Freeman v. Hewit

Background

An Indiana trustee, managing a trust for a decedent who had been an Indiana resident, instructed his Indiana broker to sell securities on the New York Stock Exchange through New York brokers. After sales were made and purchasers paid in New York, the New York brokers sent the net proceeds to the Indiana broker, who passed them to the trustee. Indiana imposed a 1% gross-income tax on those sale proceeds (about $65,214.20). The trustee paid under protest and sued to recover the tax. The Indiana Supreme Court upheld the tax, saying the securities’ situs was in Indiana.

Reasoning

The Supreme Court majority reversed, focusing on the Commerce Clause. The Court explained that a State may not impose a direct, unapportioned tax on the very sale when that sale is part of interstate commerce. The Court treated the securities sale as interstate commerce, not a special kind of local transaction, and said other means exist for States to raise revenue (for example, property or residence taxes) without taxing the sale itself. Because the Indiana tax was a direct levy on proceeds from interstate sales, it unduly burdened the free flow of commerce and could not stand.

Real world impact

As a result, Indiana cannot collect that unapportioned 1% tax on similar securities sales routed through out-of-state markets. The ruling protects sellers, trustees, and similar taxpayers from seller-state gross receipts taxes on transactions that occur through other States’ markets. The decision also underscores limits on States’ ability to tax transactions that are essentially interstate.

Dissents or concurrances

A concurrence warned about the breadth of the Court’s reasoning and suggested alternative rules (market-state taxation with credit). Other dissenters argued the tax targeted a local receipt and should be allowed.