the exercise of its express discretionary authority,113 requires that returns be made for less than quarter-year periods. Some further difficulty may be experienced in ascertaining the single taxpayer to whom a single exemption is allowed, expressly in West Virginia,®4 and by implication from the reference to "person" in the other states. The definition of this term is almost precisely the same in each of the statutes,85 except New York:*® " T h e term 'person' includes any individual, firm, copartnership, joint adventure, association, corporation, company, estate [not in West Virginia], trust or any other group or combination acting as a unit." The Indiana statute includes specifically municipal corporations, and New York omits the references to "any other group or combination acting as a unit," substituting "any combination of individuals." Affiliated corporations, therefore, acting as a unit, probably will be restricted to a single exemption in all the states (except New York, unless the phrase, "combination of individuals" is stretched to include them), all other forms of business organization in combination—copartnerships, societies, associations, and joint stock companies—having been specifically provided for. If "acting as a unit" should be construed to include for some, rather than for all, purposes, there will be trouble in determining the status of various loose-knjt combinations organized to regulate prices or for the benefit of combined purchasing power, etc. Exemption of Specified Business Activities.—These activities involve mainly the sale of food (New York®7 and North Carolina),®8 the operation of utilities (New York,®9 California, 100 and West Virginia), 101 and the production and/or sale of agricultural products (Mississippi, North Carolina, North Dakota, Pennsylvania, and West Virginia). Manufacturing is specifically exempted in North Carolina, and the various forms of transportation service are sep" Sec. "This "Sec. "Sec.

394. **Sec. 3. definition is invariably one of the first provisions in the statutes. 390. " S e c . 390 (b). **Sec. 405. M 1 Sec. 2 (d). 390 (b). ' " S e c . 5 (b).

EXEMPTIONS 102

653

103

arately taxed in West Virginia. Utah exempts the receipt of intrastate movements of freight and express, and street-railway fares. Sale of Food.—New York exempts "receipts from the sale for human consumption of the food products hereinafter . . . specified: cereals and cereal products; milk and milk products; meat and meat products; fish and fish products; eggs and egg products; vegetables and vegetable products; fruits, spices and salt; sugar and sugar products, other than candy and confectionery; coffee and coffee substitutes; tea; cocoa and cocoa products, other than candy and confectionery." These, however, are not to include "spirituous or malt liquors; soft drinks; and sodas and beverages such as are ordinarily dispensed at bars and soda fountains or in connection therewith, other than coffee, tea and cocoa." However, the liquor tax law which took effect December 5 , 1 9 3 3 , exempted liquors and wines from the sales tax. Beer remains subject to the sales tax. The North Carolina law exempts, on condition that accurate records are kept, retail sales of flour, meal, meat, lard, milk, molasses, salt, sugar, and coffee. It is added that "flour" means wheat flour, "meal" means corn meal, "meat" includes the fresh or cured meat of animals or fish, other than shell fish, not specialized canned, bottled, or boxed products, "lard" does not include oleomargarine, butter, or oils, "molasses" does not include other syrups, "milk" includes buttermilk but not canned or evaporated milk or other milk products, "sugar" includes plain and granulated sugar and no other sugar products, and "coffee" does not include coffee substitutes. The distinctions between sugar products and confectionery, and between beverages customarily dispensed at fountains and milk products, have caused trouble in New York. It was finally decided 104 that ice cream, for example, though covered with fruits, syrups, etc., and malted milks were exempt as food products. Since ice cream seems to be as clearly a sugar product as cough drops or popcorn, held taxable, and as much a confection as milk chocolate, likewise taxed, there is no certainty that the commission's ruling is in accord with the statute. This statement that "confectionery," " b y reason of its context in the law with sugar and sugar products, does not include many kinds of confectionery" seems to be without support in the statute at KO

Art. 12-A.

" S e c . 4(b).

10,

N. Y. Regs., Art. 27.

EXEMPTIONS

654

least so far as sweetened products are concerned. No reason is given for the exclusion of malted milk from beverages ordinarily dispensed at fountains. It is noteworthy that the provision specifically exempts only "coffee, tea and cocoa." The neglect to include milk in this group seems to be inexplicable, in view of the fact that milk is specifically exempt according to a preceding section of the statute. The more restricted provisions of the North Carolina statute seem to avoid these difficulties. It should be added, finally, that neither of the statutes or regulations provides for the containers used in the sale of concededly exempt products. It is difficult to tell, therefore, whether the retailer of canned tomatoes must pay the tax on the amount of the sales price necessary to cover the cost of the can, wrapping paper, etc. Sales by Public Utilities.—Municipally owned water and electric generating and/or distributing plants are exempt in West Virginia. The sale of gas, steam, and water, when delivered to consumers through mains or pipes, and sales of electricity, in New York, and receipts from the sale, furnishing, or service of gas, electric power, and water when delivered to the consumer through mains, lines, or pipes, in California, are exempt. The omission of steam in the California provision might be supplied by supposing steam to be included in the reference to the sale of water, although the fact that the California statute is in large part modeled upon that of New York may indicate that the omission was with conscious intent to exclude. Failure of the New York statute to specify the method of delivery in the case of sales of electricity (provided for in California), leaves the status of flashlight, automobile, and radio batteries undetermined in the former state. Sales of Agricultural or Other Extractive Products.—The exemptions included in this division have been, in the main, described, and the problems of classification raised have been considered, in connection with the discussion of mining, logging, and fishing, and agriculture, horticulture, and stock raising.105 There may be added here a reference to the Mississippi exemption of the "gross proceeds received from the sale of any cotton or seed cotton or lint cotton or ""Supra,

pp. 599-605.

EXEMPTIONS

655

baled cotton whether compressed or not or cotton seed in its original condition." 108 It will have been observed that the statutes of Mississippi, North Carolina, North Dakota, and Pennsylvania limit the exemption to sales by the producer or by any member of his organization. In West Virginia, the exemption applies to those engaged in agriculture, horticulture, or grazing. Receipts Otherwise Taxed.—Arizona, 107 California, 108 New York, 109 North Carolina, 110 and Oklahoma 111 exempt the sale of gasoline or motor fuel which is subject to the state sales or excise tax. Refunds accruing to taxpayers under the motor-fuel tax in California, however, are to be retained by the revenue department and charged off against the sales-tax liability, as sales of gasoline subject to refund of the gasoline tax are not exempt from the sales tax. North Carolina also exempts the sale of commercial fertilizer on which an inspection tax is paid. The Oklahoma tax does not apply to "the sale of cigarettes subject to any stamp tax levied by law of the State of Oklahoma; nor to the sale of any other commodity upon the sale of which any tax is imposed under or by virtue of Article 10 (ten), Section 12 (twelve) of the Constitution of the State of Oklahoma." The regulations announce that the sales tax is at present applicable to cigarette sales, the stamp tax having been suspended by referendum. Utah 112 exempts "sales of commodities, the sale or use of which is now subject to a sale or excise tax under the laws of the State of Utah. . . . Provided, however, that sales of beer shall be subject to the tax herein imposed." Indiana," 8 Mississippi, 114 South Dakota, 118 Washington, 119 and West Virginia 1 " exempt insurance companies which pay a premium tax. In Indiana, the exemption is restricted to those which pay at a rate in excess of 1 per cent. In Mississippi 118 those subject to a tax under the Sea Foods Act and the Amusement Tax Law, and, in South Dakota, 119 express companies which pay a tax on gross income, are exempt. Since all the statutes specifically refer to those companies which "pay" the tax, it may ,M Sec. 4 (g) • - Sec. 390 (b). '"See. 6. "'Sec. 3"* Sec. 2 (f), 4 (a).

Sec. "'Sec. '"Sec. '"Sec. '"Sec.

m

29. 405. 7 (a). 4(2). 3(d).

Sec. 6. Sec. 5. m Sec. 4 (a). 1,7Sec. 3. 1,1

656

EXEMPTIONS

be that the taxpayers, by delinquency in this respect, may render themselves subject to the sales or gross income tax. Exemption of Sales by or to the State or Its Departments.—Mis1 0 1 sissippi * and Washington" exempt sales to the state, its departments or institutions. North Dakota"* duplicates this provision and adds "and [its] industries"; Michigan 1 " and Utah, 1 " similarly, add respectively, "or any of its subdivisions," "and the political subdivisions thereof." North Carolina 125 excludes sales to the state or any of its subdivisions, including sales to agencies of the state or local government for distribution in public welfare and relief work. The New York statute1*6 exempts the receipts of sales by, or to, the state, municipalities, and any other political subdivision. The Oklahoma tax127 does not apply to sales by the state or any municipal subdivision thereof. In addition to the exemptions of sales to the state, the Mississippi law128 also declares that it is not to "be constructed [sic] to levy a tax upon the operation of municipal corporations of any electric or water system owned by the municipality operating it." A novel provision is contained in the California law 129 to the effect that any governmental agency (including the state, counties, cities, or city districts) may apply for a "refund" of taxes paid by those selling foodstuffs to said agencies for free distribution to the poor. The attorney to the commission in Mississippi180 has ruled that the reference to the departments or institutions of the state does not include counties or municipalities, relying to some extent on the fact that in other statutes municipal exemptions had been expressly made. Although it has been informally indicated that the same result is likely to follow in Washington, 181 the absence of a similar statutory history and the fact that counties and municipalities are definitely state institutions in so far, at least, as they are created by, and are subject to, the control of the state, may justify a contrary decision here as well as in North Dakota. A similar difficulty seems to be involved in the interpretation of references to "subdivisions" or "politm S e c . s. , a S e c . 3. ' " S e c . 2 (k). w Sec. 6. 121 Sec. 405. Sec. 4 (b). "*Sec. 390 (b). " Sec. 5. " S e c . 2 (d) (last sentence). " S e c . 7""Letter to Hannah and Simrall, Hattiesburg, Miss., Oct. 15, 1933, filed (note 178 to Chap. X I I , supra, p. 594). m Interview with tax official.

EXEMPTIONS

657

ical subdivisions" in Michigan, Utah, and North Carolina, although counties and municipalities are as clearly subdivisions as they are institutions. New York and Oklahoma solve the question by specifically including municipalities; counties seem clearly to be covered by "any other political subdivision" and probably by "any municipal subdivision." It will have been observed that New York and Oklahoma refer to sales by the state or its subdivisions. Interesting at this point is the California provision which permits the state to recover taxes paid by its vendor, indicating that the legislature takes seriously its provision for passing on the tax. According to this view, there is no reason to exempt sales by state agencies, since theoretically the tax does not affect them. Exemption of Sales by Non-Profit Organizations.—Utah1*2 exempts "all sales made by religious, charitable and eleemosynary institutions, in the conduct of the regular religious, charitable and/or eleemosynary functions and activities"; the Washington statute" 8 does not apply to "Religious, scientific, educational benevolent or other corporations or associations of individuals not organized or conducted for pecuniary profit," no part of whose income "inures to the benefit of any private stockholder or individual"; West Virginia134 exempts mutual savings banks without capital stock, non-profit mutual building and loan associations, cemetery companies, societies, organizations, and associations operated exclusively for the benefit of their members, and corporations, associations, and societies "operated exclusively for religious or charitable purposes"; Indiana185 and Mississippi134 exclude non-profit labor, agricultural, and horticultural organizations, cemetery associations, fraternal benefit societies, religious, charitable, scientific, and educational institutions, business leagues, chamber and boards and organizations operated exclusively for the benefit of the community, the income of which does not inure to the benefit of a private stockholder or individual. The South Dakota statute131 exempts "Farmers or other mutual Hail, Cyclone, Casualty, Fire or other Insurance Companies or Associations, including Inter-insurers and Reciprocal Underwriters, the income of which is used or held for the purpose of paying losses or expenses." m

Sec. 6. '"Sec. 7 (b).

-Sec. 4 (i). -Sec. 4 (b), (c).

"•Sec. 3. Sec. 3 (c).

m

658

EXEMPTIONS

It should be borne in mind, as previously pointed out,1*8 that the absence of a specific or general exemption covering a particular nonprofit organization may be negatived by the fact that most of the statutes are restricted to business activity. The difficulties likely to arise will probably involve the definition of such phrases as "religious, charitable and eleemosynary" in the Utah statutes, "religious or charitable purposes" in those of West Virginia, and "benefit of the community" in those of Indiana and Mississippi, the status of nonprofit corporations where receipts are in part derived from business activity (leasing buildings, etc.), and of "cooperative marketing or purchasing groups" and the significance to be attributed to the phrase, "no part of whose income inures to the benefit of any private stockholder or individual." It will be noted that only the Washington statutes contain a provision which exempts generally non-profit institutions. While "the benefit of the community" language in the statutes of Indiana and Mississippi will include most of these, it may not cover social and athletic clubs, or individual business associations, such as trade associations, as distinguished from chambers of commerce, labor unions, etc. The Utah and West Virginia provisions do not seem to include libraries, museums, universities (although there is a possibility that "charitable" may include educational activities), research organizations, etc. It is interesting to note that the broad language used in Washington has been thought ineffective to exclude cooperatives18®— a result which seems to be entirely consistent with the direct influence which these organizations have on the "pecuniary profit" of their members. In connection with the reference to "the regular religious [etc.] . . . functions . . ." in Utah it might be suggested that these institutions are not organized to sell, but to receive and spend, so that sales are never made "in the conduct of the regular religious . . . functions." A similar difficulty may be found in construing the "no income shall inure . . ." provision. Few charitable institutions can be operated without paid employees, whence it follows that the income of the institution inures to the benefit of a private individual. The provision, of course, was not so intended and will probably not be so construed. ,x

Supra, pp. 555-56.

Interview with tax official.

EXEMPTIONS

659

Exemption of the Receipt of Other State or Federal Taxes.—The 140 141 142 statutes of Indiana, Mississippi, South Dakota, Utah,143 and Washington144 contain provisions dealing with this matter. Indiana exempts "all taxes received or collected by the taxpayer as agent for the State of Indiana, and/or the United States"; Mississippi, "all sums received or collected as taxes on admissions, and . . . on the sale of tobacco, gasoline and/or oil"; South Dakota, "gasoline, cigarette and malt taxes, imposed by the laws of this state"; Utah, "any tax imposed by the federal government or by this act"; and Washington, "so much . . . as is collected by the taxpayer as an excise upon motor vehicle fuel or as a similar excise." Although the Illinois statute is silent on this question, the following administrative rulings have been made: the motor fuel tax collected by the retailer is deductible145 but Federal taxes are not,146 whether or not the retailer is obligated to pay them or whether he has purchased the goods from one who has paid a Federal tax and billed it as a separate item to the retailer, including "Federal processing taxes, compensating taxes and taxes upon floor stocks." A different attitude has been adopted in Utah,147 where, although the statute provides for the deduction of "any Federal tax," the regulation lists deductible Federal taxes as those which are consumers' taxes, including the imposts on cable dispatches, opera tickets, theater tickets, radio dispatches, telegraph messages, telephone calls, and excludes Federal taxes imposed upon the manufacturer or importer, "even though such tax be passed on from the manufacturer' to the consumer." The Mississippi provision has been administratively construed to apply to the Federal, as well as the state, tax on gasoline and oil.148 A distinction should be noted between those statutes which provide that the taxpayer is to collect the tax as agent for the taxing authority, and those which levy a tax upon the seller as such even though he may shift it to the buyer. This is the distinction made in the Utah regulations, since the deductible taxes are those levied upon the person paying for the service and collected by the taxpayer here in ,41 Sec. 2 (j). 112 Sec. 1 (g). '"Sec. 6 (b). 144 Sec. 5. "'Sec. 2 (i). "'111. Regs., Sp. R. 14. 141 Utah Regs., Art. 9. "•111. Regs., Sp. R. 18, 39. 148 Letter to A. H. Stone, State Tax Comm., Nov. 5, 1932, filed (note 178, Chap. X I I ,

supra, p. 5 9 4 ) .

660

EXEMPTIONS

question as an agen'c of the government. It is reasonable to suppose that the Indiana provision, referring to the taxpayer as an agent, is adverting to this type of tax. The taxes specifically referred to in Mississippi, South Dakota, and Washington are not of this character, however , and the provision for "any similar excise" in Washington will have to be construed with this in mind. It is likely, however, that t ax money actually collected by the taxpayer as agent for the state, or Federal, government will be generally deductible as moneys in which he has no interest, specifically provided for in the regulations of Indiana14® and South Dakota, 150 and implicit in the other statutes which purport generally to tax the principal and not his age'xit. Exemption of Miscellaneous Receipts.—The California tax 151 does not include receipts from the sale of gold bullion, concentrates, or 'precipitates by the producer or refiner, or from the sale of tangible personal property used for the performance of a contract on public works executed prior to the effective date of the statute. Oklahoma 152 exempts "tickets or admissions to State or County fairs"; the Indiana, 153 Mississippi, 154 and South Dakota15® statutes do not apply to amounts received under insurance policies and contracts paid by reason of the death of the insured and under life insurance endowments or annuity contracts, either during the term, at maturity, or upon surrender of the contract, equal to, in the case of the endowment or annuity contracts, the amount of premiums paid. South Dakota 156 exempts gifts, bequests, devises, or inheritances, amounts "received through accident or health insurance or under workmen's compensation act as compensation for personal injuries or sickness, and the amount of any damages received, whether by suit or agreement, on account of such injuries or sickness," and interest upon obligations of the state. North Carolina 157 does not tax the sale of public-school books on the adopted list, the selling price of which is fixed by law. School-books, likewise, are exempt in Mississippi, where the sale price is fixed by state contract, as are the receipts of hospitals, infirmaries, and sanitaria.158 "'Inf. Sec. 155 Sec. Sec. 152

Bull., Q. 19. 5. 4 (a), (b). 4 (f), (g).

1 M S.

D. Regs., R. 14. Sec. 6 (d), (e). 1M Sec. 4 (c), (d), (e).

Sec. 5 (c), (d). 4 (d), (e). l w Sec. 405. 151

1M Sec.

EXEMPTIONS

661

Reduction in Tax Contingent upon Federal Tax.—Although it is not, strictly speaking, an exemption provision, there may be noted here the section of the North Carolina law which provides that if the Federal government levies a sales or production tax distributable in whole or in part to the states, the state sales tax rates shall be reduced, by executive order, to reduce the yield by an amount equal to that to be received from the Federal government.159 SOME QUESTIONS ARISING UNDER THE VARIOUS STATE CONSTITUTIONS

When the Illinois Supreme Court (Winter v. Barrett, 186 N.E. 113; 111., 1933) held the original Illinois retail sales tax unconstitutional chiefly on the ground that it violated the uniformity clause of the state constitution, dismissing at the same time the contention that the statute contained more than one subject, it brought into prominence the question of the effect of these constitutional provisions, present in various forms in many of the sales-taxing states here considered, on sales and occupation taxes generally. The relevant constitutional provisions are as follows: Five states besides Illinois contain uniformity provisions clearly applicable to excise taxes. The Illinois provision1*0 is that the "General Assembly shall have power to tax . . . [there follows a specific list of occupations which is subsequently declared not to be exclusive] in such manner as it shall direct, uniform as to the class upon which it operates." The Michigan constitution" 1 provides that the "legislature may by law enforce specific taxes which shall be uniform upon the class upon which they operate." The Mississippi language182 is broader: "Taxation shall be equal and uniform throughout the state." Pennsylvania1®3 is more liberal, providing that "All taxes shall be uniform upon the same class of subjects . . . but exemptions may be made." The West Virginia1" legislature is given authority "to tax by uniform and equal laws all privileges and franchises of persons and corporations." Although the South Dakota186 and Utah1** legislatures are similarly authorized "to impose taxes upon incomes and occupations . . ." there is no analogous restriction. The Oklahoma187 constitution contains a clause applicable to all statutes to the effect Sec. 402. "'Sec. 112. "»Art. XI, Sec. 2.

Art. IX, Sec. 1. '"Art. IX, Sec. 1. '"Art. XIII, Sec. 12.

m

Art. X, Sec. 4. "'Art. X, Sec. i. '"Art. V, Sec. sq.

662

EXEMPTIONS

that "Laws of a general nature shall have a uniform operation throughout the state." The constitutions of Arizona, 188 Indiana, 169 North Carolina, 170 North Dakota," 1 South Dakota, 172 Utah, 1 7 ' and Washington 174 provide that property taxes are to be uniformly levied. Arizona, South Dakota, and Washington, however, expressly permit classification. Although restrictions on property taxation do not seem applicable to excises, there is little doubt that this proposition will be frequently argued, as it has been in a case pending in Washington, 175 especially in view of the numerous holdings to the effect that income taxes are included within constitutional references to property, relied on recently in Illinois to invalidate the state graduated net income tax. 178 Although the California provision 177 does not impose a uniformity requirement, its language: "all property is to be taxed according to its value," might be held applicable to sales taxes measured by gross receipts, which may, or may not, be deemed to vary in proportion to the "value" of the business. California decisions, however,' seem disposed to confine the constitutional inhibition to property taxes. 178 The New York constitution does not include a relevant provision. Arizona,17® North Dakota, 180 South Dakota, 181 and Washington 182 require that "Every law imposing a tax shall state distinctly the object of the tax, to which object only it shall be applied." The wording is slightly different in South Dakota. The Michigan" 3 and New York constitutions 184 provide that "Every law which imposes, continues or revives a tax shall distinctly state the tax and the object to which it is applied." The Oklahoma provision 185 is to the effect that "Every act of the Legislature shall embrace but one subject except general appropriation bills, general revenue bills. . . ." Similar provisions are contained, without the exceptions, however, in the constitutions of all 1,8

Art. I X , Sec. i . ' " S e c . 200. ' " A r t . V, Sec. 3. m Sec. 176. ' " Art. X I , Sec. 2. Art. X I I I , Sees. 2, 3. ' " A m e n d m e n t 14. "* Respondent's Brief, Washington v. Yelle, pp. 13, 14. Bachrach v. Nelson, 349 III. 579, 182 N. E. 909 (1932). m Art. X I I I , Sec. 1. Estate of Watkinson, 191 Calif. 591, 217 Pac. 1073 (1923)" • A r t . I X , Sec. 6. ' " S e e . 175. ' " A r t . X I , Sec. 8. ,M 1M Art. VII, Sec. 5. " " A r t . X, Sec. 6. Art. I l l , Sec. 24. ' " A r t . V, Sec. S 7-

1,1

EXEMPTIONS

663

the states here considered except those of Mississippi and North Carolina. Before turning to a consideration of the Illinois decision and its possible effect in other jurisdictions, it may be well to point out that the "due process" and "equal protection" clauses of the Federal, and many state, constitutions,1®* will operate in many cases as effectively as the uniformity provisions referred to to invalidate particular classifications, so that the absence of a uniformity requirement does not necessarily render any statute constitutionally unimpeachable in this respect. Section 2 of the original Illinois sales tax provided that "A tax is imposed upon persons engaged in the business of selling tangible personal property at retail," tangible personal property having been defined in the previous section to exclude "farm products or farm produce sold by the producer thereof or motor fuel as defined in the Motor Fuel Tax law. . . ." The court held that, since truck farmers and gasoline dealers were engaged in selling at retail and since farm products and motor fuel could not be deprived of their character as tangible personal property by mere legislative fiat, the statute was "not uniform in its application to the class on which it operates and cannot be sustained." Although this position seems to render irrelevant the possible existence of a reasonable basis for excluding farmers and retailers of fuel, the court went on to consider the fact that the latter were already heavily taxed, and dismissed the argument only on the ground that the tax involved was imposed directly upon the consumer rather than upon the fuel dealer. This inconsistency, combined with the fact that the decision may apparently be avoided by omitting the general classification and imposing the tax on retailers of tangible personal property other than farm products and motor fuel, is likely to result in a general rejection of the doctrine laid down, a doctrine which, so far as the wording of the other statutes is concerned, is applicable to most of them. The California and New York taxes, for example, are imposed for the "privilege of selling tangible personal property at retail," yet many exemptions are provided; the Pennsylvania tax is levied on "sale of tangible personal property," "" The Federal "equal protection" and the state "uniformity" clauses were argued and disposed of together in Winter v. Barrett (supra, p. 661), for example.

EXEMPTIONS

664

but, as in Illinois, fanners who sell their own farm products are exempted, etc. It is at present being argued in Washington that the statement in the statute to the effect that "The taxes hereinafter imposed shall apply to all business activities," and the fact that the provision for those engaged in agriculture and in unclassified business was vetoed, bring the statute squarely within the Illinois decision.181 It has been replied that the statement referred to is one of intention and does not, therefore, operate to create a class of taxable persons, and that, assuming the Illinois decision to be technically justifiable and applicable to the Washington law, it should not be permitted to defeat the acknowledged power of legislatures to tax some occupations and not others.188 The objection to the Illinois statute, based on the fact that the title, as well as the statute, included more than one subject, i.e., disposition of the proceeds of the tax and imposition of the tax, in violation of the general constitutional prohibition, was met by the argument that the disposition of the money collected was "germane to and connected with the subject of the tax" and hence might be included. The complexities of this problem and the fact that each statute is likely to present its own peculiar difficulties, both in this respect and with regard to adequate statement of the object of the tax in the title, precludes further discussion of this matter. Other questions involving the character, whether reasonable or arbitrary, of every classification or exemption made, the authority of a particular legislature to levy a gross income, sales, occupation or "consumers" tax, the possible delegation of legislative power in the administrative provisions, etc., must similarly be passed over. MT m

Respondent's Brief (note 175, supra, p. 662), pp. 21 ff. Relator's R e p l y Brief (note 175, supra, p. 662), pp. 12 ff.

APPENDICES

APPENDIX A

METHODS USED IN THE STUDY Limitations of the Sample.—Many of the difficulties of statistical investigation do not present themselves where the study embraces all the units involved, i.e., where no sampling process is necessary. Financial limitations almost invariably prohibit ventures of such wide scope, however, and once it becomes necessary to restrict the field, there is introduced an element of arbitrary choice. In this study, generally speaking, it was necessary to impose the following limits to the number of business units surveyed: (a) to limit the number of states within the study; (b) to select certain urban and rural areas within these states; (c) to draw up a classified list of industries or lines of business to be included; (d) to choose an adequate sample of the types of business selected. Each of the above limitations involved a special set of complex factors which were weighed and which affected the ultimate decision. The plan finally adopted by the authors is viewed by them as one of a number of more or less equally defensible choices. Doubtless on each of the points itemized above, several arrangements or plans could be made to yield equally interesting results. The authors do not pretend to be well enough informed conclusively to defend or reject any one of such plans of study. The material assembled in this volume is presented for what it is worth, and in such fashion as to enable each reader to judge for himself the significance of the data. Selection of the Areas to Be Studied.—The amount of funds and of time available being given as fixed factors, the three chief variables to be considered were (a) the areas to be covered, (b) the size and character of the sample, and (c) the types of business to be included. Thus a 100 per cent sample of all retailers in one state might have been taken, at the expense of failing to study conditions in any other state; or all sales-taxing states might have been covered, if one could have been content with a sample of, say, i or 2 per cent of all lines of business. The final decision was a compromise between such extremes.

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As to the areas to be covered, the guiding factors were the number of states which would be fairly certain to have a sales tax in force during the time allowed for the study, and the number of those states which differed markedly in size of tax rate, thus allowing a certain degree of comparison of the different effects to be found under different rates. The problem of urban versus rural areas was also of importance. At the time the field work was being planned, the sales tax 1 was in force in six states and was soon to be effective in seven others. Only Michigan and North Carolina had a retail rate of 3 per cent, and only Illinois and Mississippi a retail rate of 2 per cent. All the others taxed retail sales at 1 per cent or less,2 among them New York, which, because of its commercial importance and geographical convenience from the point of view of the writers and their staff, was assumed from the first to be one of the areas to be studied in whole or in part. The final choice of New York, Illinois, and Michigan, with sales taxes of 1 per cent, 2 per cent, and 3 per cent, respectively, although somewhat arbitrary, seems to be justified in view of the above considerations. New York, as the largest center of trade and manufacturing in the country, and bordered by states not having sales taxes; Illinois, as a state which had first experimented with a 3 per cent rate, and, after the tax had been declared unconstitutional, had substituted a 2 per cent measure; and Michigan, as one of the two states which were levying a rate as high as 3 per cent, offered exceptional opportunities for analysis of the various effects of sales tax legislation. Within these states, the chief areas covered by the field work were the largest cities: New York, Chicago, and Detroit. In these trade centers is the bulk of the population of the respective states, and here the greater portion of the business is transacted. It might have been as well to have surveyed the practices in all the remaining cities in each of these states and to have left the metropolitan areas untouched. The data would have been different, but perhaps equally instructive and interesting. It was at first thought that in New York State little more than the New York City sample could be collected. However, as the work progressed it became evident that a number 1 As that term is used in this study. See supra, pp. 3-4. ' E x c e p t Arizona, where the retail rate is 1.5 per cent.

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of other important areas of the state could be brought within the scope of the study. More than 5,000 establishments in other sections of New York State were visited. Buffalo and Syracuse were included, and in addition, most of the cities, towns, and villages along the borders of Pennsylvania, New Jersey, Connecticut, Massachusetts, and Vermont, as well as communities in half a dozen counties in the interior of New York State. In Illinois, the border situation in Rock Island and Moline (across the river from Davenport, Iowa) was investigated, and in Michigan, the border case of Monroe in juxtaposition to Toledo, Ohio. Some data were also gathered in Davenport and Toledo, concerning diversion of business from Illinois and Michigan. Representativeness and Adequacy of the Sample.—Another immediate problem involved a decision as to the character and size of the sample which should be taken in the territories selected. To be representative, it was felt that the sample should include at least all of the major lines of business which would be subject to the tax, and that considerable care should be exercised in avoiding any bias toward any particular size of establishment, type of neighborhood, etc. As a standard of adequacy the figure of 10 per cent was set as the minimum at which to aim, with the possibility of a higher percentage in certain areas and for certain lines of business. The 10 per cent figure was, indeed, the first of all the variables to be fixed, and the limitations of areas and lines of business to be covered were a direct result of this decision. The selection of this 10 per cent figure was, in a sense, arbitrary; but it was felt that to drop below this level would be to use such a low standard of adequacy that the data would not be worth the expense involved in their collection. They might show interesting examples of isolated cases, but would not be typical enough to be of any assistance to the legislator or to the student of social sciences wishing to develop valuable generalizations. It must, of course, be admitted that even such mathematical tests of adequacy as exist are difficult of application in the case of a questionnaire, especially one which is lengthy and framed to cover numerous points. What constitutes adequacy must therefore remain largely a matter of judgment. The final decision was to cover approximately one-half of certain

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selected lines of business (which included, however, far more than one-half the total number of all classes of establishments) on a 20 per cent basis in certain of the New Y o r k areas, in Chicago, and in Detroit, and to cover all of the remaining lines on a 10 per cent basis in the New York areas alone. The classifications of lines of business in the United States census reports of retailers, wholesalers, and manufacturers, together with the listings in the classified telephone directories and in the Dun and Bradstreet rating books formed the basis for the selection of as complete a list as possible of the lines of business to be included in the study. In New York State, aggregating the 10 per cent and 20 per cent samples, some sixty different classes of retail business were included, and approximately three hundred varieties of wholesaling and manufacturing groups were selected. For convenience in tabulation, the retail list was condensed into thirty-eight groups, and the wholesalers and manufacturers were regrouped into fifty classes. In Illinois and Michigan, on the 20 per cent basis, some 24 classified groups were studied. The lines of business chosen for the 20 per cent samples were selected in conference where "common sense" could afford the only guide of what should be included. There was no special advance knowledge concerning the results which the investigation might reveal. In general, the preference was for those classes of business which affected a large number of consumers rather than for those dealing in highly specialized products purchased by the few. This was no hard and fast principle, however, nor were the classes of business rated in any definite way as a basis for selection. In the New York study, it was found, as the survey neared completion, that an adequate series of data on the shifting and absorption of the tax could probably not have been obtained had the sample been much less than 10 per cent of all the firms in each line of business. This results from the fact that about half of the firms stated that they were exempt, and of the remainder, three-fourths declared that they did not shift the tax. As a result, slightly more than 1,000 remained to report on various methods of shifting. This meant that only a few hundred samples for the entire state were finally available for an examination of each of the several policies

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of shifting, and even less, for any one of the several areas within the state. To obtain an adequate or representative sample of the consumers' reactions, a house-to-house canvass or direct mail communication would have been necessary, and the cost of either was prohibitive. A compromise was therefore decided upon, by including, in all of the investigations conducted among business men, a question relating to their personal viewpoints as consumers. By this arrangement it was possible to obtain as many replies from the consumer standpoint as were collected from the business establishments. While the results from this question relating to the consumer viewpoint may be somewhat distorted (for one thing, they represent only indirectly the attitude of the housewife), and while they fall far short of the 10 per cent standard, they were gathered as a possibly interesting by-product available at a relatively slight cost. Within the limited field finally chosen for study, there existed the problem of attaining proper territorial distribution of the units included in the sample, and that of making the sample representative of the lines of business for the area in question. The factors entering into this problem were so numerous and the considerations so complex that nothing could be gained by deliberate selection of the units. Factors of size, character of neighborhood, population density, and the like, are all imponderables, especially when it is not known what the distribution of each type of business is for each of the many important factors to be weighed in the selecting of the sample. Even if this information were at hand, the actual process of drawing a sample which would give effect to the proper balancing of the general forces involved would prove too drawn out and complex for practical purposes. In recognition of these limitations the sample was drawn on what is virtually a random basis, using, however, the census figures as a clue to the number to be included in each sample. It is common knowledge that the number of business units of a particular type within a given area is never definitely known, even in census years. Census figures are themselves estimates in the sense that, although the result of actual count, they nevertheless only approximate the truth. Consequently, when it is stated in this report,

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for example, that a 10 per cent, or a 20 per cent, sample was drawn, it is meant that approximately a 10, or 20, per cent sample was drawn. The variation from that percentage may in fact have been considerable, because the number of units selected was determined on the basis of either the 1929 census of distribution and the census of manufactures or else the classified telephone directories, whichever showed the greater number of business concerns. This procedure makes no allowance for the heavy lists of business failures during the period 1929-33, and for the new crop of "depression establishments" which arose during those same years. It is clear that these factors operate in different degree for each type of business, so that the deviation from the stipulated percentage can be expected to differ for each class. However, this lack of precision cannot be considered to have rendered the results so defective as to make their publication injudicious. Preparation of the Questionnaire.—The preparation of the questionnaire involved a period of experimentation during which mimeographed blanks were circulated by mail and by personal canvass as a process of preliminary sampling. Three sets of mimeographed questionnaires were prepared, in which changes were made in questions to be asked and in the general form of the questionnaire. Field investigators discovered some of the questions to be ambiguous, others were found to antagonize the people interviewed, and still others seemed to yield data of no special value. In addition, problems arising during the interviews suggested new questions to be added to the questionnaire. At this stage of the work is was also found advisable to arrange for the final tabulation of the results, and care was taken to discuss with the tabulating company the most convenient layout of format for the purpose of facilitating the preparation of tabulation cards for use on the machines. Code numbers were given to each set of answers on the questionnaire and were printed in a column following the questions, so that punch-cards could be made directly from the data supplied on the questionnaires.3 Field-Work Layout.—During this process of experimentation it was also revealed that from the cost standpoint a greater number of ' See infra, Appendix E, for samples of questionnaires finally prepared.

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results, as well as more satisfactorily filled-out questionnaires could be obtained by direct personal canvass than by mail. It was therefore decided to lay out a plan of field work entirely upon the basis of personal canvass. The matter of selection of specific business establishments to be included in these field studies also presented a few problems. At first it was felt that a mere random selection by the field workers, of a certain quota of each kind of business establishment in a given community, would be satisfactory. It was soon discovered, however, that personal bias brought about an involuntary selection on the part of the field worker of the more attractive or better grade stores. The natural inclination seemed to be to select the latter type of store rather than to enter less appealing establishments, and to work the main business streets rather than the outlying areas. A similar bias would have resulted if names had been taken from the higher brackets of the Dun and Bradstreet listings of business establishments, as was first considered. It was finally decided to select the names of individual establishments from the classified telephone directories for each community visited. In very small villages where such directories were not available, names were selected at random from Dun and Bradstreet listings for these communities. An experimental sample obtained by using the telephone directory led to the conviction that stores of every size and description, and manufacturing and wholesale outlets of all varieties, could be obtained with a minimum of bias in the sampling process. It was felt that, in spite of its inaccuracies, the Federal census of distribution supplied the most reliable basis of minimum quotas. Wherever the listing in the classified telephone directory in any given geographical area exceeded the total number reported in the census of distribution or census of manufactures, the higher figure was used as the basis for the quota. In a number of cases the consistent employment of this technique resulted in samples exceeding 50 per cent of the census figure for a given class of business, in spite of a diligent search for possible differences in census and telephone book classifications. Conversely, in a few instances a 10 per cent census sample represented a 100 per cent telephone directory sample, inasmuch as a bare 10 per cent of all establishments reported in that line of busi-

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ness by the census had telephones. If the possession of a telephone represents any significant difference in rank or level of business establishment, then the sampling process was biased to this extent. In the further application of this method, a file card system was devised for the use of field workers. The geographic location was indicated at the left of the card and the type of the business at the right. Two sets of names in this geographic area and business class, together with the addresses and telephone exchanges, were recorded on this card. The cards were then assorted by geographic districts (specially, by telephone exchange districts) and were distributed in groups to the field workers, who then arranged the cards according to convenient routes. In Detroit, the services of the Detroit News were engaged to district and route the cards. As many cards were prepared as the desired quota of samples. The field workers were instructed to submit the questionnaire to the first firm listed on each card and, if unsuccessful, to proceed to the second firm. In no circumstances were they to obtain more than one questionnaire for any one card. As the questionnaires were filled in, the cards were checked and filed away, and the questionnaires dated and numbered. The Field Staff.—In New York the concentrated field work (excluding the time for experimentation) covered a period of approximately eight weeks. The original staff in New York at the outset of the field work consisted of approximately fifteen persons. Before the study was completed, the number of field workers had grown to thirty-five. In Chicago the staff was gradually stepped up during a twenty-day working period to thirty men, and in Detroit it was kept normally at fifteen. One disadvantage from which the Chicago and Detroit field work suffered was that it was crowded into a very brief period, during which it was impossible to spend any great length of time in training the field workers for the job. The result was a rather heavy and costly labor turnover while attempting to discover and discharge the workers who could not immediately apply themselves to the task. This difficulty was not so great in New York, since it was there possible to get the field work under way more gradually and the people who received early training during the experimental period proved to be excellent field workers as the study progressed. Moreover, a

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number of these people had already been trained in research, and applied themselves quickly to the investigating work. Each field worker in New York was given a copy of the law, a printed set of regulations published by the New York State tax commission, and a five-page mimeographed set of instructions on how to fill out the questionnaire. These materials were supplemented by lectures on the pitfalls to be avoided and mistakes commonly found, and by suggestions on how to approach the proprietor of a business and how to ask some of the more difficult questions. Discussions then followed and various questions and problems were cleared up for the benefit of the entire field force. All questionnaires returned by field workers were carefully edited to catch mistakes which might have crept in while recording the data in the field, and were referred back to the field workers where the causes of the errors were not directly apparent. This precaution was found highly desirable as it prevented the many inconsistencies and omissions ordinarily found in questionnaire work. This was continued for the entire period of the study, regardless of the length of time a field worker had served. In Chicago and Detroit a somewhat similar plan was followed. All new groups of employees were given extensive lectures on the marking of the questionnaire and on its pitfalls. Such instruction usually lasted from three to five hours. The men were then equipped with a copy of the law and the official blank form, and with some typewritten sheets giving the code numbers for uncoded questions on the questionnaire. Mimeographed instructions were also given to the first ten or fifteen men sent out, but later this procedure was abandoned in favor of verbal instructions. The field workers took whatever notes they saw fit during the initial talk. The men were then assigned certain hours to return for an interview after they had first been in the field for a few hours. At these interviews each return brought in by the field worker was edited by the supervisor and the field worker jointly. For the field worker it was a lesson in editing— a task which he was subsequently called upon to do himself after each day's work. After this lesson, the field worker was considered to have been properly inducted into his job. Sample checks were then made on work turned in daily. If any sample proved to be in error,

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all of the returns for that day were returned to the field worker for careful review and correction. When field workers were dismissed, the office staff completely edited their returns. In general, it may be said that the field workers experienced considerable willingness and cooperation on the part of those business men whom they interviewed. They reported that they considered the great majority of the answers obtained as reliable. Although in general only three out of four visits yielded results, inability to obtain returns was due to the facts that the proprietor was out, or that the business was closed, or had changed its location, rather than to lack of cooperation on the part of those interviewed. Refusals to give information were uncommon, probably accounting for less than 5 per cent of the total unsuccessful attempts. An explanatory note which accompanied the questionnaire, together with a letter of introduction on Columbia University stationery, proved to be sufficiently satisfactory identification for admission into most business establishments. In addition, a newspaper announcement in a number of the cities visited, describing the study and establishing its authenticity, aided the field worker. In a considerable number of cases proprietors were at first suspicious and evasive in their replies, either because they suspected the field workers of being unofficial representatives of the state tax administrators, or because they feared that an attempt was being made to obtain private information for the use of competitors. In addition, some business men feared that the field workers were endeavoring to foist upon them some scheme of accounting, tax calculation, tax information service, and other varieties of "services" which have arisen since these taxes went into effect. However, in most instances a few minutes of explanation and proof of the authenticity of their mission were sufficient to enable the field workers to obtain the desired information from the great majority of those interviewed. Tabulation.—After the completion of the field work, little further editing was necessary, inasmuch as the questionnaire had been so prepared that code numbers for mechanical tabulation were printed next to the answers on the questionnaire. The tabulation process therefore consisted chiefly of key-punching the tabulation cards and of running these off in several varieties of sortings through mechanical counter-sorter machines. The major handwork required in the

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tabulation process was that which was necessary in collecting the miscellaneous "remarks" written in on the questionnaires. In order to facilitate the reading of these tabular results, printed report sheets were prepared which were coded appropriately in accordance with the same code numbers used in the questionnaire. The tabulated results were then directly inserted in the report sheets and formed the basis for the preparation of tables. Several hundred working tables had to be constructed in order to visualize the results of different combinations of data. In New York State, tables were prepared for all lines of business on the basis of the 10 per cent sample, and certain additional tables for the lines of business covered on the 20 per cent basis were drawn up for purposes of comparison with the Illinois and Michigan data. It was not feasible to reproduce all of these tables in the present volume. The most significant data were carefully segregated, and wherever necessary to illustrate certain points, the tables were retained. The conclusions revealed from the other tables have been presented in the text rather than in tabular form. Comments and Criticisms.—From the experiences of this study, a number of lessons have been learned, particularly in connection with the handling of the field work. While it is true that the method finally decided upon in the selection of samples has undoubtedly resulted in a highly desirable scatter both geographically and with reference to size and character of business, experience has shown that a materially larger sample with substantially the same lack of bias could have been obtained at the same cost by the use of other methods. The plan of drawing the sample from the telephone directory was not altogether satisfactory. In the first place, the cost of preparing all the names and addresses might have been avoided, in Chicago and Detroit at least, for in both cities there was available at one of the leading newspapers a business survey service which could have furnished the requisite number of units by classes of business arranged in convenient bundles of cards, properly routed. Moreover, the sorting of cards by telephone office districts, in order to concentrate them geographically, did not work out precisely in those two cities. Many of the exchanges covered wide areas, or overlapped, and re-

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suited in much wasted effort and retracing of steps on the part of the field force. Practically all of the cards for these areas had to be rerouted according to main streets and side streets, by means of a street guide map. Finally, the weakness of this card system showed up in the last week of the field study, when the scatter of the firms represented by the remaining few hundred cards became so great as to make it virtually impossible for the field workers to cover the ground without tremendous loss of time. If the overhead costs of making these cards had not already been incurred, it would have been better to have purchased the entire layout from the newspaper service, thereby obviating the high cost of fruitless calls on places no longer in existence. The director of the field work in New York City believes, as a result of his experience in this study, that a much more satisfactory sample might have been obtained by a system of "controlled random selection." B y this term is meant a selection of quotas based upon census, or telephone directory, classifications. Instead, however, of providing field workers with names selected from the telephone directories, each geographical district within a given area would be allotted a definite quota for each type of business, and the field worker would be instructed to enter every other store, or every third store in each classification within that district, until his quota was filled. It is felt that had this method been employed in the present study, a sample of from 33 to 50 per cent of all business establishments might have been obtained without additional cost and at no sacrifice of the quality of the sample. This conclusion is based upon the fact that field workers reported a considerable loss of time and energy in traveling over substantially the same ground day after day in trying to reach certain destinations within the general area in which they were working. Had they been able to enter one establishment after another within a given area, the amount of time consumed in needless traveling would have been reduced to a minimum. This plan overcomes the chief defects of ordinary random selection on the part of the field worker. The specific area of investigation is assigned to the field worker, a specific quota is allotted, and he is told (if a 50 per cent sample is set as the standard) to select every

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other establishment until his quota has been filled. This eliminates most of the bias arising from the personal equation. The reason that a plan of this kind was not introduced at the outset was that the original experimentation in the field was insufficient to warn of the many complexities due to "establishments which had moved," "enterprises which had closed," "proprietors away for the day," "changes in type of business," etc., which were reported by field workers as the study progressed. Moreover, the hope of a 33 to 50 per cent sample was far beyond original estimates which were made on a basis of funds available for the study. The selection of a 10 or 20 per cent sample on the basis described above seemed to introduce the possibility of much personal bias on the part of the field worker. As the size of the sample increases, this bias tends to disappear. A number of problems also arose in checking the reliability of the field work. The questionnaire, because of its structure and style, devised for machine tabulation, gives the false impression that it can be marked mechanically. There was a tendency upon the part of the field workers, especially in the early stages of their experience, to mark up the proper quota of boxes without, in fact, obtaining all the information sought. Another common habit was for them more or less to anticipate an answer, or to guess at what they thought would naturally follow because of many similar answers. Occasionally a field worker felt that he had the ability to remember what a dozen or more people told him, and instead of noting the information immediately after each interview, preferred to postpone this process until some time later. When such workers were discovered, they were quickly corrected or eliminated. It is clear that returns may be defective, though consistently marked. The checking and editing can only assure consistent marking, but do not guarantee that the information was correctly recorded. From the experience in New York, it may be concluded that the most satisfactory way to build up a field force for this variety of work is to have a week of experimentation during which the potential members of such a staff, under constant check and supervision, are given the opportunity to familiarize themselves with the nature and purposes of the study, and with all the many points to look for and the things to avoid. A more pro-

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longed period of study—such as the eight weeks devoted to this project in New York—is also more desirable than a shorter period, such as was available in Illinois and Michigan, inasmuch as the workers become more seasoned to their tasks. The Business Man and the Questionnaire.—It was also found that it is one thing to ask questions designed to throw light upon the pricing practices of concerns with reference to the sales tax, and still another to obtain straightforward answers. The answers obtained in the questionnaires, aside from the defects due to the shortcomings of the field force and those who supervised the field work, are the best answers that it was possible to obtain from the source investigated. The answers, however, cannot be taken to represent "the whole truth, and nothing but the truth." There is no reason to believe that they are not substantially correct, except the very general reasons relating to the imperfections of human nature, upon which depend the broad question of the honesty of the business men in statements concerning their business practice on a rather delicate subject of price, even though they were assured that the information would be combined with similar information from other concerns, and used in statistical compilations, without disclosure of their identities. One gathers the impression that the information as recorded is probably correct so far as it goes, but that the returns were here and there incomplete, either because the firm refused to divulge the information and said so, in which case it is properly recorded in the return as a "no report," or because sometimes a part of the information was not divulged, without any clear indication being given to the field worker that something was withheld. This type of return is clearly defective. Unfortunately, there is no way of tracing the importance of this mischievous element. For example, few affirmative answers can be expected on the subject of transforming certain intrastate sales into interstate sales. There would seem to be no good reason why a business man should not attempt to reduce his tax burden to the legal minimum, but one who does so would probably feel rather reluctant to make the admission, even for statistical use. Also, many houses have, according to gossip, raised prices of selected commodities by much more than the amount of the tax, al-

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though indicating to the public that they are uniformly raising the price by the amount of the tax. One cannot expect to find all the data on such price practices disclosed in the returned questionnaires. The answers were, nevertheless, to repeat, the best procurable from the source by the methods formulated for the investigation.

APPENDIX

C R I T I Q U E OF T H E

B

QUESTIONNAIRES

As the field work in Illinois, New York, and Michigan progressed, it was found that, despite the considerable amount of time and effort (including a period of experimentation in the field) devoted to the preparation of the questionnaires, as noted in Appendix A above, 1 the questionnaires could have been improved, and it is the aim of this appendix to point out the ways in which this might have been done. Not only should this be of assistance in judging the data presented in Part Three above, but it may also serve as a guide to any who wish to undertake further surveys covering the same general subject. Some of the questionnaires used are presented below in Appendix E. For the most part, the realization of the ways in which improvements could have been made came too late to permit of the necessary changes in technique, and the defects thus discovered must be charged as one of the costs of the speed which was deemed essential to insure the timeliness of the study. In the main, six questionnaires were employed.2 One retail questionnaire and one manufacture-wholesale questionnaire were designed for each of the states, New York, Illinois, and Michigan. Although all of these questionnaires were similar in style and, generally speaking, in scope, there were nevertheless certain differences arising from an attempt to adapt the questions to the particular practices and legislative requirements in each state, so far as such differences could be ascertained from a preliminary survey. Although the questionnaires are not precisely alike, most of the chief criticisms here undertaken are generally applicable. It will therefore not be necessary to take up each of the six questionnaires point by point; rather, the discussion will be in terms of the types of shortcomings of one or two of the forms. The Illinois questionnaires have been selected for most illustrative purposes. In the first place, there was in some parts of the wording of the Supra, p. 672. T w o special questionnaires were prepared to check information relative to the flow of trade across state borders. These were used in Toledo, Ohio and Davenport, Iowa. 1

2

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questionnaire an ambiguity which was not discovered Until the separate studies were under way. The following examples are drawn from the Illinois retailers' questionnaire: Question j B. Have you had difficulty in distinguishing between your taxable and non-taxable sales? No Yes In the New York study this question was interpreted from the viewpoint of an accountant, that is, it was sought to ascertain whether the business having full knowledge of the requirements of the sales tax act encountered any difficulties in the segregation of the taxable from the non-taxable receipts for the purpose of its records. In the Illinois and Michigan studies the question was interpreted from the legal point of view. The information gathered related to whether or not the business experienced any difficulties in establishing the taxable status of any of its sales. In other words, all those who found it necessary to negotiate with the authorities in the application of the various sections of the sales tax act or of the numerous regulations supplementary thereto were considered to have experienced difficulties in distinguishing between their taxable and non-taxable sales, inclusive of those who ultimately found themselves to be fully taxable. Question 10 C. Do you favor the present 2 per cent tax as a part of the regular revenue system of the state, to replace part of the property tax? No Yes Do you favor the tax only for emergency relief purposes? No Yes It is not possible to record here the case in which the individual favors the tax for both purposes without writing in this information under "remarks" or elsewhere in the questionnaire. B y including the word "only" in the second part of the question it was not proper to have both parts marked "Yes." T o have omitted the word "only" would have changed the meaning of this particular question. There should have been another section to this part providing for the cases in which the individuals had no objection to the use of the sales tax funds for relief purposes and at the same time favored the inclusion of this levy among regular sources of state revenue. This is not a very serious defect, but it serves to illustrate the difficulties of a questionnaire if it is to be held down to reasonable limits of space.

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QUESTIONNAIRES

Question 7. Certain goods of high dollar value . . . The word "certain" is indefinite and may mean either "some" or "all" of the various categories of goods stipulated in numbers 1-5 of the question. In the Illinois and Michigan studies this refinement was made, but this involved additional expense owing to the difficulties of tabulating, by mechanical processes, any written-in information. It was found more practicable to assemble any information not originally provided for in the printed forms through hand tabulation. Secondly, in places, the questionnaires were structurally defective for purposes of mechanical tabulation. It was not planned, for any one question, to punch and tabulate all three of the markings—"yes," "no," and "no report." The "no report" markings were punched wherever they occurred, but for any given question either all the "yes" markings were punched, and the "no" markings disregarded, or the reverse procedure was followed. Which procedure was to be adopted depended upon whether the "no" or the "yes" column was the right-hand one. Thus, either the "yes" answers or the "no" answers were to be derived as residual amounts by deducting from the total sample the aggregate of the "no" reports" plus either the "yes" or "no" replies. Under this procedure it is essential that a "no report" item occur in conjunction with each question. Otherwise, it becomes impossible to derive residuals which have a sufficiently definite content to be useful for most purposes. In a few instances the "no reports" were inadvertently omitted, where one main question was broken into two sub-questions. The following examples are taken from the Illinois retail questionnaire: Question 2. Are you completely exempt from this 2 per cent tax? Yes No Are you partially exempt? Yes No If either fully or partially exempt, what is the basis of exemption? (to be coded) No report Suppose an individual answered the first part of the series, but refused to state the basis of exemption, or could not do so. What would a "no report" mark mean? There are two kinds of information sought

CRITIQUE OF T H E Q U E S T I O N N A I R E S

685

in the one series here and there should have been a "no report" inserted after the question of whether partially exempt. Questions j B and 3 C. 3 B. Have you had difficulty in distinguishing between your taxable and non-taxable sales? No Yes 3 C. Have you adopted some method of estimating your taxable sales? No Yes If so, specify method No report It will be clear to the reader from the first example why the "no report" is meaningless here and the residuals valueless in the constituent questions of the series. Similar cases occur in questions 5 C, 6, 7, 8 D, 9 C, 10 B, and 10 C. To clarify the point, it may be worth while to comment on the case of 5 C. The assumption was apparently that if an individual would answer one of the series of questions he would answer all. This assumption was found not to be warranted. One may refuse to disclose whether or not his firm established agencies in other states with the object of transforming former intrastate transactions into interstate commerce and at the same time be willing to answer the more vague question of whether or not "other methods" were employed for this same purpose. Strictly, a "no report" should accompany each of the series of questions in order to make the residuals serviceable. In one case in this series there is mixed a statement of actual practices with a statement of contemplated action; it is possible that those who are willing to state the facts refuse to forecast their future policy, yet a single "no report" concluded the entire series of questions. To insert all the "no reports" which are necessary to make the results perfectly precise would increase the length of the questionnaire, it is true. The conclusion is that none of the "no reports" should have appeared in the printed forms, but that each "yes" and "no" reply should have been punched on the tabulation cards. The more precise results would have been worth the added expense. Thirdly, and this is a minor point, it would have been preferable in the use of classes of percentages to show a distinct category for both the zero and 100 per cent. Thus, instead of opening the list of classes with 0-10 per cent and concluding with 76-100 per cent, greater pre-

686

C R I T I Q U E OF T H E

QUESTIONNAIRES

cision with fewer verbal instructions to field-workers could have been attained by beginning with "none," " i - i o , " etc., and closing with "76-99" and "100." This point applies to such questions as 2, 3 A , and 4 D in the Illinois retailers' questionnaire. It was found difficult to fit all the schedule plans into the framework of question 5 A . How strict an interpretation should be given to the wording of this question? Obviously, no firm could answer that it raised the price on every article sold by an exact per cent in order to cover the full amount of the tax, unless it employed fractionalcent devices or had an unusual arrangement whereby the sales price in every case had certain specific cent endings. Otherwise, charging the flat percentage to the nearest cent would not yield the full amount of the tax. Again, no provision is made in the question for the possibility of collecting more than the full amount of the tax. Some schedules actually produced more than 100 per cent of the tax payment, as for example the first schedule widely employed in Illinois under the 3 per cent tax. It would be possible to frame question 5 A so as to disclose both policy and estimated results, in the following manner: Have you advanced prices to the consumer because of the sales tax? No Yes Approximately what percentage of the tax payment to the state will be recoverable under your present policy of raising prices to your customers? None 1-10 11-25 26-50 51-75 76-99 100 Over 100 Not stated Is your present policy to: ( 1 ) employ some schedule?

CRITIQUE OF T H E Q U E S T I O N N A I R E S

687

(2) employ a schedule supplemented by fractional-cent devices? (3) charge—?— per cent to the nearest cent without use of schedules? (4) collect the entire tax by varying the percentage rate charged? (5) collect from customers only part of the total tax payment? (6) collect more than the entire tax payment, to cover incidental expenses? What explanation is there for the discrepancy between your policy and estimated results? In conclusion, the authors are keenly aware of the advantages which a simple and brief questionnaire possesses. On the whole, very little of the data assembled in the survey was not used in the statistical reports in Part Three above. The unreliability of the replies can in the majority of cases probably be attributed with equal justification to causes other than the boredom of a lengthy questionnaire.

APPENDIX C

T H E WEIGHTING FACTOR IN T H E NEW YORK STUDY Attention should be called to the fact that while the field work in New York State was spread over a considerable area, no attempt was made to canvass every important city, or to visit all rural counties. In the southern part of the state, towns and cities within twelve miles of the border were visited in the following counties: Rockland; Orange; Sullivan; Delaware; Broome; Tioga; Chemung; Steuben; Allegany; Cattaraugus; and Chautauqua. Within the interior, a circular tour along automobile highways within a fifty-mile radius of Syracuse included towns and villages in the following counties: Onondaga; Cayuga; Cortland; Chenango; Madison; Otsego; Oneida; and Oswego. Along the eastern border, certain towns were selected in Westchester, Dutchess, Columbia, Rensselaer, and Washington counties. New York City, Buffalo, and Syracuse were the three largest cities studied. The environs of Buffalo in Niagara and Erie counties were also included in the sample. When in this study reference is made to sales tax data relating to the "total state," the "total state sample" is to be understood, rather than the entire geographical area of the'state. The necessity for this distinction is due to the fact that the selection of samples throughout the state was not originally intended to be representative of the entire state, but only of certain areas. Consequently, no attempt was made to apportion the number of samples taken in rural and urban districts, border and interior areas, etc., in the ratio of units to the total which census data would show for these sections within the state. The following table presents a comparison of the percentages which the samples in each of these areas bear to the total number of the samples, and the ratios of numbers of retail stores in these sections to the total number of stores reported by the census:

THE WEIGHTING

FACTOR

689

DISTRIBUTION OF RETAIL STORES IN NEW YORK STATE, BY GEOGRAPHIC AREAS (As Shown by the Census and as Shown by the Sample)"

AREA

New York City Other cities with population of more than 100,000 (represented in the sample by Buffalo and Syracuse) Interior counties Buffalo environs (Niagara and Erie counties) Pennsylvania border counties Connecticut and New Jersey border counties Massachusetts and Vermont border counties TOTAL STATE

PERCENTAGE O F TOTAL RETAIL STORES I N N E W YORK, ACCORDING TO U N I T E D STATES C E N S U S OF D I S T R I BUTION IQ2Q

PERCENTAGE

or

T O T A L SAMPLE T A K E N IN N E W YORK

So. 9

71.0

12.4 20. S

7.8 3-3

3-5 S- 7 5-3

a.a 10.0 3.0

2-7

a.7

100.0

100.0

* Total sample is based upon 10 per cent samples taken in various parts of New York State.

It will be seen from this table that both the Pennsylvania border and New York City are given too great weight in the sample for the entire state, when compared with ratios derived from the census of distribution. To be truly representative of the entire state, therefore, the sample would have had to place less emphasis upon the New York City and Pennsylvania border samples and more upon the relatively small samples in the other parts of the state (except the Massachusetts-Vermont border areas). In other words, the total New York State sample, if interpreted to refer to the entire state, distorts the results somewhat by giving undue weight, for instance, to the policies followed by New York City dealers concerning the sales tax, and insufficient emphasis upon the practices found in the rural districts of interior counties. Approximately half of the retail stores of the state are in New York City, but more than 70 per cent of the total sample was concentrated here. More than one-fifth of all stores are in the interior of the state, but the sample collected in the in-

690

THE

WEIGHTING

FACTOR

tenor formed but 3.3 per cent of the total. Cities with populations of more than 100,000, excluding New York, have more than 12 per cent of all stores in the state, according to the census, but less than 8 per cent of the sample represents such cities. If it can be assumed that the samples taken along the border are representative of all border sections, that the samples collected in the interior truly represent all interior counties, and that the samples in Buffalo and Syracuse adequately indicate conditions in all cities (other than New York City) of 100,000 or more, etc., then the following weights would have to be given to the several samples selected, if the totals were intended accurately to depict conditions relating to the sales tax for the state as a whole, 1 rather than for the areas covered: New York City, 1.0; Buffalo and Syracuse, 2.2; Interior counties, 9.0; Buffalo environs, 1.6; Pennsylvania border, 0.8; ConnecticutNew Jersey border, 2.5; Massachusetts-Vermont border, 1.3. However, it was deemed impracticable to apply these weights in the presentation of all the tables in Chapter I X above, inasmuch as the results shown where such weights have been applied do not differ so materially from the unweighted data as to lead to significantly different conclusions. For example, in Table 1, the percentage of exemption for the total New York State sample is stated as fortynine. When the foregoing weights are applied to the detailed data used to construct this table, the percentage of exemption for New York State is shown to be fifty-three. In view, however, of the discrepancy, even though slight, which exists between the results derived from the unweighted New York State sample and the weighted sample, it is suggested that the conclusions stated in Chapter I X be regarded by the reader as referring to the total New York sample for the areas studied, rather than as data strictly representative of the entire state. Throughout the tabular presentation an attempt has been made to present pertinent data on a geographical basis wherever possible, in order to permit of ready comparison. Such a presentation indicates the direction in which the data would be corrected if the weighting factors stated above were applied. 1

Within the limits of adequacy and representativeness of the sample itself.

T H E W E I G H T I N G FACTOR

691

As far as the wholesaling-manufacturing data presented in this study are concerned, the element of variation between unweighted and weighted sample data is negligible, for these lines of business are so heavily concentrated in New York City that the percentage of samples collected in New York City and in other parts of the state to the total sample tends to coincide closely with ratios calculated from census figures. Data presented in the tables in Chapter IX relating to manufacturing and wholesaling lines may therefore be considered as almost completely representative of these groups in the entire state.

APPENDIX D

DETAILS

OF

FISCAL

DEVELOPMENTS

S I N C E 1929

T h e present section contains a description of the fiscal developments, since 1929, in each of the twenty-seven states covered in this volume except Arizona, for which adequate data were not at hand. T h e writers are indebted to officials and others in the several states, who read the manuscript and made corrections and other comments. Each of the following descriptions has had the benefit of inspection b y at least one of these individuals, and although the writers assume sole responsibility for the accuracy of the presentation, it is believed that this assistance has greatly decreased the chances of error. These descriptions have served as the sources for the brief summaries of fiscal developments since 1929 appearing in the state studies in Part T w o above. 1 ARKANSAS2

fund expenditures are so small comState Expenditures.—General pared with total expenditures that it is enough to note here that during the period 1928-29 to 1932-33, inclusive, the former totaled about $2 million annually. T h e deficit of the general fund, taking account of vouchers issued but unpaid, was approximately $1.2 million on June 30, 1933. Total state expenditure, including that of the general fund, was $43.6 million in 1928-29, $47.5 million in 1929-30, $54.7 million in 1930-31, and $39.1 million in 1931-32. T h e most variable factor in 'Supra, pp. 1 1 1 - 3 1 7 . In addition to the sources given f o r each state, the following should be n o t e d : data on loans and grants by the Federal government to the states f o r u n e m p l o y m e n t relief were furnished b y the Federal Emergency Relief Administration; data on representative cities in certain states were derived f r o m the testimony of Carl C h a t t e r s before a subcommittee of the C o m m i t t e e on M a n u f a c t u r e s of the United States Senate (Hearings . . . on S.5125, Jan., 1933, Part I, pp. 1 7 2 - 1 7 9 ) ; data on local school costs have in certain instances been taken from releases of the U . S. D e p t . of Education. R e c e n t editions of Federal and State Tax Systems, by T h e T a x Research Foundation ( C o m m e r c e Clearing House, C h i c a g o ) have been drawn upon for checking information on certain state and local taxes. 2 Sources: reports of state comptroller, tax commission, and treasurer; Special H o n o r a r y Commission, Report on Business Laws and Taxation; U. S. Bureau of the Census. Financial Statistics of States. See also supra, note 1.

F I S C A L D E V E L O P M E N T S S I N C E 1929

693

total state expenditure was capital outlay, primarily for highway purposes, which increased from $23.1 and $24.9 million in 1928-29 and 1929-30 to $31.3 million in 1930-31, but declined to $19.75 million in 1931-32. A significant factor in state expenditure is interest on the state's relatively large bonded indebtedness. This item required $5.1, $6.0, $7.5, and $7.8 million during the four years from 1928-29 to 1931-32, respectively. T h e state has just completed arrangements for the refunding of its $155 million highway bonded indebtedness, which will considerably reduce annual service requirements because of a reduction of interest rates and an extension^of maturities. T h e maintenance of the state's general departments, including aid for education, required $15.3, $16.55, $16.2, and $11.5 million in the four years 1928-29 to 1931-32, respectively. State Revenues.—Total general fund revenues, which increased from $2.2 million in 1928-29 to $2.3 million in 1929-30, declined to $2.1 million in 1930-31 and $1.55 million in 1931-32. For the next two years they were estimated at $1.35 and $1.25 million, respectively. T h e most important source of general fund revenue is the franchise tax on insurance companies, whose yield has remained close to $0.6 million annually. Next in importance is the corporation franchise tax, which yielded annually $0.5 million during the three fiscal years from 1928-29 to 1930-31 but declined to $0.45 million in the next year and $0.4 million (estimated) in 1932-33. T h e greatest contraction was exhibited by the inheritance tax, whose productivity dwindled from $0.3 million in 1928-29 to $0.09 million in 1931-32 and 1932-33 (estimated). Arkansas levies no property taxes for the benefit of its general fund. Transfers from other funds added $0.2 million in 1928-29, $0.5 million in 1931-32, and $0.3 million (estimated) in 1932-33 to the resources of the general fund. Total state revenues increased from $20.8 million in 1928-29 to $22.5 million in 1929-30, but declined to $20.4 million in 1930-31, $17.45 million in 1931-32, and $14.9 million (estimated) in 193233-s T h e tax on property produced $5.45, $4.6, $5.4, $4.35, and $3.7 (estimated) million during the years from 1928-29 to 1932-33, re1 These are the comptroller's figures and are not comparable with the data for total state expenditure given above and prepared by the Bureau of Census, which places the state's total revenues for years 1929-32 at $22.6, $27.8, $23.4, and $26.2 million, respectively.

694

FISCAL D E V E L O P M E N T S SINCE 1929

spectively. The tax on gasoline, the most important single source of state revenue (the rate of which was raised from 5 cents to 6 cents on February 2 6 , 1 9 3 1 , and lowered to 5.5 cents in 1933), yielded $6.0, $6.8, $6.6, and $6.3 million from 1928-29 to 1931-32. In 1932-33 its yield was estimated at $5 million. Motor vehicle licenses produced a revenue of $4.0, $4.3, $3.25, and $2.8 million in the years 1928-29 to 1931-32. The tax on cigars and cigarettes yielded $ 1 . 1 million in 1928-29 and $1.2 million in 1929-30, but declined to $1.0 million in 1930-31 and $0.8 million in 1931-32. The income tax, ranging from 1 per cent to 5 per cent, in effect since 1930, produced $1.2 million during the first year it was collected, but only $0.7 and $0.3 in 1930-31 and 1931-32. The conspicuous decline in the yield of the property tax was the result of a combination of factors. Assessed value of taxable property decreased from $624.3 million in 1929 to $501.4 million in 1932 and to $445.8 million in 1933. Delinquency of current levies increased from 7.3 per cent in 1929 to 8.1, 14.3, and 14.7 in 1930, 1931, and 1932, respectively. For 1933 it was estimated at about 21 per cent. An additional factor in the decline of property taxes was the reduction of the tax rate from 8.7 to 7.9 mills. This reduction was made in accordance with the provisions of the new income tax law (1929), which called for a lowering of the tax by 0.1 mill for every $60,000 derived from the income tax. Shrinkage of the yield of the new tax resulted by 1932 in returning the tax rate to 8.7 mills. The large contraction in the yield of the motor vehicle registration tax was due in part to the cutting of the rate by the Governor, who proceeded on the theory that lowering of registration fees would be compensated for by increased gasoline consumption. The Arkansas legislature began to make changes in its tax structure in 1929, but these were of only minor significance, with the possible exception of the income tax, intended to replace gradually the levy on general property. A similar tendency was exhibited by the 1931 legislature. A special session called in 1932 passed a sales tax, which was defeated by the electorate. In 1933 the legislature rejected a proposal for a $20 million bond issue to finance unemployment relief, diverted one-sixth of the 6-cent gasoline tax to the counties, reduced motor vehicle license fees by some 50 per cent, and eased regulations for the collection of property taxes.

F I S C A L D E V E L O P M E N T S S I N C E 1929

69S

The extraordinary session of the legislature in 1933 voted a beer tax of $1 per 32-gallon barrel, plus manufacturers', distributors', and dealers' licenses, the revenue to be split among common schools (70 per cent), confederate pensions (12 per cent), and four other funds. The most conspicuous feature of the Arkansas fiscal difficulty is the unprecedented increase of the state's indebtedness, which accompanied an ambitious construction program. Between 1928 and 1933, the state's bonded debt, consisting largely of highway bonds, increased from $81 million to $160 million, largely because the state assumed $54 million of road district bonds. The total state and local debt in 1932 was $258 million—$160 state, and $98 local. Of the state debt, $145 million was highway, financed by the gasoline tax, motor vehicle licenses, the 4 per cent tax on motor vehicle carriers, and tolls. Of the local debt, $43 million had been issued by drainage and levee improvement districts (financed by special assessments), and almost all of the remainder was about equally divided between district schools and city and city-improvement districts (financed largely by the property tax). At present, Arkansas has the largest per capita debt of any state in the Union. In March, 1933, it defaulted on its highway bonds, while the legislature passed two measures, creating a new set of priorities against highway revenues and ordering the conversion of state obligations, bearing mostly between 4.5 per cent and 6 per cent interest, to 3 per cent bonds maturing in 25 years. Federal aid to Arkansas amounted to $1.4, $0.7, $4.2, and $3.2 million on account of roads, in the fiscal years from 1928-29 to 193132, respectively. Federal flood relief contributed an additional $0.9 million in 1930-31 and $0.3 million in 1931-32. Federal unemployment relief to December 31, 1933, amounted to $9.8 million, $5.0 million representing outright grants, and the remainder, loans. Local Finances.—The only comprehensive data at hand as this is written relate to county and district school expenditures as of 1931, 4 when the revenues of all counties totaled $6.3 million, of which $4.5 million came from the property tax, and $1.0 million from the counties' i-cent share in the gasoline tax. District school revenue, derived entirely from the property tax, amounted to $9.0 million. 4

From an unofficial source.

696

FISCAL DEVELOPMENTS

SINCE

1929

CALIFORNIA 5

1933 the California fiscal machine underState Expenditures.—In went extensive reorganization, and additional changes became imperative. T h e depression had cut deeply into state revenues, and the almost complete dependence of the local governmental units upon property taxes, coupled with declining property values, resulted in a successful movement to relieve property. In June, 1933, the California electorate approved the Riley-Stewart amendment to the constitution, which lightened the annual burden of property owners by $40 million and provided for additional relief in 1935. A t the end of the fiscal year 1930-31, largely as a result of the productivity of public utility taxes, the state's general fund carried a surplus of $31.5 million. In the course of the next biennium expenditures exceeded revenues, and the surplus was replaced by a $10 million deficit. T h e 1933-35 budget, as approved by the legislature, called for an expenditure of $135 million but provided only for $100 million revenue, including the $10 million anticipated from new and revised taxes, thus forecasting an accumulated deficit of $45 million. A t this point the electorate approved the Riley-Stewart amendment, which increased the prospective deficit to $125 million, not including the $30 million annual reduction in state revenue from public utility taxes; this reduction becomes effective in 1935. The RileyStewart constitutional amendments, repealing Amendment Number One, provided: ( 1 ) that the state return to the county rolls, in 1935, the "operative" properties of public utilities, (2) that the state at once assume the counties' share of school costs, (3) that the annual increase in expenditure be limited, except under special circumstances, to 5 per cent in the case of political subdivisions of the state, and 2 5-4 per cent in the case of the state, and (4) that not more than 2 5 per cent of the total appropriations from all funds of the state be raised b y the ad valorem tax on property. These provisions increased annual state expenditure by $40 million and reduced annual state revenues (after 1935) by $30 million, but made no provisions for new revenue. T h e legislature which reconvened after the referendum enacted a 2^/2 per cent (after July 1, ' S o u r c e s : reports of state board of equalization, controller, division of highways, and treasurer; state budgets; report of the California T a x Research Bureau, Jan. 23, 1933; U . S. Bureau of the Census, Financial Statistics of States. See also supra, p. 692n.

FISCAL DEVELOPMENTS SINCE 1929

697

1935, 2 per cent) retail sales tax, which is expected to yield $80 of the required $125 million. An income tax, graduated to 5 per cent, was passed by the legislature but vetoed by the governor (August n , 1933). The $45 million deficiency remains unprovided for and will probably necessitate a special session, unless the sales tax should prove to be far more productive than is anticipated. Meanwhile the state is registering warrants for the first time since 1893. The significant feature of the state's expenditure is the relative importance of charges which have been either fixed in the constitution or appropriated in recurrent amounts by the legislature. In either event they are beyond the jurisdiction of the governor. In 1931-33 the governor had control over only 31 per cent of all expenditure; in the present biennium the proportion is considerably smaller. General fund expenditures increased rapidly during the depression period. T h e y amounted to $119.3 million in 1927-29, $136.4 million in 1929-31, and $148.9 million in 1931-33. Administration costs increased 22.4 per cent in 1929-31 and 12.9 per cent in the next biennium, when it amounted to $56 million. T h e appropriations for the current biennium call for a 5.7 per cent reduction. T h e expenditure for education amounted to $69.1 million in 1927-29, and increased 12.8 per cent and 8.4 per cent, respectively, in the next two bienniums; that for highways declined during the same period by 7.6 per cent and 3.6 per cent. Approximately 39 per cent of all state revenue is devoted to various local aids. In 1929-31 the state diverted to the localities 14.4 per cent of its general fund, 71 per cent of its education fund, and 28.6 per cent of its highway fund. In 1931-33 these proportions were practically unchanged. Total funds diverted to local authorities amounted to $102.8 million in 1929-31 and $98.5 million in 1931-33. In 193335, as a result of the Riley-Stewart amendment, the share of the localities will be increased by approximately $80 million. State Revenues.—Prior to the fiscal year ending June 30, 1934, the state's general revenue was derived chiefly from the gross receipts tax paid by public utilities, the premium tax paid by insurance companies, and taxes paid on inheritances and corporate franchises. In its 1933 session, the California legislature adopted, in addition to the 2 y 2 per cent sales tax mentioned above, a 3 per cent levy on the gross receipts of contract carriers utilizing motor trucks. A t the same

698

FISCAL

DEVELOPMENTS

SINCE

1929

time it revised the bank, the corporation franchise, and the public utility taxes on light, power, and telephone companies, in such a manner as to increase the annual revenue from these sources by approximately $4 million. The state collects neither a personal income, nor a general property, tax, 6 although the Riley-Stewart amendment permits a state ad valorem levy. The public utility and insurance premium taxes, which in the governor's 1933-35 budget accounted for 71 per cent of all general revenue, were most productive in 1 9 3 0 - 3 1 , when they yielded $42.3 million. This compares with $39.9 million in 1929-30, $39.4 million in 1 9 3 1 - 3 2 , and $36.3 million (estimated) in 1932-33. In the present biennium ( 1 9 3 3 - 3 5 ) they are expected to yield approximately $66 million. Two groups (gas and electric companies and steam railroads) pay more than half of all public utility taxes. The drop from 1930-31 to 1932-33 was largely the result of the shrinkage in the taxes on steam railroads, which decreased from $ 1 2 . 0 to $7.8 million. Bank and corporation franchise taxes (measured by net income) produced $6.8 million in 1929-30, and $6.6, $4.8, and $4.0 (estimated) in the three succeeding years. Inheritance tax yield for the four years respectively was $ 1 1 . 6 , $ 1 3 . 7 , $ 1 0 . 1 , and $5.0 (estimated) million. There have been no other important tax sources for the general fund, whose total revenues for the four years were $64.4, $68.5, $58.9, and $49.3 million. In 1933-35, they may not exceed $92 million, exclusive of the new taxes, and thus will probably be less than the revenues of the highway department. In contrast to general fund revenues, the special fund revenues have more than held their own. The highway fund revenues amounted to $84.5 million in 1927-29, $102.8 million in 1929-31 and $ 1 0 8 million (estimated) in 1 9 3 1 - 3 3 . The gasoline tax alone yielded $72.6 million in 1929-31 and $72.2 (estimated) million in 1 9 3 1 - 3 3 . Motor vehicle fees supplied $20 million in 1929-31 and $ 1 8 . 5 (estimated) million in 1 9 3 1 - 3 3 . Federal aid supplied $8 million in 19293 1 and $ 1 5 . 3 million in 1 9 3 1 - 3 3 . To December 3 1 , 1933, California had received from the Federal government, on unemployment relief, $ 2 2 . 1 million, of which $ 1 2 . 1 represented grants, and the remainder, loans. 8 The state taxes on the gross receipts of public utilities are in lieu of the property tax on their "operative" property.

FISCAL

DEVELOPMENTS

SINCE

1929

699

Local Finances.—The California counties, districts, and municipalities rely for their own tax revenue almost exclusively on ad valorem taxes imposed on real and personal property. Consequently, they are hard pressed b y the decline of property values. Between 1930 and 1932 property assessments declined from $7,507 million to $6,111 million in the counties and from $6,558 million to $5,336 million in the cities. In 1932 assessments of land in California declined 13.79 per cent, of improvements on land, 7.69 per cent, and of tangible personal property, 14.16 per cent. Assessment of stocks and bonds, which are taxed at a special low rate, declined 38.9 per cent, and their share in the total assessments declined from 27.56 per cent in 1929-30 to 17.99 P e r c e n t in 1931-32. Between 1930 and 1932 revenues declined more rapidly than expenditures. County revenues decreased from $375.6 to $339.8 million, while county expenditures declined only from $359.5 to $354.1 million. In 1932, county expenditures exceeded revenues by $14.3 million. T h e situation in the case of the cities was more pronounced. Revenues declined from $296.6 to $224.6 million, while expenditures were reduced from $288.9 t o $248.0 million. In 1932 city expenditures exceeded revenues by $23.4 million. Between 1930 and 1932 the bonded indebtedness of the counties was reduced from $304.6 to $291.8 million, while that of the cities increased from $413.7 to $449.6 million. In 1935, when the public utility properties revert to the local tax rolls, the local units expect to be able to reduce property tax rates by one-sixth without reducing their revenue. T h e problem of emergency unemployment relief has been handled by the local units with the substantial aid of the Federal government. T h e state had done little in this direction prior to the approval of a $20 million unemployment relief bond issue, which is now in process of flotation. GEORGIA7

State Expenditures.—For each of the years 1928-31, inclusive, the Georgia legislature voted general fund appropriations which materially exceeded both anticipated and actual revenues, and by the end of 1931 the resulting cash deficit amounted to $9.2 million (re7

Sources: reports of state auditor and comptroller; and interviews and correspondence with state officials. See also supra, p. 692n.

700

FISCAL D E V E L O P M E N T S S I N C E 1929

duced to $7.6 million a y e a r later b y discounting rentals from a stateowned railroad). T h e 1931 legislature therefore passed a budget law which provides that if actual revenues fall short of original appropriations, each appropriation is automatically scaled down pro rata so that at the close of the year the total can be no greater than revenues (certain appropriations, chiefly those for debt service and for the legislative and judicial bodies, totaling about $1 million, are exempt f r o m this provision). T h u s general fund receipts and expenditures must balance annually. For each of the calendar years 1932 and 1933 (the fiscal year coincides with the calendar y e a r ) the legislature appropriated $10.9 million, but under the new budget law the final figure for 1932 was reduced to $9.8 million, and for 1933, so sharply have revenues declined, it may be lowered to $8.4 million. F r o m the level of $13 million for 1931, this is indeed a drastic reduction. V e r y little of the $7.6 million cash deficit represented debt of the state to outside creditors. O f the above sum, $3.1 million represented school fund money owed to the counties. A b o u t $2.0 million was usual short-term borrowing in anticipation of taxes. A b o u t $1.6 million will be eliminated b y canceling all unspent appropriations (except those for the school f u n d ) for 1931 and prior years. A s for the remainder, outside creditors of the state and its institutions must wait until the state has a surplus. T h u s Georgia has avoided funding its deficit. Its constitution prohibits any such funding. T h e outstanding debt of the state, aside from the deficit noted above, consisted as of A u g u s t 3 1 , 1933, of only $5.6 million discounted railroad rental warrants, $4.3 million funded debt, and $0.2 million miscellaneous. T h e state government has spent no money for unemployment relief, nor has it expanded its aid to localities since 1929. Expenditures from special funds have totaled about twice those from the general fund. T h e s e expenditures cannot exceed the yield from their earmarked revenue sources. State Revenues.—Georgia's general fund revenues increased from 1929 through 1931, reaching nearly $ 1 1 . 5 million in the latter year. In 1932, however, they dropped sharply to $9.8 million, and for 1933 m a y reach not more than $8.4 million. O n l y in part has this decrease been a result of the effects of the business depression upon tax revenue. In large measure it has been caused b y a deliberate policy of

F I S C A L D E V E L O P M E N T S S I N C E 1929

701

tax reduction. The gross receipts tax (sales tax) was allowed to lapse as of December 3 1 , 1 9 3 1 , and for 1933 the state tax rate on general property was cut from the constitutional 5-mill limit to 4 mills, by executive order. The general fund tax machinery as it existed at the close of 1929 consisted chiefly of the state property tax (which has supplied from 50 to 60 per cent of general fund revenues), the insurance premium tax, and two newly-voted taxes—that on incomes, and the gross receipts tax. The property tax yield declined but little throughout 1930 and 1 9 3 1 , and in 1932 was less than $ 1 . 0 million below the level of the preceding years. For 1933, however, a further drop of about $1.5 million may be expected, owing largely to the rate reduction noted above. Aside from this factor, the decline from 1930 and 1931 levels has been due largely to a decrease in property valuations rather than to delinquency. Valuation of all property, which totaled $ 1 . 3 1 billion in 1929 (property of state-assessed public service corporations, $0.21; personal property $0.32; real estate $0.78), was about the same for 1930 and 1 9 3 1 , but in 1932 dropped to $ 1 . 1 4 billion, and will probably be about $0.95 billion for 1933. Delinquency may be an important factor, for the first time, in 1933; unpaid state property taxes increased about $1.0 million between August 1932 and August 1933. Perhaps this is in part the result of abolishing (in 1932) the provision that one could not vote unless all taxes were paid. Payment of the poll tax is still a prerequisite, however. The yield of the insurance tax, whose rates have remained unchanged, has fluctuated between $0.8 and $0.9 million from 1929 to 1932 inclusive. The income tax, first in force in the latter part of 1929, yielded only $0.6 million for 1930, but in 1931 gave $1.4 million. A rate increase in 1 9 3 1 , plus collection of back taxes, raised the yield to $1.5 million in 1932. The gross receipts tax (sales tax) gave $1.2 million in 1930 and $ 1 . 0 in 1931. At the close of the latter year it was allowed to lapse, so that its yield for 1932 was only $0.3 million. The inheritance tax yield dropped from $0.7 million in 1929 to $0.4 in 1930 and $0.2 in 1932. The capital stock tax yield has remained at $0.4 million. In general, it seems clear that the effects of the business depression on tax revenues, at least through 1932, do not explain the necessity for the drastic appropriation cuts noted above.

702

FISCAL DEVELOPMENTS

SINCE

1929

The only tax increase made since 1929, aside from the income tax, was a two-year increase in the tax rate on cigarettes, from 10 per cent to 20 per cent of the retail price. All of the tobacco tax revenue, however, has long been earmarked for the Confederate pension fund, which before the increase in the rate on cigarettes drew half a million or so each year from the general fund. Earmarked sources of revenue have totaled about twice the general fund revenues. The most important earmarked item is the 6cent gasoline tax (rate unchanged since 1929), whose yield dropped from about $13.5 million in 1930 to $12.1 in 1932. One cent is earmarked for a school equalization fund; one cent is returned to counties; the rest is spent on state highways. Motor vehicle fees, virtually all spent on state highways (rates unchanged since 1929 until the governor slashed them all to a flat $3 in 1933) dropped from $4.5 million in 1930 to $3.8 million in 1932. The tobacco tax has given between $1.0 and $1.5 million. Thus the yield of the chief earmarked sources, although declining somewhat, has not decreased from 1929 to 1932 so greatly as to cause a crisis in the services these sources aliment. To December 31, 1933, Georgia received $7.9 million from the Federal government for unemployment relief—$6.2 million as outright grants, the rest as loans. Local Finances.—The situation of local finances remains obscure, as no comprehensive data are available. Presumably the localities have suffered to the same extent as the state from the decline in valuations, and from the recent increase in delinquency. The local units have been left to take care of themselves, however, and their financial stress has been no factor in state finances. On the contrary, the state has in effect been borrowing from them through withholding payment of appropriations for the school fund. No increased share of state-collected taxes has been granted the localities since 1929. Now, as then, one cent of the 6-cent gasoline tax is returned to the counties to maintain secondary highways, and one cent goes to the school equalization fund, which is—and has been since 1929— also fed by the i-cent kerosene tax.

F I S C A L D E V E L O P M E N T S S I N C E 1929

703

ILLINOIS 8

State Expenditures.—On the basis of warrants issued, total state expenditures, not including trust funds, which play a minor role, were $110.2, $95.7, $126.2, and $127.0 million for the years 192829 to 1931-32, respectively. Summary figures for warrants paid and canceled in 1932-33 give a total of $150.1 million. Most of the increase over 1931-32 can be accounted for by the $19.4 million "emergency relief bond" item. When the aggregate disbursed for retirement of, and interest upon, bonds and tax anticipation notes is deducted, the figures for the period 1928-29 to 1931-32 become $98.1, $83.7, $111.4, and $108.7 million. With highway construction and maintenance and county allotments and refunds for the motor fuel tax also deducted, the result is $50.9, $54.2, $61.9, and $59.7 million. Highway construction and maintenance accounted for $47.2, $27.8, $39.3, and $36.5 million. Unemployment relief does not appear in the records until 1931-32, when it amounted to $9.4 million (financed through borrowing, the voters having authorized a $20 million bond issue for this purpose, to be retired by the counties' share of the gasoline tax). In 1932-33 it totaled $9.7 million (warrants paid and canceled). In terms of funds, warrants issued for the general fund totaled $36.2, $40.4, $42.0, and $41.6 million for the years from 1928-29 to 1931-32, respectively; the $41.6 million does not include the unemployment relief item noted above. For the 1933-35 biennium, general fund appropriations average $32.4 million annually. The appropriation for roads, on the other hand, is higher for the 1933-35 biennium ($121.5 million) than it was for 1931-33 ($112.6 million) or 1929-31 ($90.3 million). State Revenues.—Excluding receipts from the sale of tax anticipation notes, Illinois' general fund revenue increased decidedly from 1928-29 to 1930-31 and then dropped sharply in 1931-32 and 193233, the figures for the respective years being $30.6, $36.4, $39.2, $27.7, and $29.5 million. The largest general fund revenue item is the inheritance tax, which returned $9.9, $15.7, $10.0, $6.4, and $9.1 * Sources: reports of state auditor; list of appropriations passed by fifty-eighth general assembly, compiled by department of finance; and interviews and correspondence with state officials. See also supra, p. 692n.

704

FISCAL DEVELOPMENTS

SINCE

1929

million in the same years. Close to the inheritance tax in yield comes the state levy on property. The total levy remained at 3.9 mills throughout 1929, 1930, and 1931. Of this, 1.5 mills (1.4 in 1 9 3 1 ) was for general fund purposes, most of the remainder being for school purposes and service on soldiers' compensation bonds. Data on assessed valuations are available only through 1930, since the delay in reassessing Cook County's 1928 values has thrown all assessment work in that district a year or so behind schedule, but for the years 1928-30 there was virtually no variation in total assessed values. Official advice is to the effect that a recent cut of 25 per cent in Cook County valuations, and reductions in other counties, indicate that the 1932 assessment is about 20 per cent below the 1931 level. Despite a steady rate and base, general fund receipts from the state property tax have fluctuated markedly, being $5.0 million in 1928-29 and $4.1 million in 1929-30, increasing to $13.6 million in 1930-31, dropping again to $6.7 million in 1931-32, and increasing to $9.2 million in 1932-33. This reflects the irregular collection of back taxes, largely as a result of Cook County's difficulties. Nearly half of the amount so far received from the 1928 levy was received in 1930-31. The third and fourth largest general fund revenue items, insurance taxes and corporation taxes (not including the special tax on the Illinois Central Railroad), gave a steady yield of from $6.0 to $6.6 and from $3.7 to $4.1 million during the years 1928-29 to 1931-32, inclusive. For 1932-33 they were $3.5 million each. The Illinois Central tax yielded $3.0, $2.9, $2.3, $1.9, and $1.4 million in the same years.9 The special funds fed by the state property tax show revenue fluctuations similar to those noted above for the general fund levy. Of the three motor vehicle revenues, license fees remained fairly constant at $16.8, $18.7, $18.4, and $ 1 7 . 1 million from 1928-29 to 1931-32, respectively; the gasoline tax yield increased from $19.5 million in 1929-30 to $29.3 and $30.5 million in the next two years; and Federal aid for the four years from 1928-29 to 1931-32, respectively, was $5.7, $1.9, $5.4, and $8.9 million. Total bond receipts yielded $40.5 million in 1928-29, $16.0 mil* A l l of the figures in this p a r a g r a p h are as stated in the auditor's report. Figures f o r 1 9 3 2 - 3 3 furnished b y the a u d i t o r ' s office.

FISCAL

DEVELOPMENTS

SINCE

1929

70S

lion the next year, and $1.0 million the next, but did not appear in 1931-32, when $32.2 million was received from the sale of tax anticipation warrants. In summary, all revenues for all funds produced $110.7 million in 1929 in comparison with $105.4 million, $124.1 million, and $133.1 million in the three following years. B y December 31, 1933, the Federal government had advanced $85.1 million to Illinois for unemployment relief, of which $29.6 million represented outright grants and the remainder, loans. The only important revenue measures passed from the end of 1929 through 1933 were the income tax (which was declared unconstitutional), the optional county sales tax, the two retail sales taxes, 10 and the malt and vinous beverages act of April 26, 1933 (which will yield only some $2 to $3 million per year). The state has refrained from taking full advantage of the Federal 80 per cent credit relating to the estate tax. The gasoline tax law was enacted in 1929, and the 3-cent rate has remained unchanged, but after January 1, 1934, the state keeps only one cent instead of two cents, one cent going to the municipalities. The counties retain their i-cent share. The bonded indebtedness of the state was $183 million in 1933. Highway issues represent three-fourths of the obligations. The cost of the debt service is approximately $14 million. Local Finances.—Local finance, to a large degree, means Chicago, which in turn means the invalidated 1927 assessments, the 1928 assessments suspended by court litigation before confirmation, the delayed payment of taxes due in considerable measure to tax strikes, and the greatly retarded dates of tax payment, the serious weakening of credit, the expansion of floating debt, and defaults on bonds. The county collector of Cook County reported that there were uncollected, as of June 2, 1933, 14.6 per cent of 1928 taxes, 25.7 per cent of 1929 taxes, 38.2 per cent of 1930 taxes, and 45 per cent of 1931 taxes. 11 Ten larger Illinois cities imposed a general property tax in 1929, the last levy before the depression, of $239 million. Three years later the total levies had dropped by only $5.0 million, to $234 million. School costs for current expenses were $88.53 P e r pupil in 1930 and 10

See supra, pp. 227-28. " T h e second installment of the 1931 tax was not due until Sept. 1. Of the first installment, due June 2, 55 per cent had been collected by that date, according to official advice from Illinois.

706

FISCAL DEVELOPMENTS SINCE 1929

$86.41 per pupil in 1932, the slight decline reflecting a decrease in teachers' pay. INDIANA12

Aggregate State and Local Revenues and Expenditures.—A view of the entire finances, state and local, discloses the trends resulting in the property tax limit laws and the imposition of new taxes. All units within the state in 1928-29 expended $230.0 million, an amount $3.0 million higher in 1929-30 and $4.4 million higher in 1930-31, when there occurred the largest expenditure in the history of the state. The first move to readjust finances to the depression period is measured by the decrease of nearly $17 million in disbursements to $215.6 million in 1931-32. The chief reduction was in highways, and the principal increases were for poor relief and education. With revenues substantially the same as disbursements in each year, the revenue question is one of distribution of burdens. Instead of easing the strain of the depression by resorting to borrowing, Indiana reduced total borrowings from $32.6 million in 1928-29 to $22.2 million in 1931-32. Property tax collections reached their peak at $144.1 million in 1929-30 (a rise of $7.5 million over the previous year), declined to $135.4 million in 1931-32, and showed a sharp decrease the following year, partly as a result of the tax limit law. The only revenue increases of consequence from 1928-29 to 193132 were $3.1 million of gasoline tax receipts, $1.7 million from Federal aid, and less than $1.0 million of inheritance taxes. Indebtedness did not vary sufficiently during the period to account for tax changes; it fluctuated from $196 million in 1929 to $201 million in 1930, and to $191 million in 1932. State Expenditures.—So stable were state disbursements during the four years of 1929 to 1932, that the depression can be said to have had no effect before 1933, except possibly to have prevented increases in the budgets of the state which had previously reduced outlays during the flush years of prosperity. Thus the $52.3 million disbursements of 1928-29 rose to $54.8 million in 1929-30 and 11 Sources: reports of state board of tax commissioners and Indiana Taxpayers Association; Indiana library and historical department, Statistical Reports for the State oj Indiana; U. S. Bureau of the Census, Financial Statistics of States. See also supra, p.

69211.

FISCAL D E V E L O P M E N T S

S I N C E 1929

707

declined to $53.3 million in 1930-31 and $53.2 million in 1931-32. Until the past year, Indiana was virtually free of state indebtedness. A special legislative session, meeting in 1932, rewrote the budget for 1932-33 by decreasing departmental appropriations $1.8 million and by reducing payments for salaries by $2.5 million. Appropriations for state universities and departments were lowered 15 per cent and for state institutions 10 per cent, while salary decreases ranged from s to 25 per cent. At the regular 1933 session a departmental reorganization was effected and the governor was granted extraordinary powers to reduce appropriations between legislative sessions. Changes at the 1932 special session in the distributive allocation of the gasoline tax resulted in increasing the local amount from $4.8 million to $12 million and in decreasing the amount for state expenditure by the difference, or $7.2 million. Previously, the state aid from the gasoline tax fund had steadily risen from $3.7 million in 1928-29 to $4.8 million in 1931-32. Three types of state aid to local schools amounted to $5.1 million in 1928-29, dropped below this during the next two years, and rose to $5.4 million in 1931-32. The position of state aid in the fiscal structure may be gauged by the fact that road aid and school aid claimed 16.8 per cent of state disbursements in 1928-29 and 19.1 per cent in 1931-32. Of significance is the estimated rise of the proportion to approximately 50 per cent for 1933-34, resulting from the augmented gasoline tax distribution and the enlargement of school aid. Coming into effect a year after the gasoline tax increase, school aid of an estimated $13 million in 1933-34 is contingent upon the sales tax yielding sufficient revenues for education after balancing the state budget. The first state appropriation for unemployment relief was $1.0 million in 1933, coming after Indiana had started to receive Federal relief aid. At the end of December, 1933, this aid amounted to $9.9 million ($4.7 as outright grants, the rest as loans). State Revenues.—State receipts have fluctuated more widely than state expenditures. An increase of $9.9 million occurred from 192829 to 1930-31, the amounts being $49.9 and $59.8 million. Even in 1931-32 the receipts of $56.0 million were $6.2 million above 192829. The largest single source of revenue, the gasoline tax, furnished $14.0 and $17.2 million in 1928-29 and 1931-32, respectively. The

708

FISCAL DEVELOPMENTS

SINCE

1929

second largest, property tax revenue, expanded from $ 1 1 . 7 to $ 1 3 . 8 million in the same period, the rate being 0.23 in 1928 and 0.29 in subsequent years until 1932, when it was set at 0.15. Total net valuation showed very little change from 1928 through 1 9 3 1 . For the four-year period from 1928-29 to 1 9 3 1 - 3 2 , receipts from poll and insurance taxes and vehicular, or other, fees were substantially the same at the end of the period as at the beginning. The inheritance tax yield increased gradually from $ 1 . 2 million in 192829 to $2.1 million in 1 9 3 1 - 3 2 . The yield of the insurance tax has been even less. Changes in the tax rates were initiated by an increase in the gasoline tax from 3 to 4 cents on April 1 , 1929, which increased its yield $2.8 million the next year. Although the chain store tax was passed in 1929, court litigation postponed its operation until 1932, after its constitutionality had been affirmed by the United States Supreme Court. The next year, 1 9 3 3 , the legislature revised upward the rates for stores that are members of large chain systems, leaving untouched the fees of individual stores or of chains of not more than five members. The rate for a company with more than 20 stores was increased from $25.00 for each additional store to $150.00. Fundamental reform was contemplated by the submission of a state income tax amendment to the electorate on November 8, 1932. The pronounced aversion to new taxes during the depression, however, resulted in its defeat. The major change that emerges from Indiana's effort is the gross income tax, described on page 239 above; taking effect M a y 1 , 1933, it is estimated to yield $ 1 4 million. After April 1 , 1933, onequarter of automobile license revenue goes to the general fund. Indiana carries a small state indebtedness which was $ 1 . 5 million in 1929 and $3.4 million in 1932. Ending the year 1 9 3 1 - 3 2 with revenues $2.8 million in excess of disbursements, in the year 1932-33 the state faced an operating deficit of $ 1 . 3 million by reason of the contraction of state property tax receipts from the tax limitation. Indiana will have a balanced state budget, unless revenue estimates go awry, without dipping into the handsome balance to its credit. On September 1, 1932, the state balance was $ 1 7 . 4 million, the amount being $9.4 million four years earlier. The growth in the surplus during the depression period indicates that without the severe property

FISCAL D E V E L O P M E N T S SINCE 19 2 9

709

tax limitation Indiana would not have been forced to levy new taxes in 1933The 1932-33 fiscal year covered only the nine months ending June 3°> 1933; hence revenue data for that period are not comparable with those above. Although the local balances did not increase, the amounts declining from $60.4 million in 1929 to $53.6 million in 1932, the very size of the balances reveals that Indiana was far from the deficit condition which prompted new taxes elsewhere. In fact, the policy of maintaining large balances has obtained in Indiana for many years in order to avoid borrowing on tax anticipation and deficiency notes and to provide "working capital." Local Finances.—Disbursements by local governments, amounting to $189.3 million in 1928-29, were higher by $2 and $4 million the next two years only to shrink to $178.8 million for 1931-32. Highway expenditures registered the largest decrease, the amount spent being $30 million in 1928-29 and $22.2 million in 1931-32. The burden of poor relief in the depression is measured by the local increase from $4.4 million in the early year to $7.6 million in 1931-32. T o reduce the tax burden on property by tax limits, whose immediate effect in lowering levies has been noted, the 1932 legislature limited the rate to 15 cents for the state and $1.35 for all local units. Previously, the average rate had been $2.90. Except for cities and towns, whose urban expenses necessarily are higher, the 1933 legislature lowered the local limits to 85 cents, which is applicable practically to rural areas. This decrease was ordered despite ample evidence of the severity of the $1.50 limitation. In many cases the county boards of tax adjustment permitted levies in excess of the limit for emergency reasons; and, in a fewer number of cases, the state tax board permitted excess levies to stand or reduced them by a moderate amount. Decreases in school levies in many cases seriously crippled the minimum educational program, not to mention higher school standards, and a number of defaults on debts are directly attributable to inadequate appropriations for debt service. The severity of the tax limitation is intensified by a marked decrease in assessments. For the three years of 1929 to 1931 the net valuation was slightly over $5,000 million, but the reassessment cut

710

FISCAL D E V E L O P M E N T S S I N C E 1929

the figure to $3,900 million in 1932. T a x delinquency, $5.5 million in 1929, increased to $ i i - 4 1 3 million in 1931 and $19.2 1932. T h e 1932 delinquency represents

19.5 13

18

million in

per cent of the total

taxes levied in that year. T h e local debt burden, as measured by obligations outstanding, has varied but slightly. T h e debt of $194.6 million in 1929 rose $3 million the next y e a r and decreased to $187 million in 1932. T h e debt burden, however, as measured by the weight of the debt service, including amortization, increased from $28.9 to $30.4 million. IOWA14 State Expenditures.—The state's appropriations, as passed b y the 43d and 44th general assemblies, totaled $32.4 million for the biennium ending June 30, 1931, and $31.4 million for 1931-33. For 193335, the budget director recommended $27.8 million. Other figures, likewise indicating that there was no drastic retrenchment up to 1933, are those shown b y the treasurer for general fund expenditure: $16.5, $17.3, $ 1 7 . 1 , and $17.9 million in the fiscal years ending in 1929, 1930, 1931, and 1932, respectively. Later data are not available, but the cost of government will probably be reduced considerably, especially beginning with the current fiscal year, since the 1933 legislature enacted 45 of the 75 economy measures recommended b y the committee on governmental expenditures. D a t a compiled b y the committee show that the sum of expenditures b y "general state offices," " B o a r d of Control Institutions," " B o a r d of Education Institutions," and " D e p a r t m e n t s under T r u s t F u n d s , " for the fiscal years ending 1929, 1930, 1931, and 1932 was respectively $21.1, $21.9, $22.8, and $21.5 million. T h e total I o w a state expenditure of $61.1 million in 1929 compares with $60.5, $77.7, and $62.2 million for the three succeeding years. General government costs were $1.6, $1.4, $1.8, and $1.9 million, respectively, during the four years under examination. Streets and highways were the most important item, accounting for $34.9, $32.8, $45.9, and $30.8 million, during the successive years. T h e variation of this item, especially in 1931, was responsible in large " T h e s e data are f r o m a n unofficial source. " S o u r c e s : reports of state auditor, director of the budget, state board of assessment and review, and treasurer; U . S. B u r e a u of the Census. Financial Statistics of States. See also supra, p. 6g2n.

F I S C A L D E V E L O P M E N T S S I N C E 1929

711

part for the variation in total expenditure. Of the balance, welfare accounted for $6.8, $7.3, $7.3, $7.1, education for $9.4, $9.1, $9.2, $8.8, and interest for $1.7, $2.6, $3.3, and $4.4 million, during the years, 1929-32, respectively. Unemployment relief, with the exception of approximately $0.5 million spent by the general state departments for poor relief, has fallen to the Federal government, local units, and construction operations of the highway department. State highway aid to the local units is rendered by permitting the counties to retain i l /s cents of the 3cent gasoline tax and 50 cents for each motor vehicle license issued. State Revenues.—Total general fund revenues increased from $15.6 million in 1928-29 to $17.5 million in 1929-30, and $18.0 million in 1930-31, but declined to $16.3 million in 1931-32. Approximately half of general fund revenue is derived from the ad valorem levy on property, which increased in yield from $7.7 million in 192829 to $8.7 million, $9.8 million, and $8.3 million during the three succeeding years. The tax on foreign insurance companies produced $1.4, $1.5, $1.6, and $1.6 million, that on cigarettes $1.2, $1.4, $1.4, and $1.2 million, and the death duties $ i . i , $ 1 . 3 , $1.0, and $0.8 million during the years from 1928-29 to 1931-32, respectively. The contribution of the counties for the support of the insane, etc., has amounted to $1.7 million, annually. The estimated yields for 1932-33 are $8.5 million from the property levy, and $1.8 million, $1.0 million, and $1.2 million from insurance, estate and inheritance, and cigarette taxes, respectively. The total proceeds of the general fund revenues have been kept at a relatively high level since 1929 by increasing the levy on general property, from 7.68 mills in 1929, to 10.25 mills in 1930, to 10.00 mills in 1931 and to 8.00 mills in 1932. Total taxable value, exclusive of moneys and credits, was assessed at $969.4 million in 1929, $974.4 million in 1930, $924.7 million in 1931 and approximately $900.0 million in 1932. Contraction would have been greater, but for the work of the board of assessment and review, created in 1929, which was able to place new items on the tax rolls. This was particularly true as to assessed value of money and credits, which was increased from $501.0 million in 1929 to $584.2 million in 1930, but subsequently declined to $538.5 million in 1 9 3 1 . The tax to show sharpest contraction was the inheritance tax, which was affected by

712

FISCAL

DEVELOPMENTS

SINCE

1929

the shrinkage of the value of estates. State tax delinquency is apparently not a major item, since between June 30, 1930, and June 30, 1932, taxes uncollected and amounts due from counties increased only from $ 3 . 1 million to $6.5 million. Although during the past few years there has been constant pressure to relieve general property, no action was taken in this direction until 1933, when the legislature voted to reduce the millage for 1933 and 1934 20 per cent below that levied in 1930. 1 5 Other measures adopted at the same time postponed the date on sales for taxes, and extended the time and provided for installment payments of current taxes. These steps were taken in conformity with the views of the board of assessment and review, that the property tax in Iowa is facing a breakdown owing chiefly to the fact that under present reduced income it can not be paid from the earnings of the owners of property and that there must be both a reduction in the amount of tax levies and a material change in methods of raising revenue. To date, however, the legislature has failed to provide substitute revenue for the general property levy, although it reduced state budget appropriations by $3.6 million. For a number of years the legislature has been rejecting proposals for net and gross income taxes as well as the proposed general sales tax, but these measures are now being considered again at the special session of the legislature. Among special fund revenues, the automotive taxes are of most significance. The yield of these has increased from $16.8 million in 1929 to $ 1 7 . 6 million in 1930, $18.4 million in 1 9 3 1 , and $ 1 8 . 1 million in 1932. Registration fees declined from $ 1 1 . 9 million to $ 1 1 . 2 million, but the state's share of fuel taxes increased from $4.8 million to $6.8 million between 1929 and 1932. During the entire period the general fund has been operating with a surplus, which declined from $4.8 million on July 1, 1928, to $4.0 million and $4.2 million on the corresponding date in 1929 and 1930, then increased to $5.1 million in 1 9 3 1 , and declined again to $3.5 million in 1932 and $ 1 . 2 million on March 3 1 , 1933. There has been no public borrowing by the state government for purposes of the general fund, but borrowing for highway and other purposes amounted " This limitation does not apply to levies falling within the jurisdiction of the State Board of Assessment and Review, nor those made for the payment of bonded indebtedness. For additional exemptions cj. Sec. 1 of Beatty-Bennett Tax bill.

FISCAL D E V E L O P M E N T S

S I N C E 1929

713

to $21.6 million in 1929, $20.0 million in 1930, $30.9 million in 1931, and $15.4 million in 1932. Total Federal aid, including education and highway purposes, increased from $3.4 million in 1929 to $4.5 million in 1931 and $7.3 million in 1932. Federal unemployment relief to December 31, 1933, amounted to $4.6 million, $2.4 million of which represented outright grants, and the remainder, loans. Local Finances.-—The fiscal operation level of the local governing units has remained remarkably stable in the period since 1929. T h e maintenance or increase of the pre-depression standard of expenditure was made possible by increasing the share of the general property tax. In his 1933 message the governor of Iowa observed that the problem of tax reduction and decreased expenditure was more than three-fourths local. Approximately 91 per cent of property taxes collected fall within local jurisdiction, and only 9 per cent under the direct control of the legislature. T h e localities have been permitted to circumvent legislative restrictions on expenditures by incurring bonded indebtedness and by pledging warrants in anticipation of earnings and income. T h e expenditure of the counties and townships was $39.2, $41.0, $39.6, and $38.3 million, during the years 1929-32, respectively. More than half of these funds was expended for streets and highways, which accounted for $21.9 million in 1929, $23.2 million in 1930, and for $20.4 million in 1932. T h e expenditure for general government functions was $5.9 million at both terminal years (1929, 1932), that of welfare increased from $4.4 to $5.3 million, while the cost of county education remained at $0.6 million, and interest charges declined from $2.6 to $1.7 million. Total city and town expenditure was $25.2, $27.1, $26.7, and $25.0 million during the successive four years. T h e expenditure of the school districts increased from $48.8 million in 1929 to $50.6 million in 1930 and subsequently declined to $44.8 million in 1932. Of the total $2.3 million went for interest in 1929 and 1930, and $2.6 million in 1931 and 1932. T h e Elliott Act, passed in 1931, calling upon the local units to cut taxes by 5 per cent in 1932 and again in 1933, promises to bring a further reduction in local expenditures. T h e trend in local revenues is substantially the same as in expenditures. County and township revenues increased from $47.0 million in 1929 to $50.7 million in 1932. The counties' share of the

714

FISCAL DEVELOPMENTS

SINCE

1929

general property tax increased from $29.3 million in 1929 to $37.5 million in 1932. City and town revenues increased from $29.0 million in 1929 to $30.3 million in 1930 and declined to $28.5 million in 1932. In this case the yield of the property tax increased from $16.4 million in 1929 to $16.8, $16.7, and $16.5 million during the next three years respectively. School district revenues increased from $49.3 million in 1929 to $51.0 million in 1 9 3 1 , and declined to $46.7 million in 1932. The behavior of local revenues is explained by the movement of general property levies. These, exclusive of general state levies, payable in the years designated, were raised from $96.0 million in 1929 to $100.6 million in 1930, $100.3 million in 1931, and were reduced to $92.7 million in 1932. KENTUCKY1"

State Expenditures.—The recent deficits of the Kentucky state treasury are in no sense new or unusual phenomena. The state has been in arrears uninterruptedly since 1909, although, to be sure, the situation has been aggravated since 1929. General fund expenditures increased from $9.4 million for the fiscal year ending June 30, 1929, to $10.2 million for 1929-30, $ 1 3 . 1 million for 1930-31, and declined to $ 1 1 . 7 and $9.1 million in 1931-32 and 1932-33 respectively. Meanwhile, the unpaid warrants of the general expenditure fund (paying mostly 5 per cent interest) increased from $8.1 million on July 1, 1929, to $8.5, $ 1 1 . 0 , $13.9, and $15.2 million in the corresponding periods in 1930, 1 9 3 1 , 1932, and 1933. Total state expenditure amounted to $36.6 million in 1928-29, $36.7 million in 1929-30, $43.0 million in 1930-31, and $41.8 million in 1931-32, and $35.7 million in 1932-33. 17 The cost of roads constituted the largest individual item, accounting for $17.7 million in 1929, $15.2 million in 1930, $19.1 million in 1 9 3 1 , $ 1 7 . 1 million in 1932 and $18.6 million in 1933. Second in importance was education, which consumed between $9 and $ 1 1 million each year. Approximately two-thirds of these totals represent state aid to the political subdivisions. Other important items were the expenditures of the board "Sources: reports of state auditor, state inspector, highway commission, and tax commission ; U. S. Bureau of the Census, Financial Statistics oj States; and correspondence with state officials. See also supra, p. 6Q2n. " T h e 1931-32 item includes a S3.0 million expenditure incurred in connection with the Road Bridge Bonds, which are not a true state obligation.

FISCAL DEVELOPMENTS SINCE

1929

715

of charities and the governing boards and commissions, the former requiring annually approximately $2.1 million, while the latter increased from $ 1 . 3 million in 1928-29 to $2.0 million in 1 9 3 0 - 3 1 . All state departments not sustained by earmarked revenues of their own, except the highway department, are spending currently about $ 1 4 . 5 million per year. The current yearly income from taxes to operate these departments is $ 1 4 . 0 million (estimated). The total indebtedness of the state against these departments is about $ 1 5 . 0 million. Prior to 1933 Kentucky had made no specific appropriations for unemployment relief, relying almost entirely upon the counties for support of the destitute. That year's special session of the legislature, which was called by the governor, following the suggestion of Administrator Hopkins, earmarked the newly imposed wine, beer, and whisky taxes for relief purpose. State Revenues.—Kentucky's general fund revenues increased from $9.5 million in 1928-29 to $ 1 0 . 5 million in 1929-30 and then declined to $ 1 0 . 4 , $8.3, and $7.6 million in the three successive years. Total state revenues increased from $35.0 million in 1928-29 to $37.0 and $37.9 in 1929-30 and 1930-31 but declined to $33.4 and $30.3 million in 1 9 3 1 - 3 2 and 1932-33. The most important single source of revenue is the 5-cent tax on motor fuel, which yielded $7.0, $ 8 . 1 , $8.6, $8.8, and $8.1 million during the years from 1928-29 to 1932-33, respectively. The state's share of motor vehicle registration fees amounted to $ 4 . 1 , $4.3, $3.4, $3.0, and $2.9 million during the corresponding periods. The ad valorem levy on real estate yielded $4.4 million in 1928-29 and 1929-30 and $4.3 million in 1 9 3 0 - 3 1 , while that on personal property produced $5.0, $4.9, and $5.4 million. The tax on insurance companies produced $ 1 . 3 million in 1928-29 and 1929-30, and $ 1 . 4 million in 1930-31, while the inheritance tax had a steady yield of approximately $ 1 . 0 million until 1 9 3 1 , declining to $0.5 million in 1932-33. Assessed valuation of property declined from $ 3 , 1 2 3 . 5 million in 1928 to $2,776.0 million in 1929, and after rising to $2,947.8 million in 1930 and $ 3 , 1 4 1 . 6 in 1 9 3 1 , declined to $2,786.7 million in 1932. The reasons for these erratic fluctuation are not known to the writers; the assessed value of railroad property, for instance, amounted to approximately $448.0 million in 1929 and 1 9 3 1 , but to

716

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only $71.0 million in 1930. The variations in assessed valuations, together with the non-varying tax rates (3 mills for real estate, 5 mills for personal property) explain the behavior of the ad valorem levies. With the exception of the graduated retail sales tax, approved by the legislature in 1930, the Kentucky tax structure remained substantially unchanged until 1933. This sales tax produced only a total of $231,000 during the first three years of its existence. The 1932 session of the legislature, after considering a change in the sales tax, left the tax structure unaltered. This failure to provide new sources of revenue apparently would have continued, in spite of increasing budgetary deficits and the depreciation of treasury warrants, had not the Federal government made its relief grant of $8.0 million conditional upon Kentucky's appropriating $3.0 million for that purpose. After considering a wide variety of tax measures, the legislature adjourned in 1933, having provided only for the taxing of beer, wine, and whisky. That this will not produce the required amount is almost a certainty. Federal aid, largely for road purposes, contributed $1.8 million in 1929, $2.0 million in 1930, and $4.0 million in 1931. Federal unemployment relief to December 31, 1933, totaled $10.9 million, of which amount $4.2 million represented outright grants, and the remainder, loans. State aid to the local subdivisions appears to have been paid with a fair degree of regularity, and as was already noted, the state met the cumulative discrepancy by depletion of its treasury balance and the increase of the volume of its outstanding warrants. Local Finances.—Available data on local finances in Kentucky are very incomplete. There are indications that the situation is as unfavorable as that in the state treasury. Local debts are comparatively low, consisting approximately of a $35 million county, and a $70 million municipal, debt, half of the latter being in the city of Louisville. There were no municipal defaults prior to 1933, but in this year some thirty-five counties defaulted on the interest or principal of their obligations. The most serious local problem lies in the field of education. There is a wide range in the property base available for school taxation in the different counties, creating anomalous situations in the poorer

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DEVELOPMENTS

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1929

717

areas. This is aggravated by the constitutional provision that all state funds distributed for education must be divided on the basis of the number of children of school age. The recent reduction in state funds for education has been a very severe burden on the poorer communities. The critical condition of education, particularly in some parts of the state, is giving serious concern to the legislature now in session. MASSACHUSETTS18

State Expenditures.—The Massachusetts expenditure policy from 1929 to 1933 has been a compound of two phases of the single problem of adjusting outlays to the depression. The first phase, expansion of capital outlays, was begun in 1930, continued in 1931, abated in 1932, and resumed in 1933 with Federal public works funds. The second phase, reduction, was forecast by economies in 1931, became operative in 1932, with the first decrease in the general fund in thirteen years, and was continued in 1933. Total expenditure of all types expanded one-third from 1929 to 1932, the amounts being $58.3 million in the fiscal year ending November 30, 1929, $64.2 million in 1929-30, $75.3 million in 1930-31, and $78.0 million in 1931-32. Exclusive of expenditures from borrowings, but inclusive of those from the general funds and highway funds, the variation in budget allotments has been from $55.4 million in 1929 to the peak of $63.4 million in 1931, and down almost to the earlier year in the 1933 appropriations of $57.3 million. The two policies are best shown by highway and public works, whose $14.7 million expenditure in 1928-29, comparing with $16.8 million in 1929-30, rose to $26.1 million in 1930-31 and $27.2 million in 1931-32, under the stimulus of providing work for the unemployed, but was reduced sharply in 1932-33. Public welfare claimed $5.5 million in 1928-29, but, after reaching the high level of $9.2 million in 1931-32, the appropriation could be reduced only slightly for 1932-33. Accompanying the steady decrease in state indebtedness, the debt service declined from the already small amount of $2.1 million in 1928-29 to $1.3 million at the ebb year of 1930-31. Borrowing, forced by the depression, caused an upward swing to 18 Sources: reports of commission on administration a n d finance, and commissioner of corporations a n d taxation; state budgets; U. S. Bureau of the Census, Financial Statistics of States; and correspondence with state officials. See also supra, p. 6g2n.

718

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$ 1 . 7 million in 1 9 3 1 - 3 2 and $ 2 . 1 million for 1932-33, the same amount as for 1929. State aid to local functions has not occupied a major role because of state distribution to localities of state-collected revenues. Despite annual variations, the 1932 and 1933 allotments of $6.2 and $8.1 million, respectively, represent usual state subventions for local education, welfare, and miscellaneous costs. The distribution of a share of the gasoline tax to municipalities, beginning with $2.7 million in 1930-31 and $6.0 million in 1 9 3 1 - 3 2 , was stopped in 1933, at least temporarily, as a means of balancing the state budget without a drastic increase in the state tax levied against the localities. The 1928-29 budget carried the usual increase customary to prosperous periods. The dominating motive of the 1929-30 budget was the marked augmentation of capital outlays for highways and buildings to afford work for the unemployed. B y 1 9 3 1 the effect of the depression resulted in the authorization of bonds for $20 million for constructing roads and buildings. Only $ 1 million were issued, however, during the year. The 1931-32 budget was decreased $3 million from 1930-31 by departmental economies. Salary savings for 193233, varying from 6 to 10 per cent, totaled $0.9 million. Massachusetts, as a state, has not used its own revenues for direct relief to the unemployed. Indirectly it has done so, however, as state construction, under a planned five-year budget, reached a higher level, welfare costs were not reduced, and various small departmental allotments were made in order to provide work and sustain functions upon which labor was dependent. Not until June, 1933, did the state procure federal relief funds, the amount of $ 1 1 . 4 million being allotted to Massachusetts, to December 3 1 , 1933, as a grant. Old age assistance represents a new function whose 1932 financing was unbalanced, the receipts of $ 1 . 2 million comparing with the payments of $2.0 million. Without power to revise appropriations, the governor has "held down" expenditures below allotments so that in 1932 the over-estimation of receipts by about $ 1 . 5 million was nearly offset by economies. State Revenues.—Revenue sources for state use developed before the depression period into a balanced system of levies on corporations, franchises, banks, insurance companies, estates and legacies, and motor fuel. The state tax levied against localities, which in fact

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SINCE 1929

719

is largely a property tax, although not strictly such by terms of the law, has been the elastic element with which to balance the budget, but its amount has been relatively stable, the levies being $8.5, $7.0, $7-S> $9-75, and $8.75 million from 1928-29 to 1932-33, respectively. A feature emphasized in the Massachusetts system is the state collection of revenues which are turned over, in whole or in part, to localities. Virtually all of the state income tax, of which $28.2 million was collected in 1928-29 and $17.9 million in 1931-32, is distributed to municipalities. Between 1930 and 1932 the base of this tax shrank from $971.9 million to $496.2 million. Of the four classes of income, the single one to rise was that of taxable annuities, which expanded from $2.6 million to $3.2 million. In contrast, a value of $329.7 million in profits from trading in securities almost completely disappeared, leaving but $19.2 million of value to tax. Five-sixths of the excises on business corporations is allocated to local communities, the state retaining the remainder. The yield (state and local shares combined) was $14.6, $ 1 5 . 3 , $ 1 1 . 6 and $9.1 million from 1928-29 to 1 9 3 1 - 3 2 , respectively. Without regard to the year 1928-29, when the gasoline tax was collected for but eleven months of the year, the 1929-30 receipts of $10.6 million accrued to the state. While the total gasoline tax receipts rose two years later to $16.9 million, the increase resulting from an added cent of tax, the municipalities derived $6.0 million from the yield. Another type of division occurs with the excise on public service and certain other corporations. Here the total yield declined from $5.2 to $3.6 million from 1928-29 to 1931-32. Except for a rise to $14.0 million in 1929-30, the inheritance and estate taxes have yielded between $ 1 1 . 0 and $12.0 million in each year of the period. The total picture is revealed by the trend in general, property, and highway fund revenues from $ 5 1 . 7 million in 1928-29 to $57.5 million in 1929-30, $58.0 million in 1930-31, and $61.6 million in 1931-32. No decrease is disclosed by the total, since the decline in ordinary revenues was obscured by an increase in highway revenues from nearly $ 1 6 million to $23.5 million and the increase of $0.75 million in the state tax levied against localities. These increases were needed to compensate for losses in all other tax receipts. Ordinary revenues, exclusive of the state tax and highway fund receipts, de-

720

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1929

clined from $36.0 million in 1930 to $ 3 3 . 1 and $28.5 million in 1 9 3 1 and 1932. Highway revenue proved indispensable for 1932-33 in avoiding a decided increase in the state tax, when $8 million of road revenue was transferred to other budgetary purposes. This involved cessation of distributing part of the gasoline tax revenue to localities. In the same year there was imposed a beer and wine tax of $ 1 . 0 0 per 3 1 gallons for revenue to the state in addition to licenses for localities. On the bank income tax rate, computed yearly by the state, there was placed a maximum limit of 6 per cent beginning in 1 9 3 3 ; the tax is now levied on the same base as employed for the Federal income tax, except that dividends cannot be deducted. Similarly, the definition of net income for business corporations has been broadened. In 1 9 3 1 and 1932 a special poll tax of $ 1 . 0 0 on every male yielded insufficient funds to administer the old age assistance law. More vital reforms were the proposed but unadopted 1932 recommendation of the commissioner of taxation for a constitutional amendment permitting the classification of personal property, the 1933 recommendation of the governor for the imposition of luxury taxes, and the 1933 recommendation of the same official for a retail sales tax. Careful budgeting and lucrative tax yields had, until recently, assured ample surpluses at the close of each year. The fiscal year 1928-29 was begun with a surplus of $4.6 million in the general fund and closed with a surplus for use in 1929-30 of $6.3 million. From this peak the amount dropped to a $2.1 million surplus at the close of 1930-31. The first deficit, that of $0.1 million in 1 9 3 1 - 3 2 , called for changes in 1932 and 1933. The new tax yields indicate no deficit will be passed forward to the 1933-34 budget. Planned budgeting has taken, not only this current form, but has also assumed a long-time form in the marked reduction of the direct state debt from $57.5 million in 1920 and $24.8 million in 1929 to $24.0 million in 1932 (the net debt varied from $ 3 5 . 1 to $ 1 1 . 2 and $ 1 2 . 2 million in these years). 1 9 The policy of "pay-as-you-go" would have freed the state of indebtedness in a brief time if the depression had not intervened. In 1931 there was authorized nearly $ 1 4 million of bonds, of which " I n addition, the state is obligated f o r the local debts of the B o s t o n M e t r o p o l i t a n District, w h o s e charges are assessed against the district, not the state. T h e contingent net debt w a s $ 5 1 . 1 million in 1 9 2 9 a n d $ 5 5 . 2 million in 1 9 3 2 .

F I S C A L D E V E L O P M E N T S S I N C E 1929

721

$4.5 million were floated during the same and the following year for public construction. Massachusetts plans to take advantage of Federal construction funds, under the National Industrial Recovery Act, by scheduling improvements approved by an emergency public works commission. A total of $17 million may be borrowed by this commission on behalf of the state from the Federal government. Likewise, municipalities must obtain the approval of the commission before borrowing Federal funds for public works. Local Finance.—Total local revenues, nearly all of which are municipal, varied from $321 million in 1929, $334.6 million in 1930, and $331.6 million in 1931 to an estimated $313 million in 1932. The municipalities have suffered from the combined scissors movement of decreased receipts from the state income tax and other state receipts, on one hand, and on the other hand from the difficulty of collecting property taxes. The best index is afforded by the 1932 municipal property tax of $236 million. On January 1, 1933, loans in anticipation of revenue aggregated $63.1 million. To redeem the notes, unpaid 1932 taxes of $77.4 million were outstanding. By July 1, unpaid taxes were reduced to $44.7 million. While the delinquency is heavy, unpaid taxes represent a smaller proportion of total levies than in many states. Excessive delinquencies are confined to a minority of communities, usually in the area of cotton manufacturing. For the state as a whole, the assessed valuation was substantially the same in 1929 as in 1932, approximately $7,100 million. A further decline is in prospect from the high level of $7,233 million in 1930 to a valuation in 1933 and 1934 below that of 1929. Municipal funded debt rose but slowly from $282.9 million in 1929 to the peak of $316.6 million four years later. A recession of nearly $5 million resulted in a net debt of $311.6 million on January 1, 1933. The conservative borrowing is due to the severely low debt limit of 2.53 per cent, the short terms allowed bonds, and an approach to the "pay-as-you-go" policy by many units. The strain of caring for the unemployed caused a departure from this policy in 1933. From the usual cost of $15 million for welfare and soldiers' relief in 1929, the depression increased the same outlay in 1932 to $47.2 million, a rise of over $32 million. Almost as much is authorized to be borrowed by municipalities from the state, welfare loans of $30 million being allowed upon the approval of the state emergency

722

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DEVELOPMENTS

SINCE

1929

finance board, although it appears that the board may not give its approval to much more than half this sum. The same device of the extension of state credit to localities upon approval of a state board was extended to allow the same body to loan $ 1 0 million to municipalities before July i , 1935 for current expenses. State loans are limited to the amount of tax titles purchased by an individual city or town. MICHIGAN20

State Expenditures.—Michigan's general fund expenditures, as well as total state disbursements, have been in excess of receipts every year since 1928, with the exception of 1930, when revenues were exceptionally large. The $4.7 million general fund credit balance of July 1, 1928, was replaced by a deficit of $ 1 . 3 million at the end of the fiscal year 1928-29, of $4.4 million in 1 9 3 1 , of $5.2 million in 1932, and of $ 1 3 . 1 million in 1933. Total general fund disbursements increased from $40.8 million for the fiscal year ending June 30, 1929 to $47.4 million in 1930-31, but declined to $43.4 million in 1931-32 and $33.3 million in 1932-33. The 1932-33 expenditure reduction was a result of a 15 per cent cut in appropriations voted by the 1932 special session of the legislature. During the first nine months of 1932-33 total expenditures were reduced 14.1 per cent, and salaries were cut by 8.6 per cent. This represented the first substantial effort to reduce expenditure. The 1933-34 appropriations call for a general fund expenditure of $62.1 million, including an appropriation of $ 1 5 . 0 million for primary schools, contingent upon the sales tax yielding $47 million instead of $32 million, the usual estimate. The increase over the preceding year is due (a) to added financial assistance to be rendered the localities, necessitated by the decline of local revenues attributable to general economic conditions, and to a lesser degree by the adoption of the 15-mill property tax amendment in November, 1 9 3 2 ; (b) to an item of $ 1 2 million for unemployment relief—the first of its kind in the state budget. Grants-in-aid to local units 21 take two chief forms: aids for high30 Sources: reports of state administrative board, auditor, tax commission, and treasurer, and interviews and correspondence with state officials. See also supra, p. 692n. Not included in general fund expenditures except as to certain administrative expenditures.

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723

ways and education, the first coming from the highway fund, and the second from the primary-school interest fund and other educational state funds. Highway aid amounted to $9.4 million in 192829, $8.8 million in 1929-30, $ 1 0 . 6 million in 1930-31, and $ 1 3 . 0 million in 1 9 3 1 - 3 2 . The apportionments of the primary-school interest fund increased from $20.1 million in 1929 to $24.1 million in 1930 and 1 9 3 1 but declined to $20.8 million in 1932 and $ 1 8 . 0 million in 1933The two most important items of expenditure, highways and education, accounted for approximately 75 per cent of all state disbursements. The expenditure of the highway fund has been remarkably stable. It totaled $48.0, $46.1, $46.5, and $49.2 million in the fiscal years 1928-29, 1929-30, 1930-31, and 1 9 3 1 - 3 2 , respectively. Of this amount, approximately $2 5 million went annually for state construction, $ 4 . 1 million for amortization of the highway debt, and a large portion of the balance in amounts designated above, to the political subdivisions for highway construction, maintenance and debt service. Total education expenditure increased from $ 3 1 . 8 million in 1928-29 to $34.2 million in 1929-30, to $38.8 million in 1930-31, and declined to $36.4 million in 1 9 3 1 - 3 2 . The service of all the state debts required $7.5 million in 1929 and 1930, $7.4 million in 1 9 3 1 , $7.5 million in 1932, and $10.6 million in 1 9 3 3 . " State Revenues.—Total general fund revenues increased from $34.8 million in 1928-29 to $44.5 million in 1929-30, $43.7 million in 1 9 3 0 - 3 1 , $42.6 million in 1 9 3 1 - 3 2 , and declined to $25.4 million in 1932-33. T h e mainstay of Michigan's general fund, the state tax on general property (other than the operative property of most transportation and communication companies), has broken down under the combined effects of mounting delinquency, the tying-up of governmental funds in closed banks, and reductions in assessed valuation. The rs-mill constitutional limitation voted in November, 1932, will further restrict the state's use of this tax. The amount received by the state from this source, including back taxes, declined from $27.5 million in 1929-30 and $24.5 million in 1 9 3 1 - 3 2 , to $ 1 1 . 5 million for 1932-33, of which $2.6 million represented back taxes. This decrease 22

These debt figures are from an unofficial source.

724

F I S C A L D E V E L O P M E N T S S I N C E 1929

resulted, despite the fact that the levy (as contrasted with actual collections) remained fairly constant from year to year. It was $29.5 million in 1929 and 1930, $29 million in 1 9 3 1 , and $23.5 million in 1932. The 1933 levy was reduced to $3.5 million (all the revenue to go to state higher education institutions) as a measure of relief to localities. Such a reduction is necessary in view of the amendment approved by the electorate in November, 1932, which, after court interpretation, has the effect of limiting to 1 5 mills the total state and local property tax rate in local units other than cities and most villages. The average state-wide rate can probably not exceed 23 or 25 mills, whereas in 1932 it was 32.8 mills. 23 The other chief source of general fund revenues, the capital stock tax, remained more stable, fluctuating between $7.6 and $6.9 million in the period from 1929-30 to 1931-32 and declined to $5.7 million in 1932-33. It is estimated to reach $4.5 million in 1933-34. Several important state taxes are earmarked for distribution to the localities as school aid (primary-school interest fund). The most important of these is the tax on the operative property of virtually all transportation and communication companies, based on a centrally assessed valuation, and levied at the average state and local rate applied to other property. Drastic cuts in assessed valuations caused the yield of the railroad tax to drop from $9.6 million in 1928-29 and $ 1 0 . 3 million in 1929-30 to $7.8 million in 1931-32 and $5.2 million in 1932-33 and that of telephone companies from $3.7 million in 1929-30 to $2.2 million in 1932-33, although the rate of tax remained about the same (varying from 3 . 1 5 to 3.28 per cent). The other chief resources of this school fund, the gross premium insurance taxes and the inheritance tax, showed a fairly steady yield for the three years from 1929-30 to 1931-32 (life insurance companies $2.4 and inheritance $5.6 million), but in the fiscal year 1932-33 the inheritance tax yield fell off to $2.3 million and the life insurance companies tax to $2.2 million. Total specific tax fund receipts, earmarked almost wholly for education, were (in millions) $20.3 in 1928-29, $24.2 in 1929-30, $24.3 in 1930-31, $20.9 in 1931-32 and $ 1 3 . 1 in 1932-33. The low yield in 1933 was partly the result of al23 It is stated on good authority, however, that the 15-mill amendment was not in effect or even adopted at the time the reduction of the state levy noted above was promised.

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72S

lowing the taxpayers to postpone half of the tax payment until the second half of the calendar year. 24 Gasoline tax collections were never less than $19.4 million or more than $21.8 million annually during the period from 1928-29 to 193233, inclusive. Motor vehicle tax collections, however, declined steadily, being $22.0, $20.2, $18.8 and $14.1 million in the years from 1929-30 to 1932-33, respectively. Until the 1933 legislature, little effort was made to raise more revenue through new taxes or higher rates. In 1931 the inheritance tax was raised, to take advantage of the Federal 80 per cent credit, and malt, severance, and aviation gasoline taxes were introduced, the last three yielding a total of $1.1 million in 1931-32. These were the only steps taken to increase revenues before the sales tax was voted, although it may be said that in effect the state property tax rate had been raised, inasmuch as the levy was kept at a fairly constant figure in the face of a decline of assessed valuations from $8.4 billion in 1930 to $6.6 billion in 1932. Apparently as an indirect result of the general fund deficit, two $6 million installments due to local units from the highway fund were recently defaulted. The various forms of assistance received from the Federal government amounted to $7.0 million in 1931-32, which compared with $2.7 million in 1929-30 and with $3.6 million in 193031. Federal unemployment loans and grants totaled $21.8 and $18.9 million, respectively, to December 31, 1933. The Michigan constitution limits borrowing, with minor exceptions, to highway ($50 million) and war veteran ($30 million) purposes. These limits had already been reached and there was therefore no increase in the state's funded debt. Local Finances.—The deficiency of the general property tax, which is at the bottom of the state fiscal difficulty, is of even greater significance in the case of the localities, which rely on property taxes for approximately 85 per cent of all of their collections. Of an estimated total local revenue of $189.4 million in 1931-32, property tax colM " B y action of the State Administrative Board on June 28, 1933, telegraph, telephone, car loading and all other companies paying taxes into the primary school fund except the railroad companies were granted the privilege of paying one-half their taxes on June 30 and the remainder on November 1. The railroad companies were granted the privilege of paying one-half of their taxes June 30 and the other half on December 1." Treasurer of the State of Michigan, Report, 1933, p. 47.

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DEVELOPMENTS

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1929

25

lections were $160.5 million. Local revenues were prompt to reflect the effects of declining property values and tax delinquencies. Local property tax levies, which in 1929 amounted to $235 million, by 1932 declined to $ 1 9 3 million. Data for 1933 are not available, but, partly as a result of the 15-mill limitation, there is no doubt that levies had to be cut drastically, even though the state relinquished virtually all its share of property taxes. Of the total of 33 mills assessed on the average in the state in 1932, the localities collected approximately 90 per cent. Information on local tax delinquency is not available, but the rate is generally estimated to be at least as high as that for the state. In addition to taxes collected by themselves, the localities receive aid from the state, as indicated above. The two most important local units are the school districts and the cities. In 1932 these accounted for 60 per cent of state and local expenditure, or 75 per cent of all local expenditure. The total expenditure of the school districts increased from $ 1 2 1 million in 1929 to $ 1 3 2 million in 1 9 3 1 and declined to approximately $ 1 0 0 million in 1932. Three-quarters of this amount went for operating expenses and the balance for capital outlays and the service on a debt of $ 1 9 2 million. The subsequent decline must of necessity have been more pronounced, because of a decline in the yield of property taxes, which account for threequarters of the total revenue. Since sources of local revenue are declining more rapidly than local expenditures, the state has had no alternative but increase the grants it makes to its subdivisions. How extensive these grants will be in the future will depend upon the productivity of the sales tax, the proceeds of which, after $32 million of specific appropriations, is to revert to the localities for school purposes. MISSISSIPPI26

State Expenditures.—General fund appropriations have been cut drastically. For the biennium ending December 30, 1 9 3 1 , they totaled $30.0 million; for the 1932-33 biennium they are $21.0 million. Actual expenditures have totaled virtually the same as appropriations. 55 Caverly, H. L., A Survey of the Tax Situation in Michigan, Michigan Municipal League, Ann Arbor, Michigan (April, 1 9 3 3 , 6 6 pp.) p. 11. 26 Sources: reports of state auditor, and treasurer; and interviews and correspondence with state officials. See also supra, p. 6 g 2 n .

F I S C A L D E V E L O P M E N T S S I N C E 1929

727

The only important grant-in-aid to localities has been in the form of school money, and this was cut from $9.8 million to $7.1 million. Salaries of the state officials have been cut roughly 20 per cent. Another important decrease has been in bond redemption, cut from $2.4 million to $0.7 million. Elements in making the total cut of $9.0 million possible have been the facts that no money has been spent by the state on unemployment relief in either biennium, and that no new functions of importance have been undertaken by the state. The reduction in expenditures has been achieved by legislative action —not by subsequent cuts in appropriations by the executive power. State Revenues.—General fund revenue for the biennial appropriation period 1930-31 was slightly more than $20 million; for the 1932-33 biennium it will be slightly larger, at $21.4 million, reflecting new tax rates and new taxes. Details, based on the revenue years ending September 30 (in contrast to the appropriation years) show that general fund receipts declined from $ 1 1 . 2 million in 1928-29 to $9.7 million27 in 1931-32. Property tax collections, the mainstay of the general fund, dropped from $5.9 million for the year 1928-29 to $4.8 million in 1931-32, and to an estimated $4.0 million or less for 193233. The privilege taxes, yielding $1.5 million in 1928-29, dropped to $ 1 . 3 in 1931-32 and will apparently give slightly over $1.0 million in 1932-33. The income tax, formerly the third chief resource of the general fund, yielded $1.7 million in 1928-29, but only $0.4 million in 1931-32 and will give perhaps $0.3 million in 1932-33. Thus the three mainstays of the general fund as of 1929 will yield perhaps $3.8 million less in 1932-33 than in 1928-29. As against this, the new sales tax is expected to supply some $2 million a year. To a considerable degree these figures reflect the effect of the depression on the 1929 taxing machinery. The property tax rate has been kept steadily at 8 mills, but property valuations have declined drastically. From 1928 to 1932 the assessed value of real estate (assessed once every two years) dropped 25 per cent; of personal property (assessed each year) 38 per cent; of public service corporations (centrally assessed each year) 23 per cent. Delinquency, too, has been a factor, but not so great a one. The ratio of collections to levy dropped from 96 per cent for 1929-30 to 86 per cent for 1931-32, and will, perhaps, be still lower for 1932-33. 21

A d d S 1 . 0 million if proceeds of note sale are included.

728

FISCAL

DEVELOPMENTS

SINCE

1929

The shrinkage in the privilege tax yield has been largely due to the decline in revenue from taxes based on the value of certain types of merchants' stock in trade. The drop in the income tax yield is explicable by economic conditions. To offset the results of the depression, some changes were made in the tax system before resort was had to the sales tax. Beginning with incomes for the calendar year 1932, the 4.5 per cent rate of the personal tax was raised to 5 per cent, and the 5.5 per cent rate to 6 per cent. Personal exemptions were cut by about 50 per cent, to $1,500 (married) $750 (single) and $200 (dependents). In general, these changes were first reflected in the 1932-33 collections for the fiscal year. The former annual flat fee of $ 1 0 on corporations was replaced as of May 30, 1930, by a capital-stock tax of $ 1 per $1,000 or fraction, and this yielded $0.3 million in 1931-32, and may yield about the same for the current year. Insurance tax rates were raised from 2 per cent to 2.25 per cent (life, accident, and health) and 3 per cent (all others). The estate tax rates remained unchanged. A few new taxes were enacted. The admissions tax of 1 cent per 10 cents, effective June 1, 1930, and until April 1932 earmarked for a special debt fund, will yield only slightly over $0.1 million for 1932-33. The tobacco tax, first enacted in 1930 (the yield was increased by a change, in 1932, in the method of collection and was also earmarked for a time to a special debt fund), yielded $0.7 million in 1930-31 and will yield nearly $1.0 for 1932-33. A light sales tax on all sales28 was the only other new tax of importance introduced from 1929 to 1932. All told, increases in the 1929 taxes and new taxes other than the sales tax will probably account for less than $2.0 million in 1932-33. Special fund revenues come very largely from the gasoline tax and automobile licenses. In the calendar year 1931 the former accounted for $3.1 million,29 the latter for $0.2 million of the total $4.6 million from all special funds (including $0.6 million from the tobacco tax noted above). The special funds have run no deficits of importance, however, and have no direct bearing on the state's fiscal crisis. Receipts from borrowing have necessarily played an important s

Supra, p. 167. ^ This covers only the part retained by the state. Approximately 50 per cent is returned to counties.

FISCAL DEVELOPMENTS

SINCE

1929

729

part in Mississippi recently. Although on January i, 1928, the general fund had a very small cash balance, both the 1928-29 and 193031 biennial budgets were considerably out of balance (the latter by about $10 million), so that at the end of 1931 a total general fund deficit of $ 1 1 . 5 million had accumulated. Virtually all of this deficit has by now (August, 1933) been funded, and with the drastic cut in expenditures noted above, plus revenue from new tax rates and new taxes, Mississippi will apparently be able to finish the 1932-33 biennium, not only without additional borrowing, but with a net reduction in debt. To December 31-, 1933, Mississippi had borrowed $4.1 million from the Federal government for unemployment relief, and had also received $4.7 million as an outright grant for the same purpose. These moneys do not pass through the general fund. Local Finances.—Local receipts come chiefly from the property tax. For the fiscal year ending September 30, 1932, counties received $24.1 million, whereof $15.1 came from the current property tax, $0.3 from back property tax, $2.7 from the counties' share (2.5 cents) of the 6-cent gasoline tax, and $2.5 from state aid for schools. Of a total $20.8 million expenditures, $4.5 was for interest on debt, $6.8 for education, and $5.3 for highway maintenance. Of the surplus, $3.9 was used in bond redemption. As the back-tax figures and the data on state property tax delinquency suggest, local finances have not been seriously embarrassed by any "breakdown" in the property tax. The state's own fiscal troubles cannot be laid to any collapse of local finances. MISSOURI30

State Expenditures.—Total general fund expenditure amounted to $29.5 million in the 1929-30 biennium and declined to $24.7 million in the next biennium (the fiscal year coincides with the calendar year). The most important expenditure item represents education. Under the constitution, one-fourth of the general fund revenue goes to schools, but in practice the legislature has been appropriating onethird (except refunds) for that purpose. This represented $4.8 million in 1929, $5.1 million in 1930, $4.2 million in 1931, and $3.4 mil" Sources: reports of state auditor and tax commission; state budgets; U. S. Bureau of the Census, Financial Statistics oj States; and interviews and correspondence with state officials. See also supra, p. 6g2n.

730

FISCAL DEVELOPMENTS SINCE

1929

lion in 1932. In 1933, with the further decline of general purpose revenues, it will be reduced still further. The total state cost of education was $ 1 7 . 8 million in 1929-30 and $ 1 4 . 3 million in 1 9 3 1 - 3 2 . Next in importance were penal institutions, which spent $2.0 million and $2.1 million in the two bienniums, respectively. Personal services required $ 1 2 . 0 million in 1 9 3 1 - 3 2 . For the current biennium they are estimated at $8.8 million. Unemployment relief expenditure has been left hitherto almost entirely to the Federal government, local subdivisions and private organizations, with the exception of the third quarter of 1933, when the state contributed $257,000, or 10.7 per cent of the total. The state road fund expenditure amounted to $50.8 million in 1929-30 and $63.5 million in 1931-32. The total cost of the state government increased from $53.4 million in 1929 to $67.9 million in 1930 and declined to $64.6 million in 1 9 3 1 . Operation and maintenance required $28.9 million in 1929, $ 3 1 . 0 million in 1930, and $28.9 million in 1 9 3 1 . Interest requirements increased from $3.1 million in 1929 to $4.1 million in 1 9 3 1 . Outlays accounted for $ 2 1 . 4 million in 1929, $33.4 million in 1930, and $ 3 1 . 9 million in 1 9 3 1 . State Revenues.—Missouri's general purpose fund, which supplies state support for schools, institutions, and general administration of state, has in point of size receded to second place as a result of the growth of automotive revenue earmarked for the state road fund. Total general revenues were at a maximum in 1930, when they amounted to $ 1 5 . 6 million. This compared with $14.4 million in 1929, $ 1 3 . 0 million in 1 9 3 1 , and $10.7 million in 1932. General revenues for the first eight months of the current year totaled $9.8 million. The most productive of the general purpose taxes is the net income tax, which since 1932 is a graduated tax, ranging from 1 per cent to 4 per cent on incomes in excess of $9,000. Formerly it carried a flat rate of i per cent. In 1929 and 1930 it produced $4.3 million and $4.6 million, respectively, but its yield declined to $3.4 million in 1931 and $3.3 million in 1932. During the first eight months of 1933, when the increased rates became operative, it yielded $3.2 million. Second in importance is the property tax (constitutionally limited to 15 mills) which, at a one-half-mill rate, produced for the general fund $2.5 million in 1929 and 1 9 3 1 , $2.3 million in 1930, $2.1 million

FISCAL

DEVELOPMENTS

SINCE

1929

731

in 1932, and $1.6 million during the first two-thirds of 1933 (in addition to this 5-cent tax, the state has levied special property taxes aggregating from 7 to 10 cents, for the service of soldier bonus bonds, for the blind pension fund, and the interest fund). The inheritance tax has exhibited the greatest fluctuation and has accounted in large part for the variation in total general fund revenue. Its maximum of $3.8 million for 1930 compared with $2.7 million in 1929, $2.8 million in 1931, $1.2 million in 1932, and $1.1 million in 1933 (eight months). The only other taxes to produce more than a million dollars annually are the corporation franchise tax and the foreign insurance tax. The latter of these has had a steady yield of $1.2 million,31 but that of the corporation franchise tax declined from $2.3 million in 1929 to $2.0, $1.9, and $1:8 million during the three subsequent years; 1933 collections, as of August 31, amounted to $1.6 million. A conspicuous feature of the revenue aspect of Missouri state finances is the high degree of tax delinquency, estimated to be $10 per capita.82 Since 1929, the rate of delinquency has gradually increased until at present only 9 of 114 counties have succeeded in collecting more than 90 per cent of their total levies. In some places the proportion of uncollected taxes exceeds 40 per cent.33 In the first quarter of 1933 more than $40 million were outstanding in the form of unpaid obligations to various Missouri government authorities; these represented the claims of state, county, and school districts in the form of real estate and personal taxes, which have been delinquent from one to four years. Probably $1.5 million of income taxes have not been paid. In view of the property tax situation, Missouri recently passed the Jones-Munger delinquency bill, which reduced annual penalties to 10 per cent, and which resulted in a relatively good showing of property tax collections in 1933. Recent Missouri tax legislation has been prompted by the necessity of financing schools and unemployment relief; only the latter is of recent origin, having become acute with the ruling of the Federal government making Federal relief aid conditional upon the states " This represents only 50 per cent of foreign insurance tax collections. The balance goes to the county foreign insurance tax fund for school purposes. " The 13

Bond

Buyer,

J a n . 28, 1933, p . 35.

Conrad H. Hammar, "Some Aspects of Rural Land Tax Delinquency in Missouri,"

Journal

of Land

and Public

Utility

Economics,

M a y , 1933, p p . 172-81.

732

FISCAL DEVELOPMENTS SINCE

1929

themselves spending some money for that purpose. On January 6, 1934, the special session appropriated $5 million for unemployment relief. Schools in Missouri fall within the jurisdiction of nearly 9,000 school districts, which are unable, within their own limits, to collect the necessary funds. Until 1931, 85 per cent of the school revenue came from the property tax, 1 1 per cent from state appropriations, and 4 per cent from other sources.34 The revenue difficulties came to a climax in 1929, when the property tax levy was down to one-half mill and the income tax, down to 1 per cent. In 1 9 3 1 , following the recommendations of the Missouri State Survey Commission, appointed in 1929, the legislature increased the income and corporation franchise taxes and set the minimum tax for public schools at 20 cents. At the same time, it guaranteed, in the case of every elementary school unit, to supply from the state treasury the difference between $750 and the local school tax revenue. Under the circumstances, it was to the advantage of local school units to collect only the minimum tax levy and to rely upon the general fund of the state for the balance. In the interval, however, the sources of general revenue, which in 1929 seemed adequate, underwent a severe contraction, thereby forcing the issue of new revenue once more to the fore. The 1933 legislature was pledged neither to increase existent taxes, nor introduce new ones, and it adjourned without the solution of the fiscal problem. The proposed luxury tax failed of passage. A 0.5 per cent retail sales tax and a liquor tax imposed in January, 1934, are estimated to yield $7 million—enough for relief, school aid, and elimination of the general fund deficit. The income tax has recently been raised, and constitutional limitations prevent an increase of the gasoline tax, which in addition is earmarked for the state road fund. The chief special funds are the state road fund and the state highway department fund. The sale of bonds accounted for $27.5 million in the 1929-30 and $32.4 million in the 1931-32 biennium. Gasoline taxes yielded $8.3, $8.8, $9.5, $9.2 million in 1929-32, and $5.9 milM T h e constitutional limit on the tax levy for school purposes on $ 1 0 0 of assessed value of property is $ 1 . 0 0 in towns and cities and 65 cents in rural districts. The actual levy has on the average been appreciably below these limits.

FISCAL D E V E L O P M E N T S S I N C E 1929

733

lion during the first eight months of 1933. Automobile license taxes produced $9.7, $10.0, $10.1, $9.8 and $8.0 million during the corresponding periods, respectively. On January 1, 1929, the general fund carried a credit balance of $1.7 million. This rose to $2.3 million on the corresponding date in 1931 but was reduced to $0.3 million in 1933. Its constitution prevents Missouri from borrowing for general state purposes, in excess of $250,000 in any one year, and even this amount must be repaid in two years. Through constitutional amendments, the state's bonded debt, consisting of road and soldiers' bonus bonds, increased from $87.8 million on January 1, 1931, to $117.4 million on June 6, 1933. In addition, there were outstanding $4.4 million in state certificates of indebtedness. To December 31, 1933, Federal unemployment relief amounted to $10.0 million, grants accounting for $5.4 million, loans for the remainder. Local Finances.—There is no central information on the cost of either county or municipal government in Missouri. Depending for 94 per cent of their revenue upon the property tax, the local subdivisions have suffered much from the decline of property values and increase of tax delinquencies. Between 1931 and 1932 property values declined from $4,767 million to $4,427 million. With county tax rates remaining approximately the same, ranging from $0.72 to $2.59, county tax levies fell from $88.6 million to $79.6 million. The 1933 law remitting penalties for tax delinquencies, mentioned above, has already brought in about $10.0 million delinquent taxes, most of which goes to the counties. As already indicated, the counties receive for local purposes one-third of the state's general revenue and 50 per cent of the yield of the foreign insurance company tax. Expenditure for salaries and fees of county officials amounted to $2.9 million in 1931 and $2.7 million in 1932. NEW JERSEY35

State Expenditures.—Total disbursements for all purposes in creased from $90.8 million in the fiscal yeaf ending June 30, 1929, to * Sources: reports of Commission to Investigate County and Municipal Taxation and Expenditure; Report on a Survey of Administration and Expenditures of the State Government of New Jersey (Princeton University, 1932); recent issues of New Jersey State Government Functions (budget department); budget message of the governor for 1Q3334. See also supra, p. 6g2n.

734

F I S C A L D E V E L O P M E N T S S I N C E 1929

$98.6 million in 1929-30, $108.8 million in 1930-31, $119.5 million in 1931-32, and (estimated) $120.7 million in 1932-33. The increase is a result of subventions and state aid to localities and emergency relief rather than of a rise in operating costs of the state. Subventions to local units in 1932-33 were estimated from an unofficial source30 to be $46.7 million. This contrasts with $24.8 million in 1927-28. From October 13, 1931, when the state emergency relief administration was organized, to the end of the fiscal year on June 30, 1932, the state expended $8.2 million for relief. For the next year, 1932-33, the state made available $22.0 million for the same purpose. Nearly all of this sum, half being derived from borrowings rather than tax receipts, had been expended by the end of the year. Not until May, 1933, was Federal aid extended, the total amount received to December 31, 1933, being $9.2 million—$2.0 as a loan; the remainder as an outright grant. During the two years prior to October, 1931, the burden of relief was borne by local governments and private purses. Economies have been sought in the functions financed from general state fund and in the reduction of highway outlays to permit a diversion of road funds to unemployment relief. From $20.8 million in 1927-28, the highway expenditures rose to the high level of $40 million in 1930-31 and were $32.5 million in 1931-32, under the pressure of affording labor to the unemployed. An unofficial source37 estimates that there was a decrease to $17 million in 1932-33. The $5 million of state gasoline tax receipts distributed annually to municipalities, while dedicated to street outlays, have in practice meant relief for the unemployed. Although the 1931-32 debt service of $8.1 million is not materially larger than in preceding years, the mounting state debt insures its steady rise. The peak of appropriations for the general state fund was passed with $31.5 million in 1931-32, the amount declining under the governor's leadership to $25 million the next year and to (estimated) $19 million for 1933-34. Total general fund disbursements were $21.9, $23.8, and $25.3 in the period from 1929-30 to 1931-32, respectively, and the balance in the fund decreased from $43 million on July 1, " Moody's "Ibid.

Government

Letter,

1933, P- 660.

F I S C A L D E V E L O P M E N T S S I N C E 1929

73S

1929 to $1.0 million on June 30, 1932 (after inter-fund transfers). While the 1932-33 budget presumably was balanced at time of passage, by decreasing appropriations, a shrinkage of revenue threatened a deficit of $6.5 million. The extraordinary power vested in the governor by the 1932 legislature enabled him so to decrease outlays during the year as to result in $3.4 million of lapsed appropriations reverting to the treasury on June 30, 1933. In addition, salary reductions saved $0.7 million in 1932-33 and promised to save $1.7 million in 1933-34. The 1932-33 deficit of $2.4 million was expected, when the budget was adopted, to be paralleled by the larger deficit of $3.5 million for 1933-34. Beer-tax revenues and pay-roll reductions, according to the state comptroller, promise to convert the deficit into a surplus.'8 State Revenues.—Total revenues, exclusive of borrowings, were substantially the same, $91.1 to $92.4 million, in the two years of 1928-29 and 1931-32. The middle years show the higher income of $106.6 million, and $97.5 million. Of general fund revenues, the inheritance tax yielded $16.0, $10.6, and $10.7 million in 1929-30 and 1931-32, respectively, the corporation taxes, $4.0, $3.9, and $4.0, the revenues collected by the department of banking and insurance, $2.0, $2.7, and $2.6, and the state property tax ("first class tax") on railroads, $1.4, $1.5, and $1.5, respectively. Total general fund revenues decreased from $25.8 to $20.8 and $21.3 million in the same years. The "first class tax" also provided $7.8, $8.4, and $8.1 million for state educational institutions and teachers pensions, these amounts being outside the general fund, as was also the balance of this tax, $1.6, $1.9, and $2.4, distributed to the counties for school purposes. This tax is levied at the average rate of taxation of all municipalities in the state, which has been slightly above 4 per cent in recent years. Also not in general fund receipts are the taxes on general property levied by the state for certain "dedicated funds." The most important of these is the 2.75-mill tax for the school fund, the revenues from which, returned to the localities, have amounted to about $16 or $17 million in recent years. The i-mill tax for service on highway bonds has yielded about $6 million. Total taxable ratables have remained fairly steady, between $6,197 million for 1928 and $6,525 for 1932. 38

New

York Times, A u g . 3 , 1 9 3 3 .

736

FISCAL DEVELOPMENTS

SINCE

1929

For a decade New Jersey has depended upon borrowing to accelerate her road building program. Although the amount of road bonds sold annually during the period has been fairly stationary, the revenues utilized have varied sharply from $ 4 1 . 5 million in 1928-29 to $28.6 million in 1929-30, again rising to $48.0 million in 1 9 3 0 - 3 1 , and dropping to $37.0 million in 1931-32. The borrowings have permitted a diversion of $8.2 million of road revenues to unemployment relief. 39 The addition of a cent to the gasoline tax was approved in 1930, making the rate three cents, to provide funds for distribution to municipalities and to redeem road bonds. Aside from the gasoline tax increase and the beer tax, no important additions to revenue sources have been made since 1929. Proposals for a state income tax have been made repeatedly by state survey commissions during the past two decades. Commissions submitted recommendations in 1929, 1 9 3 1 , and 1933. The failure to approve an income tax has been paralleled by successful opposition to a sales tax. In 1 9 3 2 , a 1 per cent retail sales tax seemed on the verge of adoption when the state utilized loans from the teachers' pension fund and other assets for emergency relief. 40 When these assets neared exhaustion toward the end of 1932, proceeds from bond sales were used; and when these proceeds diminished, Federal relief was obtained in the middle of 1933. An asset, as yet unrealized, will be converted into cash during 1933-34. This is the estimated receipt of $ 1 3 million from the sale of New Jersey's share in the CamdenPhiladelphia bridge bonds. While this transaction amounts fundamentally to the sale of a capital investment, the proceeds may be diverted to current expenses, as relief or state aid to localities, or used for capital purposes. None of the devices for evading the adoption of income and sales taxes would have been successful if New Jersey had not followed a liberal borrowing policy. In November, 1932, referendum approval was given to the issuance of $20 million relief bonds, which is, in fact, a diversion out of a $ 1 0 0 million issue approved two years previously for roads, waterways, and institutions. At the November, " Taxegram, New Jersey Taxpayers Association, Feb., 1033. " T h e amount of $4.1 million was borrowed from the teachers pension fund on J u l y i , 1932. It is expected that this will be repaid from the proceeds of the PhiladelphiaCamden Bridge bonds when such bonds are sold.

F I S C A L D E V E L O P M E N T S S I N C E 1929

737

1933, election, the voters gave their approval to the diversion of additional sums from this issue, $5 million for relief and $7 million to assist school relief and county dependents. This $5 million, combined with the $10 million out of the $20 million noted above, which has in fact been sold, gives $15 million for unemployment relief from this source for the current year. The actual net debt outstanding has expanded from $65 million in 1929 to over $100 million in 1933. The accumulation of a "floating debt" has usually been considered only a remote possibility under the New Jersey procedure of maintaining large fund balances. Local Finances.—Substantially nine-tenths of local tax revenue is derived from property taxes. The steadiness of the base of this tax has been noted above. Total municipal and county budgets, after rising from $190 to $215 million between 1929 and 1932, receded to $204.5 million in 1933. Of these amounts, property tax levies contributed $146 million in 1929, $162 million in 1932, and $154 million in 1933. The peak of local expenditure was virtually reached in 1931, the year 1932 was stationary, and the year 1933 registered a small decline. Similarly, school levies rose from $72 million in 1929 to $77 million in 1931 and receded several millions during the next two years. An important contributing factor to the level of county and municipal expenditure is the debt service, which absorbed $50 million in 1929, $61 million in 1931, and nearly $70 million in 1933. This debt service reflects a large county and municipal indebtedness whose net amount was $373 million in 1929 and $420 million in 1932. The acute problem of delinquent taxes, causing the creation of floating debt, is set forth by the rise of the percentage of uncollected taxes to the total current levy from 25 to 35 per cent between 1929 and 1932. Restated, the tax borrowings at the close of 1929 were $60 million and on September 30, 1932, were $98 million. Today, half of the municipalities have current deficits resulting from failure to provide for uncollectible taxes, over-anticipation of revenues, and the use of frozen surplus to reduce taxes. The not unnatural result is numerous defaults. On March 31, 1933, the number of defaulting localities was 72 and the debts of 7 were state-controlled by the municipal finance commission. Two hundred school districts were unable to pay their teachers in full during 1932-33, payment waiting upon state aid. Although state subventions and aid and state-

738

FISCAL D E V E L O P M E N T S

SINCE

1929

collected locally-shared taxes totaled $50 million in 1931-32, the pressure for tax reform is occurring chiefly in the demand that the state meet a larger share of costs either by increased state aid and state assumption of local functions, or by both. NEW YORK41

1927-28 and 1931-32 (fiscal year State Expenditures.—Between ends June 30), New Y o r k State's general budget expenditure was increased by more than 50 per cent. T h e interruption of the upward trend came as a result of the economy measures of the 1932 session of the legislature. Total expenditure for general purposes, including debt service, amounted to $212.6 and $227.1 million for the fiscal years 1927-28 and 1928-29, and increased to $256.4, $305.05, and $320.1 million in the next three years. In 1932-33 these expenditures were reduced to $271.4 million. Expenditures for debt service, included in these figures, increased steadily from $17.4 million in 192728, to $24.1 million in 1932-33. T h e most important single item of expenditure is that of "fixed charges," largely state aid, which increased from $117.9 million in 1928-29 to $171.4 million in 1931-32, and was estimated at $169.5 million in 1932-33. Cost of personal services increased from $39.1 million in 1928-29 to $41.6, $46.5, $49.8 million from 1929-30 to 1931-32, respectively, and was reduced to $49.3 million in 1932-33. Capital outlays were increased from $24.0 million in 1928-29 to $57.9 and $54.8 million in 1930-31 and 1931-32, and were reduced to $22.5 million in 1932-33. T h e estimate for 1933-34 is only $14.5 million. T h e discrepancy between declining revenues and rising governmental costs resulted in the displacement of a treasury balance of $57.3, $80.5, $97.2 and $55.5 million at the beginning of fiscal years from 1928-29 to 1931-32, by a deficit of $44.3 million on July 1 , 1 9 3 2 , and $96.6 million a year later. State aid to the political subdivisions increased steadily until 1933. It amounted to $86.0 million in 1928-29, $96.4 million in 1929-30, $107.4 million in 1930-31, $129.2 million in 1931-32, and $130.0 million in 1932-33. 41 Sources : reports of state comptroller and tax commission ; Report of New York State Commission for the Revision of the Tax Laws ( F e b . 15, 1Q32) ; statements to taxpayers, N e w Y o r k C i t y department of finance ; see also supra, p. 6g2n.

FISCAL

DEVELOPMENTS

SINCE

1929

739

The bulk of state aid is earmarked for education. This item increased from $72.1 million in 1928 to $100.7 million in 1930-31 and $104.7 million in 1932-33. State aid for highway purposes has remained in the vicinity of $6 million, but is reduced to $2.3 and $3.0 million for 1933-34 and 1934-35, respectively. The 1933 legislature provided that, in the case of cities having a fiscal year identical with the calendar year, education aid be paid in January and September instead of January and March. This is in no sense a reduction in state aid to city schools, but from the state's point of view it reduced state-aid requirements in 1933-34 by $25.0 million. Emergency unemployment relief required $12.4 million in 1931-32 and $10.6 million in 1932-33. State unemployment relief takes largely the form of refunds to the localities, for 40 per cent of the relief expenditures they have already made. Additional work-relief projects are carried on directly by the state, through its various administrative and executive departments from state relief funds. The funds now in the treasury will be exhausted on November 15, 1933. The 1933 legislature, however, approved a $6o-million relief bond issue which was submitted to the electorate in November, 1933, and approved. As a result, the reimbursement of the localities is increased from 40 to 66 2/3 per cent, half of which will be supplied by the state and half by the Federal government. Prior to the current fiscal year, New York State made no extensive efforts to economize on personal service expenditure. The efforts to cut expenditure by an amount from 10 per cent to 20 per cent in 1932 were defeated by the legislature. In 1933, a reduction was approved, ranging from 6 per cent on salaries of $2,000 to 33.9 per cent on those of $15,000. This is expected to amount to a saving of $5 million. State Revenues.—New York State relies for virtually all of its general fund revenue upon sources other than the property tax. The state's levy on property, once an important source of revenue, has, since 1929, been reduced to insignificance. Total general fund revenues were at a maximum in 1929-30, at $272.6 million. This compares with $217.7 a n d $250.5 million in 1927-28 and 1928-29, and with $265.4," $218.2, and $223.6 in 1930-31, 1931-32, and 1932-33, respectively. The individual items of the revenue structure reflect to 42

Includes refund from Port of N e w York Authority of $24.4 million.

740

FISCAL DEVELOPMENTS

SINCE

1929

a large degree variations in business and financial conditions. Thus the yield of the chief revenue sources fluctuated as shown in the accompanying table. No measures to increase revenues were taken until the 1931 special session of the legislature, when the rates of the personal income tax were increased 50 per cent to raise money for unemployment relief. In the 1932 regular session, the rates were increased to 2, 4 and 6 per cent—double the rates existing in 1930. This amounted to a tripling of the state's share of the tax, as the one-half share returned to localiYIELD OF IMPORTANT SOURCES OF T A X R E V E N U E , NEW YORK STATE

1928-29

TO 1 9 3 2 - 3 3

(In Millions of Dollars) SOURCE OF REVENUE

Property tax Personal income tax (state's share) Inheritance tax Corporation income tax (state's share) Stock transfer tax Motor fuel tax (state's share) Motor vehicle tax (state's share)

1928-29

1929-30

1930-31

1931-32

1932-33

14-7

1.8

2.7

2.4

2.1

19-5 45-7

34 0

41.8

40. 2

19.7

47-2

5°-4

52-6

24.9

56-3 33-7

66.7 18.8

70.4 20.7 22.9

59-3

389

17.0 24. 2

45-7 31.6 37-0

29-5

3°-4

312

3° S

29.9

ties was at the same time reduced to one-fourth. In the 1932 session the rate of the stock transfer tax was also increased; and the rate of the motor fuel tax was raised from 2 cents to 3 cents (the localities were still given only the proceeds of one-half cent of the tax). A 65per cent increase in truck and bus taxes was voted, but lowered and finally repealed in subsequent sessions. This program was to increase revenues by $87 million a year, to meet deficits threatened for 193132 and 1932-33. In 1933, the anticipation of a cumulative deficit in excess of $100 million forced the legislature to adopt additional revenue measures. At this time it approved a program calculated to produce $88 million of new revenue. It lowered the exemptions of the personal income tax, retained the cent added to the motor fuel tax the year before, revised the inheritance and stock transfer taxes, imposed beer and wine taxes, and approved a 1 per cent retail sales tax, and a 1 per cent "emergency income" tax (in reality, a tax on those required to

FISCAL D E V E L O P M E N T S

S I N C E 1929

741

file returns under the ordinary income tax, but without inclusion of capital gains or deduction of capital losses, and without credit against net income for personal and dependent status). T o permit operation in the face of a treasury deficiency, the state contracted temporary loans for the amount of $189.5 million in 1932, of which $136.6 million were still outstanding on October 1, 1933. Total gross bonded indebtedness amounted to $359.8 million at the end of 1929 and increased to $444.2 million by the end of 1932 and $517.2 million by December 31, 1933. Net bonded indebtedness increased from $254.8 million in 1929 to $410.6 million on December 31, 1933. The increase was largely the result of debts contracted for the purpose of general state improvements, emergency construction, and unemployment relief. Federal emergency unemployment relief to New York State between July 1, 1932 and December 31, 1933 amounted to $71.3 million, $44 7 million of this representing outright grants, and the remainder, loans. Local Finances.—The local revenue systems are based largely on the property tax; thus in 1929-30, of a total $882.9 million local tax revenue, $796.1 came from the "general" property tax—in fact, almost entirely a real property tax. The assessed value of all property rose from $27.0 billion in 1928 to $28.6 and $29.5 billion in 1929 and 1930, and in 1931 to $29.6 billion. The localities have suffered from the decline in the yield of state-collected locally shared taxes, especially the personal income tax. New York City, of course, plays a preponderant part in local finance data. The total budget for the city rose from $569.8 million in 1930 to $620.8 the next year, and to $631.4 million in 1932. A decline to $518.4 million in the budget of 1933 resulted largely through abandonment of the plan to amortize subway bonds on a four-year basis, but a fiscal crisis developed through failure to economize further in the face of mounting tax delinquency. Assessed valuations of taxable property increased from $19.2 billion in 1931 to $20.0 billion in 1932, largely as a result of the expiration of the period during which partial exemption was granted to new dwellings shortly after the war. In 1933 the total dropped to $18.8 billion. The levy on property in 1931, 1932, and 1933, respectively (including city and borough special assess-

742

FISCAL DEVELOPMENTS

SINCE

1929

43

ments) was $513.4, $534.1, and $455.8 million. Continued borrowing to meet current expenses has placed the city in a position where it must apparently achieve further economies or obtain more revenue, which must come from sources other than real estate, in view of the agreement recently entered into with the banking group which has been carrying the city's floating debt. NORTH

CAROLINA44

State Expenditures.—General fund expenditures increased sharply from $15.6 million in the fiscal year ending June 30, 1929, to $26.9 million in 1931-32, were $26.8 million in 1932-33, and according to appropriations by the 1933 legislature, will be $25.5 million for 193334. Even this increase is moderate compared with the increase in appropriations, up to June 30, 1933, for during the four years from July 1 , 1 9 2 9 to June 30,1933, original legislative appropriations were subsequently cut by executive (budget bureau) orders by a total of $8.7 million,4'5 resulting in the expenditure figures noted above. For the biennium 1931-33 the cut in percentage terms was 36 per cent below the original appropriations. Such cuts were necessary, both because the North Carolina legislature, like the legislatures in Georgia and Mississippi, consistently appropriated in excess of the revenues as estimated at the time (an excess of $1.0 million for 1929-30, $ 1 . 3 million for 1930-31, $1.7 million for 1931-32, and $2.0 million for 1932-33), and because the estimates of revenues proved far too high. Drastic as these cuts were—institutional salaries, for instance, have been cut at least 32 per cent below the peak level, and departmental salaries at least 38 per cent—they were insufficient to balance the budget, and a general fund surplus of $2.1 million on June 30, 1929, was converted into a deficit of $2.2 million as of June 30, 1931, to which there were added deficits of $4.3 million for the following year and $8.4 million for 1932-33—a total of $15.0 million. This " T h e s e assessments totaled $ 2 1 . 2 , $17.0, and ?IQ.6 million in the three years, respectively. " S o u r c e s : reports of state tax commission, state budget, and interviews and correspondence with state officials. See also supra, p. 6g2n. " A negligible part of this represents unspent appropriations instead of cuts by the budget bureau. The budget bureau has no power to cut appropriations for debt service, or pensions.

F I S C A L D E V E L O P M E N T S S I N C E 1929

743

deficit is to be funded. The 1933-34 and 1934-35 budgets appear to be in balance. The major factor in general fund expenditures, accounting for the large increase in the total, has been school costs. Whereas the state contributed $6.2 million to public schools in 1929-30 ($5.1 through an equalizing fund), and $6.4 in 1930-31, this sum mounted to $16.9 in 1931-32 when the state took over the financing of the six-months term, and was about the same for 1932-33. For 1933-34 the sum will be approximately $ 1 6 million (for an eight-months term), and virtually no local property taxes will be levied for school operating expenses. Another important general fund item has been debt service, which fluctuated between $3.4 and $3.6 million from 1929-30 to 1931-32, and which will average $4.5 million per year for the 1933-35 biennium. This includes retirement of debt, which item has held constant, at about $1.4 million per year (for 1934-35 it will be $2.1 million). The state government has spent virtually none of its own revenues on unemployment relief, and there is no provision for such expenditure in the 1933-35 budget as adopted. The special fund expenditures have not been a direct factor in the state's financial strain. State Revenues.—General fund receipts dropped from $16.8 million in 1929-30 to $14.3 million in 1930-31, but, as a result of increased taxation to support the new school program, rose sharply to $22.6 million in 1931-32. Economic conditions brought another drop to $18.4 million in 1932-33, but again increased taxation pushed the level up to an estimated $27.1 million for 1933-34. This erratic fluctuation reflects the efforts of the legislature, every two years, to support its educational program, an effort partially nullified between sessions by the unexpected severity of the business depression. The dominant item in general fund revenues at the onset of the depression was the income tax, personal and corporate. In 1929-30 it yielded $7.5 million—45 per cent of general fund revenues. The yield declined to $6.0 million for the next year, rose again to $7.8 million for 1931-32 and declined again for 1932-33 to about $6 million. The other large item in the general fund has been the series of corporation franchise taxes, whose yield has increased markedly

744

FISCAL D E V E L O P M E N T S S I N C E 1929

since 1929-30—from $4.8 million in that year to $6.7 in 1931-32 and $6.1 for 1932-33. A third considerable item, making its appearance only for the years 1931-32 and 1932-33, was the temporary 15-cent state-wide tax on property. Estimated to yield $4.1 million in each year, it showed actual collections of only $3.85 for the former year and $2.2 million for the latter year, as of June 30, 1933. The fourth important source, the sales tax, will be first reflected in the 1933-34 accounts, and has been expected to yield $8.4 million annually. The effect of the business depression on the tax system as it stood in 1929 is difficult to trace owing to the many rate changes made in 1931 and 1933. It is clear, however, that as to the income tax North Carolina has been more fortunate than many other states, chiefly because most of the total comes from the tax on foreign corporations, i.e., those incorporated in other states—to a considerable degree, one may surmise, from the large tobacco companies. Of the $7.5 million collected in 1929-30, $3.4 came from foreign corporations, and only $1.8 from individuals. For 1931-32 the respective yields (both in fluenced by rate increases) were $4.6 and $0.9. At the 1931 session new taxes were introduced, and the rates of most of those existing were raised. The chief new tax was a 15-cent tax on 1930 property valuations, the first state-wide property tax levied for many years. There was also enacted a 6 per cent tax on dividends received by residents from foreign corporations, yielding about $0.6 million annually (included in the income tax yield above); and a low-rate mercantile license or sales tax, giving only $0.4 million a year. Two years later, in 1933, the legislature abandoned the 15cent tax, and the low-rate sales tax, and levied the present 3 per cent sales tax. Rate increases in both the 1931 and 1933 sessions were so numerous that only the more important (from a revenue viewpoint) are presented in the table on page 745. In addition, death duties were raised, and the privilege taxes were increased. Despite these efforts, the widening gap between revenues and expenditures necessitated borrowing, on a short-term basis. In addition, to December 31, 1933, the state borrowed $5.9 million from the Federal government to finance unemployment relief, and had received $5.0 million, for the same purpose, as an outright grant. This money

(J tj

«&& u

u E O-H» o -

fi s

t/3

H X < H

u H
% Illinois tax bring you additional

business? 3. Did you notice a definite lull in trade after the defeat of the Illinois sales tax? Yes • No • If so, do you attribute such decrease to the defeat of the Tax? , Yes • No

[J

4. Did you notice any pickup of sales after July 1, 1933 when Illinois imposed the new tax? Yes [~| No | | If so. do you attribute such increase to the passage of the 2% tax? Some of the increase

Yes l~~l No 1 I

All of the increase

Yes •

Why ^

No

•

the 2% Illinois tax bring you additional

business? Other remarks by dealer on effect of Illinois sales taxes on Davenport Business. Questionnaire used in interviewing retailers in Davenport, Iowa

Toledo, Ohio COLUMBIA UNIVERSITY TAX STUDY

Nature of business (i.e., hats, grocery, etc.)

,

•Type of outlet (i.e., whether independent, etc.) Independent Branch of Main Store Chain store unit

1.

2.

Did you notice any Increase in your sales after July 1, 1933? Over the winter of 1932 and the spring of 1933?

Yes |_J No | )

Over the summer of 1932?

Yes Q ] No | |

If so, do you attribute such increase to the passage of the sales tax in Michigan? Some of the increase :

Yes Q

No

Q

All of the increase

Yes Q

No

Q

Why ^ ^

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the

:

Michigan tax bring you additional

business?

Other remarks by dealer on effect of Michigan sales taxes on Toledo Business.

Questionnaire used in interviewing retailers in Toledo, Ohio

INDEX

INDEX Abstractors of title, 570, 617. See also Professions Acceptance, trade, 630 Accountants, 404-5, 419, 617. See also Professions Accounts receivable. See Credits Adjustments, price, 632-33 Administration, 26-29, 105; Arizona, 28688; California, 295-96; Georgia, 153-56; Illinois, 234-37; Indiana, 242-45; Kentucky, 163-64; Michigan, 258-59; Mississippi, 170-78; New York, 128-32; North Carolina, 193-94; Oklahoma, 2045; Pennsylvania, 138-42; South Dakota, 276-78; Utah, 307-8; Washington, 31617; West Virginia, 221-23 Administrators of estates, sales by, 558 Admissions extent of shifting of sales tax, 156 sales tax laws, 3-4, 90, 552, 614-15 taxes on, in relation to sales tax issue: Indiana, 239; Kentucky, 162; Mississippi, 166-67; Missouri, 183; New Jersey, 118-19; North Carolina, 188; Ohio, 267-69; Oklahoma, 202; South Dakota, 2 74n; Utah, 305; Washington, 314; West Virginia, 214, 218. See also, under each state, Fiscal developments since 1929 Advertising: agencies, 617; matter, 93, 588-89, 637; sales tax charged to, 420; treatment under sales tax laws, 183, 314, 570, 613 Affiliates, 636-37, 652 Agents: collection, 617; employment, 617; manufacturers', 608, 610; real estate, 617; taxability of, 564 Air-conditioning equipment, 574 Airplanes, 183, 612, 614 Air products, 97, 578, 580 Alabama, 11 in Albany, 132-33 Allegany County (New York), 347n, 688 American Legislators' Association, 38n, 39 Amusements, parks, 614. See also Admissions Animals, as goods or merchandise, 580 Annuities, exemption, 660 Anti-Sales Tax Federation, 301

"Any transfer" states, 560-61, 563-65, 567 Apalachin (New York), 378 Approval, delivery of goods on, 559, 561 Architects, 96, 570-71. See also Professions Arizona, yn, 11 in, 282-88; administration, 27-28, 286-88; agriculture, 604; barter, 623; business and non-business activities contrasted, 553-54, 557; credits, delivery costs, discounts, and other items in measure of sales tax, 626-37; date of approval of sales tax, 23n ; definition of manufacturer, 595, 698; definition of retailer and wholesaler, 581, 586; definition of sale, 560, 562, 570, 572-75; exemptions other than those under Federal Constitution, 655 ; exemptions under Federal Constitution, 638, 643, 646, 64849; fiscal developments since 1929, 28283; integrated concerns, 606, 608; natural-resource products, 600, 602 ; revenue from sales tax, 286; sale of services, 611, 613; sales tax issue, 283-86; sales tax law, i in, 89n, 283-85; shifting, 33, 288; state constitution, 662 ; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 10, 15-16, see also under various taxes Arkansas, 8n, i2n, 11 in, 145-49, 260, 264; fiscal developments since 1929, 145-46, 692-95 ; sales tax issue, i9n, 20, 146-49 ; taxes other than sales tax, 9-11, 13, 15, see also under various taxes; vote on sales tax, 14, 39, 148 Arkansas Association of Real Estate Boards, 148 Art, works of, as tangible personalty, 577. See also Artists and Contracts for labor and materials Artists, 95, 570-71 ; as manufacturers, 596; contracts for labor and materials, 568. See also Painting and Professions Asphalt, as manufactured product, 597 Assembling, as manufacturing, 597 Assessors, property tax, 221, 277 Assignments, 621 Associated Industries, 182-84 Association for Tax Justice, 250 Athletic events, 614. See also Admissions Atlanta Retail Merchants Association, 153

814

INDEX

Attorneys. See Lawyers Auctioneers, 617 Audit, office: Arizona, 287; Georgia, 154; Illinois, 236; Indiana, 244; Mississippi, 173-74; New York, 130; North Carolina, 194; Oklahoma, 205; Utah, 308; West Virginia, 222 Austin, 208 Australia, 5 Austria, 5 Authors, 314 Automobile assembly, as manufacturing, 599 Automobile painters and refinishers, 575 Automobile parts, sale of, to fleet operators, 584 Automobiles, dealers in: charging tax as separate item, 400, 513; exemption, 334; extent of shifting of sales tax, 75, 326, 366, 369-72, 394, 409-10, 444, 473, 512; importance as to sales tax revenue, 179, 32S> 341, 344; loss of business, 233, 486, 530-31, 538; obstacles to shifting, 388; sales tax laws, 167, i83n; seasonal element, 337. See also Motor vehicles üachrach v. Nelson, 229, 662n Bail bonds, 616 Bailment, 95, 141, 559, 561-62 Bakeries, 262, 332, 596-97 Baking powder, as manufactured product, S97 Bankers, attitude toward sales tax: Arizona, 285; Massachusetts, 114, 117; Oklahoma, 203; Oregon, 302 Bank of North Dakota, 263 Banks, application of sales tax to, 85, 97, 214, 218, 224, 559, 579, 615-16; Federal Land, 647-48; national, 646, 648; savings, 648, 657. See also Financial institutions Barbers, 96, 574, 576 Barter, 99, 623-25 Barton (New Y o r k ) , 372 Batteries, 654 Beatty-Bennett Law, 247, 251 Beauty shops, 96, 575 Beer, tax on, 4, 16; Kentucky, 163; Massachusetts, 116; Missouri, 183; Ohio, 269; Oklahoma, 201; South Dakota, 276; Texas, 207-8; Virginia, 2 1 1 ; treatment under sales tax, 87, 655. See also Exemptions Bell, J. W., i78n, 321

Bensonhurst (New Y o r k ) , 378 Bequests, 621-22, 660 Bethel (New Y o r k ) , 378 Billiards and pool, 183, 614 Bills of lading, 97, 578 Binghamton (New Y o r k ) , 372 Blacksmiths, 575 Blast furnace slag, 2:7. See also Naturalresource products Blasting, 605 Bleaching, as manufacturing, 596-97 Blending, as manufacturing, 596, 598 Blood, Governor, 304 Board of Equalization, California, 2Qiff Bonds, application of sales tax to sales of, 621-23 Bonus, 618, 621, 632 Book accounts, as intangible personalty, S78 Bookkeepers, 404-5, 489 Books, school, 660 Booksellers, extent of shifting of sales tax, 368, 444, 512; loss of business, 486; treatment under sales tax, 96, S57> 57071, 614 Bootblacks, 576 Border areas, 266, 326, 347-54,369-75, 442, 528. See also Moline, Monroe, and Rock Island Borough Park (New Y o r k ) , 378 Botkin v. Welsh, 64m Bottles, 589 Bowling alleys, 614. See also Admissions Bracket systems. See Schedules Braufman v. Bender, s6sn Bread, 189 Brick, 262 Bridges, as manufactured product, 597 Broadcasting, 613-14. See also Radio Broadway-Brooklyn (New Y o r k ) , 378 Brokers, 106, 617, 618 Bronx, 133, 373, 378 Brookings Institution, 248-49 Brooklyn, 132-33, 373 Brooklyn College, 322n Broome County (New Y o r k ) , 347n, 688 Buffalo, 62, 132, 326, 347n, 352, 374, 379, 688-90 Builders. See Contractors Building, as manufacturing, 597 ; materials, 75 Building and loan, 615, 657. See also Financial institutions Building materials, dealers in: familiarity

INDEX with tax law, 384; importance in revenue, 341, 347 ; number shifting sales tax, 325. 373; obstacles to shifting, 389 Building Owners and Managers Association, 291 Bumpers, 93, 583 Burden, 101. See also Shifting Burnet v. Clark, sssn Buses, 119, 283 Business: definition of, 97, 552-59; index of, 179; loss of, because of sales tax, 66, 73-74, 76. 233. 370-75, 475-86, 527-38; methods of, influence of sales tax upon, 106; taxes on, 3-4n, 15, 97 Butter, 88, 604. See also Farm products Buttons, 575 Cadosia (New York), 378 Cadwalder v. Lederer, 557n Calculating machines, 368 California, 7n, 12-14, 19, i n n , 288-98, 321; administration, 27, 295-96; barter, 623; business and non-business activities contrasted, 553, 557; credits, delivery costs, discounts, and other items in measure of sales tax, 626-37; date of approval of sales tax, 23n ; definition of retailer and wholesaler, 581, 583-84, 58688, 592 ; definition of sale, 560-6T, 564, 570-75 ; exemptions other than those under Federal Constitution, 652, 654-57, 660; exemptions under Federal Constitution, 638, 640, 646; fiscal developments since 1929, 288-90, 696-99; revenue from sales tax, 38-39, 298; sales tax issue, 19-20, 22, 290-95; sales tax law, 25, 87, 292-94; shifting, 3^33, 294-98 ; state constitution, 662 ; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 910, 25, 38-39, see also under various taxes California County Supervisors Association, 291 California Farm Bureau Federation, 291 California Merchants' Federation, 294 California Real Estate Association, 291 California Retail Dry Goods Association, 293 Canada, 5, 7, 375 Canavan v. Mechanicville, 58011 Candy, 335, 653 Canning, as manufacturing activity, 596, 598 Capital, contribution to, 621

815

Carnivals, 614. See also Admissions Carter v. Slavick Jewelry Co., 565m Catholics, 268 Cattaraugus County (New York), 347n, 688 Cayuga (New York), 347^ 688 Cemeteries, 657 Census of distribution, 331, 670-72 Chain stores, 4, 25, 27; administration of sales tax, 141, 221, 244; attitude toward sales tax, 18, 265; charging tax as separate item, 194, 329; exemption, 344; extent of shifting of sales tax, 69; importance as to sales tax revenue, 325; litigation, 258; special study of, in New York, 415-18; taxes on, 119, 159, 160, 161, 166, 220, 253, 280 Chambers of Commerce, 658; attitude of, toward sales tax: Arkansas, 148-49; Illinois, 232; Indiana, 240; Pennsylvania, 137-38; West Virginia, 219 Charging tax as separate item, 24, 68-69, 72, 76-78, 104; Arizona, 286; Illinois, 232, 433, 436, 472, 473, 474; Michigan, 525; Mississippi, 178; New York, 329, 390, 391, 399, 400, 4ir, 421; North Carolina, 194-98; Pennsylvania, 144 Chase and Baker Co. v. National Trust and Credit Co., 6i6n Chattels, real, 577 Chautauqua County (New York), 347n, 688

Check books, 93, 583, 590 Checker boards, 183 Cheese, 604. See also Farm products Chemicals, 585, 587, 590 Chemung (New York), 378 Chemung County (New York), 347n, 688 Chenango (New York), 347n, 688 Chicago, 24, 32; statistical survey, 76-80, 321, 323, 424-99. See also Illinois Chicago Real Estate Board, 230 Chickens. See Poultry Chocolate, milk, 88, 653. See also Food Choses in action, 579-80 Cigarettes. See Tobacco products Cigar stores, 344, 399, 405, 415. See also Stationery and cigar stores Cincinnati, 266 Circus, 614. See also Admissions City College, 322n Civic Federation and Bureau of Public Efficiency, 229 Civilian conservation camps, 647

816

INDEX

Civil W o r k s Administration, 129 Classification, 662-64 Clay, 224 Cleansing, as manufacturing, 596-97 Cleveland, 375 Clocks, 183 "Closed transaction" states, 560-63, 566-67 Clothing: as m a n u f a c t u r e d product, 597; as tangible personalty, 5 7 7 ; exemption of, 201 Clothing stores: a t t i t u d e t o w a r d sales tax, 220; chain, 4 1 5 ; charging tax as separate item, 399-400, 513 ; extent of shifting of sales tax, 75, 366, 370, 372, 394-95, 444, 473, 512, 524; importance as t o sales tax revenue, 325, 341, 344, 347; loss of business, 486, 530; obstacles t o shifting, 388; seasonal element, 337 Clubs, 557, 658 Coal, 7, 119, 214, 217, 221, 223-24; charging tax as separate item, 399-400, 4 1 1 , 5 1 3 ; extent of shifting of sales tax, 326, 366, 372, 394, 409. 4441 S12 ; freight charges on, 631 ; importance as to sales tax revenue, 325, 344; interests, a t t i t u d e t o w a r d sales tax, 219; obstacles t o shifting, 389; record-keeping costs, 404; seasonal element, 3 3 7 ; used b y m a n u f a c turers, 93, 233, 583, 587, 593 Coast guard, 649 Cobblers, 96, 574 Cocoa, 653 Coffee, 189, 305, 653 Coke, 602 Cold cream, as m a n u f a c t u r e d product, 597 Cold storage plants, 619 Collection a t source, 28, 273, 276-77 Collection period, 101 Colorado, 11 i n Columbia C o u n t y (New Y o r k ) , 347n, 688 Columbia University, 322n Commerce Clearing House, 11 i n Commercial credit companies, 615. See also Financial institutions Commissioner of Internal Revenue v. Widen er, 556n Commissions, taxability of, 565. See also Agent Commonwealth v. National Cash Register Co., 564n Commonwealth v. Wilkes-Barre Ry. Co., 617n Compensation payments, 621-60 Composers, 314

Concrete, 262 Conditional Sales Act, 633 Coney Island, 378 Confectioners: charging tax as separate item, 400; exemption, 334-3S, 3S2> 4 " > 653; extent of shifting of sales tax, 368; importance as to sales tax revenue, 3 4 1 ; obstacles t o shifting, 388; record-keeping costs, 404; seasonal element, 337 Connecticut, 4, 11 i n , 375 Conner, Governor, 168, i69n, 230 Conqueror, The, s8on Constitutionality of sales tax, 661-64 > Arizona, 284; Illinois, 2 3 7 ; Iowa, 245; M a s sachusetts, 1 1 4 - 1 5 ; Michigan, 258; South D a k o t a , 276; Washington, 601 Consumers, 19, 24, 69, 76, 330. See also Retailers, definition of and Shifting, consumers' reports on Containers, 88, 93, 167, 233, 306, 368, 550, 582-83, 587-90, 592, 604 Contests, athletic, 557 C o n t r a b a n d , 580 Contractors, t r e a t m e n t under sales tax laws, 96, 167, 214, 218, 223, 262, 57375. 616, 647-49 C o n t r a c t s : cost-plus, 575; f o r labor and materials, 95, 559-60, 567-76 Conversion, 559 Cook C o u n t y , 16, 227-28, 231 Cooperatives, 97, 556-57, 658 Copper. See Natural-resource products Copyrights, 555, 579-8°. 650 Correspondence: Illinois, 236; Indiana, 245; Mississippi, 1 7 7 ; N e w Y o r k , 1 3 1 ; Pennsylvania, 142; West Virginia, 223 Correspondence school courses, 96, 570 Cortland ( N e w Y o r k ) , 347n, 688 Cosmetics, i 3 6 n , 183, 269, 274n, 305, 388, 400-1 Cost of administration, 26-28, 105-6, 147; Arizona, 285-86; California, 296; Georgia, 1 5 5 ; Illinois, 237; Indiana, 245; K e n t u c k y , 163-64; Mississippi, 1 7 7 ; N e w Y o r k , 1 3 2 ; N o r t h D a k o t a , 263; Oklah o m a , 202-4; Oregon, 3 0 1 ; S o u t h D a kota, 273; U t a h , 307; Washington, 315 Cost of sales tax t o taxpayer, 68, 74, 76, 106, 329, 401-9, 422, 434, 488-89 Cotton, 167, 581, 640, 654-55 Cotton piece goods stores, 368 C o t t o n seed, 167 Cough drops, 653 Council of Illinois Merchants, 23a

INDEX Counties, exemption, 656-57 Coupon system, 33-36, 268,308 Cox v. Stulls Eagle Drug Co., 284n Credit information, 96, 570 Credits, 98, 626-29 Crops, 577, 580. See also Farm products Crushing, as manufacturing, 597-98, 605 Curtains, 575 Customs duties, 104 Czechoslovakia, 5 Dahnke-Walker Mill Co. v. Bondurant, 639 n Daily products, 332, 586, 601. See also Farm products Dalton v. Bowers, sssn Damages, exemption, 660 Dances, 614. See also Admissions Davenport, 61, 70, 74, 250, 477, 486, 494 Debt burden, 193 Debts, bad, 628 Deeds, 95, 571 Delaware, 4, i n n Delaware County (New York), 347n, 688 Delicatessens, 334, 368, 409 Delinquency under sales tax : Georgia, 15455; Kentucky, 164; Mississippi, 172-77; New York, 129-32; North Carolina, 194; Pennsylvania, 139-41 Delivery costs, 98, 245, 630-32, 636, 641 Dentists, 96, 141, 241, 570-71. See also Professions Department stores, 103, 418-23; administration of sales tax, 141, 421-22; attitude toward sales tax, 119, 220, 265, 415, 423; charging tax as separate item, 513; extent of shifting of sales tax, 69, 75, 144, 288, 308, 366, 394, 418-23, 444, 473, 512; importance as to sales tax revenue, 179, 326, 344, 419; in banking business, 616; in interstate commerce, 642; loss of business, 486, 530; recordkeeping costs, 405, 422 ; special taxes on, *5. 159 Detectives, 617 Detroit, statistical survey, 76-80, 321, 375, 500-546. See also Michigan Detroit Retail Merchants Association, 506, S2S Dewey, A. D., Jr., 304 Diamonds, 602 Discounts, 98, 245, 616, 618, 620, 629-30. See also Investment income Discrepancies, comment on, 424n

817

District of Columbia, i n n Dividends, 3, 6, 90, 97, 116, 555, 620-22, 646. See also Investment income Doctors, 96, 169, 570, 575, 617. See also Professions Documents, 97 Dog trainers, 617 Drain tile, 262 Drug stores, 144, 194, 285, 288; attitude toward sales tax, 414; chain stores, 41516; charging tax as separate item, 400, 513; drugs, in department stores, 420, 422; economies engendered by sales tax, 401; exemption, 334-35; extent of shifting of sales tax, 388, 394, 444, 473, 512, 524; importance as to sales tax revenue, 341, 344; loss of business, 486; obstacles to shifting, 388; record-keeping costs, 404; treatment under sales tax laws, 575, 596, 598. See also Pharmacists Dry cleaning, as manufacturing, 598-99 Dry goods stores, 75, 179; attitude toward sales tax, 414; charging tax as separate item, 513; exemption, 334; extent of shifting of sales tax, 368, 370, 394, 444, 473. 512; loss of business, 538; obstacles to shifting, 388; record-keeping costs, 40S Drying, as manufacturing, 596 "Due process" clause, 643, 663 Dutchess County (New York), 347n, 688 Dyeing, as manufacturing, 596 Easements, 577 Eastern Air Transport v. South Carolina Tax Commission, 64on East Ohio Gas Co. v. Tax Commission of Ohio, 64on Economy measures, 12-13. See also, under each state, Fiscal developments since 1929 Educational Film Corp. v. Ward, 6$on Educators, attitude toward sales tax, 21; Arkansas, 148-49; California, 293; Georgia, 152; Illinois, 228-32; Indiana, 242; Iowa, 251; Kentucky, 163; Michigan, 254-57; Mississippi, 168; Missouri, 184; New Jersey, 121; New York, 12728; North Carolina, 190; Ohio, 266; Oklahoma, 203; Oregon, 302; Texas, 207; Washington, 313; West Virginia, 219-20 Edwards v. Chile Copper Co., 554n Eggs, 88, 332, 586, 603-4, 653. See also Farm products

818

INDEX

Ehringhaus, Governor, 191 Electrical appliance stores, in statistical study, 325-26, 331, 341, 344, 347, 366, 368, 401 Electricians, 96, 572-73 Electricity: as goods or merchandise, 580; as manufactured product, 597-98, 599; as tangible or intangible personalty, 57778; exemption, 654; tax on, in relation to sales tax issue, 86, 97, 116, 119, 124, 183, 188, 202, 294, 262, 283, 306; used by retailer, 583. See also Public service corporations Electric light and power companies. See Public service corporations Electric ranges, 183 Elliott v. Commissioner of Internal Revenue, S57n Elmira (New York), 372 Elmira Heights (New York), 378 Ely, Governor, 114-15 Emblements, 580 Emoluments, 618 Endicott (New York), 371 Endowments, exemption, 660 Engravers, 96, 575 "Equal protection" clause, 663 Equipment, as tangible personalty, 577 Erie County (New York), 347n, 688, 689 Errors by taxpayers: Illinois, 236; Indiana, 244; Mississippi, 175; New York, 1303 1 ; Pennsylvania, 141 Estate of Watkinson, 662n Estate taxes, 9-10, 15, 39, 84, 103, 644. See also Inheritance taxes, and, under each state, Fiscal developments since 1929 Europe, 5 Evaporating, as manufacturing, 596 Evasion, 25-26, 105-6, 119, 222, 328, 378, 414, 423, 499. See also Administration Excises, Federal, 104 Excursions, 614 Executors, sales by, 558 Exemptions, 46-60, 86-88, 213, 218-19, 234, 239, 638-64 agricultural products, 654-55 chain stores, 416 department stores, 418 Federal instrumentalities, 646-50 food, 653-54 interstate commerce, 629-43 methods of estimating, 29, 405, 539-41 miscellaneous provisions, 660 natural-resource products, 654-55

non-profit organizations, 657-58 on jurisdictional grounds, 643-46 other state or Federal taxes, 659-60 public service corporations, 654 receipts otherwise taxed, 655-56 sales by or to the state, 656-57 small retailers, 106 state laws: Arizona, 283-84; California, 293-94; Illinois, 70, 85; Indiana, 239, 243; Michigan, 74, 254; New York, 62-64, 124, 330-41, 354-58; North Dakota, 263; Oregon, 301; South Dakota, 276; Washington, 313, 315 stated sum, 7, 86, 124, 331, 335, 500, 650-52 statistical survey, 6in, 79, 330-58, 42630, 500-6 Exhibitions, 614. See also Admissions Expenditures, 1 1 - 1 3 ; limitations on, 294. See also, under each state, Fiscal developments since 1929 Expenses, advances for, 618 Express companies, exemption, 655. See also Public service corporations Factor, 618 Fairs, 202, 314, 614. See also Admissions Familiarity with sales tax law, 384, 491, 542 Farm Bureau, 262, 274 Farmers, attitude toward sales tax, 6-7, 19-20; California, 292; Georgia, 152; Illinois, 228-31; Indiana, 241; Iowa, 250; Kentucky, 163; Massachusetts, 1 1 4 ; Michigan, 255; Mississippi, 169; Missouri, 182-84; New York, 127; North Carolina, 188-90; North Dakota, 26162; Ohio, 267; Oklahoma, 200-3; Oregon, 300-1; Washington, 3 1 3 ; West Virginia, 213-19 Farmers' Relief Association, 274n Farmers' Union, 262 Farm Holiday Association, 262, 274 Farm implements, 512, 531 Farm products, special treatment of, under sales tax, 85-88, 601, 603-5, 65455; Arizona, 283-84, 595; Arkansas, 147; Illinois, 227, 234, 610, 663; Michigan, 254; Mississippi, 166; Missouri, 182; North Carolina, 189; Ohio, 268; Oklahoma, 201; Oregon, 301; Pennsylvania, 135; Washington, 314 Federal Emergency Relief Administration, 12, 22, 162

INDEX Federal instrumentalities, 85, 155, 646-50 Feed, 93, 585-86 Fees, 618, 620-21 Felling, as manufacturing, 596 Ferguson, Governor, 206-8 Fern dale (New York), 378 Fertilizers, 167, 189, 257, 604-5, 655 Field work: Arizona, 287; California, 296; Georgia, 154; Illinois, 236; Indiana, 244; Kentucky, 164; Mississippi, 172; New York, 129-30; North Carolina, 193-94; Pennsylvania, 139-41; South Dakota, 278; Utah, 307; West Virginia, 222 Finance companies, 615. See also Financial institutions Financial institutions, 90, 314, 615-16. For taxes other than sales tax, see under each state, Fiscal development since 1929 Fish, 332, 653. See also Natural-resource products Fishing, 89. See also Natural-resource products Five- and ten-cent stores: chain stores, 415-16; exemption, 334-35; extent of shifting of sales tax, 394, 444, 512; importance as to sales tax revenue, 179, 344; loss of business, 486, 538; obstacles to shifting, 388, 390 Fixtures, store, 93, 583 Florida, 11 in Florists: extent of shifting of sales tax, 368, 409; seasonal element, 337; treatment under sales tax laws, 88, 596, 598, 605 Flour, 189, 653 Flowers. See Florists Food: analysis of exemption, 653-54, 656; exemption or taxation of, in relation to sales tax issue, 3, 85,87-88,124, 179,189, 201-2, 234, 268, 545; sales of, in statistical survey, 331-32» 334-3S. 339. 354. 357. 368, 415-18, 427. 499, 500. See also Restaurants Foreclosure, 621 Foreigners, 115 Forest products, 88, 189. See also Farm products and Natural-resource products Fortune tellers, 614. See also Admissions Fountain pen assembling, as manufacturing, 597 Fox Film Company v. Doyal, 155, 6son Fractional-cent devices, 33, 68; Arkansas, 147, 149; California, 297; Illinois, 72,

819

431. 435-36; Michigan, 75, 507, 525; New York, 359, 364, 388; North Carolina, 196 France, 6 Franchises, 579 Fraternity houses, 557 Freight. See Delivery costs Frick v. Pennsylvania, 644n Fruits, 88, 332, 605, 653. See also Farm products Fur dealers, 601; charging tax as separate item, 394, 400; exemption, 334; extent of shifting of sales tax, 366, 512; importance as to sales tax revenue, 325, 344; loss of business, 486; seasonal element, 337 Furniture dealers: attitude toward sales tax, 220; charging tax as separate item, 394, 399-400, 473. S13; exemption, 334-35; extent of shifting of sales tax, 366, 372, 512; importance as to sales tax revenue, 32S, 341-44. 347; loss of business, 486, 530, 538; obstacles to shifting, 388; seasonal element, 337; treatment under sales tax laws, 577, 587 Fur repairing, 575 Garages: exemption, 334; number shifting sales tax, 326, 366, 444; treatment under sales tax law, 96, 572-73, 576, 619 Garden, products of, as natural-resource products, 601. See also Farm products Gardner, O. Max, 191 Garment repairers, 96, 575 Gas as goods or merchandise, 580 as manufactured product, 599 as tangible or intangible personalty, 97, 577-78 exemption under sales tax, 86, 124, 294, 331, 592, 654 in interstate commerce, 640 produced by integrated concerns, 606 tax on, in: Arizona, 283-84; Missouri, 183; New Jersey, 119; Oklahoma, 202; Utah, 306; Washington, 314; West Virginia 7, 214, 217, 223-24. See also Natural-resource products Gasoline, tax on, 5, 8, 11, 12, 15, 21, 126; Illinois, 229, 234; Kentucky, 161; Michigan, 253; Mississippi, 168, 179; New York, 126; Ohio, 267, 268, 269; Pennsylvania, i36n; South Dakota, 274; Texas, 207; Washington, 311. See also, under

820

INDEX

each state, Fiscal developments since 1929 Gasoline dealers: exemption from sales tax, 85, 87, 189, 227, 294. 331. 335- 339, 352, 354, 357. 655, 663; extent of shifting of sales tax, 366, 409, 473, 524; foreign and interstate commerce, 640; non-exemption, 234, 262, 552; salts to Federal government, 649 Gas ranges, 183 Gavit, 639n, 64m, 642n General sales tax, definition of, 4 General stores, 179, 334-35, 370, 394, 473, 486 Generators, 574 Georgia, 7, 12-13, I l l n > 149-59! administration, 153-56; date of approval of sales tax, 23n; fiscal developments since 1929, 149-51; 699-702; revenue from sales tax, 156-59; sales tax issue, i9n, 151-53; shifting, 30-31; 1 0 2 , 1 5 1 , 1 5 6 ; taxes other than sales tax, 7, 9-10, see also under various taxes Georgia Mercantile Association, 153 Gerber v. Wcmstcin, 57m Germans, 379, 499, 546 Germany, 5-6 Gifts, 93-94, 559, 583, 59°-9i, 621-22, 660 Glue, 575 Gold, 293, 660. See also Natural-resource products Golf dues, 269 Good will, 580 Government, sales to or by, 87, 646-50, 656-57! Illinois, 427; Michigan, 500; New York, 124, 331,335, 354,418; Oklahoma, 202; Utah, 306; Washington, 315 Governor, 22, 101; Arizona, 284; California, 293-94; Georgia, 153; Illinois, 230; Indiana, 239-42; Iowa, 247; Kentucky, 161; Massachusetts, 114-15; Michigan, 254-58; Mississippi, 168; Missouri, 182-85; New Jersey, 118-21; New York, 126-28; North Carolina, 1 9 1 ; North Dakota, 262; Ohio, 267-68; Oklahoma, 200-3; Oregon, 300-1; South Dakota, 274; Texas, 206-8; Utah, 305; Virginia, 2 1 1 ; Washington, 312-15 Grange, 274 Gravel, 217. See also Natural-resource products Grease, 574-75 Great Britain, 5 Greenhouse. See Farm products

Green point (New York), 378 Grocers: charging tax as separate item, 473, 513; exemption, 335,352; extent of shifting of sales tax, 144, 288, 308, 368, 409, 444, 524; importance as to sales tax revenue, 334; loss of business, 486, 538; obstacles to shifting, 388; opposition to sales tax, 285; record-keeping costs, 404 Gross receipts tax, definition of, 4 Guyton, Grady, i78n, 321 Hair tonic, 183, 568 Hale Eddy (New York), 378 Hardware stores: charging tax as separate item, 400, 473, 513; exemption, 334; extent of shifting of sales tax, 395,444,512, 524; importance as to sales tax revenue, 341, 347; loss of business, 486; obstacles to shifting, 388; record-keeping costs, 404 Harlem (New York), 378 Harness, 575 Harvard University, 32 2n Hearst, W. R., 23, 230 Heat, 306 Heating systems, 368, 568, 574, 598 Highway interests, 21, 207, 267 Highways: construction of, 597; expenditures for, and revenues from, 12, 116, 120,311. See also, under each state, Fiscal developments since 1929 Bolt Manufacturing Co. v. Jaussaud, 562c Homestead exemption, 10, 207-8 Hope Natural Gas Co. v. Ball, 64m Horticulture. See Farm products Hospitals, 254, 575, 647, 649, 660 Hotels, 119, 239, 614, 619 House furnishings, 342, 395 I c e cream, 88, 118, 422-23, 590, 653. See also Food Ice-cutting, as manufacturing, 596-97 Ice dealers, 240; charging tax as separate item, 400, 513; extent of shifting of sales tax, 366, 394, 409, 444, 512; importance as to sales tax revenue, 325-26, 344; record-keeping costs, 404; seasonal element, 337 Idaho, 11 in Illinois, 7n, 8n, 12-13, m n , 202, 225-37, 424-99, see also Chicago; administration, 27, 234-37; barter, 623-24; business and non-business activities contrasted, 554, 557-58; credits, delivery costs, discounts

INDEX and other items in measure of sales tax, 626-37 ; dates of approval of sales taxes, 33n; definition of property, 577-78; definition of retailer and wholesaler, 581, 583-86, 588-89, 591-92; definition of sale, 560, 563-66, 570-75; exemptions other than those under Federal Constitution, 659; exemptions under Federal Constitution, 638-39; 646-49; fiscal situation, 225-26, 703-6; invalidation of 3 per cent tax, 73, 85, 227, 661-64; revenue from sales tax, 38-39, 101, 237; sale of services, 613 ; sales tax issue, 16, 21-22, 227-34; sales tax laws, u n , 70, 81, 228; shifting, 30-33, 37, 68, 70-73, 103, 232, 237, 430-73; state constitution, 661-64; statistical survey, 70-74, 424-99; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 9-10, 15, 25,38-39, 74, see also under various taxes Illinois Agricultural Association, 229 Illinois Chamber of Commerce, 433,435-36 Illinois Emergency Relief Committee, 227 Illinois Federation of Labor, 229 Illinois Manufacturers Association, 233 Illinois State Teachers' Association, 232 Importers, 331 Incidence, 3 3 1 ; distinguished from impact, 358-64. See also Shifting Income tax, Federal, 103, 221, 321 legal problems, 88, 91-92, 98, 644-45, 662 relation to sales tax issue, 7-10, 15-16, 19. *5i 39; Arizona, 284, 285; California, 291, 293, 294, 295; Georgia, 1 5 1 , 1 5 4 ; Illinois, 74, 78, 228, 229, 231, 492-95 ; Indiana, 241 ; Iowa, 247 ; Kentucky, 163; Massachusetts, 116; Michigan, 76, 78, 253, 5 4 2 - 4 3 ! Mississippi, 168; Missouri, 183, 185; New Jersey, 1 2 1 ; New York, 69, 78, 126, 330, 412, 414, 423; Oklahoma, 200, 202, 204; Oregon, 300; Pennsylvania, 136, 137; Texas, 209; Utah, 304, 306, 307; Washington, 310, 3 1 1 , 315, 316; West Virginia, 213, 215, 219; Wisconsin, 280, 281. See also, under each state, Fiscal developments since 1929 Indiana, 7n, 12, i n n , 237-45; administration, 26-27, 242-45; agriculture, 603-5; barter, 623-24; business and non-business activities contrasted, 552, 555-56, 558 ; credits, delivery costs, discounts and other items in measure of sales tax, 626-

821

37; date of approval of sales tax, 230 ; definition of manufacturer, 595-96, 598; definition of property, 578-79; definition of retailer and wholesaler, 592-93 ; definition of sale, 560, 564-65, 570, 573; exemptions other than those under Federal Constitution, 650-52, 655, 657-60; exemptions under Federal Constitution, 638, 641, 643-44, 646; fiscal developments since 1929, 238, 706-10; integrated concerns, 606; investment income, 618; miscellaneous receipts, 621-23; naturalresource products, 600, 602 ; revenue from sales tax, 38-39, 101, 245; sale of services, 6 1 1 - 1 3 , 615, 617-18; sales tax issue, 21-22, 238-42 ; sales tax law, 6, 25, 81, 84, 88-90, 239; state constitution, 662 ; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 10, 14-15, 19, 25, 38-39, see also under various taxes Indiana Farm Bureau, 242 Indianapolis News, 240 Indianapolis Real Estate Board, 242 Indiana Real Estate Association, 242 Indiana State Teachers Association, 242 Indian Motorcycle Co. v. United States, 649n Indians, 648 Industrial loan companies, 615. See also Financial institutions Inflation, 5, 421 Information at source, 27, 221, 244, 277 Inheritance tax, 9-10, 15, 39, 644. See also Estate tax, and, under each state, Fiscal developments since 1929 Insecticides, 605 Installation, in interstate commerce, 642 Institutions: charitable, 87, 239, 556, 65758; educational, 87, 556, 657-58; nonprofit, 87, 97, 219, 254, 315 Insurance: adjusters, 617; attitude of companies toward sales tax, 302 ; exemption of companies, 167, 219, 254, 301, 315, 615, 655, 657, 660; exemption of proceeds of policies, 239, 621-22; taxes, 11, see also, under each state, Fiscal developments since 1929 Intangibles, 3-4, 15-16, 284-85. See also Property Integrated concerns, 91, 106, 313, 606-9 Interest, 3, 6, 90, 97, 618, 620, 622, 646-47. See also Investment income Interior counties, 326

822

INDEX

International Business Machines Corporation, 32m Interstate commerce, 638-43; attempts to transform intrastate sales, 73, 76, 486-87, 538; exemption of sales in, 5, 81-84, 91, 107, 156, r79, 233, 331, 500, 541, 638-43; extent of, 63, 70, 75, 79. 335"39. 354» 374. 416, 418, 422, 427-29, 503-4, 528; freight charges in, 632; legal aspects of, 8, 549; radio broadcasting, 61314; telephone messages, 613; wholesalers in competition with, 582, 584 Investment income, 215-16, 223, 239, 243, 277, 554-55. 618-21 Iowa, 8n, 11 in, 246-51; fiscal developments since 1929, 246-47, 7io-t4; sales tax issue, i9n, 20, 247-51; taxes other than sales tax, 10, 13, 15, see also under various taxes Iowa Farm Bureau, 250 Iowa Real Estate Dealers Association, 24g Italians, 379, 499, 546 Italy, 5 Jamestown (New York), 372 Jewelry stores, 183, 575; exemption, 334, 337; extent of shifting of sales tax, 372, 409; loss of business, 486; obstacles to shifting, 388; seasonal element, 337 Jews, 380, 499, 546 Jiffy Sales Tax Recorder, 405n Jobbers, 33 t. See also Wholesalers Judgments, collection of, 621 Junk, sales of, 557, 588, 591-92 Jurisdiction, 84-85, 643-46 Kansas, 11 in Kentucky, 7n, 8n, 12, 25, i n n , 159-64, 169, 253, 280; administration, 26, 16364; date of approval of sales tax, 23n; fiscal developments since 1929, 159, 71417; revenue from sales tax, 164; sales tax issue, 17, 22, 159-63; taxes other than sales tax, 13, see also under various taxes Kiwanis clubs, 240 Kuhn v. Ambrose, 562n Labels, 93, 582, 589 Labor. See Wages Labor groups, attitude toward sales tax, 6-7, 19, 24; Arkansas, 148; California, 292-93; Georgia, 151, 153; Illinois, 229, 434; Indiana, 241; Iowa, 250; Massachusetts, 115; Mississippi, 169; Missouri,

185; New Jersey, 120; New York, 12627; North Carolina, 192; North Dakota, 262; Ohio, 266; Oregon, 300-1; Pennsylvania, 137; Utah, 305 Labor unions, 658 Laffoon, Governor, 161 La FoUette, Senator, 280 Land Title Association, 291 Langer, Governor, 262 Lard, 189, 653 Laundries, as manufacturers, 598-99 Lawrence v. State Tax Commission, 645n Lawyers, 95, 169, 570-71, 617-18. See also Professions Leaseholds, 580 Leases, 95, 559, 561-64, 577, 619 Lee v. Griffin, 57m Lemke v. Farmer's Grain Co., 639n Letters, 93 Libraries, 614,658. See also Admissions Licenses, 562, 577, 594; California, 296; Michigan, 254-58; Mississippi, 171; New York, 124-28; North Carolina, 193; Utah, 308 Lignite, 262 Limestone, 217. See also Natural-resource products Linen service, in interstate commerce, 642 Liquor, 15-16, 284, 653. See also Beer, Whisky, Wine tax Listing taxpayers: Arizona, 286-87; California, 296; Georgia, 154; Indiana, 24455; Kentucky, 164; Mississippi, 171; New York, 129; North Carolina, 193; Oklahoma, 204; Pennsylvania, 139; South Dakota, 277-78; Utah, 307; Washington, 316 Litigation, 26-28, 105-6; Georgia, 155-56; Illinois, 234, 237; Indiana, 245; Kentucky, 160, 164; Michigan, 258, 541-42; Mississippi, 177; New York, 132; North Carolina, 194; Pennsylvania, 141; Utah, 306; Washington, 313, 315-16; West Virginia, 223 Live stock: as natural-resource product, 601; as tangible personalty, 577; jurisdiction, 643, 646; subject to tax, 88, 93, 167, 273, 301, 582, 586, 595, 598, 603-5. See also Farm products Lobbies, 17 Local authorities, attitude toward sales tax: Mississippi, 169; New York, 126; Ohio, 266; Texas, 207-8 Local officials, 22, 191

INDEX used in administration: Arizona, 286-87 ¡ Indiana, 244; South Dakota, 277

Local taxes, 230-31, 280. See also, under

each state, Fiscal developments since 1929

Logging, 89. See also Natural-resource products Logs, 93, 583 Los Angeles, 294 Louisiana, 4, 11 in Lowman (New York), 378 Lubrication, 574

823

integrated concerns, 91 jurisdiction over, 643, 646 mobility of, 107 proposed taxes on, 239, 248, 253, 254 retail sales by, 84, 93, 228, 254 revenue from, 180, 223-24 sales for resale, 262, 297-98 sales to, 306,5828, 609-10

special taxes on, 4 taxed on production, 83, 89, 166-67, 214, 217, 273, 283, 284, 314

Lumber, 93,302, 583,598. See also Natural-

valuation of articles produced by, 63537. See also Shifting, Sales tax, manu-

114, 118-19, 125, 181-84, 239, 249, 270, 283, 312, 495, 543. See also, under each

Manure, 88, 604. See also Farm products Manuscripts, 93 Market, normal, 637 Market value, definition of, 98-99 Martin, Governor, 314 Maryland, i n n Massachusetts, 8n, i n n , 112-17; fiscal developments since 1929, 112-13, 717-22; sales tax issue, 17, 19-20, 22, 113-17; taxes other than sales tax, 9-10, see also

resource products Lumber dealers: charging tax as separate item, 399-400, 513; extent of shifting of sales tax, 326, 366, 371, 394, 409, 444; importance as to sales tax revenue, 325, 344. See also Building materials Lumbering. See Logging Lunch rooms, 417, 422-23 Luxury taxes, relation to sales tax issue, state, Fiscal developments since 1929

MacDonald, William J., 114-15 Machinery, 257, 325, 347, 577. 581. 583. 585, 587, 591 McKnight, V. J., 304 McLaren v. State, 6i6n

MacLean, A. D., i87n, 188, 190 McNutt, Governor, 239 Madison (New York), 347n, 688 Magazines. See Periodicals Mail order houses, 421, 476 Maine, i n n Malt, 4, 253, 262-63, 267, 284, 305 Manhattan, 133, 373,378 Manufacturers attitude toward sales tax, 20; Arkansas, 148; California, 293; Illinois, 233,49199; Indiana, 241; Iowa, 250-51; Massachusetts, 115, 117; Michigan, 254, 256, 257, 543-56; Missouri, 182; New Jersey, 120; New York, 125, 127, 41215; North Carolina, 190-91; Ohio, 266; Oklahoma, 203; Oregon, 302; West Virginia, 213 definition of, 89, 156, 568, 595-99, 602-3

exemption, 189, 652 extent of shifting of sales tax, 156, 325415, 430-73, 506-24

facturers', and Chaps, ix, 1, x>, passim

under various taxes

Massachusetts Institute of Technology, 3«n Meal, 189, 653 Meals, 306, 574. See also Food Meat, 189, 262, 332, 653 Meat packing plants, 339 Medicines, patent, 602 Meier, Governor, 300-1 Mellitt v. Sunfeld Co., s8on Mente v. Eisner, 557n Merchants, attitude toward sales tax, 7, 17-19, 23-24, 29-30; Arizona, 285-86;

Arkansas, 148; California, 292-95; Georgia, 153; Illinois, 232, 491-99; Indiana, 240-41; Iowa, 251; Kentucky, 160-63; Massachusetts, 1 1 5 ; Michigan, 256» 543-46; Mississippi, 168-70; Missouri, 182; New Jersey, 118-21; New York, 1258, 330, 412-15, 417-23; North Carolina, 191; North Dakota, 262; Ohio, 265fr; Oklahoma, 203; Oregon, 300-1; Pennsylvania, 137; South Dakota, 274; Texas, 207; Utah, 305-6; Virginia, 2 1 1 ; Washington, 312; West Virginia, 219-20 Merry-go-rounds, 614. See also Admissions Messengeis, 617 Metals, 342, 347. See also Natural-resource products Metcalf and Eddy v. Mitchell, 649n

824

INDEX

Michigan, 711, 11-13, 15, 23, i n n , 251-59, 500-546; administration, 26, 258-59; barter, 623; business and non-business activities contrasted, 554, 556-57; credits, delivery costs, discounts and other items in measure of sales tax, 626-37; date of approval of sales tax, 2311 ; definition of property, 577; definition of retailer and wholesaler, 581, 584, 592; definition of sale, 560, 563, 566, 570-71, 573-74! exemptions other than those under Federal Constitution, 650-51, 65657; exemptions under Federal Constitution, 646, 649; fiscal developments since 1929, 251-53, 722-26; revenue from sales tax, 38-39, 101; sales tax issue, 21, 253-58; sales tax law, u n , 25, 74-75, 93, 254, 257; shifting, 24, 30-33, 68, 75-76, 103, 256, 259, 506-24; state constitution, 661-62; statistical survey, 61, 7476, 500-546; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 10, 14, 19, 25, 3839, 76, see also under various taxes. See also Detroit Michigan Education Association, 232-55 Michigan Real Estate Association, 255 Michigan State Grange, 255 Milford (Pennsylvania), 370 Milk, 88, 332, 604, 653-54; dealers in, 240. See also Farm products Millinery, 394, 399, 409 Minerals, 214-17. See also Natural-resource products Mining and mining companies, 89-90, 189. See also Natural-resource products, Gas, Oil Minnesota, 11 i n Mississippi, 7n, 8n, 12-13, « i n > 164-80, 201, 230, 300, 307, 321; administration, 26-28, 170-78; agriculture, 604-5; barter, 623; business and non-business activities contrasted, 553-54; credits, delivery costs, discounts and other items in measure of sales tax, 626-37; date of approval of sales tax, 23n ; definition of manufacturer, 595, 598; definition of retailer and wholesaler, 581-82; definition of sale, 562, 567; exemptions other than those under Federal Constitution, 650-52, 654-60; exemptions under Federal Constitution, 638-43, 646-50; fiscal developments since 1929,165-66, 726-29 ;

integrated concerns, 606-9; investment income, 618-20; natural-resource products, 600, 602-3» revenue from sales tax, 29, 38-39» 178-80; sale of services, 6111 7 ; sales tax issue, 17-18, 22, 166-70; sales tax law, 89n; shifting, 33, 178; state constitution, 661-63; statistical survey, 30; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 9-10, 13, 38-39, see also under various taxes Missouri, 180-85; fiscal developments since 1929, 180-81, 729-33; sales tax issue, 19, 181-85; taxes other than sales tax, 9-11, 13, 15, see also under various taxes Missouri Organization for Reduction of Taxes and Public Expenditure, 182 Missouri State Survey Commission, 181-82 Mixing, as manufacturing, 598 Moeur, Governor, 284 Molasses, 189, 653 Moline (Illinois), 37, 61, 70-74, 323. See also Chapter x, passim Moline Association of Commerce, 435 Money, 580 Mongaup Valley (New Y o r k ) , 378 Monroe (Michigan), 61, 74-76, 323. See also Chapter xi, passim Montana, 11 in Moore, Governor, 118 Morgan-plan companies, 615. See also Financial institutions Morris-plan companies, 615. See also Financial institutions Mort, Paul R., 203 Mortgagees, 98, 558 Mortgages, 95, 119, 559-60, 562-64, 616, 629 Motion pictures, 614. See also Admissions Motor boats, 183 Motor-vehicle carriers, 6 1 1 - 1 2 ; taxes, 1112, 16, 22, 126, i36n, 267 Mt. Morris (New Y o r k ) , 378 Municipalities, exemption, 656-57 Murray, William H., 200-1 Museums, 614, 658. See also Admissions Music stores: charging tax as separate item, 513; exemption, 334; extent of shifting of sales tax, 366, 394, 409, 444, 473; loss of business, 486 N a m e plates, 93, 589 National Association of Manufacturers, 6

INDEX National Association of Real Estate Boards, 6 National Industrial Conference Board, 321 National Industrial Recovery Act, 148, 305 National Retail Dry Goods Association, 143 National Tax Association, 83 Natural-resource products, 599-603; attitude of firms toward sales tax, 20, 207, 219, 302; definition of, 89-90; exemption, 189, 654-55 ; jurisdiction, 643 ; proposed tax on, 254; revenue from, 180, 213; subject to sales tax, 3-5, 7, 26n, 166-67, 215-17. 239. 283, 313-14; taxed on production, 83; valuation of, 635-37. See also Integrated concerns Nebraska, 11 in Negroes, 152, 168, 379, 499, 546 Neighborhood, type of, 375-80 Net value product tax, 248 Nevada, i n n Newark (New Jersey), 373 New Hampshire, 11 in New Jersey, 8n, i n n , 117-22, 373, 375; fiscal developments since 1929, 117-18, 733-38; sales tax issue, 18, 190, 118-22; taxes other than sales tax, 10, see also under various taxes New Jersey Retail Merchants Association, 120 New Jersey Taxpayers Association, 121 New Mexico, 4, 23n, i n n Newsboys, 570 Newspapers, 23, 96, 115, 119-20, 183, 1919J, 249, 266, 570-71, 597, 613 New York City: finances, 123, 126; sales tax revenue, 132-33; statistical survey, 61-62, 64, 66, 69, 76-80, 321-423. See also New York State New York State, 7n, 8n, 12-13,15. 29, i n n , 132-33. 293. 296, 321-423, 430, 500; administration, 27-28, 128-32; barter, 623; business and non-business activities contrasted, 552 ; credits, delivery costs, discounts and other items in measure of sales tax, 626-37; date of approval of sales tax, 23n; definition of property, 577-78; definition of retailer and wholesaler, 581, 583-84, 587-88, 590-92; definition of sale, 560-61, 564, 566, 570-71, 573-75 ; exemptions other than those under Federal Constitution, 539, 650-57; exemptions under Federal Constitution, 638-39, 642, 646, 648-49; fiscal developments since 1929, 122-23, 738-42; reve-

82S

nue from sales tax, 37-39, 100, 132-33; sales tax issue, i9n, 20-22, 123-28; sales tax law, 29; shifting, 30-31, 33, 64-70, 102, 104, 325-30, 358-423; state constitution, 662; statistical survey, 61, 62-70, 321-423; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 9-11, 13, 39, 69, see also under various taxes. See also New York City New York State Commission for the Revision of the Tax Laws, 124 New York University, 322n Niagara County (New York), 347n, 688, 689 Night clubs, 614. See also Admissions Non-Partisan League, 261-62 Non-profit activity, as a test of non-business activity, 555-57 Non-residents, 243, 552. See also Jurisdiction Norfolk, 211 Norman, R. C., 152 North Carolina, 7n, 8n, 12, 14-15, 19, m n , 186-98, 418, 524; administration, 27-28, 193-94; agriculture, 603-4; barter, 62324; credits, delivery costs, discounts and other items in measure of sales tax, 62637; date of approval of sales tax, 23n; definition of manufacturer, 595-96, 598; definition of property, 579; definition of retailer and wholesaler, 581, 584, 592; definition of sale, 560, 563, 566, 568, 573, 575; exemptions other than those under Federal Constitution, 652, 657, 660; exemptions under Federal Constitution, 643, 646-47, 649; fiscal developments since 1929, 186-87, 742-46; integrated concerns, 608; natural-resource products, 600; reduction of tax contingent on Federal tax, 661; revenue from sales tax, 37-39, 101, 198; sales tax issue, 17-18, 21-22, 187-93; sales tax laws, 25, 81, 83, 88-89; shifting, 31, 33, 104, 19498; state constitution, 662-63; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 4, 9-10, 14, 39, see also under various taxes North Carolina Education Association, 190 North Carolina Fair Tax Association, 192 North Carolina Federation of Labor, 192 North Carolina Retail Merchants Association, 191 North Dakota, 7n, 15, i n n , 259-64; ad-

826

INDEX

ministration, 27; agriculture, 603-4; barter, 623 ; business and non-business activities contrasted, 552 ; credits, delivery costs, discounts and other items in measure of sales tax, 626-37 ; date of approval of sales tax, 23n; definition of retailer and wholesaer, 581-82 ; definition of sale, 560, 565; exemptions other than those under Federal Constitution, 652, 655-56; exemptions under Federal Constitution, 643, 647; fiscal developments since 1929, 259-60, 746-50; investment income, 619; sale of services,612-17; sales tax issue, 22, 260-64 > sale 3 tax law, 262-63 ; state constitution, 662; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 9-10, see also under various taxes; vote on sales tax, 14, 264 Northwest Association of Trade Executives, 302 Notes, 621-22 Occupational tax, Pennsylvania, i36n Oculists, 96, 570-71 Offset provisions, 156, 160, 164, 166, 231, 310, 312 Ohio, 8n, 12, i n n , 264-70, 528; fiscal developments since 1929, 264-65, 750-54; sales tax issue, 17, 21-22, 37, 265-70; shifting, 31-32, 37, 268; taxes other than sales tax, 13, 15, 19, 25, see also under various taxes Ohio Retail Merchants Association, 36 Oil, 7, 119. 2i4> 2i7> 224, 314, 574; in interstate commerce, 640; produced by integrated concerns, 606; production tax, xi, 200. See also Natural-resource products Oklahoma, 7n, 8n, 12-13, 11 in, 199-205; administration, 27, 204-5; agriculture, 604; barter, 623-24; business and nonbusiness activities contrasted, 552 ; credits, delivery costs, discounts and other items in measure of sales tax, 626-37; date of approval of sales tax, 23n; definition of property, 577, 579 ; definition of retailer and wholesaler, 581, 586; definition of sale, 561, 566, 573-75; exemptions other than those under Federal Constitution, 655-57, 660; exemptions under Federal Constitution, 647; fiscal developments since 1929, 199, 754-58; natural-resource products, 600; revenue from sales tax, 38-39, 205 ; sale of serv-

ices, 611, 613-14; sales tax issue, 17, 199204; sales tax law, 83; state constitution, 661-62; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 9, 11, 39, see also under various taxes Oleomargarine, 653 Oneida (New Y o r k ) , 347n, 688 Onondaga (New Y o r k ) , 347n, 688 Opera house, 614. See also Admissions Oppenheimer v. Telhiard, 562n Opticians, 337, 368, 409, 570-71 Optometrists, 570 Orange County (New Y o r k ) , 347n, 688 Orchards. See Farm products Oregon, 7n, I2n, m n , 260, 264, 298-302; date of approval of sales tax, 23n; fiscal developments since 1929, 298-99, 758-62; sales tax issue, i9n, 22, 299-302; sales tax law, n n , 301; shifting, 31, 300; taxes other than sales tax, 9, see also under various taxes; vote on sales tax, 14, 22, 302 Oregon State Grange, 300 Ores. See Natural-resource products Oswego (New Y o r k ) , 347n, 688 Otsego (New Y o r k ) , 347n, 688 Overpayment, 177 P a c k i n g , as manufacturing, 598 Packing cases. See Containers Paint, 366 Painting, 95, 573-75, 596, 599. See also Artists Panhandle Oil Co. v. Knox, 649n Paper, 325, 342, 347, 404 Paper hangers, 573 Pasteurizing, as manufacturing, 596-97, 599 Patent medicines. See Medicines, patent Patents, 579-80 Pawn brokers, 558, 615 Peddlers, 608, 610 Pelts, 89 Penalties: Arizona, 287; Georgia, 155; Illinois, 235 ; Indiana, 245; Michigan, 258; Mississippi, 170, 175-77; New Y o r k , 13132 ; Pennsylvania, 139-40; South Dakota, 277; West Virginia, 222-23 Pennsylvania, 7n, 12-13, J Si m n , 133-44, 324, 375; administration, 27, 138-43; agriculture, 603-4; barter, 623; business and non-business activities contrasted, 552; credits, delivery cost, discounts, and other items in measure of sales tax,

INDEX 626-37; date of approval of sales tax, 2311; definition of property, 577-78; definition of retailer and wholesaler, 581, 584, 588-90; definition of sale, 560-62, 564, 566, 570, 573-75! exemptions other than those under Federal Constitution, 652, 655; exemptions under Federal Constitution, 638-39, 643-44, 646-47; fiscal developments since 1929, 134-35, 762-66; mercantile license tax, 133, 13738, 142-43; revenue from sales tax, 101, 144; sales tax issue, 17, 135-38; sales tax law, i i n , 88,135-36; shifting, 30-31,14344; state constitution, 661; statute and regulations analyzed in legal section, 550 ; taxes other than sales tax, 4, 10, see also under various taxes Pennsylvania Retailers' Association, 137-38 Pennsylvania State Education Association, 137 Pennsylvania State Federation of Labor, 137 Pensions, 618, 646-47 Perfume, 93, 583 Periodicals, 96, 119, 388, 570-71, 613 Person, definition of, 652 Pharmacists, 96,141, 570-71. See also Drug stores Photo-finishers, 575 Photographers, 575 Photostats, 575 Physicians. See Doctors and Professions Picture framers, 96, 573 Pin tables, 183 Pipe lines, 218, 283-84, 611-13 Planters, 594 Playing cards, 183 Pledgees, 98, 558 Pledges, 559, 562-63 Plumbers, 96, 332n, 384, 572-73 Poll tax, 146, 495 Popcorn, 88,653. See also Food Port Jervis (New Jersey), 370 Post office, Federal, 647 Pottery, 262 Poultry, 88, 332, 586, 601, 603-4. See also Farm products Preference as to taxes, expressed by business men, 69, 74, 76, 78-79 Premium merchandise, 93, 590 Prescriptions, compounding, as manufacturing, 596 Preserving, as manufacturing, 596-97 Principal. See Agent

827

Printers: as manufacturers, 597-98; extent of shifting of sales tax, 373; familiarity with law, 384; importance as to sales tax revenue, 325, 332n, 342, 346; job, 575; obstacles to shifting, 389; recordkeeping costs, 404 Privilege taxes, Mississippi, 553 Prizes, 590-91, 621, 623 Processing, as manufacturing, 597; taxes on, 400, 659 Professions, services rendered in: as contracts for labor and materials, 568, 570; treatment under sales tax laws, 3-4, 6, 90, 154,168, 171, 180, 191, 213, 218, 224, 239. 276, 552-53. 616-18

Profiteering, 295, 308-9 Property definition of, 97, 576-80; distinction between real and personal, 576-77 tax on, relation to sales tax issue, 9-11, 13-16, 38, 69, 74, 78, 84, 92, 662; Arkansas, 146; Illinois, 228, 230, 234,492, 495; Iowa, 247; Massachusetts, 114; Michigan, 253, 255, 542-43; Mississippi, 168-69; Missouri, 184; New Jersey, 118; New York, 125, 330, 374n, 414-15, 423; North Carolina, 188, 190; Ohio, 267; Oklahoma, 200203; Oregon, 300, 302; South Dakota, 273-74; Texas, 207-9; Utah, 304; Virginia, 210; Washington, 310, 315-16; West Virginia, 215; Wisconsin, 280. See also, under each state, Fiscal developments since 1929, and Tax-limit measures Proposition Number 9, 291-93 Publications, college, 557 Publicity, 27; Illinois, 235; Indiana, 243; Michigan, 542; Mississippi, 170; Pennsylvania, 138; New York, 128-29; North Carolina, 193; South Dakota, 277; Utah, 307; West Virginia, 221 Public service corporations attitude toward sales tax, 20 exemption, 86-87, i89> 653-54 extent of shifting of sales tax, 156 in the several states: Arkansas, 147-48; California, 293; Georgia, 152; North Carolina, 190-91; Oregon, 302; West Virginia, 219 municipally owned, 315-17 proposed tax on, 248, 305 revenue from, 180, 224, 317 subject to sales tax, 3, 5, 90, 166-67,

828

INDEX

«4-15. « 7 - i 8 , 233, »37. 254» »83-84, 306, 314-16, 552, 611-13 taxes other than sales tax, in relation to sales tax issue, 11, 267, see also, under each state, Fiscal developments since 1929 Public works, 660 Publishers, 284, 301, 314, 568, 597-99. 613See also Printing Purchase tax, 211 Quarrying, as manufacturing, 597 Queens (New York), 373 R a c e tracks, 614. See also Admissions Radio, 95, 202; broadcasting, 90, 314, 31617; installation of, 568, 572; stores, 337, 399, 415. See also Music stores Railroad companies. See Public service corporations Real estate, sale of, 119, 59»; sale of personal property attached to, 574. See also Contractors Real estate organizations, attitude toward sales tax, 20; Arizona, 285; Arkansas, 148; Georgia, 153; Illinois, 230-31; Indiana, 242; Iowa, 249; Massachusetts, 114; Michigan, 255-56; Missouri, 184; New Jersey, 121; New York, i25ff; North Carolina, 192; North Dakota, 262; Ohio, 267; Oklahoma, 203; Pennsylvania, 137; South Dakota, 275; Texas, 207; Virginia, 211; Washington, 313; West Virginia, 219 Real estate tax. See Property, tax on Rebates. See Refunds Receivers, 98; sales by, 558-59 Reconstruction Finance Corporation, 12, 22, 136, 230 Referendum, 7, 17, 111; Arizona, 284; North Dakota, 260-61; 263-64; Oklahoma, 201-2; Oregon, 299, 302; South Dakota, 275-76; Washington, 313, 315 Refining, as manufacturing, 596-97 Refund of 3 per cent tax in Illinois, 73 Refunds on selling price, 98, 487-88, 63233 Regressivity of sales tax, 102-3 Regulations issued under sales tax: Arizona, 287-88; California, 296; Illinois, 235; Indiana, 245; Michigan, 259, 541-42; New York, 129; Oklahoma, 204; Pennsylvania, 139; South Dakota, 277;

Utah, 308; Washington, 316; West Virginia, 221. See also various legal references for specific points Religious institutions, exemption from sales tax, 87 Rensselaer County (New York), 347n, 688 Rentals: decrease in, 329, 401; definition of, 95, 141, see also Sale, conditional; involving business activity, 97, see also Business; subject to sales tax, 3, 6, 215, 277, 614-15, 618-20. See also Investment income and Leases Repacking, as manufacturing, 596 Repairs, 568, 574, 616 Replacement of defective parts, 591 Repossession, 633 Resale certificates, 29, 68, 92, 583-84; Illinois, 430; Michigan, 505-6; New York, 131. 329,408; South Dakota, 277 Resin, 604 Restaurants: chain stores, 415; charging tax as separate item, 507; department stores, 422; exemption, 334, 352; extent of shifting of sales tax, 368, 409; proposed tax, 119; treatment under sales tax laws, 202, 305, 552, 557, 574, 596, 614 Retailers: definition of, 549, 581-94; revenue from, 180, 224; special tax rate on, 166-67, 189, 214, 217, 239, 273, 283-84. See also Chapters ix, x, xi, Passim; Integrated Concerns; Merchants; Shifting Retail sales tax, defined, 3 Returned goods, 422 Returns, filing of: Georgia, 153-54, 158; Indiana, 243-44; Kentucky, 164; Mississippi, 173, 177; New York, 128; North Carolina, 198; South Dakota, 277; Utah, 309; Washington, 317 Revenue from sales taxes, 29,37-39,100-1; Arizona, 286; California, 298; France, 6, Georgia, 156-59; Germany, 6; Illinois, 237; Indiana, 245; Kentucky, 164; Mississippi, 166, 178-80; North Carolina, 198; Oklahoma, 205; Pennsylvania, 144; Utah, 309; Washington, 317; West Virginia, 223-24 Rhode Island, 11 in Riding academy fees, 269 Riley, R. L., 292 Riley, W. F., 249 Riley-Stewart plan, 14, 290-92, 294 Riparian rights, 577 Rivara v. Stewart, s8on

INDEX Rivers, E. D., 152 Roasting, as manufacturing, 596-97, $99 Rochester (New York), 132 Rock Island (Illinois), 37, 61, 70-74. 3*3See also Chapter s, passim Rockland County (New York), 688 Roscoe (New York), 378 Royalties, 555, 618, 620, 650. See also Investment income Rugs, 444 Russell, Richard B., Jr., 153 Sackett, Ralph L., 17811, 321 Salaries, See Wages Sale: accommodation, 557; cash, 328, 39899, 420; conditional, 94-95, 202, 305, 559-63, 565-66, 615, 633, see also Conditional Sales Act; consummation of, 95, 560-61, 565-67 ; credit, 328, 398-99, 420, 470, 513. 560-61; definition of, 94-97. 559-76; "extra-state," see Jurisdiction; forceid, 636; installment, 202, 305, 560, 562, 564, see also Credits; isolated (nonbusiness), 4, 554, 557-58, 584; on consignment, 95,106, 562, 564-65; on execution, 621; retail, defined, 81, 92, 105, 141. 331. 581-94 Salesmen, 94, 594, 618 Sales tax: constitutional questions, 16-17, 227, 424, 427, 487, 524, 638-50, 661-64; dates of enactment, 23 ; definition of, 3-4, 551; Federal, 6-7, 19, 26, 231, 49s, 543, 597, 661, see also Sales tax, manufacturers' ; foreign, 6-7 ; list of states enacting, 7, m - 1 2 ; manufacturers', 4, 69, 107, 227, 330, 4:2, 414, 417. 4 J 3. 493-95, 543 ; provisions of laws, 40-60, see alto, under each state, Sales tax law ; revenue from, see Revenue from sales tax ; selective, 4 Salt, 189, 653 Sample: in statistical study, character of, 61, 323, 424-30, 500-6, 546, 667-81, 68891 ; of goods, 583 Sampson, Governor, 160 San Antonio, 207 Sand, 217, 224. See also Natural-resource products Sandstone, 217. See also Natural-resource products Sandwich, as manufactured product, 598 San Francisco, 294 San Juan Hill (New York), 378 Sayre (Pennsylvania), 371-72

829

Schedules, use of, in shifting sales tax, 32-33, 68, 71, 75-76, 78; Arizona, 288; California, 297; Illinois, 232,430-38,44344. 448; Michigan, 432, 506-7, 513, 522 ; Mississippi, 178; New York City, 418, 421 ; New York State, 329,388,400,418 ; North Carolina, 189, 194-98; Oklahoma, 203-4; Pennsylvania, 144; Utah, 308 Schuster v. Ohio Farmers' Co-operative Milk Association, 55711 Securities, dealings in, 98, 119, 217, 580, 61S Seed, 93,167, 585, 604 Services, costs and sales of, under sales tax, 81, 9S-96, 105, 141, 331-39, 354. 418, 427, 500, 541, 568-69. See also Public service corporations, and Professions Severance tax, 219. See also Natural-resource products Shampoos, 96, 574 Shere, Louis, 322n Shifting, 102-3 by location, 66; New York State, 32627, 369-75 by race or nationality, New York State, 379-80 by size of business: Illinois, 438, 442-43 ; Michigan, 507, 512; New York State, 368 by time periods, New York State, 380-86 by type of business : Illinois, 444 ; Michigan, 512 ; New York State, 366-68 by type of neighborhood, New York State, 375-79 change in policy with respect to: Illinois, 470-71 ; Michigan, 513, 522 ; New York State, 327, 382-84, 417, 420 consumers' reports on, 69, 76; Illinois, 472-73; Michigan, 523-24; New York State, 409-12 definition of, 358-64, 471-72 mandatory provisions for, 18, 29, 3032,194-98, 433. 524-25 number of manufacturers and wholesalers reporting: Illinois, 438, 442; Michigan, 512; New York State, 326, 364 number of retailers reporting: Illinois, 438, 442; Michigan, 506, 523; New York State, 326, 364, 416, 419 obstacles to : Illinois, 475 ; Michigan, 52627; New York State, 328, 387-90, 416, 420-21 states and cities: Arizona, 286, 288;

INDEX

830

California, 294-98; Chicago, 76-78, set also Illinois; Detroit, 76-78, see also Michigan; Georgia, i j i , 156; Illinois, 70-74, 232, J37, 430-75; Michigan, 74-76, 256, 259, 506-28; Mississippi, 169, 178; New York City, 76-78, see also New York State; New York State, 64-70, 327-30. 358-401,

409-12; North Carolina, 194-98; Ohio, 268; Oklahoma, 203; Oregon, 300; Pennsylvania, 143-44; Utah, 305-6, 308-9; West Virginia, 220 summary of findings, 29-37; Illinois, 7074; Michigan, 74-76; New York City, 76-77; New York State, 64-70. See also Fractional-cent devices Ships, 580, 591, 597-98 Shoemakers. See Cobblers Shoes: as manufactured product, 596; exemption, 201; freight charges on, 631 Shoe stores: chain stores, 415; charging tax as separate item, 399; extent of shifting sales tax, 370, 394, 409, 411, 444, 473, 512; importance as to sales tax revenue, 341, 344; loss of business, 486 Silver. See Natural-resource products Skating rink, 614. See also Admissions Slaughtering, as manufacturing, 597 Slum areas, 328 Smoking stands, 183 Smoothing, as manufacturing, 597 Soap, 93, 583 Socialist party, 240 Soft drinks: proposed taxes, 118, i36n, 188, 274n, 305; special taxes, 267, 269; treatment under sales tax laws, 167, 262, 335, 417. 552. 653 Sonneborn Bros. v. Cureton, 642n

South America, 5 South Carolina, i n n , 648

South Carolina v. United States, 648n

South Dakota, 7n, 8n, 12, 15, i n n , 250, 270-78; administration, 276-78; agriculture, 603, 605; barter, 623-24; business and non-business activities contrasted, S52-55. 557; credits, delivery costs, discounts and other items in measure of sales tax, 626-37; date of approval of sales tax, 23n; definition of manufacturer, 59596, 598; definition of property, 579; definition of retailer and wholesaler, 582, 593; definition of sale, 560, 564-65; exemptions other than those under Federal Constitution, 655, 657, 659-60; exemp-

tions under Federal Constitution, 641, 643, 645-48; fiscal developments since 1929; 271-72, 766-70; integrated con-

cerns, 606,609; investment income, 61820; miscellaneous receipts, 621, 623; natural-resource products, 600; revenue from sales tax, 39; sale of services, 61214, 617-18; sales tax issue, 272-76; sales tax law, 25, 28, 81-82, 84, 88-89, 89n,

272-73; state constitution, 661-62; statute and regulations analyzed in legal section, 550; supreme court, 552n; taxes other than sales tax, 10, 39, see also under various

taxes

South Dakota Retail Merchants Association, 274 South Dakota Tax Conference, 274 South

Dakota v. Welsh,

$S3a

Sparrowbush (New York), 378 Spengler, Edwin R., 32211 Spices, 597, 653 Sporting goods stores, 368 Spraying, 605 Sprinkler systems, 574 Stamps: collection by, 183, 308; trading, 578 Stamp tax, 495 Starching, as manufacturing, 597 State aid, in relation to sales tax issue, 9, 12-13,16, 25, 231 ; Arkansas, 146ft; California, 291 ; Illinois, 227; Michigan, 255, 257; Missouri, 184-85; North Carolina, 187-88, 190; North Dakota, 263-64; Ohio, 267, 270; Oklahoma, 200-203; South Dakota, 273; Utah, 306; Washington, 311,315. See also Educators State Street Council, 232, 433, 438, 448 State Tax Commission of Mississippi Interstate Natural Gas Co., 64on

v.

Stationery and cigar stores: attitude toward sales tax, 414 ; charging tax as separate item, 400; exemption, 334-35; extent of shifting of sales tax, 368, 372, 409, 411; importance as to sales tax revenue, 341; obstacles to shifting, 388; record-keeping costs, 405 Stationery manufacturers and wholesalers: importance as to sales tax revenue, 325, 347 ; treatment under sales tax laws, 587, 589 Statistical survey, 61-80, 319-545, 667-81, 688-91. See also Shifting

Statistics of Income, 321 Statute of Frauds, 569, S7i. 577, 580

INDEX Steam, 86, 97, 124, 331, 580, 59*. 597. 599. 654 Steamboat companies, 218 Stenographers, 571 Steuben County (New York), 347n, 688 Stewart, F. E., 292 Stock, treasury, 621 Stockings, 305 Stock transfer tax, 11, 122,126 Stone. See Natural-resource products Stone, A. H., 170 Store fixtures, 257 Sub-activities, 558 Sugar, 189, 653 Sullivan County (New York), 347n, 688 Surety concerns, 616 Surplus, paid-in, 621 Swindlers, 68, 259 Syracuse, 62,132-33.347»>. 35*. 688, 689 Syracuse University, 322n Syrups, 653 Tacks, 575 Tags, 93, 589 Tailors, 332n, 512-13; loss of business, 538 Talmadge, Eugene, 153 Tax consciousness, 24, 33, 37, 71,104,107, 232; Illinois, 473-74; Michigan, 524-26; New York, 389, 411-12. See also Charging tax as separate item, and Schedules Taxes paid, with reference to sales tax base, 98-99, 245, 633-35. 659-60 Taxicabs, 612, 614, 618 Tax-limit measures, 10, 14, 17, 19, 146, 204, 214-15, 221, 231, 241-42, 255, 270, 310-11 Tea, 305, 653 Teeth, false, 568 Telegraph, 202, 612-13, 641. See also Public service corporations Telephone, 119, 202, 612-13, 641. See also Public service corporations Tennessee, 11 in Terminology, 3-4 Texas, 8n, 12-13, » l n . 20S-9i fiscal developments since 1929, 205-6, 770-74; sales tax issue, 22, 206-9; taxes other than sales tax, 10-11, 13, 15, see also under various taxes Theater, 614. See also Admissions Thread, 575 Ticker tape service, 96, 570 Tickets: as intangible personalty, 578; brokers of, 617

831

Timber, 214, 224. See also Natural-resource products Tinters, 575 Tioga Center (New York), 372 Tioga County (New York), 347n, 688 Tire dealers, 262, 552, 575 Title companies, 615. See also Financial institutions Tobacco products manufacture of, 596 under sales tax, 581,655. See also Cigar stores and Stationery stores taxes in relation to sales tax issue, 4, 11, 15. 87 taxes in the several states: Arizona, 284; Michigan, 253; Missouri, 183; New Jersey, 118-19; North Carolina, 188; Ohio, 267, 269; Oklahoma, 201-2; Pennsylvania, 13611; South Dakota, 274; Texas, 207; Utah, 305, 307, see also, under each state, Fiscal developments since 1929 Tokens. See Fractional-cent devices Toledo, 61, 266, 375, 528-31 Tooth-paste tubes, 93 Townsend, T. C., 219 Toy stores, 368 Trade associations, 658 Trade-ins, 99, 624 Trading stamps, 401 "Transfer of ownership" states, 560, 563, 566 Transportation, 611-12. See also Public service corporations Travel service, 617 Trust companies, 615. See also Financial institutions Trust receipts, 559, 562 Trusts, income from, 621 Tug boats, 580 Umbrella assembling, as manufacturing, 597. 599 Undertakers, 96,572-73, 598 Underwood Typewriter Co. v. Chamberlm, 644a Unemployment relief in relation to sales tax issue, 9, 1 1 - 1 3 , 16, 22-23, 25. 102. 647, 656 in the several states: Arizona, 285; Illinois, 227, 229, 234; Kentucky, 16263; Massachusetts, 116; Michigan, 255; Missouri, 184; New Jersey, 11820, 122; Ohio, 267, 269Oklahoma,

832

INDEX

200; Oregon, 300-1; Pennsylvania, i35ff; Texas, 208; Utah, 304, 306; Washington, 3 1 1 ; Wisconsin, 281. Set also, under tack statt, Fiscal developments since IQ29 Uniformity provisions, 85,228-29, 233,610, 661-62 Uniform Sales Act, 566, 569, 57i, 575. S80, 5 9o Unincorporated concerns, 4 Union Square (New York), 378 United Fuel Gas Co. v. Hallanan, 64011 Universities, 658. See also Institutions, nonprofit University of Chicago, 322n University of Mississippi, 30, 178, 321 University of Washington, 312 Upholsterers, 575 Usury, 620 Utah, 7n, 12, m n , 303-9; administration, 307-8; barter, 623-24; credits, delivery costs, discounts, and other items in measure of sales tax, 626-37 ; date of approval of sales tax, 23n; definition of retailer and wholesaler, $81, 58s, 588; definition of sale, 560, 562, 570, 572-75; exemptions other than those under Federal Constitution, 653, 655-59; exemptions under Federal Constitution, 638, 646, 648; fiscal developments since 1929, 303, 774-77; revenue from sales tax, 309; sale of services, 611-13; sales tax issue, ign, 303-7; sales tax law, n n , 305-6; shifting, 31, 33, 30S-6; 308-9; state constitution, 661-62 ; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 9-10, 15, see also under various taxes Utah Oil Refining Company, 304 Utah State Retailers' Association, 308 Utica, 132-33 Utilities. See Public service corporations Valuations under sales tax, 609, 635-37 Vaudeville, 614. See also Admissions Vegetables, 332, 653 Vehicles, as tangible personalty, 577 Vending machines, 269 Vermont, 4, 23n, 11 in, 324 Veterinaries, 570 Veto, 313-15. 601 Vicksburg, 169 Virginia, 4, 8n, 9-10, m n , 209-11; fiscal developments since 1929, 209-10; 777-

80; sales tax issue, 210-11 Vocation, contrasted with avocation, 556 Vote by electorate on sales tax, 8 ; Arkansas, 146, 148; North Dakota, 264; Oregon, 302 Vulcanizers, 575 W a g e s , under sales tax, 3-4, 6, 28, 90, 215-16, 221, 223, 239, 243, 273, 276, 301, 329, 401, 487, 553, 616-18, 646-47 Wagon assembling, as manufacturing, 598 Wallace, William R., 304 Warehouse receipts, 97, 578 Warehouses, 558, 619 Washington, 7n, 8n, 12, i n n , 217, 30917; administration, 316-17; barter, 623; business and non-business activities contrasted, 553, 556; credits, delivery costs, discounts and other items in measure of sales tax, 626-37; date of approval of sales tax, 23n; definition of manufacturer, 595, 598; definition of retailer and wholesaler, 582, 594; definition of sale, 560, 562; exemptions other than those under Federal Constitution, 655-56, 65860; exemptions under Federal Constitution, 638, 643, 646, 648; fiscal developments since 1929, 309-10, 780-83; integrated concerns, 606, 608-9; investment income, 618¡natural-resource products, 599, 601-3 ; revenue from sales tax, 38, 317 ; sale of services, 612-15; sales tax issue, 310-16; sales tax law, 85, 87, 8911, 312-15; state constitution, 662, 664; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 10, 14-15, 19, 38, see also under various taxes Washington County (New York), 347n, 688 Washington Education Association, 311 Washington State Grange, 311 Washington Tax Equalization Council, 311 Washington Tax Investigation Commission, 3" Washington v. Feile, 662n Water, 86, 97, " 4 . 217. 294. 33*. 578, 580, 597-99. 654 Waverly (New York), 371-72 Weighing machines, 183 Wellman v. Conroy, 564n Westchester (New York), 133 West Virginia, 7, 11-13. 15. I I l n . 211-24, 312-13; administration, 221-23; agricul-

INDEX ture, 604-5! barter, 623-24; business and non-business activities contrasted, 55354/556; credits, delivery costs, discounts, and other items in measure of sales tax, 626-37; date of approval of sales tax, 2311; definition of manufacturer, 595, 598; definition of retailer and wholesaler, 581-82, 594; definition of sale, 560, S62, 573; exemptions other than those under Federal Constitution, 650-55, 65758; exemptions under Federal Constitution, 641, 643, 647; fiscal developments since 1929, 211-13, 783-88; integrated concerns, 606-9 ; investment income, 61819; natural-resource products, 599, 6013; revenue from sales tax, 223-24; sale of services, 6 1 1 - 1 6 ; sales tax issue, 2132 1 ; sales tax laws, 6, 26, 26n, 27, 81, 88, 89n, 90, 94, 213-14, 216-19; shifting, 33, 220; state constitution, 661; statute and regulations analyzed in legal section, 550; taxes other than sales tax, 10, 14, 19, see also under various taxes Wheeling, 213 Whisky, 270 White, Governor, 267 Wholesalers, 4-5, 106-7, Chapters ix, x, xi, Passim attitude of, toward sales tax: Illinois,

833

491-99; Michigan, 543-46; New York, 412-15 definition of, 94, 549, 581-94 interstate commerce, 643 jurisdiction, 646 revenue from, 180, 224 under sales tax: Arizona, 283; Illinois, 228; Indiana, 239; Michigan, 254; Mississippi, 166-67; North Carolina, 189; North Dakota, 262; Oregon, 300; South Dakota, 273; Washington, 314; West Virginia, 214. See also Integrated concerns, and Shifting Williamsburgh (New York), 378 Windsor (New York), 378 Wine tax, 116, 123, 163 Winter v. Barrett, 227, 230, 610, 661, 663 Wire service, 96, 570 Wisconsin, 8n, m n , 278-81; fiscal developments since 1929, 278-70, 788-93; sales tax issue, 24, 279-81; taxes other than sales tax, 9-10, 15, see also under various taxes Women's clubs, 115 Wyoming, 11 in Yield. See Revenue TLonne v. Minneapolis Syndicate, 554n

COLUMBIA U N I V E R S I T Y PRESS COLUMBIA

UNIVERSITY

NEW

YORK

FOREIGN AGENT OXFORD U N I V E R S I T Y PRESS HUMPHREY AMEN

HOUSE,

MILFORD

LONDON,

E.C.

4