Summary
reprinting excerpt from the Report of the Citizens Task Force
Summary of this case from Crown Paper Co. v. City of BerlinOpinion
No. 6034.
Answer returned January 30, 1970.
1. An advisory opinion upon the constitutionality of proposed legislation was rendered to the Governor and Council when such opinion might assist the Governor and Council in performing their constitutional duty to determine whether to convene a special session of the Legislature.
2. A tax may be constitutionally imposed at a uniform rate upon the "net profits" of all business organizations, corporate or unincorporated, doing business within the State, measured by "net taxable income" with allowance for a "reasonable salary" for each "working owner" in cases of partnerships, farmers, and sole proprietorships, and with provision for deduction of special taxes paid to the State under existing law from the business tax so determined, and exclusion from taxable business income of income subject to the interest and dividends tax (RSA ch. 77).
3. Net income may properly be defined by reference to presently effective federal law, and no constitutional barrier stands in the way of the levy of a general income tax at a uniform rate upon gross or net income of a taxpayer.
4. The rate of a tax upon net income need not be uniform with the rate of the existing tax upon gross income in the form of interest and dividends.
5. Business income may reasonably be classified separately from salaries, wages, and unearned income of individuals and taxed at a rate differing from that imposed upon income from investments described in RSA 77:4 where held to the accounts of nonbusiness interests.
6. Uniformity and proportionality are not required between a tax upon the net income of business organizations and the state property tax upon the estates of railroads and telephone companies (RSA 82:2, 37), or the special taxes imposed upon gas and electric companies (RSA 83-B:2, 6 (supp)), or national and savings banks (RSA 84:7, 16-c (supp)), or insurance companies (RSA 402:57, 61; RSA 402:59).
7. A proposed method of distribution of certain of the proceeds of a proposed business tax to towns and cities to replace the proceeds of certain taxes to be repealed, was thought to disclose no constitutional infirmities.
Joseph A. Millimet, for the Citizens Task Force, filed a memorandum in support of negative answers.
Robert A. Backus, also filed a memorandum in support of negative answers.
The Governor and Council assembled in executive session January 9, 1970 adopted the following resolution, which was filed in this court the same day:
"Whereas the Citizens Task Force established by Laws of 1969, ch. 26 (sic), has submitted its final report to the Governor, recommending far-reaching changes and improvements in the organization, finances and operations of our state, county and local governments; and
"Whereas the work of the Task Force, participated in by more than 300 citizens over a period of eight months, represents the most comprehensive study of our State's government in its history, and its recommendations pose a fundamental challenge as to the ability of the State to modernize its governmental organization and operations and to finance the required changes in the same; and
"Whereas the foregoing report gives high priority to certain basic reforms, proposing that these be considered at a special session of the General Court to be convened as soon as possible, central among which is a key recommendation for the enactment of a tax at a common rate on all net profits derived from the ownership and operation of business organizations in this State; and
"Whereas questions have been raised as to the constitutionality of such tax legislation in the light of Opinion of the Justices. 106 N.H. 202, and unless a reasonable constitutional area for tax legislation of this kind exists, there would appear to be no justification for the Governor and Council, at this time, to convene a special session of the General Court for the purpose of acting upon such tax legislation; and
"Whereas the Governor and Council are in need of judicial advice as to the constitutionality of such tax legislation in order properly to perform their constitutional duty of determining whether to convene the General Court in special session at this time.
"Now Therefore Be It Resolved by the Governor and Council that the Justices of the Supreme Court be respectfully requested, upon this solemn occasion, to give their opinion upon the following important questions of constitutional law:
"1. Would the enactment of a tax levied at a common rate, on all net profits derived from the ownership and operation of business organizations in this State, as outlined in the report of the Citizens Task Force, violate any provision of the State Constitution?
"2. If the answer to the first question is in the negative, must the rate of such tax be uniform with the rate of the tax on profits from interest and dividends (RSA 77) or with the rate of any other state tax now levied?
"Further Resolved that there be annexed to these resolutions an excerpt from the report of the Citizens Task Force which fully describes the proposed tax legislation.
"Further Resolved that the Secretary of State transmit to the Clerk of the Supreme Court six attested copies of these resolutions and the annexed excerpt from the report of the Citizens Task Force.
Excerpt From the Report of the Citizens Task Force
"OUTLINE OF PROPOSAL
"We propose a state tax at a uniform rate (in the order of 6%) on all net profits derived from the ownership and operation of business organizations in New Hampshire. `A business organization' may be defined as a corporation, partnership, sole proprietorship or other form of business organization, doing business in this state for gain or profit, whether in manufacturing, farming, producing goods and/or services, wholesaling or retailing, and including the selling or leasing of property (real, personal or intangible), the furnishing, sale or rental of services and facilities of all kinds, and the furnishing, sale or leasing of combinations of such property and such services and facilities. In other words `business organization' would encompass every conceivable form of business, industry, profession or trade carried on for gain or profit by a corporation, partnership or sole proprietorship.
"The proposed tax would be levied on the net taxable income of such business organizations as determined for federal income tax purposes, except that in the case of partnerships the tax would be collected from the firm, based on its partnership federal income tax return adjusted by deduction of appropriate salaries for partners, as hereinafter described. In the case of unincorporated sole proprietorships, the tax would be based on the present U.S. Schedule C `Profit (or Loss) from Business or Profession' or in the case of farmers on the present U.S. Schedule F `Farm Income and Expenses,' in both cases allowing reasonable deductions for salaries of proprietors.
"In Opinion of the Justices, 106 N.H. 202 at 206, it was pointed out that it would be unconstitutional to levy a business income tax which permitted corporations to deduct management salaries while not permitting unincorporated businesses to deduct the equivalent for the services rendered by the working owners of such businesses. In order to meet this constitutional objection, a further deduction from taxable income (as determined for federal income tax purposes) would be allowed in the cases of all unincorporated businesses (i.e., partnerships and sole proprietorships). This deduction would be a sum equal to a reasonable salary allowance for each working owner of such business organization. Unreasonable and excessive salary deductions, in such category, would be disallowed upon audit, and the State Tax Commission would be granted power to make reasonable rules and regulations to prevent evasion by excessive deductions in such category, within general standards set by the legislature. The general intention in the case of unincorporated business organizations would be to tax the proprietors on that net income which they make as proprietors which exceeds the salaries they might reasonably earn if performing like services as employees of a corporation. While this feature of the plan presents some administrative problems, its inclusion appears required for constitutional reasons. It is believed that such administrative problems are not excessively difficult — at least, not any more so than those presently encountered by the U.S. Internal Revenue Service in determining whether corporate management is making unreasonably large salary deductions in the calculation of the federal income tax on corporations.
"In order to avoid double taxation, either in fact or in substance, the taxpayer, in applicable instances, would be allowed to deduct from its or his tax, certain taxes (if paid by such taxpayer) which are now collected by the state, such as the special taxes levied on banks, public utilities and insurance companies. Further, any income subject to the interest and dividends tax should be excluded from taxable business income. Such deductions from tax are very likely required to meet the constitutional objections against double taxation outlined in Opinion of the Justices, 106 N.H. 202 at 207.
"In order to provide for timely collection of revenues, a business organization must be required to pay its estimated tax quarterly, if it can reasonably expect that its estimated tax for the year will be $500.00 or more. Further, the amount of estimate paid must be at least 80% of the final tax due to be paid. It is recommended that two/thirds of the revenue collected from the business profits tax be returned to the cities and towns within a reasonable time after collection by the appropriate state agencies.
"This will provide the cities and towns with revenue lost from the repealed taxes on a quarterly basis. The cash flow in the communities of New Hampshire will be improved and the necessity of borrowing in anticipation of taxes greatly reduced.
"At the same time, we recommend repeal of the taxes on stock in trade, factory machinery, road building and construction machinery, portable mills and all livestock and animals, with just and fair provisions for reimbursing cities and towns for the tax revenues lost to them by such repeal. We suggest reimbursement at the 1969 collection level. These outmoded taxes discriminate heavily against certain types of businesses. They are based on neither ability to pay nor economic productivity. A business profits tax will substitute a modern revenue raising device for an arbitrary and erratic taxing system."
To his Excellency the Governor and the Honorable Council:
The undersigned Justices of the Supreme Court reply as follows to the inquiries contained in your resolution filed January 9, 1970, pertaining to a proposal to levy taxes upon net profits derived from the operation of business organizations in this state.
The inquiries stem from certain recommendations by the Executive Committee of the Citizens Task Force, an organization of some three hundred citizens, established in 1969 pursuant to act of the Legislature, and charged with recommendation to the Governor of measures to achieve efficiency and effectiveness in government and improve the economy of the State. Laws 1969, ch. 24. The recommendations to which your inquiries relate appear at pages 46-48 of the report of the Citizens Task Force submitted to the Governor under date of January 7, 1970. Since they are appended to your resolution they need not be repeated.
The act establishing the Task Force provides that legislation proposed by it "shall be submitted in final form" to the speaker of the house and the president of the senate "on or before fifteen days prior to the convening of any special session of the general court called to consider the report and recommendations of the task force . . . ." Laws 1969, 24:8.
Although such legislation apparently has not yet been submitted, your resolution states that you are "in need of judicial advice as to the constitutionality of such [proposed] tax legislation in order properly to perform [your] constitutional duty of determining whether to convene the General Court in special session at this time," as proposed by the Task Force. Const. Pt. II, Art. 50th. Your resolution further suggests that unless the proposed tax would be constitutional a special session of the Legislature may not be warranted.
As the Justices have observed upon other occasions, the question of the wisdom and practicality of proposed legislation is not a matter of judicial concern. Opinion of the Justices, 101 N.H. 549, 553, 137 A.2d 726. Ordinarily advisory opinions may not be given upon legislative matters not pending before the Legislature and awaiting its action. However, the constitutional status of the proposal to which your inquiries relate is pertinent to the question pending before you, as to whether or not a special session of the Legislature shall be called; and our answers may be of assistance to you in performance of your constitutional duties. We deem it proper in this instance to answer your present inquiries. Opinion of the Justices, 109 N.H. 578, 258 A.2d 343, 347. See Opinion of the Justices, 101 N.H. 549, 553, supra; Opinion of the Justices, 105 N.H. 125, 127, 193 A.2d 880; Opinion of the Justices, 96 N.H. 517, 183 A.2d 738.
What is proposed by the Task Force report is a tax at a uniform rate upon the "net profits" of all business organizations, corporate or unincorporated, doing business within the State. The tax, "at a uniform rate (in the order of 6%)," would be levied on "net taxable income" as determined for federal income tax purposes, with allowance for a "reasonable salary" for each "working owner," in the cases of partnerships, farmers, and sole proprietorships. To obviate double taxation, banks, public utilities, and insurance companies would be permitted to deduct from their business taxes so determined the amounts of special taxes paid to the State under existing law. For the same purpose, income subject to the interest and dividends tax (RSA ch. 77) would be excluded from taxable business income.
No constitutional barrier stands in the way of the levy of a general income tax at a uniform rate. Const. Part II, Art. 6th; Conner v. State, 82 N.H. 126, 130 A. 357. This is so, whether the levy is upon the gross or the net income of a taxpayer (Opinion of the Justices, 95 N.H. 537, 64 A.2d 320); and net income may properly be defined by reference to presently effective federal law. Opinion of the Justices, 95 N.H. 540, 542, 64 A.2d 322.
The Constitution does not require the rate of a tax upon net income to be uniform with that of the existing interest and dividends tax, which is a tax upon certain gross income, now fixed at 4 1/4%. RSA 77:1 (supp); Opinion of the Justices, 101 N.H. 549, 558, 137 A.2d 726.
Exclusion from taxable business income of income taxable under the interest and dividends tax would avoid the issue of double taxation thought to be an objection to the bill considered in Opinion of the Justices, 106 N.H. 202, 207, 208 A.2d 458. While the business tax now proposed would have the effect of nullifying the exemptions provided by RSA 77:4 and 5 where it may apply to interest and dividends accruing to business organizations, as distinguished from the personal accounts of individual partners or sole proprietors, no constitutional issue would thereby be presented, since business income may reasonably be classified separately from salaries, wages, and unearned income of individuals. Opinion of the Justices, 101 N.H. 549, 558, supra. Similarly, business income may properly be taxed at a rate differing from that imposed upon income derived from the investments described in RSA 77:4 when held to the accounts of nonbusiness interests. Id.
The provision suggested for the allowance, before tax, of reasonable salaries to partners and sole proprietors, comparable to a similar allowance made under federal regulation for salaries paid by corporate business, would serve a double purpose. It would avoid discrimination, by placing a partner or sole proprietor on a par with the salaried executive, so that neither would be taxed upon a reasonable salary, or its equivalent. It would also obviate the further objection thought to invalidate the legislation considered in Opinion of the Justices, 106 N.H. 202, supra, under which the income of self-employed persons would have been taxed while that of wage earners and salaried employees would not. Id., 206. As the recommendations suggest, this feature of the plan may present administrative problems. See 4A Mertens, Law of Federal Income Taxation, ss. 25.61, 25.68. However, it is not objectionable on constitutional grounds.
A question might be thought to arise with respect to the proposed tax, vis-a-vis special taxes presently levied upon utilities, banks, and insurance companies. Railroads and telephone companies are presently subject to a state property tax upon their estates at the state level, according to the current average property rate. RSA 82:2, 37. See Boston Maine R. R. v. Portsmouth, 80 N.H. 7, 112 A. 394; Opinion of the Justices, 101 N.H. 549, 555, 137 A.2d 726. The Constitution does not require uniformity or proportionality between such a tax and the business tax now proposed. Opinion of the Justices, Id., 557.
The state franchise taxes, imposed on gas and electric companies, measured by their "actual income" at a current rate of 9% (RSA 83-B:6 (supp)), and upon national and savings banks, equivalent to 1% of interest and dividends paid in excess of $10,000 (RSA 84:7, 16-c (supp)), are likewise free from the requirement of uniformity with a general or business income tax. Opinion of the Justices, 101 N.H. 549, 557, supra. See Manchester Sav. Loan Assn. v. State Tax Comm., 105 N.H. 17, 19, 191 A.2d 529.
Taxes imposed by the state upon insurance companies, while varying in rate and measure (RSA 402:57 (supp)); RSA 402:59; RSA 402:61 et seq.), are considered to be in the nature of franchise taxes upon the privilege of doing business in the state (New York Life Ins. Co. v. Sullivan, 89 N.H. 21, 192 A. 297), and hence are also free from the requirement of a rate uniform with taxes upon "other classes of property." Const. Pt. II, Art. 6th, supra.
It may be noted that in the case of gas and electric utilities the special tax imposed is at a rate higher than proposed for the tax now under consideration. This may account for the suggestion that "special taxes" should be treated differently from the tax upon interest and dividends. While income from interest and dividends is to be excluded from taxable business income, it is proposed that special taxes shall be credited against the business tax itself.
Business organizations subject to the interest and dividends tax might be thought to be favored thereby, since such taxpayers will be taxable partially at the rate of the business tax upon net income, and partially at a lower rate upon certain gross income from interest and dividends. This we do not consider a fatal objection, since just reason may be thought to exist for the employment of the lower rate. Should this have the effect of a partial exemption it appears to rest upon rational classification. Opinion of the Justices, 84 N.H. 559, 569, 149 A. 321. See Opinion of the Justices, 105 N.H. 22, 192 A.2d 22; Opinion of the Justices, 97 N.H. 533, 536, 81 A.2d 845. A higher rate of tax as to such income might be thought to discourage the investments so taxed, with consequences inimical to the public good. See Petition of Savings Bank, 68 N.H. 384, 387, 36 A. 17.
The proposal of the Task Force report contemplates repeal of stock in trade and certain other taxes, now payable to towns and cities. Although not constitutionally required, the plan would provide for distribution of two-thirds of the proceeds of the business tax to towns and cities "at the 1969 collection level," to replace the proceeds of the taxes repealed. The method of distribution suggested in the report discloses no constitutional infirmities. See Opinion of the Justices, 88 N.H. 500, 507-508, 190 A. 801; Opinion of the Justices, 97 N.H. 533, 538-539, 81 A.2d 845. As stated in the latter opinion, "If [the `1969 collection level'] proves to be unfair in future years, the method of distribution may be changed. The validity of the tax is not thereby affected." Id., 539.
It should be emphasized that no specific legislative proposal has been submitted, and that this advisory opinion should not be construed to give advance approval of the constitutionality of proposed legislation not before us. So far as we can determine from the broad outline laid before us, the proposed tax upon business income would be constitutional, and need not be levied at the rate of other state taxes referred to. The questions submitted by your resolution are answered in the negative.
FRANK R. KENISON. LAURENCE I. DUNCAN. EDWARD J. LAMPRON. WILLIAM A. GRIMES. ROBERT F. GRIFFITH.
January 30, 1970.