James v. United Artists Corp.

Background

A Delaware motion-picture distributing company with its principal office in New York sued a West Virginia tax official to stop collection of a state gross-receipts tax. The company has no office or agents in West Virginia other than a traveling representative who solicits contracts. West Virginia exhibitors sign offers that the distributor accepts in New York, films are shipped into the State temporarily for showing, and exhibitors send payments to the distributor at locations outside West Virginia. The State sought to tax the distributor under a statute on ‘‘collecting incomes’’ in the State.

Reasoning

The central question was whether the distributor was legally “engaging within” West Virginia in the business of collecting income so as to incur the State’s one-percent gross-receipts tax. The Court relied on the statute’s language that the taxed activity must be carried on within the State. Because the distributor did not maintain offices or collection agents in West Virginia, and exhibitors paid the distributor at out-of-state locations, the Court found no basis to treat the distributor as collecting income in West Virginia. The lower court’s injunction was affirmed, the distributor prevailing, and the attempted tax was held to impose an unconstitutional burden on interstate commerce.

Real world impact

The ruling protects out-of-state distributors who accept contracts and receive payment outside a State from being taxed there solely because their films are temporarily shown in-state. Local theater operators remain subject to the State’s tax on exhibition receipts. The decision does not resolve whether a differently framed State tax could apply to income actually collected inside the State.