F.S. Royster Guano Co. v. Virginia
253 U.S. 412 (1920)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A state tax classification that imposes a tax on the out-of-state income of domestic corporations that also conduct business within the state, while exempting from taxation the out-of-state income of domestic corporations that conduct no business within the state, violates the Equal Protection Clause of the Fourteenth Amendment because it is arbitrary and has no fair or substantial relation to the object of the legislation.
Facts:
- F. S. Royster Guano Co. is a corporation organized under the laws of Virginia engaged in manufacturing and selling commercial fertilizers.
- The company operated a manufacturing plant in Norfolk County, Virginia, as well as several plants in other states.
- During 1916, the company earned approximately $260,000 in net profits from its Virginia operations.
- In the same year, the company earned approximately $270,000 in net profits from its operations in other states.
- A Virginia statute (c. 472) imposed an income tax on the aggregate income of corporations, including profits from business done 'in or out of Virginia.'
- A separate Virginia statute (c. 495), approved on the same day, exempted Virginia-chartered corporations from income tax if they did 'no part of their business within this State.'
Procedural Posture:
- Virginia state officials assessed an income tax against F. S. Royster Guano Co. on its aggregate net profits, including those earned from its out-of-state operations.
- F. S. Royster Guano Co. filed a petition in the Corporation Court of the City of Norfolk, a state trial court, seeking relief from the portion of the tax assessed on its out-of-state income.
- The Corporation Court sustained the tax assessment.
- F. S. Royster Guano Co. (appellant) applied to the Supreme Court of Appeals of Virginia, the state's highest court, for a writ of error and supersedeas to review the lower court's judgment.
- The Supreme Court of Appeals of Virginia denied the application, thereby affirming the judgment of the Corporation Court.
- F. S. Royster Guano Co. then brought the case to the Supreme Court of the United States on a writ of error.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a Virginia law that taxes the entire net income of domestic corporations conducting business both inside and outside the state, while simultaneously exempting from income tax domestic corporations conducting business only outside the state, violate the Equal Protection Clause of the Fourteenth Amendment?
Opinions:
Majority - Mr. Justice Pitney
Yes, the Virginia law violates the Equal Protection Clause of the Fourteenth Amendment. While states have wide discretion in creating classifications for taxation, the classification must be reasonable, not arbitrary, and rest upon a ground of difference having a fair and substantial relation to the object of the legislation. Here, the law discriminates against Virginia corporations that conduct business within the state by taxing their out-of-state income, while exempting other Virginia corporations that do no business in the state from the same tax. The court could conceive of no ground for this exemption that would not apply with equal or greater force to the corporations being taxed. In fact, the classification discriminates against corporations for activity—doing business within Virginia—that ought to operate in their favor. The ground for the distinction lacks any fair or substantial relation to a proper legislative object, making it arbitrary and unconstitutional.
Dissenting - Mr. Justice Brandeis
No, the Virginia law does not violate the Equal Protection Clause. The classification is not arbitrary because a substantial reason can be conceived for the legislature's distinction. The legislature may have sought to attract revenue by encouraging non-resident companies to incorporate in Virginia, even if they transact business wholly elsewhere. To compete with other states for this incorporation business, Virginia could reasonably offer tax exemptions on out-of-state income. For corporations that already transact business within Virginia, such an incentive is unnecessary, as they derive other benefits from their in-state presence. This is a legitimate legislative strategy to manage state revenues, and the wisdom of such a policy is not for the court to question. The classification is therefore not invidious or arbitrary but is a rational exercise of the state's power to tax.
Analysis:
This case is a key example of the Equal Protection Clause placing limits on a state's broad power to create tax classifications. It establishes that even under the deferential rational basis standard of review for economic legislation, a classification must not be purely arbitrary or illusory. The court's application of a 'fair and substantial relation' test demonstrates that classifications that appear to penalize entities for conduct beneficial to the state (i.e., conducting local business) will face heightened scrutiny. The decision reinforces that while perfect equality in taxation is not required, a legislative distinction must be based on a real difference that is germane to the law's purpose.
