## Facts

- Norfolk & Western Railway Company (N&W) operated an interstate railroad and, in 1964, leased all property of the Wabash Railroad Company.
- Before the lease, N&W had little fixed property and minimal rolling stock in Missouri; its operations and equipment were primarily tied to coal routes in Virginia, West Virginia, and Kentucky, and much specialized coal equipment rarely entered Missouri.
- Under the lease, N&W became obligated to pay 1965 Missouri ad valorem taxes on the Wabash property.
- Missouri assessed railroad rolling stock under a statute apportioning to Missouri a share of the railroad’s total rolling stock value based on the ratio of Missouri track miles to total system track miles.
- Applying the mileage ratio (8.2824%), the Missouri State Tax Commission assessed N&W’s rolling stock at $19,981,757 for 1965.
- N&W presented evidence that, on the tax day, only about 2.71% of its rolling stock units and 3.16% by value were located in Missouri; the assessment exceeded by more than 2.5 times the value of N&W rolling stock physically present in Missouri.
- The assessment also exceeded by more than twice the prior year’s Wabash assessment for substantially the same property, despite no material increase in Missouri operations or equipment.
- N&W also offered evidence that traffic density on its Missouri lines was substantially lower than systemwide traffic density.
- The Commission rejected N&W’s challenge; Missouri courts affirmed, accepting the statutory formula and reasoning that connection to an integrated railroad system could justify attributing additional value to Missouri.

## Issues

1. Whether Missouri’s mileage-based apportionment, as applied to N&W’s rolling stock, violated the Due Process Clause by attributing to Missouri value not fairly connected to the state.
2. Whether the same application violated the Commerce Clause by imposing an unfairly apportioned, extraterritorial tax burden on an interstate railroad.

## Decision

- The Supreme Court reversed the Missouri Supreme Court.
- The Court held that, although formula apportionment and mileage methods are generally permissible, Missouri’s assessment in this case attributed to Missouri a share of rolling stock value far beyond what was reasonably connected to Missouri.
- The Court concluded the assessment violated both the Due Process Clause and the Commerce Clause.
- The case was remanded for further proceedings consistent with the Court’s opinion.

## Legal Principles

- A state may tax only its fair share of an interstate transportation enterprise, including an apportioned share of system or intangible value, if there is a sufficient connection to the state and the tax is fairly apportioned.
- States have latitude to use practical apportionment formulas, and a formula is not unconstitutional solely because it is an approximation.
- An apportionment method cannot be sustained when its application in a particular case produces a palpably disproportionate result that effectively taxes value unconnected to the taxing state.
- Due Process and the Commerce Clause limit state taxation to value rationally related to the taxpayer’s in-state property and activities and prohibit extraterritorial taxation through unfair apportionment.

## Conclusion

The Court permitted mileage-based apportionment in general but invalidated Missouri’s assessment because the formula’s application grossly overstated the rolling stock value attributable to Missouri, resulting in unconstitutional taxation of extraterritorial value under both Due Process and the Commerce Clause.


Norfolk & W. Ry. Co. v. Mo. State Tax Comm’n, 390 U.S. 317 (1968)