National Can Corp. v. State Tax Commission

BrunE, C. J., delivered the opinion of the Court. The appellant, National Can Company, (National) seeks to set aside the assessment for the year 1957 of its tangible personal property, consisting of furniture, fixtures and equipment, manufactured products and raw material, tools and machinery used for manufacturing, and tools and machinery not used for manufacturing. The aggregate assessed value of such property is somewhat in excess of $5,200,000, the great bulk of it being placed upon manufactured products and raw material (over $3,737,000) and tools and machinery used for manufac ⁴²² taring ($1,432,000). The assessments were made by the appellee, the State Tax Commission (the Commission).

The case turns upon the validity of Chapter 73 of the Acts of 1958 (the Act), which the trial court upheld. The Act begins with nine recitals: (1) a reference to the decision by this Court of the case of Sears, Roebuck & Co. v. State Tax Commission ( 214 Md. 550 ), 136 A. 2d 567 ; (2) a summary of the holding therein—that real property and stock in business have been classified alike by the General Assembly for assessment purposes and that the same allowance for inflation must be made in respect of stock in business as in respect of real property; (3) that Article 15 of the Maryland Declaration of Rights empowers the General Assembly to provide for the separate assessment of land and the classification and sub-classification of personal property; (4) that “it is the intention of the General Assembly to classify real property separate and distinct from personal property, and to separately sub-classify certain classes of personal property for assessment purposes, to the end that an allowance for inflation may be made in respect to real property, but not in respect to personal property;” (5) that “it is the belief of the General Assembly that the natural and inherent differences between real and personal property, and the peculiarities of certain classes of personal property require and justify separate classification and sub-classification for assessment purposes as aforesaid, and require and justify the making of an allowance for inflation in respect to real estate assessments but not in respect to personal property assessments; ” (6) that “the State will lose substantial revenues as the result of the Sears Roebuck decision unless remedial legislation is enacted and made retroactive to January 1, 1957; ” (7) that “the great majority of taxpayers have paid taxes upon stock in business without protest for the year 1957, leaving only a small number of protesting taxpayers to whom the Sears Roebuck decision will be applicable unless remedial legislation is made retroactive; ” (8) that “it is the belief of the General Assembly that fundamental concepts of fairness and equality require that the protesting taxpayers be accorded the same tax treatment as those taxpayers who have paid taxes ⁴²³ upon stock in business without protest, to the end that no undue advantage will accrue to the protesting taxpayers who had not paid their taxes at the time of the filing and publication of the Sears Roebuck decision on or about November 22, 1957; ” and (9) that “it is the intent of the General Assembly of Maryland to effectuate the policy of the State Tax Commission and of other taxing authorities of this State as it existed prior to the decision in the Sears case, this policy being to allow for inflationary factors in the assessment of real estate but not to allow for such inflationary factors in the assessment of personal property”. The operative provisions of the Act undertake to carry into effect the purposes and intent of the General Assembly as expressed in the above preamble clauses numbered (4) to (9), inclusive. Accordingly, the Act, insofar as here pertinent, amends or adds to the pre-existing law by providing, in brief, “effective as of January 1, 1957”: (a) for the separate classification for taxation of real and personal property, with a separate sub-classification under the latter of “stock in business” (inventory); (b) for the determination of the “full cash value” of real estate by deducting from its “current value * * * an allowance for inflation, if in fact inflation exists”; (c) for the determination of the full cash value of personal property, as its “current value without any allowance for inflation”; (d) for the determination of the “fair average value” of a “stock in business” by taking the “cost or market value [thereof], whichever is lower, without any allowance for inflation”; (e) for immunity from prosecution or penalty for any violation of the Act which occurred prior to its passage; and (f) for the separability of the provisions of the Act.

The Act was passed as an emergency measure to take effect from the date of its passage, and it was approved on April 4, 1958. It was clearly intended to reverse the result of the Sears case for 1957 and subsequent years. This case is a sequel to the Sears case, supra, 214 Md. 550 , 136 A. 2d 567 . There this Court held that, under the then existing law, the assessment practice of the State Tax Commission of making a deduction from the “full cash value” of real estate in order to allow for the effect of inflation, but of ⁴²⁴ refusing to make any such deduction from the “full cash value” of personal property (consisting of stock in trade) constituted a discrimination against the owner of such personal property, from which the owner was entitled to relief by having his assessment reduced.

At the times of the assessments involved in the Sears case Code (1957), Art. 81, Sec. 14 1 provided (in part) that, “[ejxcept as hereinafter provided, all property directed in this article to be assessed, shall be assessed at the full cash value thereof on the date of finality.” A special method of determining the fair cash value of the stock in trade of persons engaged in manufacturing or commercial business was prescribed by Sec. 15 (Sec. 14 in 1951). This was based upon the average value of inventory for the twelve months preceding the date of finality. Before proceeding further it seems well to state that the Sears case did not determine that Article 15 of the Maryland Declaration of Rights required uniformity of treatment of real estate and personal property for tax purposes. No such question was involved in the case.

It was there held that under the applicable statutory provisions the Legislature had put real estate and inventories on the same footing for tax purposes, and that a practice of the Commission which gave to the former more favorable treatment than to the latter as to assessments and therefore (because the tax rates per dollar of assessed value were the same) also gave to owners of real estate more favorable treatment as to the amount of taxes on property of equal value, was invalid. It was further held that under the Equal Protection Clause of the Fourteenth Amendment to the Constitution of the United States, the owner of personal property was entitled to have his assessment reduced to the same level as that applicable to real estate. The challenges to the validity of the Act are based upon the following grounds: first, that it sets up an unfair and dis ⁴²⁵ criminatory basis for the assessment of real and personal property, which (a) is not authorized by the provisions for classification of property contained in Article 15 of the Maryland Declaration of Rights and which (b) is prohibited by the Fourteenth Amendment to the Constitution of the United States; second, that it is an invalid attempt to delegate legislative power to the Commission, since it sets up no standards whatever by which the Commission is to be guided in making an allowance for inflation in assessing real estate and thereby nullifies the sole basis ordered for differentiation between real and personal property; and third, that its retroactive provisions are unconstitutional as a violation of due process under Article 23 of the Maryland Declaration of Rights and under the Fourteenth Amendment to the Constitution of the United States. The first attack is two-pronged, but its two branches are so closely related as to make it desirable to treat them together so as to avoid unnecessary repetition.

The power to classify property for purposes of taxation was conferred by the amendment to Article 15 of the Maryland Declaration of Rights which was proposed by Ch. 390 of the Acts of 1914 and ratified November 2, 1915. Prior to that amendment, taxes were required under Article 15 to be apportioned in accordance with the actual worth of the taxpayer in real or personal property. This necessarily meant uniformity of assessment as well as uniformity of tax rates. See an article by H. H. Walker Lewis, Esq., “Maryland Tax Articles,” 13 Maryland L. Rev. 83, at 105; State v. Cumberland & Penn.

R.R. Co., 40 Md. 22 ; Schley v. Montgomery County, 106 Md. 407 , 67 A. 250 . The history of Article 15 is traced by Lewis and is also traced in a very full opinion of the then Attorney General, now Judge Hammond, and of Robert M. Thomas, Esq., then an Assistant Attorney General, reported in 37 Ops. Att’y Gen. 424 (1952). See especially pages 426-433 and the cases therein cited.

We shall not undertake to review this history at length in this opinion. In the Constitution of 1867, as originally adopted, Article 15 contained a provision that “every person in the State, or person holding property therein, ought to contribute his ⁴²⁶ proportion of public taxes, for the support of the government, according to his actual worth in real or personal property”. This was omitted by the 1915 amendment, which substituted the provision “that the General Assembly shall, by uniform rules, provide for separate assessment of land and classification and subclassifications of improvements on land and personal property, as it may deem proper; and all taxes thereafter provided to be levied by the State for the support of the general State Government, and by the Counties and by the City of Baltimore for their respective purposes, shall be uniform as to land within the taxing district, and uniform within the class or subclass of improvements on land and personal property which the respective taxing powers may have directed to be subjected to the tax levy”. The Article still concludes with the provision “yet fines, duties or taxes may justly be imposed, or laid with a political view for the good government and benefit of the community.” This last clause is not involved in the present case.

Susquehanna Power Co. v. State Tax Comm., 159 Md. 334 , 151 A. 29 , makes it clear that the obligation of owners of property within the State to pay taxes thereon continues to exist, notwithstanding the amendment, and is implicit in the provisions with regard to uniformity within classes or subclasses. We find, however, no implication in that case of a continued constitutional obligation under Article 15 that taxes must be uniform as between different classes of property. Cf. Wells v. Hyattsville, 77 Md. 125, 26 A. 357 , decided in 1893, in which it was held that a local Act imposing a tax on real estate, but barring a tax on personal property, for town purposes was unconstitutional under Article 15 as it then stood.

In Oursler v. Tawes, 178 Md. 471 , 13 A. 2d 763 , this Court held that Article 15 did1 not bar income taxes at different rates on ordinary income and on investment income. This case is of especial significance here because, although the Court considered it doubtful whether an income tax was a property tax, it was held that it was controlled by the same basic principles which govern either excise or property taxation. ( 178 Md. 482 .) In rejecting the taxpayers’ argument based upon ⁴²⁷ alleged unwarranted discrimination this Court said ( 178 Md. 484 -485) : “In some cases, it is submitted that sources of income accruing from property of one classification are subjected to a greater tax burden than are sources of income derived from property pertaining to another and separate classification. And it is argued that for that reason the effect of the act is to impose an arbitrary and discriminatory tax upon some taxpayers as compared with the tax burden which it places upon others.

This situation, however, arises not as between taxpayers whose sources of income or situations are similar in that they accrue from property of like classification under the act; but arises in cases where the sources of income accrue from property of separate and distinct classifications under the act.” This seems to be a clear indication that taxes can be different as between different classes of property. See also County Comm’rs of Anne Arundel County v. English, 182 Md. 514 , 35 A. 2d 135 , which recognized that there can be a reasonable classification for tax purposes, but struck down the assessment there involved as being discriminatory. 1 Cooley, Taxation, (4th Ed.), § 281, p. 596, states: “* * * |T]n those states where all property need not be taxed, a classification of property as real and personal, and the taxing of one and not the other, has been upheld.” Maryland has long granted or permitted exemptions in favor of religious or charitable organizations and other exemptions believed to be in the public interest, such as those from local or State taxation, or both, of raw materials and inventory in the hands of manufacturers and manufacturing machinery and equipment. Indeed, it was the repeal of such exemptions in Baltimore City which precipitated the present controversy. Cf.

Kimball-Tyler Co. v. City of Baltimore, 214 Md. 86 , 133 A. 2d 433 . National was a party to a suit covered by that case. In footnote 25 to § 292, op. cit., Cooley says: “If there is a general power to classify, no good reason is apparent why different rates may not be imposed on real and personal property as constituting separate classes.” See Klein v. Bd. of Supervisors, 282 U. S. 19, 24 ; Waring v. City of Savannah, ⁴²⁸ 60 Ga. 93, 98 ; Wadhams & Co. v. State Tax Comm., 273 P. 2d 440 (Ore.); Hilger v. Moore, 182 P. 477 (Mont.). A like rule has been applied to variations in assessments of different classes of property.

Rees v. City of Erie, 90 A. 58 (Pa.), involving different percentages applied to land and to improvements. Kentucky Finance Co. v. McCord, 290 S. W. 2d 481 (Ky.), 100% of full cash value on intangible personal property, 29.7% on real estate. In Maryland, a totally different basis of taxation of intangible personal property long prevailed—the so-called 30-mill tax on stocks, bonds and other securities. Its repeal and replacement by the income tax on investment income shows the interrelation which may exist between property taxes and income taxes. 2 The Attorney General’s opinion above referred to (37 Ops.

Att’y Gen. 424) dealt directly with a statute which provided for the assessment of inventories in two counties for local purposes at 75% of the fair average value thereof during the year preceding the date of finality. In discussing the question, the opinion (p. 434) referred to 1 Cooley, op. cit., § 298 and quoted a footnote stating that “Ordinarily, it would seem, a classification whereby one class of property would be valued at a higher or lower percentage of real value than other property, conceding the power to classify in a proper case, would ordinarily be an unreasonable classification and therefore invalid.” The Attorney General commented: “This is almost the equivalent of saying the power does not exist.” We agree with this comment. At page 436 of the above opinion, the Attorney General made the following further comment, with which we also agree: “Moreover, inasmuch as the final tax is the product of the rate and an assessment of valuation, there ⁴²⁹ would seem to be little logic from the standpoint of practical results in denying the Legislature the power to classify for purposes of valuation and assessment when it already has the power to classify as to rates. The trend, such as it is, seems to be toward increased powers of classification for all purposes, particularly where the Constitution requires uniformity only within the class or sub-class of property.” We, therefore, find it unnecessary to rest our decision with regard to the power of the General Assembly to classify upon the narrow ground of the statement in Rogan v. County Commissioners of Calvert County, 194 Md. 299, 309 , 71 A. 2d 47, 51 (which cited a similar statement in Leser v. Lowenstein, 129 Md. 244, 250 , 98 A. 712 ), to the effect that the requirement of Article 15 that taxes shall be uniform as to land within the taxing district, “refers to levies of taxes and not to assessments.” The test which we deem appropriate is the reasonableness of the classification rather than the method by which a difference in the amount of taxes is effected—whether by a difference in percentage of assessment or by a difference in the rate of taxation applicable to the respective classes.

Cf. Lewis, op. cit., 13 Md. L. Rev. 103 -107, where he questions the statement as made in the Rogan case on the ground that it has been lifted out of the context in which it was made in the Leser case and was thereby given a destructive effect as to the uniformity which should be required. Our present Article 15 requires that a classification be uniform within a class, and this Court struck down as arbitrary a classification under our Income Tax Law in Blaustein v. Tax Comm., 176 Md. 423 , 4 A. 2d 861 , where there was no real difference between income from certain trust estates which was taxed and income from others which was not. Turning now to the Equal Protection Clause of the Fourteenth Amendment, it is well settled that this Clause does not prevent a State from making a reasonable classification for tax purposes and taxing different classes differently.

Michigan Central R.R. Co. v. Powers, 201 U. S. 245 ; Kentucky Union Co. v. Kentucky, 219 U. S. 140 ; Northwestern Mutual Life Ins. Co. v. Wisconsin, 247 U. S. 132 ; Nashville, C. & St. ⁴³⁰ L. Ry. v. Browning, 310 U. S. 362 ; 1 Cooley, Taxation, (4th Ed.), § 332, p. 705. In the very recent case of Allied Stores of Ohio, Inc. v. Bowers, 358 U. S. 522 (1959), the Supreme Court has reviewed many cases dealing with classification for purposes of state taxation of several kinds and has restated some of the rules with regard to the application thereto of the Equal Protection Clause of the Fourteenth Amendment. The Court points out that this clause “imposes no iron rule of equality, prohibiting the flexibility and variety that are appropriate to reasonable schemes of state taxation.” ( 358 U. S. at page 526 .) The Court further says (p. 527) : “But there is a point beyond which the State cannot go without violating the Equal Protection Clause.

The State must proceed upon a. rational basis and may not resort to a classification that is palpably arbitrary. The rule often has been stated to be that the classification ‘must rest upon some ground of difference having a fair and substantial relation to the object of the legislation.’ [Cases cited.] ‘If the selection or classification is neither capricious nor arbitrary, and rests upon some reasonable consideration of difference or policy, there is no denial of the equal protection of the law.’ Brown-Forman Co. v. Kentucky, 217 U. S. 563, 573 ; State Board of Tax Comm’rs v. Jackson, 283 U. S. 527, 537 . That a statute may discriminate in favor of a certain class does not render it arbitrary if the discrimination is founded upon a reasonable distinction, or difference in state policy. American Sugar Ref.

Co. v. Louisiana, 179 U. S. 89 ; Stebbins v. Riley, 268 U. S. 137, 142 .” The Brown-Forman case upheld a tax on distillers and rectifiers of blended spirits, though the state imposed no corresponding tax on distillers or rectifiers of straight spirits. In the Jackson case a progressive tax on chain stores based upon the number of units was upheld. In the American Sugar Refining case a tax on persons or corporations engaged in the business of refining sugar and molasses was upheld, notwithstanding an exemption in favor of planters and farmers grinding and refining their own sugar and molasses. In Stebbins v. Riley, supra, a state inheritance tax was upheld which prohibited the deduction of the amount of the Federal Estate Tax in arriving ⁴³¹ at the amount of the state tax, even though such disallowance resulted in equalities in some instances.

Equality within a class is essential under the Equal Protection Clause, but equality between different classes is not required. Kentucky Railroad Tax Cases, 115 U. S. 321 , Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283 ; Michigan Central R.R. Co. v. Powers, supra; Hart Refineries v. Harmon, 278 U. S. 499 . The Supreme Court has also said that the Equal Protection Clause does not require that a state tax all pursuits or all property that may legitimately be taxed. Connolly v. Union Sewer Pipe Co., 184 U. S. 540, 562 .

That Court has held that if a state taxes wholesale dealers in certain specified articles, it need not impose a like occupation tax upon wholesale dealers in other articles. Southwestern Oil Co. v. Texas, 217 U. S. 114 . Our next problem is whether or not, under established rules, the particular classification here made is valid under Article 15 of the Maryland Declaration of Rights and under the Equal .Protection Clause of the Fourteenth Amendment. The Supreme Court has repeatedly stated that under the Equal Protection Clause real property and personal property may be differently taxed.

Bell’s Gap R. Co. v. Pennsylvania, 134 U. S. 232, 237 ; Home Ins. Co. v. New York, 134 U. S. 594, 606 ; American Sugar Refining Co. v. Louisiana, supra; Southwestern Oil Co. v. Texas, supra; Stebbins v. Riley, supra; Ohio Oil Co. v. Conway, 281 U. S. 146, 149 . In none of these cases was this the actual holding of the case, but the general principle appears from these numerous statements to be fully accepted as well settled law. See also, 1 Cooley, Taxation, § 281, above cited, as to taxation of one class of property and not the other; 51 Am.

Jur., Taxation, § 194; 84 C.J.S., Taxation, § 26; Kentucky Finance Co. v. McCord, supra. These authorities are, we think, sufficient to sustain different treatment of real and personal property for purposes of assessment for taxation. We shall not, however, rest our decision on this phase of the case solely on that general ground. We have already set forth the declarations of the Legislature in the preambles to the Act.

Those numbered above as (4), ⁴³² (5) and (9) seem of particular pertinence in this aspect of the case, and the operative provisions of the Act are in accord with the intent and belief therein set forth. It is not incumbent upon the Legislature to state its reasons, motives or policies for adopting a tax classification (Southwestern Oil Co. v. Texas, supra; Allied Stores of Ohio v. Bowers, supra), insofar as the Equal Protection Clause is concerned; but if it does so, State action may be tested solely on the basis of the purpose declared. Wheeling Steel Corp. v. Glander, 337 U. S. 562 , commented upon and distinguished in the Allied Stores case. The preamble of the Act (Par.

(5)) speaks of the inherent differences between real and personal property and the peculiarities of certain classes of personal property (first) as requiring and justifying separate classification and sub-classification for assessment purposes and (second) as requiring and justifying the making of an allowance for inflation with respect to real estate, but not personal property. Other recitals show, we think, that inflation at least prompted the adoption of the statute. Yet, after we give careful consideration to that fact, and if we accept the appellant’s contention that there must be some difference in the impact of inflation as between real estate and tangible personal property to support the difference in treatment here accorded, we cannot say that the legislative classification based upon the finding stated in preamble clause (5), supra, is unsustainable. There is a strong presumption in favor of the validity of a legislative finding.

As was said by Chief Judge Markell, speaking for this Court in Dundalk Liquor Co. v. Tawes, 201 Md. 58, 62 , 92 A. 2d 560 : “An invalid act cannot be made valid by a ‘preface of generalities’ in the form of a legislative declaration of purpose. Schechter Poultry Corporation v. United States, 295 U. S. 495, 537 , 55 S. Ct. 837 , 79 L. Ed. 1570 . But if a legislative declaration is not demonstrably untrue or meaningless, and if true, would support the validity of the act, the courts must accept the judgment of the legislature and cannot substitute a contrary judgment of their own.” See also Mt. Vernon-Woodberry Cotton Duck Co. v. Frankfort Marine, etc., Insurance Co., 111 Md. 561 , 75 A. 105 . ⁴³³ It is true that in the Sears case, this Court recognized what was not, indeed, contested, that inflation had affected sales prices of real estate as well as of inventories.

That, however, is not an end of the matter for the impact may be, and, in effect, has been declared by the Legislature to be, different as between real property and personal property. Only a relatively small portion of the total amount of real property is, we believe, in the nature of the stock in trade of developers or real estate dealers, and only a relatively small portion is used for the purpose of manufacturing goods for sale, which goods are themselves directly affected by inflationary prices. Most real estate is not held for sale or for manufacturing purposes. Perhaps it would be desirable to classify properties so held separately from, say, residential real estate not held for sale.

But to say that there is no difference, so far as the impact of inflation is concerned, between real estate in general, on the one hand, and tangible personal property consisting of inventory and tools and machinery used for manufacturing, on the other hand, would be to make the tail wag the dog. So to hold would, we think, amount to a substitution of the judgment of this Court for that of the Legislature, without any adequate evidence to show that the classification made by the Legislature was without any reasonable foundation. The burden rests upon one attacking the constitutionality of an Act to show such lack. Salsburg v. State, 201 Md. 212 , 94 A. 2d 280 , affd. 346 U. S. 545 ; Allied American Mutual Fire Ins.

Co. v. Commissioner of Motor Vehicles, 219 Md. 607 , 150 A. 2d 421 ; Dundalk Liquor Co. v. Tawes, supra; Mt. Vernon-Woodberry Cotton Duck Co. v. Frankfort Marine, etc., Insurance Co., supra; Robey v. Broersma, 181 Md. 325, 329 , 26 A. 2d 820 ; Tatlebaum v. Pantex Mfg. Co., 204 Md. 360, 370 , 104 A. 2d 813 . As to the relative impact of inflation upon real property and tangible personal property, we may note that under our present tax laws and exemptions from taxation (as to the latter of which see Secs. 9 (12) and 9 (17) of Art. 81), generally speaking, taxable personal property is held or used for manufacturing, mercantile or other business purposes.

As we have noted above, real estate, to a very considerable extent, is not. ⁴³⁴ Inventories are held for sale or resale in the hope and expectation of a quick turnover. By reason of the limitation of the assessable value of inventories under Sec. 15 (a) to cost or market, whichever is lower, the owner is ordinarily protected taxwise against any inflationary rise in prices after he has become the owner of the property. No corresponding protection is built into the statute for other types of tangible personal property, but even such other types of property are usually held for a considerably shorter time than real estate, because they wear out or become obsolete more rapidly. They are generally subject to fairly rapid rates of depreciation under income tax laws as compared 'with improvements to real estate, and land is not subject to depreciation at all in an accounting sense.

Of course, depreciation allowances give a tax benefit under income tax laws. In the overall picture of taxation the owner of tangible personal property held for business purposes thus receives a greater deduction in any given year from gross income in arriving at his net income subject to taxation than does the owner of real property of equal original value. Even though the owner of tangible personal property held for business purposes may fare worse taxwise than the owner of real estate, this alone does not nullify a classification based upon the two different types of property. Insofar as our Article 15 of the Declaration of Rights is concerned, as we have already pointed out, there would seem to be little point in providing for different