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manufacturing and mercantile corporations, based on their net income as reported to the United States Treasury Department, amounting to three per cent. of such net income. If the corporation's business was entirely transacted within the State, the tax would be equal to three per cent. of such net income. If only a portion of the company's business was transacted within the State, the tax would be in proportion to the tangible property within and without the State. The tax was payable in advance, and based on the Federal Income Tax for the preceding fiscal or calendar year.
Administrative features were added for making the reports of corporations, for the computation of the tax, providing for failure to report, for revision and re-hearing of a tax in case of error or illegality, for review by certiorari, and for the collection of a tax by the State in case of peglect or failure to pay the same; there was also provision for the deposit of revenue collected by the State and the division or apportionment between the State and the several counties of the State; for secrecy by officials, and penalties for violation thereof; and for the exemption from personal property taxation, and from the State Franchise Tax under Section 182 of the corporations subject to tax under this law.
By Chapters 271, 276, 292 and 417 of the Laws of 1918, various amendments were made to Chapter 726 of the Laws of 1917, which are more fully treated hereafter. The Act of 1917 is in itself designated as Article 9-a. It specifically excepts certain classes of corporations from the method of taxation therein provided for. (Chap. 417, L. 1918.) The excepted corporations are still subject to taxation under Article 9. It is therefore essential to review the general system of franchise taxation under Article 9, in order to grasp the bearing of the new law.
Article 9 of the tax law up to the time of the enactment of the 1917 law imposing a franchise tax on manufacturing and mercantile corporations based on net income, contained a complete system for the taxation of corporations for state purposes. It also included the statutory provisions for the organization and license taxes which respectively provide for the amount to be paid by a
domestic corporation upon receiving its charter for the exercise of its franchise in the state, and for the tax to be paid by a foreign corporation as a license fee to do business in the state. By Chapter 726 of the laws of 1917, manufacturing corporations which were theretofore exempted (section 183 of the tax law, Article 9) from taxation on their capital stock, and the greater number of mercantile and miscellaneous corporations, theretofore taxable on their capital stock under section 182 of Article 9, were now taxable on net income under Article 9-a. These mercantile and miscellaneous corporations now taxable under Article 9-a were hereafter to be exempted from taxation under Article 9.
It is patent then, that no very clear idea can be obtained from the new provisions of the tax law contained in Article 9-a taxing general business corporations (formerly denominated manufacturing and mercantile corporations) on their net income without considering Article 9, which is entitled in the Consolidated Laws "Corporation Tax."
The chapters immediately following therefore treat of Article 9 with the exception of that portion devoted to the administrative procedure, certiorari and collection. This procedure is in the main common to the entire system of state taxation and is treated in Part III of the book.
THE SYSTEM OF TAXING STOCK CORPORATIONS FOR STATE
The present system of taxing corporations for state purposes dates from the year 1880. Until that time the largest part of the revenue of the state was derived from a direct tax on land assessed and collected by the various counties of the state.
Annual franchise tax.-By Chapter 542 of the Laws of 1880 a general scheme of state taxation of stock corporations, excepting certain specified corporations, was inaugurated. A tax was imposed by this law on all stock corporations, resident and foreign, excepting savings banks, life insurance companies, foreign insurance companies and companies carrying on manufacturing and mining within the state, the basis of computing the tax in each case being the value of the capital stock.
Organization tax.- To this law, in 1886 (Chapter 143), was added an organization tax, to be paid by every domestic stock corporation, with the exception of banking and building loan associations upon the organization of the company, the basis of computation being the par value of the authorized capital stock.
This act did not apply to literary, scientific, medical and religious associations or corporations.
License tax.-By Chapter 240 of the Laws of 1895 a tax similar to the organization tax, and known as a license tax, was required to be paid by every foreign corporation upon its commencing business within the state, for the privilege of carrying on such business, to be computed on the basis of the capital stock employed within the state.
Additional franchise tax based on gross earnings.-Chapter 361 of the Laws of 1881 provided for an additional annual franchise tax on transportation and transmission companies, based on gross earnings within the state. This tax was in 1896 also imposed on elevated and surface railroads not operated by steam; and on water, gas, electric, steam heating, light and power companies at a higher rate. The latter companies were, however, relieved from the payment of the annual franchise tax on capital stock.
Franchise tax on insurance companies, trust companies, banks.—Chapter 361 of the Laws of 1881 imposed an annual franchise tax on insurance companies, based on gross premiums or earnings, for business done in the state. Chapter 679 of the Laws of 1886 amended the Law of 1881 by reducing the amount of tax on the premiums of fire and marine insurance companies and exempting them from payment of the tax on capital stock.
In 1901 the annual franchise tax was also extended to trust companies and savings banks, to be computed on the basis of surplus and undivided profits.
The entire system of state taxation on stock corporations is based on the theory of an annual tax to be paid by each stock corporation for the privilege of exercising its corporate franchise or carrying on its business in the state, whether the corporation be foreign or domestic, and whether the tax be computed on the basis of capital stock net income or gross earnings.
In 1906 and 1907 the method of computing the franchise tax and the license tax under sections 181 and 182 of the Tax Law was materially changed. While the basis of the tax remained capital stock employed in the state, the value of the capital stock and the rate of the tax were fixed by certain arbitrary rules. Heretofore, the value of the capital stock employed within the state had been in most cases determined by the value of the property itself. People ex rel. Commercial Cable Co. v. Morgan, 178 N. Y. 433 (1904). The method of ascertaining the amount of the capital stock employed in the state by means of the property or gross assets in the state is now incorporated in the statute, and very little
is left to the discretion of the taxing authorities in making an assessment.
Power of the State to tax corporations. The inherent power of the state to tax, apart from any statutory provisions or constitutional limitations, is necessarily dependent upon whether the person, property or business is within its jurisdiction. State Tax on Foreign Held Bonds, 15 Wall. 300 (319).
In the case of a domestic corporation, except in so far as it may be restrained by the constitution of the United States, the power of the state to tax as to mode, form and extent is unlimited. (Ibid.).
In respect to foreign corporations its power is limited by the property located, or business done, within its borders.
The State of New York has proceeded to exercise its powers to tax corporations for state purposes by levying a tax on their franchises or business. While this is the general scheme of corporate taxation for state purposes, the basis on which the tax is computed, and the rate or amount of the tax, differ in various classes of corporations. In some cases the basis on which the tax is computed, depends upon the value of the capital stock or property of the corporation. In other cases it depends on earning power, and in a third class, on surplus or undivided profits. In a number of the classes of corporations named below, a combination of these methods of computation is used in estimating the tax or taxes to
Corporations subject to franchise tax and basis thereof. The following classification will show the various taxes paid by corporations to the state for the privilege of exercising their corporate franchises or business in the state.
1. Domestic corporations, paying an incorporation or organization tax based on the amount of the authorized capital stock.
2. Foreign corporations, paying a license fee or business tax based on the amount of the capital stock used within the state represented by property in the state.