Under § 5495, Ohio Gen.Code, Ohio levied a franchise tax on
appellant for the "privilege of doing business" in the State.
Appellant owns and operates several factories, sales agencies,
warehouses, and retail stores in Ohio and numerous factories, sales
agencies, and retail stores in other States. Goods manufactured in
Ohio are sold partly in Ohio and partly in other States. Some goods
manufactured in other States are sold by appellant's sales agencies
in Ohio to customers in Ohio. Under § 5498, Ohio Gen.Code, the tax
base is computed as follows: the total value of the taxpayer's
issued capital stock is divided in half. One half is multiplied by
a fraction whose numerator is the value of all the taxpayer's
property in Ohio and whose denominator is the total value of all
its property, wherever located. The other half is multiplied by a
fraction whose numerator is the total value of "business done" in
Ohio and whose denominator is the total value of business done
everywhere. The sum of these two products is the tax base.
Page 329 U. S. 417
1. This does not constitute a tax on sales made outside Ohio in
violation of the Due Process Clause of the Fourteenth Amendment,
since it is a franchise tax for the privilege of doing business in
the State. Pp. 329 U. S.
(a) The fact that the State chose to measure the tax on the
business of manufacturing done in the State by the value of the
products (including those sold out of the State) does not transform
the tax on that business to a tax on sales out of the State. P.
329 U. S.
(b) Treatment of sales within Ohio of products manufactured
elsewhere as "business done" in Ohio did not result in taxing
out-of-state or interstate transactions or sales in violation of
the Due Process Clause, since the business of Ohio sales agencies
and their sales to Ohio customers were intrastate activities. Pp.
329 U. S.
2. The tax does not violate the Commerce Clause, since the
purpose of the formula was to arrive at a fair conclusion as to
what was the value of the intrastate business, and it has not been
demonstrated that it achieves an unfair result. Pp. 329 U. S.
(a) A State's tax law is not to be nullified merely because the
result is achieved through a formula which includes consideration
of interstate and out-of-state transactions in their relation to
the intrastate privilege. P. 329 U. S.
(b) No multiplication of this tax through its imposition by
other States is involved, since the tax is levied only against the
privilege of doing local business of manufacturing and selling in
Ohio, and no other State can tax that privilege. P. 329 U. S.
146 Ohio St. 58, 64 N.E.2d 53, affirmed.
The Supreme Court of Ohio affirmed a decision of Ohio's Board of
Tax Appeals fixing the amount owed by appellant for its state
corporation franchise tax assessed pursuant to §§ 5495-5499, Ohio
Gen.Code. 146 Ohio St. 58, 64 N.E.2d 53. Affirmed,
329 U. S.
Page 329 U. S. 418
MR. JUSTICE BLACK delivered the opinion of the Court.
The Supreme Court of Ohio affirmed a decision of that State's
Board of Tax Appeals fixing the amount owed by appellant for its
State corporation franchise tax for the years 1935 to 1940,
inclusive. 146 Ohio St. 58, 64 N.E.2d 53. In affirming, the Ohio
court rejected appellant's contention that the controlling tax act,
§§ 5495-5499, Ohio Gen.Code, as applied to appellant, was in
violation of the Due Process clause of the Fourteenth Amendment and
the Commerce clause of the Federal Constitution. Art. 1, § 8, cl.
3. The case is here on appeal under 28 U.S.C. § 344. Appellant
repeats its arguments as to invalidity of the tax, but only as to
the years 1937 to 1940, inclusive.
Section 5495 of the Ohio Gen.Code provides that each foreign
corporation authorized to do business in the State must pay a tax
or fee for the "privilege of doing business" or "owning or using a
part or all of its capital or property" or "holding a certificate .
. . authorizing it to do business in this state." It is not denied
that appellant owed a franchise tax under this section, for it held
a certificate to do business in Ohio during all the years in
question. It also owned and operated two large factories at
Springfield, Ohio, which produced millions of dollars worth of
goods. And it operated four branch selling establishments
associated with four warehouses, and fourteen retail stores, all
located at various places in Ohio, which stored and sold goods
produced at the Ohio factory.
But appellant also owns and operates sixteen factories, nearly a
hundred selling agencies, and numerous retail stores in other
states. Goods produced at its Ohio factories are not only sold in
Ohio, but, in addition, are shipped for storage to out-of-Ohio
warehouses to be sold by out-of-Ohio selling agencies to
out-of-Ohio customers. Some are shipped directly to out-of-Ohio
customers on orders from out-of-Ohio selling agencies. Conversely,
goods manufactured by appellant out-of-Ohio are shipped to its
Page 329 U. S. 419
warehouses, and sold by its Ohio selling agencies to Ohio
customers. Appellant's claim is that the amount of the tax assessed
against it has been determined in such manner that a part of it is
for sales made outside Ohio and another part for interstate sales.
These consequences result, appellant argues, from the formula used
by Ohio in determining the amount and value of Ohio manufacturing
and sales, as distinguished from interstate and out-of-state
The tax is computed under the Ohio statute in the following
manner: Section 5498 prescribes the formula used in determining
what part of a taxpayer's total capital stock represents business
and property conducted and located in Ohio. To determine this, the
total value of issued capital stock [Footnote 1
] is divided in half. One half is then
multiplied by a fraction the numerator of which is the value of all
the taxpayer's Ohio property and the denominator of which is the
total value of all its property wherever owned. The other half is
multiplied by another fraction whose numerator is the total value
of the "business done" in the State and whose denominator is
countrywide business. Addition of these two products gives the tax
base, which, when multiplied by the tax rate of 1/10 of 1%,
produces the amount of the franchise tax.
In the "business done" numerator the State included as a part of
Ohio business an amount equal to the sales proceeds of a large part
of the goods manufactured at appellant's Ohio plants, no matter
where the goods had been sold or delivered. [Footnote 2
] A part of the measure of the tax is
Page 329 U. S. 420
an amount equal to the sales price of Ohio-manufactured goods
sold and delivered to customers in other states. Appellant contends
that the State has thus taxed sales made outside of Ohio in
violation of the Due Process clause. A complete answer to this due
process contention is that Ohio did not tax these sales. Its
statute imposed the franchise tax for the privilege of doing
business in Ohio for profit. The State supreme court construed the
statute as imposing the tax on corporations for engaging in
business such as that in which taxpayer engaged. One branch of that
business was manufacturing. It has long been established that a
state can tax the business of manufacturing. The fact that it chose
to measure the amount of such a tax by the value of the goods the
factory has produced, whether of the current or a past year, does
not transform the tax on manufacturers to something else.
American Mfg. Co. v. St. Louis, 250 U.
; Hope Natural Gas Co. v. Hall,
274 U. S. 284
274 U. S.
-289; Utah Power & Light Co. v. Pfost,
286 U. S. 165
286 U. S.
-190; Wallace v. Hines, 253 U. S.
, 253 U. S. 69
Freeman v. Hewit, 329 U. S. 249
See also Adams Mfg. Co. v. Storen, 304 U.
, 304 U. S.
-314, and cases cited in notes 14 and 15.
In the Ohio "business done" numerator, we assume the State also
included sales made by Ohio branches to Ohio customers of goods
manufactured and delivered to these Ohio customers from out-of-Ohio
factories. [Footnote 3
Appellant's business practice was to conduct and account for its
sales agencies' activities separately and distinctly from its
factory operations. The State followed this distinction. It treated
the sales agencies as conducting one type of business
Page 329 U. S. 421
and the factories another. Thus, it measured the value of the
Ohio sales agencies' business by the total amount of the preceding
year's Ohio sales of goods manufactured outside of Ohio as well as
those manufactured in Ohio. Here again, appellant's contention that
this resulted in taxing out-of-state or interstate transactions or
sales in violation of the Due Process clause is wholly without
substance. The Ohio sales agencies' business and their sales to
Ohio customers were intrastate activities. International
Harvester Co. v. Department of Treasury, 322 U.
. What effect inclusion of this element in the
"business done" numerator would have were these transactions not
intrastate is a question we need not now decide.
What we have said disposes of the only grounds urged to support
the due process contention. It also answers most of the argument
made against the Ohio statute on the ground that its application to
appellant unduly burdens interstate commerce, and therefore
violates the commerce clause. Of course, the commerce clause does
not bar a state from imposing a tax based on the value of the
privilege to do an intrastate business merely because it also does
an interstate business. Ford Motor Co. v. Beauchamp,
308 U. S. 331
308 U. S. 336
Nor does the fact that a computation such as that under Ohio's law
includes receipts from interstate sales affect the validity of a
fair apportionment. See e.g., Hump Hairpin Mfg. Co. v.
Emmerson, 258 U. S. 290
Underwood Typewriter Co. v. Chamberlain, 254 U.
; American Mfg. Co. v. St. Louis, supra;
International Shoe Co. v. Shartel, 279 U.
, 279 U. S. 433
Western Cartridge Co. v. Emmerson, 281 U.
. And here, it clearly appears from the background
of Ohio's tax legislation that the whole purpose of the State
formula was to arrive without undue complication at a fair
conclusion as to what was the value of the intrastate business for
which its franchise was granted. In October, 1924, this Court
Page 329 U. S. 422
Ohio's then corporation franchise tax on the ground that it did
not make an apportionment between local and interstate business so
as to confine its tax to local business only. The tax was also held
to be in violation of the Equal Protection clause. Air-Way
Electric Appliance Corp. v. Day, 266 U. S.
. In April, 1925, the legislature of Ohio passed a new
act expressly to cure the defects this Court had found in the old
law. [Footnote 4
] 111 Ohio Laws
471. That 1925 Act, as slightly amended, [Footnote 5
] is the law under which the present
apportionment was made.
Plainly, Ohio sought to tax only what she was entitled to tax,
and there is nothing about application of the formula in this case
that indicates a potentially unfair result under any circumstances.
It is not even contended here that the amount of these taxes could
be considered to bear an unjust or improper relation to the value
of the privilege of doing business in Ohio if the legislature had
imposed a flat franchise tax of the same amounts for the respective
years which application of this formula has produced. See Hump
Hairpin Mfg. Co. v. Emmerson, supra,
at 258 U. S. 296
Furthermore, this Court has long realized the practical
impossibility of a state's achieving a perfect apportionment of
expansive, complex business activities such as those of appellant,
and has declared that "rough approximation, rather than precision"
is sufficient. Illinois Central Ry. Co. v. Minnesota,
309 U. S. 157
309 U. S. 161
Unless a palpably disproportionate result comes from an
apportionment, a result
Page 329 U. S. 423
which makes it patent that the tax is levied upon interstate
commerce, rather than upon an intrastate privilege, this Court has
not been willing to nullify honest state efforts to make
cases collected in opinion of Mr.
Chief Justice Stone, dissenting, Northwest Airlines v.
Minnesota, 322 U. S. 292
322 U. S. 325
A state's tax law is not to be nullified merely because the result
is achieved through a formula which includes consideration of
interstate and out-of-state transactions in their relation to the
intrastate privilege. Since it has not been demonstrated that the
apportionment here achieves an unfair result, cf. Hans Rees'
Sons, Inc. v. North Carolina, 283 U.
, 283 U. S.
-135, and since it is assessed only against the
privilege of doing local Ohio business of manufacturing and
selling, we do not come to the question, argued by appellant, of
possible multiplication of this tax by reason of its imposition by
other states. None of them can tax the privilege of operating
factories and sales agencies in Ohio.
Section 5498 also sets out in some detail the factors to be
considered, and those not to be considered, in calculating the
total value of a taxpayer's issued and outstanding stock. These
provisions are not here at issue.
Rule 275, Tax Commissioner of Ohio, Oct. 13, 1939, exempted from
the computation all goods manufactured by appellant in Ohio, but
shipped to appellant's out-of-Ohio warehouses before sale.
The State contends here that it did not include in the
"business-done" numerator an amount equal to the proceeds from
sales by Ohio branches to Ohio customers of goods which were
shipped to the Ohio customers from factories outside Ohio.
Appellant insists that it did. We need not resolve this
controversy, for we think the result is the same whichever view is
In vetoing the bill which became the law on grounds not here
relevant, the Governor of Ohio said:
"The Supreme Court decision, of course, made it necessary for
you to devise a basis for the levy of the tax other than on the
authorized capital stock. You have seen fit to embody in the
pending measure an asset value or total net worth basis for the
assessment of the tax on domestic corporations as well."
Ohio House Journal 1925, Vol. III, 874. The bill was passed over
112 Ohio Laws 410 (1927); 113 Ohio Laws 637 (1929); 114 Ohio
Laws 714 (1931); 115 Ohio Laws 589 (1933).
MR. JUSTICE RUTLEDGE, concurring.
I concur in the opinion and judgment of the Court. But I desire
to add that, in the due process phase of the case, I find no basis
for conclusion that any of the transactions included in the measure
of the tax was so lacking in substantial fact connections with Ohio
as to preclude the state's use of them, cf. McLeod v. J. E.
Dilworth Co., 322 U. S. 327
dissenting opinion 322 U.S. at 322
-357, if indeed a limitation of this sort were
material to an apportionment found on the whole to be fairly made.
For the rest, as the Court holds, the apportionment clearly is