A state corporate franchise tax on the privilege of doing local
business, measured by a charge upon such proportion of the
outstanding capital stock, surplus, and undivided profits of the
corporation, plus its long-term obligations, as the gross receipts
from its local business bear to the gross receipts of its entire
business,
held constitutional. P.
308 U. S.
334.
The gross receipts from the local business for the year in
question were approximately $34,000,000; the total gross receipts
about $888,000,000; the ratio of local to total receipts, 3.85
percent; the total taxable capital $600,000,000; the value of local
assets about $3,000,000, while the value of the capital allocated
to the
Page 308 U. S. 332
taxing State as a base for taxation by the statutory formula
would exceed $23,000,000. 100 F.2d 515 affirmed.
Certiorari, 306 U.S. 628, to review the affirmance by the court
below of a judgment sustaining a state tax.
MR. JUSTICE REED delivered the opinion of the Court.
The question for determination in this proceeding is the
validity, as applied to this petitioner, of a statute of the Texas
levying an annual franchise tax on all corporations chartered or
authorized to do business in Texas, measured by a graduated charge
upon such proportion of the outstanding capital stock, surplus, and
undivided profits of the corporation, plus its long-term
obligations, as the gross receipts of its Texas business bear to
the total gross receipts from its entire business.
The Court of Appeals [
Footnote
1] affirmed the judgment of the District Court, upholding the
validity of the tax. On account of an alleged probable conflict
with the principles underlying certain decisions of this Court,
certiorari was granted. [
Footnote
2] The applicable provisions of the statute appear below.
[
Footnote 3]
Page 308 U. S. 333
By Article 7057b of the Revised Civil Statutes of Texas,
Vernon's Ann.Civ.St.Tex. art. 7057b, any corporation which may be
required to pay any franchise or other privilege tax may pay it
under written protest and bring suit within a limited time
thereafter in any court of competent jurisdiction in Travis County,
Texas, against the public official charged with the duty of
collecting such tax, the State Treasurer, and the Attorney General,
for its recovery. This suit was instituted in the District Court of
the United States, Western District, Austin Division, against the
state officials authorized to be made defendants. Defendants joined
in a demurrer on the ground that no cause of action was set out in
the petition.
Petitioner owns and operates a large manufactory of motor
vehicles in Michigan and assembly plants in Texas. No parts for the
automobiles produced by petitioner are manufactured at any point
within Texas. The manufactured parts are shipped to petitioner's
assembly plants in Texas, and are there assembled. The assembled
vehicles are sold in intrastate commerce to various dealers who, in
turn, sell the vehicles to the public. A relatively small number of
completed vehicles are shipped into Texas and later sold in
intrastate commerce, along with large quantities of motor parts and
accessories. Without undertaking to be precise, the gross receipts
from business done in Texas for the year in question amounted to
approximately $34,000,000. Petitioner's total gross receipts
Page 308 U. S. 334
were about $888,000,000. The ratio of Texas receipts to total
receipts was 3.85 percent. Petitioner's total taxable capital was
$600,000,000. The value of all assets located in Texas was somewhat
over $3,000,000, while the value of the capital allocated to Texas
as a base for taxation by the statutory formula would be in excess
of $23,000,000.
For the taxable year beginning May 1, 1936, a franchise tax was
tendered Texas in the sum of $1,224, computed on the actual net
book value of all of petitioner's assets in Texas. On demand and
under protest, an additional franchise tax and penalty was paid in
the sum of $7,529, based on the allocation to Texas of capital as
calculated by the statutory formula. This suit was brought to
recover the alleged unlawful exaction.
This exaction, petitioner pleads, is calculated from a formula
that results in the levy of a tax on assets used in petitioner's
interstate business in violation of Article I, Section 8, of the
Constitution. It is further alleged that the tax operates to
deprive petitioner of its property without due process of law in
violation of the Fourteenth Amendment, because it must pay a tax on
property neither located nor used within the Texas and on
activities beyond the borders of Texas.
The statute calls the excise a franchise tax. It is obviously
payment for the privilege of carrying on business in Texas.
[
Footnote 4] There is no
question but that the State has the power to make a charge against
domestic or foreign corporations for the opportunity to transact
this intrastate business. [
Footnote
5] The exploitation by foreign corporations
Page 308 U. S. 335
of intrastate opportunities under the protection and
encouragement of local government offers a basis for taxation as
unrestricted as that for domestic corporations. In laying a local
privilege tax, the state sovereignty may place a charge upon that
privilege for the protection afforded. When that charge, as here,
is based upon the proportion of the capital employed in Texas,
calculated by the percentage of sales which are within the state,
no provision of the Federal Constitution is violated.
The motor vehicles for the marketing of which the privilege is
used are concededly sold in intrastate commerce. The tax here
levied is not for the privilege of engaging in any transaction
across state lines or activity carried on in another state. It is
much like that upheld in
Bass, Ratcliff & Gretton v. Tax
Commission. [
Footnote 6]
In that case, a tax was laid for the privilege of doing business in
New York determined, for corporations which did not transact all
their business within that state, by a percentage of that part of
the net income which is calculated by the proportion which the
aggregate of specified classes of property within the state bears
to all the property of the corporation. [
Footnote 7]
In
National Leather Company v. Massachusetts, [
Footnote 8] this Court upheld a tax for
the privilege of doing business in a state by a corporation of an
amount "equal to five dollars per thousand upon the value of the
corporate excess employed by it within the Commonwealth." This
excess was defined as
"such proportion of the fair cash value of all the shares
constituting the capital stock . . . as the value of the assets,
both real and personal, employed in any business within the
Commonwealth . . . bears to the value of the total assets of the
corporation."
The National Leather Company, a Maine corporation, owned the
stock of two
Page 308 U. S. 336
other Maine corporations. Their plants were in Massachusetts. On
the assumption that the situs of the stock followed the domicile of
the owner, the taxpayer challenged the inclusion of the Maine stock
in the basis for the local tax. This Court held that Massachusetts
was free to use the stock for the calculation of the local tax.
Similar methods of determining privilege taxes were left to the
states in
International Shoe Co. v. Shartel [
Footnote 9] and
New York v. Latrobe.
[
Footnote 10] The
Constitution recognizes the dual interests of the national and
state governments and permits taxes for local privileges upon the
intrastate activities of the far-flung enterprises which gain large
benefits from the nationwide market, protected by the commerce
clause. We reject petitioner's contention that constitutionality of
state taxation turns on so narrow an issue as whether local assets,
rather than local gross receipts, are used in a taxing formula.
In a unitary enterprise, property outside the state, when
correlated in use with property within the state, necessarily
affects the worth of the privilege within the state. Financial
power inherent in the possession of assets may be applied, with
flexibility at whatever point within or without the state the
managers of the business may determine. For this reason, it is held
that an entrance fee may be properly measured by capital wherever
located. [
Footnote 11] The
weight, in determining the value of the intrastate privilege, given
the property beyond the state boundaries is but a recognition of
the very real effect its existence has upon the value of the
privilege granted within the taxing state. This was recognized by
this Court in
Great Atlantic &
Page 308 U. S. 337
Pacific Tea Company v. Grosjean, [
Footnote 12] where an occupation or license tax
on chain stores was graduated "on the number of stores or
mercantile establishments" included under the same management
"whether operated in this State or not." We said:
"The law rates the privilege enjoyed in Louisiana according to
the nature and extent of that privilege in the light of the
advantages, the capacity, and the competitive ability of the
chain's stores in Louisiana considered not by themselves, as if
they constituted the whole organization, but in their setting as
integral parts of a much larger organization. [
Footnote 13]"
This same rule applies here.
James v. Dravo Contracting
Company [
Footnote 14]
contains nothing contrary to this view. The statute under
consideration there levied a privilege tax "equal to two percent of
the gross income of the business." Insofar as it was upon receipts
in other states for work done in other states, it was conceded to
be outside of the taxing power of the statute.
Affirmed.
MR. JUSTICE McREYNOLDS is of opinion that the judgment
complained of should be reversed.
MR. JUSTICE BLACK and MR. JUSTICE DOUGLAS concur in the
result.
[
Footnote 1]
Ford Motor Co. v. Clark, 100 F.2d 515.
[
Footnote 2]
306 U.S. 628.
[
Footnote 3]
"Art. 7084. Amount of Tax -- (A) Except as herein provided,
every domestic and foreign corporation heretofore or hereafter
chartered or authorized to do business in Texas, shall, . . . each
year, pay . . . a franchise tax . . . based upon that proportion of
the outstanding capital stock, surplus and undivided profits, plus
the amount of outstanding bonds, notes and debentures, other than
those maturing in less than a year from date of issue, as the gross
receipts from its business done in Texas bears to the total gross
receipts of the corporation from its entire business, which tax
shall be computed at the following rates for each One Thousand
Dollars ($1,000.00) or fractional part thereof; One Dollar ($1.00)
to One Million Dollars ($1,000,000.00), sixty cents (60�). . .
."
[
Footnote 4]
Investment Securities Co. v. Meharg, 115 Tex. 441, 282
S.W. 802;
United North & South Development Co. v.
Heath, 78 S.W.2d 650.
[
Footnote 5]
Ficklen v. Shelby County Taxing District, 145 U. S.
1,
145 U. S. 21;
American Mfg. Co. v. St. Louis, 250 U.
S. 459;
Matson Nav. Co. v. State Board,
297 U. S. 441;
Western Live Stock v. Bureau of Revenue, 303 U.
S. 250;
Coverdale v. Arkansas-Louisiana Pipe Line
Co., 303 U. S. 604,
303 U. S.
608.
[
Footnote 6]
266 U. S. 266 U.S.
271.
[
Footnote 7]
Cf. Underwood Typewriter Co. v. Chamberlain,
254 U. S. 113,
254 U. S.
120.
[
Footnote 8]
277 U. S. 277 U.S.
413.
[
Footnote 9]
279 U. S. 279 U.S.
429.
[
Footnote 10]
279 U. S. 279 U.S.
421.
[
Footnote 11]
Atlantic Refining Co. v. Virginia, 302 U. S.
22,
302 U. S. 29;
cf. Kansas City, Fort Scott & Memphis Ry. v. Botkin,
240 U. S. 227,
240 U. S.
235.
[
Footnote 12]
301 U. S. 301 U.S.
412,
301 U. S.
424-425.
[
Footnote 13]
301 U. S. 301
U.S. 425.
[
Footnote 14]
302 U. S. 302 U.S.
134,
302 U. S.
139.