A manufacturing corporation, incorporated in Delaware with an
authorized capital stock of a designated number of nonpar value
shares, of which only about one-eighth were issued, had all its
property in Ohio, where it was duly authorized to do business and
transacted during a tax year a business of which 28% was confined
to Ohio and the remainder was interstate. Under an Act of May 17,
1921 (§ 8728-11 Gen.Code Ohio) which prescribes an annual fee
payable by each foreign corporation having common stock without par
value, for the privilege of exercising its franchise in the state,
of
"five cents per share upon the proportion of the number of
shares of authorized common stock represented by property owned and
used and business transacted in this state. . . . ,"
the taxing authorities assessed a tax by applying this
prescribed rate to the entire number of shares authorized. The
court below reduced this by taking such proportion of the total
number of shares authorized as the value of the property plus
Page 266 U. S. 72
the local business was of that value plus all the business, and
by applying the rate to the result.
Held:
(1) That the tax, computed either way, and the act, violate the
commerce clause, since all the corporation's business, intrastate
and interstate, and all its property were represented by the shares
of stock outstanding, and the application of the rate to all the
shares authorized, or to a number greater than the total
outstanding, necessarily amounted to a tax and direct burden upon
all the property and business, including the interstate commerce.
P.
266 U. S.
82.
(2) The fee imposed in either case was arbitrary, since the
number of nonpar shares which the corporation might issue under the
law of Delaware was not an indication of the amount of its capital,
and the number not subscribed or issued had no relation to the
value of the privilege of doing business in Ohio. P.
266 U. S.
83.
(3) The act, in its practical operation, does not require like
fees for equal privileges held by foreign corporations in Ohio
under the same circumstances. P.
266 U. S.
84.
(4) A classification of foreign corporations for the purpose of
determining the amounts of such annual franchise fees should be
based upon something having relation to the purpose for which it
was made. P.
266 U. S. 85.
(5) The Ohio act, having no tendency to produce equality, and
being of such character that there is no reasonable presumption
that substantial equality will result from its operation, violates
the equal protection clause of the Fourteenth Amendment.
Id.
279 F. 878 reversed.
Appeal and cross-appeal from a decree of the District Court
enjoining the Treasurer and other officials of Ohio from collecting
more than a stated portion of a franchise fee from the above named
corporation, but declining to hold the tax void
in toto,
as the corporation claimed it to be, in this suit to enjoin its
collection.
Page 266 U. S. 77
MR. JUSTICE BUTLER delivered the opinion of the Court.
Plaintiff, Air-Way Electric Appliance Corporation, brought this
suit against the above-named treasurer and other state officers to
restrain the collection of a franchise fee charged against it as a
foreign corporation for the privilege of exercising its franchises
in Ohio during the year commencing July 1, 1921, on the grounds,
among others, that the legislation of Ohio under which the fee was
imposed is invalid under the commerce clause of the Constitution
and is repugnant to the Fourteenth Amendment.
Plaintiff was incorporated in 1920 under the laws of Delaware.
Under its certificate of incorporation and the laws of that state,
its authorized capital stock is 400,000 shares without par value,
of which 200,000 shares are common stock and 200,000 founders'
stock. The only
Page 266 U. S. 78
difference between the two classes is that holders of the former
are entitled to one vote per share and of the latter to five votes
per share. Shortly after its incorporation, it obtained from the
secretary of state in conformity with the laws of Ohio a
certificate of admission to do business in that state, and also
paid the initial fee for the privilege of there exercising its
franchise. Sections 178-180, 183, 184, General Code of Ohio. It
complied with the laws of Ohio regulating the sale of stock in that
state and received a certificate from the commissioner of
securities authorizing sale at $7 per share. Sections 6373-1 to
6373-24, General Code of Ohio. It acquired two large manufacturing
plants at Toledo, including grounds, buildings, tools, machinery,
etc. August 1, 1920, it commenced business -- the manufacture of
electrical household appliances and their sale in Ohio and
elsewhere. In July, 1921, as required by law, it filed with the tax
commission a report covering the year ended July 1, 1921. There had
been issued and were then outstanding only 50,485 shares of stock,
of which 10,010 shares were common and 40,475 were founders' stock.
All of its property was located in Ohio; its value was $458,278.56.
The amount of business transacted in the preceding year was
$250,594.58. The complaint alleged and the answer admitted that the
value of the stock was $7 per share.
Section 5503 (enacted May 31, 1911) imposes an annual fee
required of foreign corporations having capital stock with par
value as follows:
"On or before October fifteenth, the auditor of state shall
charge for collection, as herein provided, annually, from such
company, in addition to the initial fees otherwise provided for by
law, for the privilege of exercising its franchises in this state,
a fee of three-twentieths of one percent upon the proportion of the
authorized capital stock of the corporation represented by property
owned and used and business transacted in this state. . . . "
Page 266 U. S. 79
An act of May 14, 1921 (109 Ohio Laws, p. 277), amending §
8728-11, General Code of Ohio, provides:
". . . The amount of fees payable by a foreign corporation
having common stock without par value . . . under § 5503 shall be
three-twentieths of one percent upon the proportion of the
authorized preferred stock represented by property owned and used
and business transacted in this state and five cents per share upon
the proportion of the number of shares of authorized common stock,
represented by property owned and used and business transacted in
this state. . . ."
Under the section last quoted, an annual fee of $20,000 was
assessed and payment on or before December 1, 1921, was demanded,
and notice was given that, if not made on or before that day, a
penalty of 15 percent would be added. Under the laws of the state,
all fees, taxes, and penalties constitute liens on the
corporation's property; a fine for each day's delinquency may be
imposed; and, in case of failure to pay, its authority to do
business is liable to cancellation, and injunction and ouster are
authorized. Sections 5506, 5507, 5509, 5512, 5513.
Plaintiff's report to the tax commission stated that the amount
of business transacted in Ohio in the year ended July 1, 1920, was
$250,594.58, whereas that figure represented its total sales, of
which only $70,802.30, or about 28 percent, was intrastate, and the
balance, $179,792.28, or about 72 percent, was interstate. The
state officers, assuming that all plaintiff's property and business
was located and transacted in Ohio, made no apportionment between
local and interstate business, and fixed the annual franchise fee
at 5 cents per share on its total authorized stock.
Plaintiff invoked equity jurisdiction on the ground that it was
threatened with irreparable injury through the enforcement of the
coercive provisions of the statutes above referred to.
Ohio Tax
Cases, 232 U. S. 576,
232 U. S. 587.
A motion
Page 266 U. S. 80
for a temporary injunction was heard by a court of three judges.
Section 266, Judicial Code. It was held (279 F. 878) that the
plaintiff's objections to the act and the tax were not valid, but
the bill was retained to await the result of an application by the
plaintiff to the tax commission for a rehearing and correction of
the amount of the tax. Plaintiff made such an application, setting
forth the above mentioned amount of intrastate and interstate
sales, respectively. The commission held that, as more than 60 days
had elapsed after the certification of the amount of the tax by the
state auditor, it had no jurisdiction to entertain such an
application. At a later hearing, the court held that the commission
was authorized to grant plaintiff a rehearing and make correction
if it found the tax or any part of it to be erroneous, that it was
not the intent of the state laws to include interstate commerce as
a basis for the levy, and that plaintiff may not be taxed on its
interstate business and on the portion of its authorized stock
represented by property owned and used and business transacted in
other states, that the $20,000 charge included a substantial sum
levied directly on the stock representing interstate business and
that the tax should have been $14,926 -- five cents per share on
298,520 shares. These figures were arrived at by taking such
proportion of 400,000, the total number of shares authorized, as
the actual value of plaintiff's property in Ohio plus its local
business in that state is to such actual value plus all its
business, and by applying thereto five cents per share. [
Footnote 1] By the decree,
defendants
Page 266 U. S. 81
are enjoined from collecting any part of the tax in excess of
$14,926. The plaintiff appealed, and attacks the act on the grounds
above stated. Defendants appealed, and contend that the lower court
erred in finding that 298,520 shares of the authorized capital
stock of plaintiff represented the property owned and used and
business transacted by it in Ohio, and in enjoining the collection
of a tax in excess of $14,926.
In cases involving the validity of the laws of a state imposing
license fees or excise taxes on corporations organized in another
state, this Court has decided:
"1. The power of a state to regulate the transaction of a local
business within its borders by a foreign corporation -- meaning a
corporation of a sister state -- is not unrestricted or absolute,
but must be exerted in subordination to the limitations which the
Constitution places on state action."
"2. Under the commerce clause, exclusive power to regulate
interstate commerce rests in Congress, and a state statute which,
either directly or by its necessary operation, burdens such
commerce is invalid, regardless of the purpose with which it was
enacted."
"3. Consistently with the due process clause, a state cannot tax
property belonging to a foreign corporation and neither located nor
used within the confines of the state."
"4. That a foreign corporation is partly, or even chiefly,
engaged in interstate commerce does not prevent a state in which it
has property and is doing a local business from taxing that
property and imposing a license fee or excise in respect of that
business, but the state cannot require the corporation, as a
condition of the right to do a local business therein, to submit to
a tax on its interstate business or on its property outside the
state."
"5. A license fee or excise of a given percent of the entire
authorized capital of a foreign corporation doing
Page 266 U. S. 82
both a local and interstate business in several states, although
declared by the state imposing it to be merely a charge for the
privilege of conducting a local business therein, is essentially
and for every practical purpose a tax on the entire business of the
corporation, including that which is interstate, and on its entire
property, including that in other states, and this because the
capital stock of the corporation represents all its business of
every class and all its property wherever located."
"6. When tested, as it must be, by its substance -- its
essential and practical operation -- rather than its form or local
characterization, such a license fee or excise is unconstitutional
and void as illegally burdening interstate commerce and also as
wanting in due process because laying a tax on property beyond the
jurisdiction of the state."
International Paper Co. v. Massachusetts, 246 U.
S. 135,
246 U. S.
141.
All plaintiff's business, intrastate and interstate, and all its
property, wherever located, were represented by the 50,485 shares
of stock outstanding. The annual fee demanded by the state officers
is five cents per share on 400,000 shares, and that fixed by the
lower court is based on 298,520 shares. The inevitable effect of
the act is to tax and directly burden interstate commerce of
foreign corporations permitted to do business in Ohio, and engaged
in interstate commerce, wherever the number of shares authorized,
subject to the charge of 5 cents each, exceeds the number of
outstanding shares attributable to or represented by the
corporation's property and business in that state. In this case,
the fee fixed by the commission was based on nearly eight times the
number of outstanding shares, and that determined by the court on
nearly six times that number. As some of the outstanding shares are
represented by plaintiff's interstate business, the application of
the rate to all the shares, or to a number greater than the total
outstanding, necessarily amounts to
Page 266 U. S. 83
a tax and direct burden upon all the property and business
including the interstate commerce of the plaintiff.
International Paper Co. v. Massachusetts, supra, p.
246 U. S. 142.
We hold that the act violates the commerce clause.
The fee determined by the lower court, as well as that fixed by
the state officers, is arbitrary. Without holding that such a
charge must be measured by the value of the privilege for which it
is imposed, it may be said that some relation to such value is a
reasonable requirement. Indeed, under the Constitution and laws of
Ohio, a tax on privileges and franchises cannot exceed the
reasonable value of the privilege or franchise originally conferred
or its continued annual value thereafter.
Southern Gum Co. v.
Laylin, 66 Ohio St. 578. That value depends on the "property
owned and used and business transacted" in Ohio. Section 8728-11.
Plaintiff's authority to issue stock or the number of shares it may
have outstanding at any time does not depend upon the laws of Ohio.
Under the laws of Delaware, where the corporation was organized,
these matters are left to the discretion of the persons controlling
the corporation. Laws of Delaware 1917, c. 113, § 3, amending, by
adding 1918a, § 4a to Revised Code, c. 65. The number of nonpar
value shares of the corporation is not an indication of, and does
not purport to be a representation as to, the amount of its
capital. Each outstanding share represents merely an aliquot part
of its assets. The number of shares not subscribed or issued has no
relation to the privilege held by plaintiff in Ohio, and it is not
a reasonable measure of such a fee. Such shares may never be
subscribed or issued, or additional shares may be issued to acquire
property or do business in other states or to carry on interstate
commerce. Plainly the fee, to the extent that it is based on a
number of shares in excess of those outstanding, has no relation to
what was paid in for the stock or to its value, or to the amount of
plaintiff's capital, its property or its business,
Page 266 U. S. 84
intrastate in Ohio or interstate. The act, in its practical
operation, does not require like fees for equal privileges held by
foreign corporations in Ohio under the same circumstances. Unless,
under the laws of the states where organized, they chance to be
authorized to issue the same number of nonpar value shares, the
annual franchise fees imposed on foreign corporations having the
same amount of property and business, and exercising the same
privileges in Ohio, will not be the same, and the charge imposed on
one may be many times that made against another. If plaintiff's
authorized shares were of the par value of $100 each, the amount of
capital stock for apportionment between its property and business
in Ohio and its interstate business to arrive at the franchise fee
would be $40,000,000, and, adopting the basis of apportionment
determined by the lower court, which attributed about 75 percent of
the shares to the property and business in Ohio, the amount of the
fee would be $44,778, and with par value of $7 each, the amount for
which the commissioner of securities authorized plaintiff to sell
its shares in Ohio, and their admitted value, the amount for such
apportionment would be $2,800,000, and the fee would be $3,134.46.
[
Footnote 2] These figures are
to be contrasted with $14,926, fixed by the lower court. Again,
compare two corporations organized in a sister state having the
same number of authorized nonpar value shares, one having property
and business of little value, all in Ohio, and the other having
much more property and business in that state, and also much
property and business in other states. The act would require the
former to pay five
Page 266 U. S. 85
cents per share on all its shares, but would require the latter
to pay a fee based only on the proportion of its shares
representing its property owned and used and business transacted in
Ohio.
It is clear that the mere number of authorized nonpar value
shares is not a reasonable basis for the classification of foreign
corporations for the purpose of determining the amount of such
annual fees. Such a classification is not based on anything having
relation to the purpose for which it is made.
Southern Railway
Co. v. Greene, 216 U. S. 400,
216 U. S. 417;
Royster Guano Co. v. Virginia, 253 U.
S. 412,
253 U. S. 415.
The act has no tendency to produce equality, and it is of such a
character that there is no reasonable presumption that substantial
equality will result from its application.
Martin v. District
of Columbia, 205 U. S. 135,
205 U. S.
139,;
Gast Realty Co. v. Schneider Granite Co.,
240 U. S. 55,
240 U. S. 58;
Kansas City Southern Ry. v. Road Improvement District,
256 U. S. 658,
256 U. S. 660.
The act violates the equal protection clause of the Fourteenth
Amendment.
Plaintiff's motion for a temporary injunction should have been
granted.
Decree reversed.
[
Footnote 1]
The formula employed by the court is the same as the announced
rule of the tax commission for the ascertainment of the correct
amount of the tax to be paid by foreign corporations, and is taken
from the case of
State v. Coal Co., 17 Ohio Nisi Prius
Reports (New Series) 60. It was applied as follows:
$458,278.56 + $ 70,802.30
------------------------- x 400,000 = 298,520
$458,278.56 + $250,594.58
298,520 x $0.05 = $14,926.00
font=tnr12
[
Footnote 2]
If par value were $100:
298,520 x $100=$29,852,000
$29,852.000 x 3/20 of 1% = $44,778 amount of tax
If par value were $7:
298,520 x $7=$2,089,640.
$2,089,640 x 3/20 of 1%=$3, 134.46 amount of tax