Superior Bath House Co. v. McCarroll

Background

A company formed under Arkansas law leases land from the United States and runs a for-profit bath house on the Hot Springs federal reservation. Arkansas passed a 1929 law taxing 2% of net income for domestic corporations doing business in the state. The company argued it was exempt from that tax because the reservation was under federal control and Congress had limited state taxing rights in an 1891 law and a 1903 Arkansas cession.

Reasoning

The Court examined the 1891 federal language that let Arkansas tax “all structures and other property in private ownership on the Hot Springs Reservation.” The majority read those words broadly and rejected the company’s narrow view that only direct ad valorem taxes on tangible property were allowed. The Court said Congress intended to let the State tax privately owned property on the reservation in many forms, not freeze Arkansas’s 1891 tax structure. On that basis the Court affirmed the state court’s decision that the 1929 income tax applied to the company.

Real world impact

The ruling means Arkansas may collect its corporate income tax from a company organized under its laws even when the income comes from business on the federal reservation, so long as the taxing power fits within the consent described by the federal and state acts. The decision leaves in place Arkansas’s 2% income tax liability for the bath house and similar businesses operating under private ownership on reservation land.

Dissents or concurrances

A concurring opinion agreed with the result but offered another reason: a State may tax income of its own corporations unless Congress expressly prohibits it, and no such prohibition appears here.