An interesting case of recent date bearing upon the right of the Federal Government, by taxation or otherwise, to interfere with state governmental operations is that of the State of South Carolina v. United States,56 decided in 1905. In this case was questioned the right of the Federal Government to levy internal revenue taxes upon intoxicating liquors sold under the state dispensary system of South Carolina.

51 17 Wall. 322; 21 L. ed. 597.

52 In this case two justices dissented on the ground that, conceding that the instruments for conducting the public affairs of the municipality are entitled to the same exemption from federal taxation as those of the State at large, it did not follow that property possessed and used merely in a commercial way for income or profits was thus exempt.

53 121 U. S. 138; 7 Sup. Ct. Rep. 826; 30 L. ed. 895.

54 Pollock v. Farmers' Loan & Trust Co. (157 U. S. 429; 15 Sup. Ct. Rep. 673; 39 L. ed. 759).

53 187 U. S. 1; 23 Sup. Ot. Rep. 1; 47 L. ed. 49.

By several statutes the State had assumed the direct control of the wholesale and retail sale of intoxicating liquors within its limits, had established dispensaries, and appointed dispensers therein. The dispensers received fixed salaries, and had therefore no pecuniary interest in the sales, the entire profits therefrom being appropriated by the State, one-half being divided equally between the municipality and the county in which the dispensaries were located, and the other half paid into the state treasury. In previous cases the Supreme Court of the United States had held that the regulation and control of the sale of intoxicating liquet, so far as interstate commerce was not interfered with, was within the legitimate police power of the States, and, indeed, by express congressional statute the States had been permitted to control the sale of imported liquors after their arrival within the States. The question thus was: had the Federal Government the constitutional power to exact taxes from officials appointed and paid by the State of South Carolina and performing functions which the State was constitutionally empowered to intrust to them? The Supreme Court held that, in this particular case, it had. With reference to the argument that was made by South Carolina that for Congress to tax the agents of the State charged with the duty of selling intoxicating liquors, was to interfere with the State's legitimate police power, the court said: "We are not insensible to the force of this argument, and appreciate the difficulties which it presents, but let us see to what it leads. Each State is subject only to the limitations prescribed by the Constitution, and within its territory is otherwise supreme. Its internal affairs are matters of its own discretion. The Constitution provides that 'the United States shall guarantee to every State in this Union a republican form of Government.'57 That expresses the full limit of national control over the internal affairs of a State. The rights of South Carolina to control the sale of liquor by the dispensary system has been sustained.58 The profits from the business in the year 1906, as appears from the findings of fact, were over a half a million dollars. Mingling the thought of profit with the necessity of regulation may induce the State to take possession, in like manner, of tobacco, oleomargarine, and all other objects of internal revenue taxation. If one State finds it thus profitable, other States may follow, and the whole body of internal revenue tax be thus stricken down."

56 190 V. S. 437; 26 Sup. Ct. Rep. 110; 50 L. ed. 2G1. 57 Art. IV, § 4.

The Supreme Court was not content to rest its judgment upon a premised possibility of serious interference with the revenues of the National Government should the State be permitted, by assuming control of an enterprise, to withdraw it from federal taxation. Two additional reasons were given why the tax in question should be held valid. In the first place the court note the fact that the tax "is not imposed on any property belonging to the State, but is a charge on a business before any profits are realized therefrom." It is thus, the court say, similar to a succession tax which has been construed to be a tax levied upon and deducted from property before the person to whom it is bequeathed obtains a title thereto. The second additional reason given by the Supreme Court for holding constitutional the federal income tax upon the South Carolina dispensaries is that it is not a tax upon the means of instrumentalities employed by the State in discharge of its ordinary functions of government. Upon this point the court adverts to the fact that in the cases in which a federal tax upon state agencies had been held unconstitutional, it had been levied upon instrumentalities of government. After a review of the cases, the court say: "These decisions, while not controlling the question before us, indicate that the thought has been that the exemption of state agencies and instrumentalities from national taxation is limited to those which are of a strictly governmental character, and does not extend to those which are used by the State in the carrying on of an ordinary private business."59

58 Vance v. Vandercook Co. (170 U. S. 438; 18 Sup. Ct. Rep. 674; 42 L. ed. 1100).

In conformity with the doctrine that state inheritance taxes, may be levied and collected upon bequests or estates consisting of federal securities, it has been held that state securities are similarly subject to inheritance taxes federally imposed.

59 In support of this distinction between the ordinary functions of government, and the control of private enterprises by the State, the court refers to the well-established distinctions between the duties of a public character cast upon municipal corporations, and those which relate to what may be considered their private business, and the resulting different responsibilities in cases of negligence in respect to the discharge of those duties, respectively. (Oliver v. Worcester, 102 Mass. 489; Lloyd v. New York, 5 X. Y. 369; Western Sav. Fund Society v. Philadelphia, 31 Pa. 175.) In the last case it was held that a city supplying gas to the inhabitants acts as a private corporation, and is subject to the same liabilities and disabilities. In its opinion the Supreme Court declare: "Such contracts are not made by the municipal corporation by virtue of its powers of local sovereignty, but in its capacity of a private corporation. The supply of gaslight is no more a duty of sovereignty than the supply of water. Both these objects may be accomplished through the agency of individuals or private corporations, and in very many instances they are accomplished by those means. If this power is granted to a borough or a city, it is a special private franchise, made as well for the private emolument and advantage of the city as for the public good. The whole investment is the private property of the city, as much so as the lands and houses belonging to it. Blending the two powers in one grant does not destroy the clear and well-settled distinction, and the process of separation is not rendered impossible by the confusion. In separating them, regard must be had to the object of the legislature in conferring them. If granted for public purposes exclusively, they belong to the corporate body in its public, political or municipal character. But if the grant was for the purpose of private advantage and emolument, though the public may derive a common benefit therefrom, the corporation quoad hoc is to be regarded as a private company. It stands on the same footing as would any individual or body of persons upon whom the like special franchises had been conferred." Concluding its opinion, the Supreme Court of the United States say: "Now, it it be well-established, as these authorities say, that there is a clear distinction as respects responsibility for negligence between the powers granted to a corporation for governmental purposes and those in aid of private business, a like distinction may be recognized when we are asked to limit the full power of imposing excises granted to the National Government by an implied inability to impede or embarrass a State in the discharge of its functions. It is reasonable to hold that, while the former may do nothing by taxation in any form to prevent the full discharge by the latter of its governmental functions, yet, whenever a State engages in a business which is of a private nature, that business is not withdrawn from the taxing power of the nation."