Fargo v. Hart
24 S. Ct. 498, 1904 U.S. LEXIS 922, 193 US 490 (1904)
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Rule of Law:
A state cannot tax property of a business located outside its jurisdiction that is not organically or functionally related to the interstate business conducted within the state, even under a 'unit rule' or mileage-based apportionment formula.
Facts:
- The American Express Company, a New York joint stock company, conducted interstate express business, including operations in Indiana.
- The company owned tangible personal property in Indiana valued at less than $8,000.
- The company also held over $15.5 million in personal property, primarily securities, in New York, which it asserted was not used in its express business.
- Indiana's State Board of Tax Commissioners assessed the company's property for taxation using a 'unit rule'.
- This rule calculated the taxable value in Indiana by taking a proportion of the company's total value, which included the New York securities.
- The proportion was determined by the ratio of the company's business mileage in Indiana to its total mileage.
- This valuation method resulted in a tax assessment on property in Indiana of over $800,000.
Procedural Posture:
- The president of the American Express Company sued the Auditor of the State of Indiana in the United States District Court.
- The suit sought an injunction to prevent the auditor from certifying state tax assessments for the years 1898 through 1901.
- The U.S. District Court, as the court of first instance, dismissed the American Express Company's bill.
- The American Express Company, as plaintiff-appellant, appealed the dismissal to the United States Supreme Court.
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Issue:
Does a state's property tax assessment on an interstate express company, calculated using a unit rule that includes the value of personal property (securities) located and held outside the state and not used in the express business, violate the Commerce Clause and the Fourteenth Amendment?
Opinions:
Majority - Mr. Justice Holmes
Yes. The state's tax assessment is unconstitutional because it attempts to tax property outside its jurisdiction. While a state may tax property within its borders and consider its value as part of a larger, interstate system (the 'unit rule'), this principle is not limitless. The 'notion of organic unity' cannot be used as a pretext to tax property outside the state. The securities held in New York were not organically connected to the express business in Indiana; the express business did not enhance the value of the securities, and the securities only contributed to the business's good will in a highly attenuated way. Including these out-of-state, non-operational assets in the tax base was not a mere overvaluation but an unconstitutional application of principle, amounting to a tax on property beyond the state's jurisdiction and an unconstitutional burden on interstate commerce.
Dissenting - The Chief Justice, Mr. Justice Brewer and Mr. Justice Day
No opinion was provided. The justices were noted as dissenting without a written explanation in the provided text.
Analysis:
This case establishes a critical limitation on the 'unit rule' of state taxation for interstate businesses, which had been broadly approved in earlier cases like Adams Express Co. v. Ohio. The decision clarifies that the rule cannot be applied mechanically to include all of a company's assets, wherever located. It mandates that there must be an 'organic connection' between the out-of-state property and the in-state operations for the former's value to be constitutionally included in a state's tax base. This precedent strengthens the Due Process Clause's prohibition against extraterritorial taxation and protects multistate corporations from having their investment assets taxed by every state in which they operate.
