State officials and students of public finance urge the amendment, some even the repeal, of R.S. 5219 because of two major changes that have taken place since the national bank tax clause was last amended. At that time, in 1926, the retail sales tax was practically unknown. Since then it has become a standard component of the tax structure of 44 states as of January 1, 1969. Individuals and businesses alike must pay this tax and presumably if the tax had been used by the states in 1926, Congress would have included it among those which national banks had to pay. In any event, there is no longer any reason, now that the legal question has been decided by the United States Supreme Court, to delay taking the action necessary to require national banks to pay the same taxes that other corporations and all individuals have to pay. Moreover, the kinds of activities conducted by national banks have changed substantially during this same period. It was pointed out in the Agricultural National Bank case that the federal fiscal functions served by national banks were radically revised with the passage of the Federal Reserve Act of 1913 and that today national banks perform no significant fiscal service to the federal government that is not performed by their state competitors. At the same time, legislation was enacted to make them more competitive with state banks, for example, with respect to branch banking and fiduciary powers. More recently, national banks have been accorded a greater scope of operation outside the domiciliary state by virtue of the loan production office rulings. This extension of national bank operations geographically has been accompanied by an even greater expansion in the kinds of activities conducted by national banks. These include data processing services; leasing of personal property; ownership of subsidiary corporations performing mortgage servicing, factoring, warehousing and similar functions; credit cards; collective investment accounts; the sale of insurance and travel agency functions. Other businesses conducting similar activities have to pay all generally applicable taxes; when national banks provide these services they need pay only the taxes authorized by R.S. 5219. In short, consideration of the changes that have occurred in the composition of the tax systems of the states and the changes that have taken place in the functions and services performed by national banks in the years since the national bank tax clause was last amended, demonstrate most convincingly that the present restrictions are not only outmoded but also that they give national banks an unfair advantage over other businesses with which they are in competition. Sincerely, CHARLES F. CONLON, RESOLUTION OF THE MIDWESTERN STATES ASSOCIATION OF TAX ADMINISTRATORS Whereas, national banks are presently subject to certain local taxation under Title 12, United States Code, section 548, as follows, "The several states may (1) tax said (national bank) shares, or (2) include dividends derived therefrom in the taxable income of an owner or holder thereof, or (3) tax such associations on their net income, or (4) according to or measured by their net income (.)", and; Whereas, the United States Supreme Court decision in the First Agricultural National Bank of Berkshire County v. State Tax Comm., No. 755, 6-17-68, held that Title 12, United States Code, section 548, "was intended to prescribe the only ways in which the states can tax national banks", and, Whereas, the resulting effect of the Supreme Court's decision in the First Agricultural National Bank of Berkshire County v. State Tax Comm., is to proscribe collection from national banking institutions of a sales or use tax imposed upon the ultimate consumer, and, Whereas, the local and state taxation of tangible personal property of national banks leased to other persons for use in the operation of the lessees respective businesses may be questioned under Title 12, United States Code, Section 548, and, Whereas, similar state chartered banking institutions are subject to state and local sales or use taxes imposed upon the ultimate consumer and the state and local property taxes on tangible personal property leased to other persons for use in the operation of lessees respective business. Now, therefore, be it resolved, that the Midwestern States Association of Tax Administrators requests and would support amendments to Title 12, United States Code, Section 548, to allow the states and their subdivisions to impose such a sales or use tax upon national banks and such property taxes on leased tangible personal property upon national banks or the lessees of such property at a rate no greater than the sales or use tax imposed by such authority on other similar local state chartered banking institutions or property taxes on leased tangible personal property on such local state chartered banking institutions or the lessees of the property. (Resolution unanimously adopted by the Midwestern States Association of Tax Administrators at the Ninth Annual Meeting, Osage Beach, Missouri, August 25-28, 1968.) Hon. WRIGHT PATMAN, CONGRESS OF THE UNITED STATES, Chairman, House Banking and Currency Committee, DEAR MR. CHAIRMAN: It has come to my attention that H.R. 7491, sponsored by yourself, is under consideration by the House Committee on Banking and Currency. Although I was not aware of the recently scheduled hearings on this bill in time to request an opportunity to make a personal appearance before your Committee in support of the bill, I am taking the liberty of informing you by this means that this bill has my full support. The need for this legislation has been clearly demonstrated. At the recent session of the Idaho Legislature, a memorial was adopted urging Congress to adopt legislation such as H.R. 7491. I have received many other expressions of support from the state of Idaho. Sincerely yours, ORVAL HANSEN, Member of Congress. PENNSYLVANIA BANKERS ASSOCIATION, HARRISBURG, PA., May 24, 1969. Hon. WRIGHT PATMAN, Chairman, Banking and Currency Committee, DEAR CONGRESSMAN PATMAN: We have been advised that the House Banking and Currency Committee has scheduled a meeting for Monday, May 26, 1969, to consider the several bills before it which would, in effect, allow the States to impose sales and use taxes on national banks. These banks, as you know, are currently exempt from this type of taxation by virtue of a decision by the U.S. Supreme Court last June 17. The Pennsylvania Bankers Association vigorously supports legislation which would equalize taxation among banks, regardless of their charter, and we are hopeful that your Committee will favorably report out a bill which would accomplish this result. Earlier we had sent to you a resolution adopted by our Association along this line, and I am pleased to enclose another copy of it for you. Thank you very much for your kind consideration of our views. Sincerely, Enclosure. FRANK S. SMITH, President. RESOLUTION ON THE EXEMPTION GRANTED BY THE U.S. SUPREME COURT TO NATIONAL BANKS FROM PAYMENT OF STATE SALES AND USE TAXES STATEMENT OF CONSIDERATIONS A decision by the U.S. Supreme Court, June 17, 1968, holding that national banks are exempt from state and local sales and use taxes has caused great financial problems for many states and, in particular, has created a severe fiscal situation in Pennsylvania. Over two-thirds of the commercial banks in the Commonwealth hold national charters. The result of the U.S. Supreme Court decision not only has produced an unwarranted competitive inequality between state and national banks, but also has denied the Commonwealth much needed revenues for education from this important tax source. The decision has further affected adversely the Commonwealth's already critical fiscal picture because of the possible refunds due national banks under provisions of the State's Fiscal Code. Over the years the question of the applicability of sales taxes on national banks was raised on a number of occasions by virtue of Section 5219 of the National Banking Act but national banks in Pennsylvania continued to pay the sales tax during that time until the Court decision. On advice of counsel, stemming from the distinct possibility of derivative suits by shareholders for paying taxes for which they have no legal responsibility, national banks in Pennsylvania subsequently refrained from paying the state's sales tax from the time of the court decision and filed for the appropriate refunds as provided by law. The Pennsylvania Bankers Association has always been a strong and vigorous supporter of the dual banking system and at all times has advocated and encouraged a climate of competitive equality between state and national banks. The result of the U.S. Supreme Court decision for Pennsylvania with so large a number of national banks has seriously disturbed this competitive balance. Now, therefore, be it resolved, That in view of the foregoing consideration the Pennsylvania Bankers Association strongly urges the Congress of the United States to enact legislation as quickly as possible which would equalize taxes on national banks and state banks. Now, therefore, be it further resolved, That copies of this Resolution be sent to the White House, to all members of Congress from the Commonwealth of Pennsylvania, to the Chairman of the United States House of Representatives Committee on Banking and Currency and the United States Senate Committee on Banking and Currency, officials of the United States Treasury Department, to appropriate members of the Pennsylvania General Assembly and officials of the State Administration, as well as all members of the Pennsylvania Bankers Association. I, B. L. Daniels, Executive Vice President of the Pennsylvania Bankers Association, certify the foregoing to be a true copy of the Resolution adopted by the Executive Committee of the Pennsylvania Bankers Association on April 26, 1969. B. L. DANIELS, Executive Vice President. PREPARED STATEMENT OF THE NATIONAL ASSOCIATION OF SUPERVISORS OF STATE BANKS The regular members of the National Association of Supervisors of State Banks (NASSB) are the 52 State Bank Supervisors throughout the country. These State officials have under their regulatory jurisdiction all State-chartered banks in the 50 States, Puerto Rico and the Virgin Islands, including 8,975 commercial bank assets. Their interest in removing the preferential tax treatment which national banks enjoy under the National Bank Act1 as interpreted in recent decisions by the United States Supreme Court is two-fold: first, as public officials concerned with the rising revenue needs on the part of state and local governments throughout the country, and second, as state supervisors concerned with competitive equality between national banks and state-chartered commercial banks in their respective states. The Association's position may be simply stated: we do not believe Federal law should prevent any State or local subdivision, if it chooses, from imposing any kind of tax on banks doing business therein so long as the tax imposed does not discriminate between nationally-chartered banks on the one hand and statechartered commercial banks on the other. 1 Revised Statutes, Section 5219 (12 U.S.C. § 548). 2 First Agricultural National Bank v. State Tax Commission, 392 U.S. 339 (1968), First National Bank of Homestead v. Dickinson, 291 F. Supp. 855 (N.D. Fla. 1968), aff'd U.S. (January 20, 1969). Like their state-chartered counterparts, national banks are privately owned, privately managed institutions operated for profit. They perform no unique services for the Federal Government today which would justify as a matter of policy the exemptions which the Supreme Court of the United States has read into the National Bank Act. There are, in fact, no services or functions they perform for the Federal Government that cannot be performed as well by statechartered banks that are members of the Federal Reserve System. In our view, states and localities should be free to choose whether or not to tax such banks just as they are now free under our federal system to determine other forms of taxation, and if they choose to tax such banks, they should be free to determine as well the method and rate of taxation. This choice should not be limited, as it is today, to the taxes specifically mentioned in Section 5219, i.e., taxes measured by income or capital and taxes on real property. States and localities now utilize many other forms of taxation, and new revenue sources will undoubtedly be sought in the future. As Supervisors of State-chartered commercial banks, we seek equality of treatment on this subject between two groups of commercial banks offering virtually the same services to the public-one operating under State charter, the other under national charter. The nation's present system of dual banking regulation presupposes substantial equality in matters of basic competitive importance, of which taxation is clearly one. Failure to change existing law is likely to lead to an increasing number of conversions by commercial banks from State to national charter or to the granting of similar exemptions to State-chartered banks or to compensatory action at the State and local level which could provoke unnecessary litigation and still not resolve the inequities of the present situation as easily as a change in the National Bank Act. It should be noted further that none of the changes proposed in Section 5219 requires States and their local subdivisions to tax national banks. Each is enabling legislation removing a Federal roadblock to freedom of choice at the State and local level. BILLS BEFORE THE COMMITTEE NASSB believes that the enactment of any of the bills now before the Committee would be a significant move toward protecting State and local revenue sources and toward achieving competitive equality between national and State banks. We recommend, however, that: The taxes now to be authorized on a nondiscriminatory basis should not be specifically limited to sales taxes, use taxes, personal property taxes, intangible personal property taxes and/or documentary stamp taxes (as is done, for example, in H.R. 2116, H.R. 3826, H.R. 7491, and H.R. 9794). Any such limitation would require further amendment in the years ahead as States and localities search out new revenue sources. Some taxing authorities even today impose excise taxes on State banks not included in the foregoing list. From this point of view, NASSB strongly prefers the approach taken in H.R. 8642. Specific authority for the imposition of taxes by local subdivisions should be included in view of the present references in Subdivisions (2) and (3) of Section 5219 to certain kinds of taxes imposed by States or "taxing district" and "any subdivision thereof." (H.R. 8642, e.g., limits its language to "State taxation"). If State and local taxes are to be authorized (as NASSB suggests and as each of the bills before the Committee can be construed) in States where national banks do business as well as where their principal offices are located, an amendment to Section 94 of the National Bank Act should also be included so that a national bank can be sued to enforce the tax liability outside its domiciliary State. NASSB has provided the staff of your Committee with appropriate statutory language to accomplish each of these objectives. We have also undertaken a 50-state survey to determine the taxes now imposed on State-chartered banks at State and local levels, as well as the magnitude of the present and potential loss of tax revenues caused by the existing national bank exemption. We will file the results of this survey with your Committee promptly upon its completion. We stand ready to assist the Committee in any other way we can in its deliberations on this important matter. Respectfully submitted. FRANK WILLE, Superintendent of Banks of the State of New York, Chairman, Federal THE PREFERENTIAL TAX AND VENUE TREATMENT ENJOYED BY NATIONAL BANKS National banks hold an unwarranted tax exemption from all forms of State and local taxation other than income and real property taxes. They do not, as one example, pay sales and use taxes which are in existence in more than forty States, and which their competitor State banks are forced to pay except in a few States which have actually extended some tax exemptions to Statechartered banks in order to achieve competitive tax equality. Not only is this unfair, but as Congressman Bertram Podell (D., N.Y.) announced early this year, a survey he conducted disclosed that these tax losses to State and local governments because of national bank immunities in this area amounted to at least $50 million annually. Additionally, national banks for many years have been held to be immune from suits other than in the judicial district, city or county in which the bank's principal office is located. Neither State banks nor other business corporations enjoy this favored staus. These competitive disparities favoring national banks have their origins in historical settings which are no longer valid. And, both the tax and venue inequities can be uniformly remedied only by Congressional action. HISTORICAL BACKGROUND (a) Taxing of national banks.-In 1819, Supreme Court Chief Justice Marshall in a landmark decision (McCulloch v. Maryland) ruled that The Second Bank of the United States was an instrumentality of the Federal government, created to exercise its sovereign powers, and that the imposition of a State tax on the bank would constitute an unconstitutional infringement upon the free exercise of those powers. The charter of The Second Bank lapsed in 1836, and there followed a thirty-year period in which the Federal government abstained from such direct involvement in the banking industry. Then, in 1863 and 1864, Congress enacted the National Bank Acts providing for the establishment of the national banking system, and through it, the issuance of a national currency. In 1864, Congress permitted four specified types of State taxes to be levied on national banks (in addition to real estate taxes): taxes on national bank shares, on stockholder dividends on these shares, on the bank's income and taxes "according to or measured by" a bank's income (12 US.C. 548), In the ensuing years national banks have continued to enjoy immunity from State and local taxes, including sales and use taxes which are of relatively recent origin. However, most recently, the Massachusetts Supreme Court denied the contention of the First Agricultural National Bank of Berkshire County that it was immune from Massachusetts sales and use taxes on purchases for its own use. The Massachusetts Supreme Court was of the opinion that the status of national banks had so changed since 1864, as will be noted below, that they should no longer be considered non-taxable by the States as instrumentalities of the United States. On June 17, 1968, the United States Supreme Court reversed the ruling of the Massachusetts Supreme Court. The Court expressly declined to rule on the "Federal instrumentalities" issue but premised its decision on the provisions of the National Bank Act of 1864 which specified those taxes States were empowered to levy against national banks. Mr. Justice Black in reading the majority opinion on that occasion stated that “. . . if a change is to be made in State taxation of national banks, it must come from Congress, which has established the present limits." (Emphasis added.) Today, national banks, as State-chartered banks, are privately owned and managed institutions, operated for a profit. All but an insignificant number of commercial banks are subjected to comparable degrees of Federal supervision National banks perform no unique services for the Federal government, such as they did in the past when they served as a currency issuing medium. Because of this, and in view of the constantly rising revenue needs on the part of State and local governments, and the reliance on taxation to meet these needs, it would seem to this Association to be contrary to public policy that national banks should continue to be exempt from non-discriminatory State and local taxes. (b) Venue for proceedings against national banks.-Title 12, U.S.C. 94, originally adopted in 1864, provides that suits, actions and proceedings against national banks ". . . may be had in any district in which such association may be established, or in any State, county, or municipal court in the county or city in which said association is located, having jurisdiction in similar cases." |