J. D. Adams Manufacturing Co. v. Storen

Background

An Indiana manufacturing company that makes road machinery and sells about 80% of its products to customers in other States and abroad challenged Indiana’s Gross Income Tax Act of 1933. The company also held interest-bearing municipal bonds that state law had earlier described as tax-exempt. It sued to prevent state officials from requiring returns and payments on income from interstate sales and interest on the municipal bonds.

Reasoning

The Court addressed two basic questions: whether the gross-income tax, as applied, burdened interstate commerce, and whether taxing interest on municipal bonds impaired a contractual exemption. The majority concluded the tax, construed as a one-percent levy on gross receipts, unconstitutionally burdens interstate and foreign commerce because it reaches un apportioned receipts and risks multiple taxation. The Court therefore reversed the state-court judgment as to interstate sales. On the bond question, the Court found the exemption language must be read in the context of the State’s ad valorem property tax scheme and, following controlling precedent, affirmed the judgment as to interest on Indiana municipal obligations.

Real world impact

Indiana may not enforce the gross-receipts portion of the law against receipts from the manufacturer’s interstate and foreign sales, protecting out-of-state sales from un-apportioned state taxation. At the same time, holders of Indiana municipal bonds cannot rely on that 1903/1919 exemption to avoid the State’s gross-income tax on interest under the Court’s reading. The case was reversed in part, affirmed in part, and remanded for further proceedings consistent with this opinion.

Dissents or concurrances

Justice Black dissented in part, arguing broadly that a uniform, nondiscriminatory gross receipts tax should be permissible and that Congress, not courts, should set national tax policy.