South Central Bell Telephone Co. v. Alabama

526 U.S. 160

Case Year: 1999

Case Ruling: 9-0, Reversed and Remanded

Opinion Justice: Breyer

FACTS

Alabama imposed a franchise tax on all companies doing business in the state. A domestic firm (a company organized under the laws of Alabama) was assessed an amount equal to 1 percent of the par value of the firm’s stock. Because the par value is set by the company, Alabama corporations were given considerable latitude in controlling the franchise tax they were required to pay. Foreign corporations (those companies organized in other states) were assessed a franchise tax equal to 0.3 percent of the actual amount of capital employed in Alabama. Thus, out-of-state companies doing business in Alabama had no control over their tax obligations and normally paid higher taxes than Alabama companies.

In 1986 Reynolds Metals and other corporations sued for a refund of their franchise taxes on the ground that they, as foreign corporations, were paying more than Alabama companies. They claimed this discriminated against interstate commerce in violation of both the Commerce and Equal Protection Clauses. The Alabama Supreme Court denied their refund request in White v. Reynolds Metals Co. (1989), finding that the differences in franchise tax rates were largely compensated for by other provisions in Alabama’s tax laws. While the Reynolds case was pending, a similar lawsuit was filed by the South Central Bell Telephone Company, although for different tax years. When Reynolds lost its suit, South Central Bell continued to press its legal case. Based on the Reynolds decision, the Alabama Supreme Court rejected South Central Bell’s arguments, and the telephone company appealed to the Supreme Court.

JUSTICE BREYER DELIVERED THE OPINION OF THE COURT.

We granted the Bell plaintiffs’ petition for certiorari, agreeing to decide ... whether the franchise tax “impermissibly discriminates against interstate commerce, in violation of the Commerce Clause.” We decide ... in favor of the Bell plaintiffs....

Turning to the merits, we conclude that this Court’s Commerce Clause precedent requires us to hold Alabama’s franchise tax unconstitutional. Alabama law defines a domestic corporation’s tax base as including only one item--the par value of capital stock--which the corporation may set at whatever level it chooses. A foreign corporation’s tax base, on the other hand, contains many additional balance sheet items that are valued in accordance with generally accepted accounting principles, rather than by arbitrary assignment by the corporation. Accordingly, as the State has admitted, Alabama law gives domestic corporations the ability to reduce their franchise tax liability simply by reducing the par value of their stock, while it denies foreign corporations that same ability. And no one claims that the different tax rates for foreign and domestic corporations offset the difference in the tax base. The tax therefore facially discriminates against interstate commerce and is unconstitutional unless the State can offer a sufficient justification for it. This discrimination is borne out in practice, as the record, undisputed here, shows that the average domestic corporation pays only one-fifth the franchise tax it would pay if it were treated as a foreign corporation.

The State cannot justify this discrimination on the ground that the foreign franchise tax is a “complementary” or “compensatory” tax that offsets the tax burden that the domestic shares tax imposes upon domestic corporations. Our cases hold that a discriminatory tax cannot be upheld as “compensatory” unless the State proves that the special burden that the franchise tax imposes upon foreign corporations is “roughly ... approximate” to the special burden on domestic corporations, and that the taxes are similar enough “in substance” to serve as “mutually exclusive” proxies for one another. Oregon Waste Systems [Department of Environmental Quality of Oregon (1994)].

In this case, however, the relevant tax burdens are not “roughly approximate.” And the State has made no effort to persuade this Court otherwise.

Nor are the two tax burdens similar in substance. Alabama imposes its foreign franchise tax upon a foreign firm’s decision to do business in the State; Alabama imposes its domestic shares tax upon the ownership of a certain form of property, namely, shares in domestic corporations. No one has explained to us how the one could be seen as a “proxy” for the other.

Rather than dispute any of these matters, the State instead says, with “respect to the merits,” that “the flaw in petitioners’ claim lies not in the application to Alabama’s corporate franchise tax of this Court’s recent negative Commerce Clause cases; the flaw lies rather in the negative Commerce Clause cases themselves.” The State adds that the Court should “formally reconsider” and “abando[n]” its negative Commerce Clause jurisprudence.” We will not entertain this invitation to reconsider our longstanding negative Commerce Clause doctrine, however, because the State did not make clear it intended to make this argument until it filed its brief on the merits. We would normally expect notice of an intent to make so far-reaching an argument in the respondent’s opposition to a petition for certiorari, cf. this Court’s Rule 15.2, thereby assuring adequate preparation time for those likely affected and wishing to participate. We are not aware of any convincing reason to depart from that practice in this case. And consequently we shall not do so.

For these reasons, the decision of the Alabama Supreme Court is reversed, and the case is remanded for further proceedings not inconsistent with this opinion. It is so ordered.

JUSTICE O’CONNOR, CONCURRING.

I join the opinion of the Court, and I agree that the State’s failure to properly raise its challenge to our negative Commerce Clause jurisprudence supports a decision not to pass on the merits of this claim. I further note, however, that the State does nothing that would persuade me to reconsider or abandon our well-established body of negative Commerce Clause jurisprudence.

JUSTICE THOMAS, CONCURRING.

I join the opinion of the Court. I agree that it would be inappropriate to take up the State’s invitation to reconsider our negative Commerce Clause doctrine in this case because “the State did not make clear it intended to make this argument until it filed its brief on the merits.”