The constitutional freedom to undertake interstate commerce and the inherent subjugation to State taxation, locked horns in a matter that at first blush, appeared somewhat unfair, yet with all the facts considered, revealed a carefully planned business strategy designed to deceive and undermine.
From 1937 through to 1940, the petitioners operated a shoe manufacturing enterprise in St. Louis, Missouri, while enabling a sales force to promote and sell its wares across a number of States including Washington; and so, in order to circumvent taxation under the Washington Unemployment Compensation Act of 1941, the petitioners subsequently structured its workforce in a way that allowed them to enter the State for product promotion and business transactions, yet prevented them from entering into any direct contracts with the purchasers.
For clarity, upon completion of a sale, the buyer would receive a direct shipment from a dispatch center outside the Washington State, while the salesmen themselves would only occupy suitable premises on short-term leases, in order to showcase footwear samples to curious Washington residents.
Having discovered this strategy and serving notice of collection under § 14(c) of the Act, the petitioners appeared before the State Commissioner and the office of unemployment, only to contest the notice on grounds that it violated the Fourteenth Amendment to the U.S. Constitution, while claiming that as a Delaware registered corporation, the 1941 Act was null and void in effect.
In the first instance, the relevant appeal tribunal dismissed the petitioners’ argument and decreed that the Commissioner was legally entitled to recover the unpaid taxes, before the Superior Court of King County and Washington Supreme Court uniformly affirmed the judgment, with the latter court holding that:
“[W]here there is a systematic and regular solicitation of orders by an agent or agents of the corporation, resulting in a continuous shipment of goods into the state where the agents are operating, together with the maintenance of a permanent office in the state by the corporation, the corporation can be said to be doing business in that state so as to make it amenable to process by the courts of such state.”International Shoe Co. State
And so, appealing to the U.S. Supreme Court under writ of certiorari, the Court immediately drew reference to 26 U.S.C.A. § 1606, which explained that:
“No person required under a State law to make payments to an unemployment fund shall be relieved from compliance therewith on the ground that he is engaged in interstate or foreign commerce, or that the State law does not distinguish between employees engaged in interstate or foreign commerce and those engaged in intrastate commerce.”26 U.S.C.A. § 1606
While further reminding the petitioners that in Kentucky Whip & Collar Co. v. Illinois Central R. Co., the Court held that:
“[I]n the exercise of its control over interstate commerce, the means employed by the Congress may have the quality of police regulations.”Kentucky Whip & Collar Co. v. Illinois Central R. Co.
Before adding that in Hutchinson v. Chase & Gilbert, the Second Circuit Court of Appeals succinctly illustrated that:
“The shareholders, officers and agents are not individually the corporation, and do not carry it with them in all their legal transactions. It is only when engaged upon its affairs that they can be said to represent it, and we can see no qualitative distinction between one part of its doings and another, so they carry out the common plan.”Hutchinson v. Chase & Gilbert
While in closing, the Court also relied upon Baldwin v. State of Missouri, where the presiding Holmes, J., held that:
“I have not yet adequately expressed the more than anxiety that I feel at the ever increasing scope given to the Fourteenth Amendment in cutting down what I believe to be the constitutional rights of the States. As the decisions now stand, I see hardly any limit but the sky to the invalidating of those rights if they happen to strike a majority of this Court as for any reason undesirable.”Baldwin v. State of Missouri
Hence, with these numerous compelling reasons, the Court upheld the previous judgment on grounds that there was no evidence suggesting that the collection of taxes from an entity in all but full occupation of the State, was in any way contrary to the Due Process clause of the Constitution, while reminding the parties that:
“[S]olicitation within a State by the agents of a foreign corporation plus some additional activities there are sufficient to render the corporation amenable to suit brought in the courts of the State to enforce an obligation arising out of its activities there.”