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PART III.

STATE TAXATION

CHAPTER I.

THE SYSTEM OF TAXING STOCK CORPORATIONS FOR STATE

PURPOSES.

The present system of taxing corporations for state purposes dates from the year 1880. Until that time the largest part of the revenue of the state was derived from a direct tax on land assessed and collected by the various counties of the state.

Annual franchise tax.- By Chapter 542 of the Laws of 1880 a general scheme of state taxation of stock corporations, excepting certain specified corporations, was inaugurated. A tax was imposed by this law on all stock corporations, resident and foreign, excepting savings banks, life insurance companies, foreign insurance companies and companies carrying on manufacturing and mining within the state, the basis of computing the tax in each case being the value of the capital stock.

Organization tax.- To this law, in 1886 (Chapter 143), was added an organization tax, to be paid by every domestic stock corporation, with the exception of banking and building loan associations, upon the organization of the company, the basis of computation being the par value of the authorized capital stock.

This act did not apply to literary, scientific, medical and religious associations or corporations.

License tax.- By Chapter 240 of the Laws of 1895 a tax similar to the organization tax, and known as a license tax, was required to be paid by every foreign corporation upon its commencing business within the state, for the privilege of carrying on such business, to be computed on the basis of the capital stock employed within the state.

Additional franchise tax based on gross earnings.—Chapter 361 of the Laws of 1881 provided for an additional annual franchise tax on transportation and transmission companies, based on gross earnings within the state. This tax was in 1896 also imposed on elevated and surface railroads not operated by steam; and on water, gas, electric, steam heating, light and power companies at a higher rate. The latter companies were, however, relieved from the payment of the annual franchise tax on capital stock.

Franchise tax on insurance companies, trust companies, banks.—Chapter 361 of the Laws of 1881 imposed an annual franchise tax on insurance companies, based on gross premiums or earnings, for business done in the state. Chapter 679 of the Laws of 1886 amended the Law of 1881 by reducing the amount of tax on the premiums of fire and marine insurance companies and exempting them from payment of the tax on capital stock.

In 1901 the annual franchise tax was also extended to trust companies and savings banks, to be computed on the basis of surplus and undivided profits.

The entire system of state taxation on stock corporations is based on the theory of an annual tax to be paid by each stock corporation for the privilege of exercising its corporate franchise or carrying on its business in the state, whether the corporation be foreign or domestic, and whether the tax be computed on the basis of capital stock or gross earnings. The state leaves the various local subdivisions free to tax the corporations on property, reserving to itself the right to tax them on their franchises or business.

In 1906 and 1907 the method of computing the franchise tax and the license tax under sections 181 and 182 of the Tax Law was materially changed. While the basis of the tax remained capital stock employed in the state, the value of the capital stock and the rate of the tax were fixed by certain arbitrary rules. Heretofore, the value of the capital stock employed within the state had been in most cases determined by the value of the property itself. People ex rel. Commercial Cable Co. v. Morgan, 178 N. Y. 433 (1904). The method of ascertaining the amount of the capital stock employed in the state by means of the property or gross assets in the state is now incorporated in the statute, and very little is left to the discretion of the comptroller in making an assessment.

Power of the State to tax corporations. The inherent power of the state to tax, apart from any statutory provisions or constitutional limitations, is necessarily dependent upon whether the person, property or business is within its jurisdiction. State Tax on Foreign Held Bonds, 15 Wall. 300 (319).

In the case of a domestic corporation, except in so far as it may be restrained by the constitution of the United States, the power of the state to tax as to mode, form and extent is unlimited. (Ibid.)

In respect to foreign corporations its power is limited by the property located, or business done, within its borders.

The state of New York has proceeded to exercise its powers to tax corporations for state purposes by levying a tax on their franchises or business. While this is the general scheme of corporate taxation for state purposes, the basis on which the tax is computed, and the rate or amount of the tax, differ in various classes of corporations. In some cases the basis on which the tax is computed, depends upon the value of the capital stock or property of the corporation. In other cases it depends on earning power, and in a third class, on surplus or undivided profits. In a number of the classes of corporations named below, a combination of these methods of computation is used in estimating the tax or taxes to be paid.

Corporations subject to franchise tax and basis thereof.The following classification will show the various taxes paid by corporations to the state for the privilege of exercising their corporate franchises or business in the state:

1. Domestic corporations, paying an incorporation or organization tax based on the amount of the authorized capital stock.

2. Foreign corporations, paying a license or business tax based on the amount of the capital stock used within the state represented by property in the state.

3. Domestic and foreign corporations, with the exception of certain special corporations hereinafter named, paying an annual tax based on the value of capital stock employed within the state.

And the following special classes of corporations:

4. Transportation, heating, power, lighting, water and transmission companies, paying an annual tax based on gross earnings.

5. Elevated and surface railroads not operated by steam, paying an annual tax based on gross earnings.

6. Insurance companies, paying an annual tax based on gross premiums or earnings.

7. Trust companies, paying an annual tax based on capital stock, surplus and undivided profits.

8. Savings banks, paying an annual tax based on surplus and undivided earnings.

9. Foreign bankers, which class includes corporations, pay, ing an annual tax on net earnings or interest earned.

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