New Jersey Bell Telephone Co. v. State Board of Taxes & Assessments

Background

A New Jersey telephone company challenged a state law called the Voorhees Franchise Tax Act after receiving a 1928 assessment. The Act required telephone companies to report gross receipts and pay a franchise tax based on the share of their line mileage located in public streets. The tax rate had risen to 5% by 1920. After acquiring another company, the appellant had many miles of lines in streets and the combined 1927 gross receipts in New Jersey were over $40 million; about 23–24% of receipts in the State were from interstate calls. The company paid the intrastate portion and sued over the part tied to interstate receipts.

Reasoning

The Court asked whether the franchise charge was really a property tax or a direct tax on gross receipts from interstate commerce. The majority found that using gross earnings as the measure made the exaction operate like a direct tax on interstate receipts, not a valuation of a discrete property right. The Court noted the mismatch between local property assessments and the percentage-of-receipts scheme, and observed the franchise tax equated to a very large property valuation per mile with no sound basis. Because states may not directly tax interstate commerce, the Court held the interstate portion was invalid and reversed the state courts’ judgment.

Real world impact

The ruling prevents New Jersey from collecting the 5% franchise charge as applied to interstate telephone earnings while leaving local property assessments and intrastate taxes intact. It clarifies limits on state ability to use gross receipts measures to tax interstate business.

Dissents or concurrances

Justice Holmes (joined by Justice Brandeis) dissented, arguing the charge was a reasonable price for the privilege to use public streets and did not impose a direct and material burden on interstate commerce.