Hans Rees' Sons, Inc. v. North Carolina Ex Rel. Maxwell

Background

Hans Rees’ Sons, Inc., a New York corporation that tanned and manufactured leather, operated a plant in Asheville, North Carolina, with its sales office and warehouse functions in New York. For 1923–1926 North Carolina used a statute that allocated corporate income according to the value of a company’s real and tangible property in the State, and it assessed roughly eighty percent of the company’s net income to North Carolina. The company presented evidence that only about seventeen percent of its income was actually generated by the manufacturing and tanning in North Carolina.

Reasoning

The Court addressed whether the State’s statutory apportionment, as applied to this company, was arbitrary and therefore unconstitutional. Relying on the record, the Court explained that when a State’s allocation method, although fair on its face, produces an unreasonable result for a particular business, evidence must be considered. The Court concluded that the company’s evidence showed the statutory method, as applied, attributed a far larger share of income to North Carolina than was fairly attributable to in‑state operations, and therefore the tax assessments exceeded the State’s authority.

Real world impact

The decision allows companies to offer proof that a state’s formula unfairly overstates in‑state income. It requires states to respect reasonable apportionment and not simply apply a mechanical property-based formula when the evidence shows a grossly disproportionate result. The case was reversed and sent back for further proceedings consistent with this holding.