refund claims for several years during 1933-1949 and for other charges was estimated at some $75 million.69 On January 14, 1956, the trial court handed down its decision in favor of the defendant Board. The case was appealed to the California Supreme Court and on February 23, 1961, the Board was again sustained. The United States Supreme Court denied a writ of certiorari on October 9, 1961.70 At long last the use of "built-up" rates had been approved.

The work of the joint committee of 1941-42 in developing an agreed bill finally resulted in its introduction in Congress in the 81st Congress, in 1949. It became S. 2547, offered by Senators Maybank and Robertson. In the second session of the 81st Congress, Mr. Spence introduced the bill in the House of Representatives (H.R. 7896) on March 28, 1950." A hearing on the Senate bill was held by a subcommittee on July 20, 1950. Witnesses from the American Bankers Association and the National Tax Association explained the origin of the bill and its main provisions and recommended its enactment. No opposition to the bill could be reported.72

House Committee hearings on H.R. 7896 also were scheduled but were postponed-indefinitely, as it turned out.73

In the 82d Congress, H.R. 3175 introduced by Mr. Spence on March 13, 1951, aroused bankers in four States which, in addition to California, were using "built-up" rates for their excise taxes on national banks. These States, instead of figuring the differential due to the taxation of nonbank tangibles of mercantile, manufacturing, and business corporations, had written into their laws one rate for general business corporations and a slightly higher rate (about 2 percentage points) for national banks. If H.R. 3175 was enacted, banks and other corporations would be taxed alike. The banks in the four States were satisfied with the way they were being taxed; in May 1951, they undertook a vigorous campaign against the bill. No effort was made to push it, and the bill expired with adjournment of the 82d Congress.74 No further bills were introduced to amend section 5219. Nor did the bankers ever reconcile their internal differences. By 1955 they

69 Saxe, loc civ.

70 Security National Bank of Los Angeles vs. Franchise Tax Board of California, 55 Calif. 2nd 407, 359 P. 2d 625 (1961); 368 U.S. 3 (1961). The case is discussed more extensively infra, at p. 260.

71 95 C.R., p. 812774 (September 13, 1949); 96 C.R., p. H4272 (March 28, 1950).

72 81st Congress, 2d session, Senate Committee on Banking and Currency, State Taxation of National Banks: Hearing before a Subcommittee. . . on S. 2547, July 20, 1950: 21 pages. Witnesses were C. Francis Cocke, chairman of the Committee on Federal Legislation of the American Bankers Association; Francis H. Beam, American Bankers Association and vice president of the National City Bank, Cleveland, Ohio; Henry F. Long, Massachusetts Commissioner of Corporations and Taxation and chairman of the National Tax Association Committee on Bank Taxation. Mr. Beam presented an explanatory memorandum on S. 2547 and H.R. 7986, submitted by Philip Nichols on behalf of the American Bankers Association; ibid., pp. 11-18. The record includes also letters voicing "no objection" to the bill from S. R. Carpenter, Secretary of the Board of Governors of the Federal Reserve System, April 4, 1950; E. H. Foley, Jr., Acting Secretary of the Treasury, April 6, 1950; and Maple T. Harl, Chairman of the Federal Deposit Insurance Corporation, April 5, 1950. Ibid., pp. 3-4.

13 Report of Committee on Bank Taxation, Proceedings of the National Tax Association, 1950, p. 399; ibid., 1951, p. 450.

74 97 C.R., p H2304 (March 13, 1951). Mr. Spence was chairman of the House Committee on Banking and Currency. Cf. report of the Committee on Bank Taxation, Proceedings of the National Tax Association, 1952, pp. 675-6, where the committee chairman, Henry F. Long, reported developments as follows: "As a result, a hearing on this objection was held by the Administrative Committee of the American Bankers Association on January 16, 1952, which aroused great interest and was widely attended. "On the following day the Administrative Committee adopted a resolution reaffirming the principle that national banks should pay their just and equitable share of State taxes, but should be effectively protected against taxes which would be discriminatory as compared with other corporate taxpayers, and recommending that the subcommittee on section 5219 should continue its study, jointly with a committee of the National Tax Association, in an endeavor to develop an amendment which would secure the fundamental objectives above stated; that further effort should be made to harmonize the views of the bankers of the respective States; and that pending further study no action should be taken to urge consideration of H. R. 3175.

"We have been informed that since this resolution was adopted negotiations have been carried on between the bankers who favor and those who oppose the contested feature of the proposed revision and that so progress has been made but no agreement has yet been reached."

He asked (and obtained) a continuance for the N.T.A. committee.

wanted to await a decision in the California case, mentioned above, before doing anything to amend section 5219.75

This second movement to amend section 5219 had neither the vigor nor support of earlier efforts. The elapsed time was longer but the efforts were somehow more lackadaisical. There were no significant pressures upon Congress.76

4. Banks and interstate commerce.-In its report to the 1958 conference of the National Tax Association, the Committee on Bank Taxation called attention to recent decisions of the United States Supreme Court concerned with the power of a State to tax a nonresident industrial corporation, doing only an interstate business in the State, upon its net income from sources within the State. Because it expected that the decisions in those cases would have considerable bearing upon possible future developments in the field of bank taxes, the committee planned to follow the situation closely." At the time, the Committee could scarcely have anticipated the impact that these decisions might ultimately have upon national banks, since section 5219 prevented taxation of out-of-State national banks. But a decade later, after enactment of Public Law 91-156, both in the temporary period between 1969 and 1972 and thereafter, national banks would be subject to nondiscriminatory sales, use, and other taxes that applied to State banks.

The committee on bank taxation devoted most of its 1959 report to this subject. Bankers were warned in these terms:78

"In February 1959, the Supreme Court of the United States decided Northwestern States Portland Cement Co. v. Minnesota and Williams v. Stockham Valves and Fittings, Inc., 358 U.S. 450. Those cases involved situations where foreign corporations maintained sales offices in the taxing State which were used as headquarters by salesmen soliciting orders for goods, but maintained no other place of business or stock of goods in the State, accepted all orders outside of the State and shipped from outside of the State all goods used to fill such orders. In both cases it was agreed that the corporations were engaged solely in interstate commerce in the taxing State and that the net income upon which the tax was imposed had been fairly apportioned to the State. The Supreme Court held that under those circumstances the direct net income tax did not violate the commerce clause and that the taxpayer had a sufficient connection with the State to satisfy the requirements of due process.

"In May 1959, the Supreme Court denied certiorari in International Shoe Co. v. Fontenot, 359 U.S. 984 in which the Louisiana Supreme

75 Ibid., 1955, p. 398; ibid., 1957, p. 342.

76 Two efforts were made at national tax conferences to get the National Association Committee to broaden the scope of its recommendations. In 1943, Oscar Leser, a veteran state official in the struggle to amend section 5219 after the Richmond decision, asked that the Committee "broaden its powers to take up the real mischief that is to be cured." Dixwell Pierce of California joined the effort, saying, "if more work is to be done of any significance, [it] will have to be under a resolution broader than that originally assigned." They lost the struggle. Proceedings of the National Tax Association, 1943, pp. 33-4, 459-65. At subsequent conferences perfunctory reports were rendered by the Committee Chairman with no discussion following. See ibid., 1944, pp. 350-55; 1946, p. 460; 1947, pp. 306-307; 1948, pp. 222, 562; et. seq. In 1948 the Executive Committee of the N.T.A. voted to discharge the committee but Henry Long, during the annual conference, asked that the committee be revived, and this was done out of deference to him. Ibid., 1948, p. 222. He carrie i on thereafter almost alone until his death (1956), and whatever the committee accomplished was due largely to him. The lack of support is indicative of how little interest other States had in the proposed amendment. They did not attempt to block it, but neither did they work for its adoption. The limited scope of the recommendations, particularly in not trying to improve the share tax option (which bankers opposed), left the committee with almost no support from States whose tax officials had previously worked hard to amend section 5219.

77 Proceedings of the National Tax Association, 1958, p. 314. The Committee was now under the chairmanship of Carter T. Louthan, attorney, of New York City. 79 Ibid., 1959, pp. 214-15.

Court upheld a direct net income tax upon the portion of the net income of a foreign corporation apportioned to the State; the corporation's only activity in the State being the solicitation of orders for goods by traveling salesmen. No orders were accepted in the State nor did the corporation maintain any place of business or stock of goods in the State.

"As a result of the strong representations which were made by interstate businesses, Public Law 86-272 was enacted in September to prohibit States from imposing taxes upon net income derived within the State by a person engaged solely in interstate commerce if the only activity within the State is the solicitation of orders by the taxpayer for the sale of tangible personal property. The statute directs that a further study of the situation be made by congressional committees. . . .

"In view of the limited nature of the prohibition imposed by present legislation, it is obvious that many persons, including banks, earning income in interstate commerce still may be vulnerable to multiple taxation of net income by numerous States with which they have rather minimal contacts.

“The Committee intends to follow closely the proceedings of the congressional committees in this field. The Committee also has been in touch with the American Bankers Association and intends to cooperate with the appropriate committee of that Association in an effort to work out a program which will give reasonable protection to interstate banking.”

In its next annual report, the National Tax Association committee made the warnings to the banking community even more specific:79 "Although banks do not maintain offices outside of the State in which they have their head office, they frequently make loans to persons in other States and regularly send employees into such other States to keep in contact with such borrowers and correspondent banks.

"Such business is frequently generated by correspondent banks which cannot, or do not wish to, handle the entire loan. Such loans are closed at the out-of-state bank's head office so that no liability for a privilege or franchise tax is incurred. However, the rule of the above-mentioned cases [Northwest and Stockham Valves cases, 358 U.S. 450, and International Shoe, 359 U.S. 984] seems applicable, so that if an income tax is imposed the only open question would seem to be whether there was a fair apportionment of net income to the taxing State.

“In the simple case the borrower may do only a local business or may borrow the funds only for use within the taxing State. More frequently, the borrower will do both a local business in the second State and an interstate business in a third State and will borrow the funds for use in its entire business. Under such circumstances the interest may be said to have been earned partly in the third State and should not be considered in its entirety as a receipt within the second State, whether the allocation is to be made on a separate 79 Ibid., 1960, p. 297. Mr. Louthan submitted the report.

accounting basis or in accordance with a formula using receipts as one of the factors. Thus the difficulties which are encountered in using sales as one of the factors in an apportionment formula also will be encountered in using interest receipts as an apportionment factor in the case of banks.

"Furthermore, if the third State also imposes an income tax, the out-of-state bank may become liable for tax upon the net income Ideemed to have arisen in that State if it has sufficient activities in the third State to satisfy the due process clause.

"The necessity of paying income taxes to several States with respect to interest received upon an out-of-state loan could involve such burdensome problems of compliance that there would be an interference with the free flow of credit on an interstate basis. Since credit is the life blood of the national economy this problem deserves careful consideration by the Congressional Committees charged with the duty of studying the problems involved in the taxation of income earned in interstate commerce. It may be that the national interest will be best served where the bank's contacts with a State are minimal, if limitations are placed upon the power to tax so that there will be no impediment to the free flow of credit in interstate commerce."

gave

As indicated above, the Supreme Court in decisions in 1959 so the States tax jurisdiction over foreign corporations doing business within their boundaries in situations where they had sales offices and traveling salesmen within the State. Business firms, particularly small enterprises, at once called for action by Congress to modify the consequences of these decisions.

The result was the quick enactment of Public Law 86-272, on September 14, 1959. The limitations imposed upon the States can be seen clearly from the first paragraphs of the law (15 U.S.C. 381), reproduced in appendix 1-G, above. The power of Congress to regulate interstate commerce was invoked to restrict the taxing power of the States, an action that was characterized by critics as "destructive of sovereign rights. . . . [A] further encroachment by the Federal Government on the powers reserved to the States." 82 Sales and solicitation of orders by independent contractors for more than one principal were excepted from the terms of the act.83 Title II of the Act directed the Committee on the Judiciary of the House of Representatives and the Committee on Finance of the Senate to make full and complete studies of State taxation of interstate commerce. Voluminous studies were indeed made by staff employed by the House Committee. 84

Several bills to regulate the rights of States in taxing interstate commerce subsequently were introduced in Congress. Representative Edwin E. Willis, chairman of a special subcommittee of the Judiciary Committee, introduced H.R. 11798 on October 22, 1965.85 The next year he introduced H.R. 16491 to supercede H.R. 11798.8 In the 1967

80 In the Northwestern, Stockham, and International Shoe cases, ibid. See appendixes 11 and 12, below, pp. 435-514. 81 73 U.S. Stat. L. 555-56, approved September 14, 1959 (86th Congress 1st Session, S. 2524), reproduced supra, pp. 8-9,

82 Guy Sparks, Alabama Commissioner of Revenue, "Taxation of Interstate Commerce: The Case for State Control," Proceedings of the National Tax Association, 1962, esp. p. 510. Cf. Leonard E. Kust, "A New Venture in Federalism: Toward a Solution to State Taxation of Multistate Business," in the Tax Executive, vol. 23, January, 1971, pp. 424-34.

83 P.L. 86-272, section 101 (c); 15 USC 381 (c), (d), in appendix 1-G, supra, pp. 8-9.

Sections 201 and 202. 15 USC 381 note, in appendix 1-G supra at p. 9. The original reporting deadline, July 1, 1962, was extended to June 30, 1965.

85 111 C.R., p. H28659. Nine other members introduced bills with the same title, H. R. 11799 through 11807, on the same day.

86 112 C.R., p. H16902 (July 25, 1966). On the same day, 10 other members introduced bills with the same title, H.R. 16492 through 16501. H.R. 16491 was reported out by Mr. Willis on September 7; ibid., p. H22015 (House report 89-2013).

session this bill was reintroduced as H.R. 2158. On May 22, 1968 it passed the House by a vote of 286 to 89.87

About this time the Council of State Governments came forward with a plan to solve problems of tax jurisdiction over interstate commerce through the use of interstate compacts instead of Federal legislation.88 A Multistate Tax Commission was formed to foster this approach through State action. More than 20 States have enacted legislation of this type. Another approach was through the National Conference of Commissioners on Uniform State Laws, which promoted the Uniform Division of Income for Tax Purposes Act. As the title indicates, this legislation has been more concerned with the division of income, or in some cases property, than with the ways in which States acquire jurisdiction to tax. The proposals have been designed to standardize allocation factors, about which there has been much debate. Of 39 States with corporate income taxes, 23 had enacted the Uniform Division of Income for Tax Purposes Act by 1969. Twentynine of the 41 States with corporation or personal income taxes used the Federal income tax, with some modifications, as the base for State purposes.89 So far the allocation formulae have been devised with reference to mercantile and manufacturing businesses; formulae have not been worked out for financial corporations, including banks.

On February 27, 1969, Representative Peter W. Rodino, Jr. of New Jersey introduced in the House another bill (H.R. 7906) to regulate State taxation of interstate commerce. On June 2, 1969, the Rodino bill was reported favorably by the Judiciary Committee. It passed the House on June 25, 1969, by a vote of 311 to 87. In the Senate, the bill was referred to the Committee on Finance where it died.90

The Rodino bill (H.R. 7906) was identical with the Willis bill (H.R. 2158) passed 13 months earlier, except that it omitted provisions relating to taxation of personal income which had been added in a floor amendment to the earlier bill. The bill provided that no State could (1) impose a net income tax or capital stock tax on a foreign corporation unless it had a business office in the State during the taxable year, or (2) require the collection of a sales or use tax on sales of tangible property unless a person had a business office in the State or regularly made household deliveries in the State, or (3) impose a gross receipts tax with respect to sales of tangible property unless the seller had a business location in the State. Where net income (or capital) was taxed, the maximum permissible allocation to the State would be determined by a two-factor formula based on property and payrolls. Excluded from the protection given by the act would be corporations doing at least 50 percent of their business in transportation of passengers for hire, telephone or telegraph service, sale of electric energy, gas or water, issuance of insurance or annuity contracts, "banking, the lending of money, or the extending of credit,"

113 C.R., p. H435 (January 12, 1967). On the same day, 8 other members introduced bills with the same title, H.R. 2159 through 2166, H. R. 2158 was reported with amendment March 7, 1967; ibid., p. H5747 (House report 90-69). For the debate, amendment, and House passage of H.R. 2158, cf. 114 C.R., PP. 1114398-402 and H14405-33 (May 22, 1968). Referred to Senate Committee on Finance May 24, 1968; 114 C.R., p. 814889. 88 Drafted in cooperation with the National Association of Tax Administrators, Association of Attorneys General and the National Legislative Conference. Cf. Proceedings of the National Tax Association, 1967, p. 241.

89 Representative Sisk (California) in 115 C.R., p. 17291 (June 25, 1969).

20 115 C.R., p. H4758 (February 27, 1969); reported (House report 91-279), ibid., p. H14472 (June 2) by Mr. MacGregor for the Committee on the Judiciary; rule reported (House report 91-308), ibid., p. H15465 June 11); rule debated, pp. H17290-93 (June 25); bill debated and passed, pp. H17294-322 (June 25); referred to Senate Committee, p. S17695 (June 30).