1. The commerce clause does not prevent a State from imposing
upon her corporations, for the privilege of exercising their
corporate franchises within the State, a tax measured on the net
income justly attributable to their business done within the State,
though part of the income so attributable be from interstate and
foreign commerce. P. 297 U. S.
2. A tax thus laid held consistent with due process. Hans
Rees' Sons v. North Carolina, 283 U.
, distinguished. P. 297 U.S. 444
3. A state tax on the privilege of exercising corporate
franchises within the State, measured at a uniform rate on net
income attributable to business within the State, does not
discriminate unconstitutionally against corporations deriving such
income from interstate and foreign as well as from intrastate
business because other corporations, having no interstate business,
are taxed only on intrastate income, or because foreign
corporations engaged in interstate and foreign business exclusively
are exempt from the tax. P. 297 U. S.
4. A foreign corporation whose sole business in a State is
interstate and foreign commerce cannot be subjected to a privilege
tax. P. 297 U. S.
5. A discrimination in state taxation required by the commerce
clause cannot be held to violate the equal protection clause of the
Fourteenth Amendment. P. 297 U. S.
3 Cal. 2d 1
P.2d 805, affirmed.
Page 297 U. S. 442
Appeal from a judgment sustaining, on review, a state tax.
MR. JUSTICE BUTLER delivered the opinion of the Court.
The California Bank and Franchise Tax Act declares: every
business corporation, with exceptions not here material, "shall
annually pay to the State, for the privilege of exercising its
corporate franchises within this State, a tax according to or
measured by its net income" to be computed at the rate of 4 percent
upon that income for the preceding year. § 4. If all the
corporation's business is done in California, the tax shall be
computed on its entire net income; if not, on that portion which is
derived from business done within the State. § 10. Net income is
the revenue from all sources less expenses, losses, bad debts,
taxes, depreciation, depletion, etc. §§ 6, 7, and 8. *
Appellants were incorporated under the laws of California and,
for purposes of taxation, are deemed affiliated. § 14. Matson
Navigation Company and the Oceanic Steamship Company, in addition
to doing substantial intrastate business in California, were
engaged in transportation between ports on the Pacific Coast in the
United States and ports in Hawaii, the South Sea Islands,
Australia, and New Zealand. The Matson Terminals, Inc., had no 1930
net income from interstate or foreign commerce.
Page 297 U. S. 443
In March, 1931, appellants made a consolidated return showing
for 1930 net income from intrastate business of $730,357.81, and
from interstate and foreign business of $2,526,148.22. They
maintained that the tax should not be more than 4 percent of their
net income from intrastate business. But the tax commissioner held
that there should be included in the computation the part of their
net income from interstate and foreign commerce that was
attributable to California, found to be 22.2 percent, and on that
basis he assessed an additional tax. The state board of
equalization sustained the additional assessment. The case was
taken on writ of review to the state Supreme Court and there,
contrary to appellants' contentions, it was held that the act as
construed by the tax commissioner is not repugnant to the Commerce
Clause of the Federal Constitution or to the due process or equal
protection clause of the Fourteenth Amendment. 3
Cal. 2d 1
, 43 P.2d 805.
The only question here is whether, consistently with these
constitutional provisions there may be included in the base, to
which the rate of 4 percent was applied, any part of net income
derived from appellants' interstate and foreign commerce.
1. Does the tax burden interstate commerce? There is no
controversy as to the amount, if any, that may be apportioned to
California for the purpose of computing the tax. The state Supreme
Court held that the act imposes a tax for the privilege of
exercising corporate franchises and extends to every corporation,
foreign or domestic, which is engaged in interstate or foreign
commerce "so long as such corporation is doing some intrastate
business." Appellants' franchises, including the right to be
corporations empowered to do business in corporate form in
accordance with California law, were granted to them by the State,
and undoubtedly the State may tax the privilege of exercising the
franchises. St. Louis S.W. R.
Page 297 U. S. 444
v. Arkansas, 235 U. S. 350
235 U. S.
-367; Detroit International Bridge Co. v.
Corporation Tax Appeal Board, 287 U.
; Anglo-Chilean Nitrate Corp. v. Alabama,
288 U. S. 218
288 U. S. 224
Unquestionably annual profits, gains, or net income derived from
business done within the State is an indication sufficiently
significant to be deemed a reasonable base on which to compute the
value of that use. Cf. Air-Way Corp. v. Day, 266 U. S.
, 266 U. S. 83
Our decisions demonstrate that a state tax on gross earnings
derived from interstate commerce is a burden upon that commerce and
repugnant to the commerce clause. Philadelphia & Southern
S.S. Co. v. Pennsylvania, 122 U. S. 326
Galveston, Harrisburg & S.A. Ry. Co. v. Texas,
210 U. S. 217
Meyer v. Wells Fargo & Co., 223 U.
, 223 U. S. 300
New Jersey Telephone Co. v. Tax Board, 280 U.
, 280 U. S. 346
Cf. Pullman Co. v. Richardson, 261 U.
, 261 U. S. 338
They also definitely show that a State may tax net income derived
from a domestic corporation's business -- intrastate, interstate,
and foreign. U.S. Glue Co. v. Oak
Creek, 247 U. S. 321
247 U. S. 328
Shaffer v. Carter, 252 U. S. 37
252 U. S. 57
Atlantic Coast Line R. Co. v. Doughton, 262 U.
, 262 U. S.
-422. Cf. Peck & Co. v. Lowe,
247 U. S. 165
National Paper & Type Co. v. Bowers, 266 U.
, 266 U. S. 377
net income justly attributable to all classes of business done
within the State may be used as the measure of a tax imposed to pay
the State for the use therein of the corporate franchises granted
by it. Bass, Ratcliff & Gretton, Ltd. v. Tax Comm'n,
266 U. S. 271
266 U. S. 277
Underwood Typewriter Co. v. Chamberlain, 254 U.
, 254 U. S. 120
Cf. Hans Rees' Sons v. North Carolina, 283 U.
, 283 U. S. 129
The act as construed below does not violate the
2. Appellants suggest that the additional tax has no relation to
the privilege of exercising their corporate franchises, and that
the State, by enforcing it, would deprive them of property without
due process of law. They rely on Hans Rees' Sons v. North
Page 297 U. S. 445
there held that a method of allocating, for taxation, to a State
that part of the income of a foreign corporation which bears the
same ratio to its entire net income as the value of its tangible
property within that State bears to the value of all its tangible
property works an unconstitutional result if the part of the income
thus attributed to the State is out of all appropriate proportion
to the business there transacted by the corporation. There is
nothing in that decision to support appellants' contention. In that
case, the question was as to apportionment of income to the taxing
State. The controversy now before us concerns the amount to be paid
for the privilege of using in California corporate franchises
granted by that State to appellants. No question of apportionment
is here involved. The tax commissioner's determination, 22.2%, was
not disturbed by the board of equalization or the Supreme Court,
and appellants do not in this Court challenge the use of that
ratio. As above shown, net income from appellants' intrastate,
interstate, and foreign business attributable to California may be
taken into account in computing the tax. As the taxing jurisdiction
of California extends to that income, the use thereof to compute
the tax may not be said to be arbitrary, capricious, or in
violation of the due process clause of the Fourteenth
3. Appellants insist that, by enforcement of the tax in
question, the State would deny them the equal protection of the
laws. They say: the tax is on the doing of business; it would be
void if imposed on the doing of interstate and foreign business,
and can only be upheld as to intrastate business. Many corporations
subject to the tax do only the latter. Others do both. The basis of
the tax imposed on members of the class first mentioned is net
income from intrastate business, while the basis of that exacted
from members of the other class is net income from all business.
The act imposes no tax
Page 297 U. S. 446
on corporations engaged exclusively in interstate and foreign
The differences portrayed in the argument of appellants do not
deny them equal protection of the laws. The measure of the tax is
the total net income attributable to California; it does not depend
upon the net derived from business wholly within or that partly
within and partly without the State. Gains from intrastate business
may be wiped out by losses sustained in interstate or foreign
business and vice versa. The basis of the classification is not the
kind of business -- whether intrastate or otherwise -- from which
the income is derived; it is the exclusion of all income
attributable to business done outside the State. The measure of the
exaction does not lack uniformity because of differences in the
amounts of net incomes attributable to California. Appellants'
contention is not supported by the fact that there are or may be
substantial differences between amounts and sources of net incomes
of corporations subject to the tax. The rate is uniform; no
discrimination results from its application.
There is no merit in the suggestion that failure of the act to
extend to foreign corporations exclusively engaged in interstate or
foreign commerce in California constitutes an unconstitutional
discrimination against appellants. A foreign corporation whose sole
business in California is interstate and foreign commerce cannot be
subjected to the tax in question. Alpha Portland Cement Co. v.
Massachusetts, 268 U. S. 203
268 U. S. 216
et seq.; Anglo-Chilean Nitrate Corp. v. Alabama, supra.
The submission by the State to the commerce clause cannot be held
to violate the equal protection clause. Des Moines Nat. Bank v.
Fairweather, 263 U. S. 103
263 U. S.
* Act approved March 1, 1929, Cal.Stats. 1929, p. 19, as amended
June 11, 1929, Cal.Stats.1929, p. 1555.