                                              The Attorney                General of Texas
                                                                 October 28, lV83
    JIM MATTOX
    Attorney General



    Supreme    Court Building
                                            Honorable Bob Bullock                           Opinion No..JM-83
    P. 0. aox 12546
                                            Comptroller of Public Accounts
    Austin.  TX. 78711-2548                 P. 0. Box 2243                                  Re:   Constitutionality of
    5121475-2501                            Austin, Texas   78767                           section 182.042 of the Tax
    Telex    9101674-1367                                                                   Code
    Telecopier     51214750266

                                            Dear Mr. Bullock:
    1607 Main St.. Suite 1400
    Dallas.  TX. 75201-4709                      YOU   ask whether    section 182.042 of     the TSX Code      is
    2141742J3944                            constitutional. The section imposes s gross receipts tax on foreign
                                            car companies on business done in this state. Citing the recent
    4624 Alberta       Ave., Suite    160
                                            United States Supreme Court case of Western and Southern Life
    El Paso. TX.       79905-2793           Insurance Company V. State Board of Equalization of California, 451
-   9151533-3464                            U.S. 648 (1981). you assert that section 182.042 of the Tax Code is
                                            unconstitutional on its face because it imposes a gross receipts tax
     ,--II Dallas Ave., Suite 202
                                            on car companies residing or incorporated outside this state only and
    Hws,on,      TX. 77002-6986
                                            not on Texas companies engaged in identical activities. We agree and
    7131650-0666                            conclude that a court would declare that section 182.042 of the Tax
                                            Code violates the equal protection clause of the fourteenth amendment
                                            to the United States Constitution.
    606 Broadway.        Suite 312
    Lubbock.     TX.    79401-3479
    6061747.5238
                                                 Section 182.041 of the Tax Code sets forth the following:

                                                      9182.041. Definitions
    4309 N. Tenth. Suite B
    McAllen. TX. 78501.1665
                                                      In this subchapter:
    51216624547

                                                         (1)         'Car company' means a person who:
    200 Main Plaza. Suite 400
    San Antonio.  TX. 76205-2797                                 owns a stock car, refrigerator or fruit
                                                               (A)
    512/225-4191
                                                         car of any kind, tank car of any kind, coal car
                                                         of any kind, furniture car, cormnonbox csr, or
    An Equal       Opportunity/                          flat car; and
    Affirmative      Action     Employer
                                                            (B) leases or charges mileage for the use
                                                         of the car.

                                                         (2)  'Business' mean6    the leasing            of   or
                                                      charging mileage for the use of the car.

                                            Section 182.042 of the Tax Code provides the following:




                                                                          p. 349
Honorable Bob Bullock - Page 2   (JM-83)




          S182.042. Imposition and Rate of Tax

             (a) A tax is imposed on each car company
          residing or incorporated outside this state on the
          gross receipts from business done in this state.

             (b) The tax rate is three percent of the gross
          receipts. (Emphasis added).

Sections 182.041 and 182.042 of the Tax Code are merely the
codification of an occupation tax first enacted at Acts 1907,
Thirtieth Legislature. 1st Called Session, at page 479, as article
7062, V.T.C.S. Article 7062, V.T.C.S., was subsequently repealed and
re-enacted as section 11.04 of Title 122 "Taxation" at Acts 1959,
Fifty-sixth Legislature, 3rd Called Session, chapter 1, at page 303.
The three enactments are substantially identical; each imposes the tax
upon foreign car companies only and not on Texas companies engaged in
identical activities. There has been no court challenge to the
statute's constitutionality; the issue here, then, is one of first
impression.

     In Western and Southern Life Insurance Company v. State Board of
Equalization of California, 451 U.S. 648 (1981) [hereinafter Western],
the United States Supreme Court upheld the constitutionality of a
California retaliatory insurance ;ax against the charge that it
violated the equal protection clause of the fourteenth amendment to
the United States Constitution. The state of California, in addition
to imposing a premiums tax on both foreign and domestic insurance
companies doing business in California, also imposed a retaliatory tax
on a foreign insurer when that insurer's state of incorporation
imposed higher taxes on California insurers doing business in that
stats than California would otherwise impose on that state's insurers
doing business in California.

      A line of early Supreme Court cases held that a state may attach
essentially any conditions it chooses upon the grant of the privilege
to do business within that state. See, e.g., New York V. Roberts. 171
U.S. 658 (1898); Horn Silver Mining Company V. New York, 143 U.S. 305
 (1892); Pembina Consolidated Silver Mining & Milling Co. v.
Pennsylvania, 125 U.S. 181 (1888). Philadelphia Pine Association V.
New York, 119 U.S. 110 (1886); Paul V. Virginia, 75 U.S. 168 (1869).
HOWaVer, this doctrine, first enunciated in Paul V. Virginia, supra,
"as rejected shortly after the turn of the century. see, e.g.,
Southern Railway Company V. Greene, 216 U.S. 400 (1910); Pullman
Company V. Kansas, 216 U.S. 56 (1910); Western Union Telegraph Company
v. Kansas, 216 U.S. 1 (1910). While acknowledging that a line of
subsequent cases apparently resurrected the Paul V. Virginia doctrine,
see, Prudential Insurance Company V. Benjamin, 328 U.S. 408 (1946);
Lincoln National Life Insurance Company V. Read, 325 U.S. 673 (1945),




                             p. 350
Honorable Bob Bullock - Page 3   (JM-831




the Court in Western, 451 U.S. 664, quoting Hanover Fire Insurance
Company V. Harding, 272 U.S. 494. 511 (1926), declared that,

         [wlith respect to the general tax burden on
         business, 'the foreign corporation stands equal,
         and is to be clsssified with domestic corporations
         of the same kind.'

     The Court in Western, 451 U.S. 664-65, then restated the doctrine
first set forth in Frost 8 Frost Trucking Company V. Railroad
Commission of Texas, 271 U.S. 583, 593-94 (1926):

          It is not necessary to challenge the proposition
          that, as a general rule, the state, having power
          to deny a privilege altogether, may grant it upon
          such conditions as it sees fit to impose. But the
          power of the state in that respect is not
          unlimited; and one of the limitations is that it
          mY   not impose conditions which require the
          relinquishment of constitutional rights. If the
          state   m=Y   compel    the   surrender   of   one
          constitutional right as a condition of its favor.
          it may, in like manner, compel a surrender of all.
          It is inconceivable that guaranties embedded in
          the Constitution of the United States may thus be
          manipulated out of existence.

The Court in Western imposed a traditional equal protection "rational
basis" test:

          We consider it now established that, whatever the
          extent of a State's authority to exclude foreign
          corporations from doing business within its
          boundaries, that authority does not justify
          imposition of more onerous taxes or other burdens
          on foreign corporations than those imposed on
          domestic corporations, unless the disrrimination
          between foreign and domestic corporations bears a
          rational relation to a legitimate state purpose.

451 U.S. at 667-68.

     The test was formulated in the following way:

          In determining whether a challenged classification
          IS  rationally related to achievement of a
          legitimate state purpose, we must answer two
          questions:   (1) Does the challenged legislation
          have a legitimate purpose?, and (2) Was it




                            p. 351
Honorable Bob Bullock - Page 4 (JM-83)




          reasonable for the law makers to believe that use
          of the challenged classification would promote
          that purpose?

451 U.S. at 668. The Court went on to answer both questions in the
affirmative. We believe, however, that a court, employing this same
test in a challenge to section 182.042 of the Tax Code would not so
find. We conclude that section 182.042 fails the first test.

     In Western, the Court declared that the purpose of the
retaliatory insurance tax was to promote the interstate business of
domestic   insurers by    deterring other   states   from  enacting
discriminatory or excessive taxes.

          Since the amount of revenue raised by the
          retaliatory tax is relatively modest . . . and
          impetus for passage of the tax comes from the
          nationwide insurance industry, it is clear that
          the purpose is not to generate revenue at the
          expense of out-of-state insurers, but to apply
          pressure on other States to maintain low taxes on
          California insurers.

451 U.S. 669-70. The court concluded that there could be no doubt
that the promotion of domestic industry by deterring barriers to
interstate business is a legitimate state purpose. In this instance,
however, we have discovered no indication from any source that the
occupation tax at issue seeks to deter barriers to interstate
commerce. In fact, we can discern no purpose for the tax other than
to provide a means to regulate the entry of foreign car companies into
the state and to provide a means to generate revenue for the state.

     We think it significant that the tax imposed by section 182.042
only upon foreign car companies does not serve to equalize or
compensate the tax burden already borne by Texas car companies. See,
*,     Southern Railway Company v. Greene, supra. For example, the
franchise tax is imposed on foreign and domestic corporations alike.
Tax Code, §§lll.OOl et seq. See Colonial Pipeline Company v. Traigle,
421 U.S. 100 (1975); Ford Motor Company v. Beauchamp, 308 U.S. 331
(1940). reh'g denied 388 U.S. 640 (1945). Indeed, none of the
remaining business taxes impose a tax on only foreign corporations
doing business in Texas: the taxes are imuosed on foreien and domestic
corporations or activities alike. See g' enerally, Tax Code, §§151.001
through 203.001.

     We conclude that section 189.042 of the Tax Code, by imposing a
gross receipts tax on foreign car companies only, while not imposing a
tax on Texas companies engaged in identical activities, violates the




                              p. 352
Honorable Bob Bullock - Page 5     (JM-83)




equal protection clause of the fourteenth amendment to the United
States Constitution and is unconstitutional.

                             SUMMARY

             Section 18sL.42 of the Tax Code, which imposes
          a gross receipts tax on car companies residing or
          incorporated outside this state only and not on
          Texas companies engaged in identical activities,
          violates the equal protection clause of the
          fourteenth amendment to      the United    States
          Constitution and is unconstitutional.




                                             JIM     MATTOX
                                             Attorney General of Texas

TOM GREEN
First Assistant Attorney General

DAVID R. RICHARDS
Executive Assistant Attorney General

Prepared by Jim Moellinger
Assistant Attorney General

APPROVED:
OPINION COMMITTEE

Rick Gilpin, Chairman
Jon Bible
Colin Carl
Susan Garrison
Jim Moellinger
Nancy Sutton




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