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Norfolk & W. R. Co. v. Mo. State Tax Comm'n - 390 U.S. 317, 88 S. Ct. 995 (1968)

Rule:

A State is not entitled to tax tangible or intangible property that is unconnected with the State. The taxation of property not located in the taxing State is constitutionally invalid, both because it imposes an illegitimate restraint on interstate commerce and because it denies to the taxpayer the process that is his due. A State will not be permitted, under the shelter of an imprecise allocation formula or by ignoring the peculiarities of a given enterprise, to project the taxing power of the state plainly beyond its borders. Any formula used must bear a rational relationship, both on its face and in its application, to property values connected with the taxing State.

Facts:

Taxpayer, the Norfolk And Western Railway Company, an interstate railroad, leased all of the property of another railroad, Wabash Railroad Company. Subsequently, the Missouri State Tax Commission determined the state ad valorem tax assessment for the Taxpayer's rolling stock in Missouri to be $19,981,757. This figure was based on the Commission's calculation that over 8 percent of the Taxpayer's track mileage was situated in Missouri. The Commission's use of a mileage formula in assessing the rolling stock of interstate railroads was authorized by a Missouri statute. The Taxpayer challenged this method of assessment, contending that its rolling stock in Missouri comprised only about 3 percent of its total rolling stock, was shown by actual inventory to have had an assessment value of only $7,600,000, and was practically the same property as had previously been assessed to the other railroad at $9,177,683. Following a hearing, the Commission rejected this challenge. On judicial review, the Commission's decision was affirmed by the Circuit Court of Cole County and again, by the Supreme Court of Missouri. The Missouri Supreme Court held that use of the mileage formula could be justified on the theory that the rolling stock regularly employed in one State has an "enhanced value" when connected to "an integrated operational whole." The Taxpayer sought further appellate review.

Issue:

Was it proper for the State of Missouri to assess taxes against an interstate railroad using a mileage formula? 

Answer:

No.

Conclusion:

On appeal, the United States Supreme Court vacated the Missouri Supreme Court's judgment and remanded the case for further proceedings. The Court held that since the Commission’s use of the mileage formula yielded a grossly distorted result in the assessment of the Taxpayer’s rolling stock, and since the difference between the assessed value and the actual value was too great to be explained in terms of an assumed and nonparticularized enhancement of intangible value, the assessment violated the due process and commerce clauses of the Federal Constitution.

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