Royster Guano Company was a Virginia corporation that manufactured and sold commercial fertilizers through a plant in Virginia and several plants in other states. In 1916 it earned about $260,000 in net profits from its Virginia plant and about $270,000 from its out-of-state plants. Under Virginia's 1916 income tax law, state officials taxed the company on the aggregate of both amounts. At the same time, another Virginia statute exempted Virginia corporations that did no business within Virginia from any income tax, even when they earned income from business conducted outside the state.
Issue
Whether Virginia denied equal protection of the laws by taxing a Virginia corporation on income derived from business conducted outside the state when the corporation also did business within Virginia, while exempting other Virginia corporations from tax on similar out-of-state income if they did no business within Virginia.
Rule
The Equal Protection Clause does not forbid legislative classifications, including in taxation, but the classification must be reasonable, not arbitrary, and must rest on some ground of difference having a fair and substantial relation to the object of the legislation, so that all persons similarly circumstanced are treated alike. A discriminatory tax law cannot be sustained if the classification is altogether illusory.
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One of 10 multiple-choice questions for this case. Pick an answer to see why.
Cascade Milling Group is incorporated in Oregon. It operates a flour mill in Portland and a separate milling business in Idaho. Oregon taxes domestic corporations on all income, including income earned outside Oregon, if they conduct any business in Oregon, but a companion statute exempts Oregon corporations that conduct no business in Oregon from tax on their out-of-state income.
Cascade challenges the tax on its Idaho profits under the Equal Protection Clause. What is the strongest argument for Cascade?
Explanation. The majority rule permits tax classifications, but only if they are reasonable, not arbitrary, and based on a difference having a fair and substantial relation to the legislation’s object. Here, as in the governing case, the only difference is that Cascade also does business in-state. That does not justify taxing its unrelated out-of-state income while exempting identical out-of-state income of similarly situated domestic corporations that do no in-state business. The case does not hold that states can never tax out-of-state income, nor does it require proof of hostile intent.