Certiorari Denied June 4, 1990. See 110 S.Ct. 2602.
This Court issued a writ of certiorari in this case to address the questions raised by an advisory opinion request from the Governor. See Opinion of the Justices No. 330, 558 So.2d 390 (Ala.1989). At issue is the constitutionality of Alabama's franchise tax on corporations that are incorporated under the laws of other states, Ala. Code 1975, § 40-14-41 (foreign corporations). The challenge to § 40-14-41 concerns the relation of the tax imposed by that section to the franchise tax on corporations
On July 28, 1986, Reynolds Metals Company filed a petition for a writ of mandamus ordering the Commissioner of Revenue to set aside assessments of franchise taxes paid by Reynolds in 1982 and 1983 and to refund the taxes paid. Similar petitions, or appeals from denials of refunds, were filed by General Motors Acceptance Corporation ("GMAC"), GMAC Leasing Corporation, and General Motors Corporation ("GM"). Because all of the proceedings challenged assessments made pursuant to § 40-14-41 as violating the Equal Protection Clause and the Commerce Clause, the cases were consolidated. Amended pleadings were filed regarding subsequent tax years. The trial court entered a summary judgment for the plaintiffs.
Section 229 of the Constitution, as amended by Amendment 27, reads, in pertinent part:
Section 232 of the Constitution, as amended by Amendment 473,
Section 40-14-40 imposes on domestic corporations an annual franchise tax of $10 on each $1000 of capital stock, or a minimum of $50. Section 40-14-41(a) imposes on foreign corporations an annual franchise tax of $3 on each $1,000 of "the actual amount of its capital employed in this state," or a minimum of $25. Paragraph (b) of § 40-14-41 defines "capital," as we shall more fully discuss below; paragraph (c) provides that the actual amount of capital employed in this state "shall be determined in accordance with generally accepted accounting principles appropriate in the particular case"; and paragraph (d) sets forth exclusions and deductions.
The circuit court and the Court of Civil Appeals viewed the Equal Protection Clause as requiring that the same franchise tax be imposed on both domestic and foreign corporations. However, § 40-14-40 imposes a tax that is "in proportion to the amount of capital stock" of a domestic corporation, that is, exactly as prescribed by § 229 of the Constitution; and, although § 40-14-41 provides in detail for the measurement of the "actual amount of capital employed" by a foreign corporation in this state, that section also sets forth a method of taxation that is designed to follow the mandate of the corresponding section of the constitution, § 232.
A franchise tax that apportioned a domestic corporation's capital stock according to how much of it was employed in this
Therefore, a holding that the Equal Protection Clause or the Commerce Clause requires the same tax to be applied to both domestic and foreign corporations appears to require a holding that either § 229 or § 232 of our Constitution violates the United States Constitution. This we are loath to do. Although the Supremacy Clause, U.S. Const. Art. VI, cl. 2, binds "the judges in every state" to abide by the United States Constitution, "any thing in the Constitution or laws of any state to the contrary notwithstanding," we are also sworn to "support the Constitution of the United States, and the Constitution of the State of Alabama." Ala. Const.1901, Art. XVI, § 279. It is therefore our duty to support both, if that be possible, before we conclude that the one violates the other.
History of the Franchise Taxes
To clarify the current relationship of the domestic and foreign corporation franchise taxes, we shall summarize their historical development.
After the adoption of the Constitution of 1901, the legislature adopted a franchise tax only on foreign corporations. Ala.Code 1907, §§ 2391-2400. This Court affirmed an assessment of taxes under that act, Southern Ry. v. Greene, 160 Ala. 396, 49 So. 404 (1909), but the Supreme Court of the United States reversed, 216 U.S. 400, 30 S.Ct. 287, 54 L.Ed. 536 (1910), holding that the tax violated the Equal Protection Clause.
The legislature responded by enacting a franchise tax on both domestic and foreign corporations, in the manner prescribed by the respective constitutional sections. Acts 1915, Act No. 464. In Louisville & N. R.R. v. State, 201 Ala. 317, 318, 78 So. 93, 94 (1918),
"`For instance, take the Tennessee Coal & Iron Co. They have a capitalization of $30,000,000. They have large property in Tennessee as well as in Alabama. Therefore it should not be required of them, or any other corporation of like character, to pay its franchise tax upon property they own in other states. Take the Southern Iron & Foundry Company. They have a capitalization of $600,000 and own a small plant in this state. The main plant is in Tennessee. This amendment would reach all the capital they had in use in Alabama, but they would
The constitutional convention, therefore, expressly amended the corporation committee's proposal that became § 232, so that a foreign corporation's franchise tax would be calculated according to the portion of its capital employed in this state, but it did not make such a change in the same committee's identically worded proposal for the tax on domestic corporations. The convention clearly envisioned that, absent the offered amendment, the proposed tax "in proportion to the amount of capital stock" would be calculated on the entire capitalization of the corporation. No such amendment was offered for the proposal that became § 229, so that section of the constitution directs the legislature to impose the tax on a domestic corporation's "capital stock" and does not provide for a reduction of a domestic corporation's franchise tax in proportion to its out-of-state capital.
It can also be seen from the quoted portion of Louisville & N. R.R. that the Court considered the term "paid-up capital stock" to be synonymous to the term "capital stock." The Court later upheld franchise taxes imposed on a domestic corporation "with a paid-up capital stock of $7,400,000," even though the corporation was in receivership. State v. Bradley, 207 Ala. 677, 678, 93 So. 595, 596 (1922).
Id., 207 Ala. at 679, 93 So. at 596.
Thus, in the course of discussing whether a corporation in receivership was subject to the franchise tax, the Court firmly established the interpretation that the franchise tax would be measured by the corporation's paid-up capital stock, with no other factors taken into consideration. In 1920, the Attorney General issued an opinion stating that surplus capital was not to be included within the term "capital stock" as used in § 229. Atty. Gen.'s Biennial Report for 1919-20, p. 570. We do not see that that interpretation is necessarily a correct interpretation of § 229.
The Court in Ellis v. W.A. Handley Mfg. Co., 214 Ala. 539, 540, 108 So. 343, 344 (1926), a case involving the foreign corporation franchise tax, noted:
See, also, State v. Guaranty Savings Building & Loan Ass'n, 225 Ala. 481, 144 So. 104 (1932), holding a domestic building and loan association subject to a franchise tax on its paid-in (or paid-up—the two terms are synonymous) capital stock, and holding a statute declaring the contrary unconstitutional under § 229. That decision was overturned by Amendment 27, ratified in 1935, which exempted such institutions and retroactively ratified the statutes declaring such an exemption.
In 1982, the Court of Civil Appeals followed State v. Bradley's holding that a domestic corporation in receivership is subject to the franchise tax.
Id., 419 So.2d at 233.
Again in 1987, the Court of Civil Appeals cited the principle that § 229 allows imposition of a tax only on the amount of a domestic corporation's capital stock. The court held that "a nonstock member association" is not subject to the tax because it has no capital stock on which the tax can be imposed. State v. Raymond M. Sims, D.M.D., P.A., 519 So.2d 523, 523 (Ala.Civ. App. 1987) (emphasis in original), writ quashed, 519 So.2d 524 (Ala.1987).
Although these recent cases by the Court of Civil Appeals reaffirm the principle that a domestic corporation's franchise tax must
There are many more cases applying the franchise tax on foreign corporations than there are applying the tax on domestic corporations, and they have concerned questions such as whether the property or business sought to be included in the tax base was in fact "capital employed" in this state by the foreign corporation, and, if so, how to measure its value and apportion it to the tax imposed in this state. See, e.g., Ellis, supra; State v. National Cash Credit Ass'n, 224 Ala. 629, 141 So. 541 (1932); State v. Anglo-Chilean Nitrate Sales Corp., 225 Ala. 141, 142 So. 87 (1932), reversed, 288 U.S. 218, 53 S.Ct. 373, 77 L.Ed. 710 (1933); Investors' Syndicate v. State, 227 Ala. 216, 149 So. 83 (1933); State v. Southern Natural Gas Corp., 233 Ala. 81, 170 So. 178 (1936), affirmed, 301 U.S. 148, 57 S.Ct. 696, 81 L.Ed. 970 (1937); State v. Pullman-Standard Car Mfg. Co., 235 Ala. 493, 179 So. 541 (1938); Alabama Textile Products Corp. v. State, 263 Ala. 533, 83 So.2d 42 (1955).
At least partially in response to the holdings in some of the above cases, the legislature passed numerous amendments to the foreign corporation franchise tax, refining the definition of "capital employed" and providing certain exemptions. See, e.g., Acts 1935, No. 194; Acts 1955, Second Ex. Session, No. 74; Acts 1961, No. 912; Acts 1963, No. 255; Acts 1965, No. 764; Acts 1969, No. 1138; Acts 1971, First Ex. Session, No. 103; Acts 1971, No. 499; Acts 1973, Nos. 469 and 1173; Acts 1985, No. 85-412; Acts 1986, No. 86-214.
In contrast, the only amendments to the domestic franchise tax before 1983 simply raised the millage rate in conjunction with equal increases in the millage rate of the foreign corporation franchise tax. Acts 1935, No. 194; Acts 1955, Second Ex. Session, No. 74; Acts 1971, First Ex. Session, No. 103.
The legislature maintained the same rate on the two taxes until 1983, when it increased the rate for domestic corporations to $10 per $1000 of capital stock, or a minimum of $50. Acts 1983, No. 83-745. On the motions for summary judgment, the parties submitted the depositions of James Sizemore, the Commissioner of the Department of Revenue, and Ernest Broadhead, the Chief of the Department's Division of Franchise Tax. Broadhead explained the genesis of the increase in the domestic tax rate. He explained that in 1983, at the request of some legislators, he drafted a proposed amendment of the domestic franchise tax that would have imposed that tax in the same manner as the tax on foreign corporations. The draft included a bill that would have proposed an amendment to § 229. When it became clear that those bills would not pass, Broadhead said, he hastily drafted a substitute bill, which became Act No. 83-745.
Long before these efforts to amend § 40-14-40, the legislature had passed a tax on the stock of domestic corporations that seems clearly to have been designed to offset the reduced base of the domestic franchise tax. Sections 40-14-40 and -41 trace back to the General Revenue Act of 1935, Act No. 194. In that same Act, the legislature imposed a tax on the stock of domestic corporations.
Although the domestic corporate stock tax is nominally imposed on the stockholders,
The following overview of corporate franchise/capital stock taxes was published in 1965 as Chapter 29 of the Report of the Special Subcommittee on State Taxation of Interstate Commerce of the Committee on The Judiciary, House of Representatives, June 30, 1965, Vol. 3, Part IV. It provides an informative background to the detailed history of such taxes in Alabama. The excerpts here are from pp. 903-911:
"This brief history demonstrates how the capital stock tax grew out of two very distinct forms of tax, each of which has left traces that are important in any appraisal of the present system. On the one hand, there were the one-time incorporation and entrance fees exacted for
In the terms of that report, one could say that § 40-14-40 imposes on domestic corporations a capital-account tax, and that §§ 40-14-41 and -70 impose capital-value taxes.
Given these facts, we now turn to a discussion of the standards that have been developed by the United States Supreme Court for applying the Equal Protection and Commerce Clauses to questions similar to the ones presented here.
Equal Protection of the Laws
The Equal Protection Clause provides: "No state shall ... deny to any person within its jurisdiction the equal protection of the laws." U.S. Const. Amend. 14. The term "person" was long ago held to apply to corporations. Santa Clara County v. Southern Pac. R.R., 118 U.S. 394, 6 S.Ct. 1132, 30 L.Ed. 118 (1886); and see Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751 (1985).
State tax legislation is given great deference before it will be found to be in violation of the Equal Protection Clause.
Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 359, 93 S.Ct. 1001, 1003, 35 L.Ed.2d 351 (1973) (footnote omitted).
Id., 410 U.S. at 364-365, 93 S.Ct. at 1006 (footnote omitted). See, also, City of New Orleans v. Dukes, 427 U.S. 297, 96 S.Ct. 2513, 49 L.Ed.2d 511 (1976).
The above-quoted standards of review were also applied in Exxon Corp. v. Eagerton, 462 U.S. 176, 195-96, 103 S.Ct. 2296, 2308, 76 L.Ed.2d 497 (1983).
In equal protection analysis of challenges to tax statutes, the basic test is that a classification for taxing purposes will be upheld if it is rationally related to a legitimate state purpose, "a relationship that is not difficult to establish." Metropolitan Life Ins. Co., supra, 470 U.S. at 881, 105 S.Ct. at 1683; Western & Southern Life Ins. Co. v. State Board of Equalization, 451 U.S. 648, 101 S.Ct. 2070, 68 L.Ed.2d 514 (1981); Baldwin v. Montana Fish & Game Comm'n, 436 U.S. 371, 98 S.Ct. 1852, 56 L.Ed.2d 354 (1978); Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 96 S.Ct. 2488, 49 L.Ed.2d 220 (1976).
Western & Southern Life Ins. Co. v. State Bd. of Equalization, 451 U.S. 648, 668, 101 S.Ct. 2070, 2083, 68 L.Ed.2d 514 (1981).
This case is unlike Metropolitan Life Ins. Co. v. Ward, supra, because that case involved premium taxes that were facially discriminatory against foreign insurance companies: a three or four percent rate
The Commerce Clause provides: "The congress shall have power to ... regulate commerce ... among the several states." U.S. Const. Art. I, § 8, cl. 3. The prohibitions of the Commerce Clause apply even in the absence of action by Congress on the principle that the clause itself prohibits an undue burden on interstate commerce by the states. Boston Stock Exchange v. State Tax Comm'n, 429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514 (1977); Freeman v. Hewit, 329 U.S. 249, 67 S.Ct. 274, 91 L.Ed. 265 (1946).
"No state, consistent with the Commerce Clause, may `impose a tax which discriminates against interstate commerce ... by providing a direct commercial advantage to local business.'" Boston Stock Exchange, 429 U.S. at 328, 97 S.Ct. at 605, quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct. 357, 362, 3 L.Ed.2d 421 (1959); Westinghouse Elec. Corp. v. Tully, 466 U.S. 388, 403, 104 S.Ct. 1856, 1865, 80 L.Ed.2d 388 (1984).
The Court has recently changed its analysis of the application of this clause to tax statutes. The current test is that a tax must (1) have a sufficient nexus to the taxing state, (2) be fairly apportioned, (3) not discriminate against interstate commerce, and (4) be reasonably related to the services provided by the taxing state. As part of the apportionment test, the Court has held that a tax must be internally consistent, that is, that it must be susceptible of application by all of the states without burdening interstate commerce. Amerada Hess Corp. v. Director, Div. of Taxation, New Jersey Dept. of the Treasury, ___ U.S. ___, 109 S.Ct. 1617, 104 L.Ed.2d 58 (1989); Goldberg v. Sweet, 488 U.S. 252, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989); American Trucking Ass'ns, Inc. v. Scheiner, 483 U.S. 266, 107 S.Ct. 2829, 97 L.Ed.2d 226 (1987); Armco Inc. v. Hardesty, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540 (1984); Commonwealth Edison Co. v. Montana, 453 U.S. 609, 101 S.Ct. 2946, 69 L.Ed.2d 884 (1981); Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977).
Applications of the Standards to this Case
We note here that the ultimate question in applying either equal protection or commerce clause analysis to these facts is virtually the same. The foreign corporation franchise tax has a nexus to this state and is apportioned fairly, because only such portion of the corporation's capital as is employed in this state forms the base for the franchise tax. It is reasonably related to services provided by this state, because the corporate function depends upon the provision of services such as roads, police and fire protection, etc. Therefore, the only element of the commerce clause test that is at issue here is the discrimination against interstate commerce test. While there are certain differences between this test and the test for application of the Equal Protection Clause, they are sufficiently similar that the bulk of our analysis will not treat them separately.
The question, as we see it, is whether the franchise tax on foreign corporations invidiously discriminates against them by imposing a grossly disproportionate tax on them for no other reason than to provide a competitive advantage to domestic corporations. We emphasize the term "invidiously" because the tax will be sustained if its classifications are rationally related to a legitimate state purpose and because, in enacting taxing statutes, legislatures are not required to reach equality with mathematical precision.
Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 813, 96 S.Ct. 2488, 2499, 49 L.Ed.2d 220 (1976); Lehnhausen v. Lake Shore Auto Parts, supra; Allied Stores of Ohio, Inc. v. Bowers, supra.
The guiding principles for courts to apply when legislative acts are challenged as unconstitutional were ably expressed in Alabama State Federation of Labor v. McAdory, 246 Ala. 1, 9, 18 So.2d 810, 815 (1944):
See, also, Home Indemnity Co. v. Anders, 459 So.2d 836 (Ala. 1984); Crosslin v. City of Muscle Shoals, 436 So.2d 862 (Ala.1983); Thorn v. Jefferson County, 375 So.2d 780 (Ala.1979); Mobile Housing Bd. v. Cross, 285 Ala. 94, 229 So.2d 485 (1969).
Thus, when testing the constitutionality of a statute, the only question for the Court to decide, under the constitutional separation of powers, is one of legislative power, not of legislative expediency or legislative wisdom. All questions of propriety, wisdom, necessity, utility, and expediency are exclusively for the legislature to determine and are matters with which the courts have no concern. Alabama State Federation of Labor v. McAdory, supra; Fireman's Fund American Ins. Co. v. Coleman, 394 So.2d 334, 352-53 (Ala.1980) (Shores, J., concurring in the result); Reed v. Brunson, 527 So.2d 102, 116 (Ala. 1988); Friday v. Ethanol Corp., 539 So.2d 208, 211 (Ala.1988).
Our legislature is faced with a difficult problem of imposing a franchise tax, because §§ 229 and 232 prescribe different methods of imposing the tax. Section 229 makes no allowance for apportionment of the domestic corporation franchise tax according to the amount of a corporation's capital stock that is attributable to activities within the state, while § 232 requires such an apportionment for foreign corporations, as it must under the Commerce Clause. The problem is compounded by the historical developments that "capital stock" in § 229 was held to mean only paid-in capital stock and that that measure of capital stock is no longer as appropriate a measure of the actual capitalization of a corporation as it was when the first franchise tax statutes were enacted pursuant to §§ 229 and 232.
Thus, we find that the plaintiffs' claims of unequal treatment and discrimination against them are answered by two factors in the record that are not taken into account in the opinion of the trial court or that of the Court of Civil Appeals, and which presumably have been taken into account by the legislature in its efforts to enact nondiscriminatory taxes. The first is that, while it is true that there are more domestic corporations doing business in this State than there are foreign corporations doing business in this State and that, as is shown in the opinions below, those
Both of these points are illustrated by the affidavit of Ernest Broadhead:
"1. Number of domestic share tax assessments by year
"2. Estimated total tax using average state millage rate (.038)
"3. Estimated average per corporation.
1987 1986 1985 1984"1. 45,048 42,902 41,348 39,501 "2. $13,563,668 $11,470,954 $11,197,983 $11,517,468 "3. 301.09 267.37 270.82 291.57
The State filed a brief in support of its motion for summary judgment that included the following argument based on Broadhead's affidavit:
"Before a tax is subject to the rational basis test, the Taxpayer must initially show that discrimination exists. The Taxpayers have attempted to do this
"The figures for the 1984 tax year are even more compelling. In that year domestic corporations paid a total of $325.29 in franchise taxes and $291.57 in corporate share taxes, for a total of $616.86. If one multiplies this figure times the factor of 4.5 one may see that a domestic corporation of a size comparable to an average foreign corporation would pay a total of $2,815.87 in taxes. A foreign corporation in that same year paid on average $3,323.08 in franchise taxes. The domestic share tax figures are estimates based on the average statewide tax rate of 38 mills. It stands to reason that proportionally more corporations are located in the large metropolitan areas, which have a higher millage rate. For instance, as of October, 1986 Huntsville had a millage rate of 68.5; Birmingham had a rate of 70.6; Mobile had a rate of 51.5 and Montgomery had a rate of 34.5. Had the estimates been weighted toward the higher millage rates which exist in the larger cities, the figures might well show that the total tax paid by domestic corporations equals that
We note that Broadhead inadvertently stated that his figures showed that domestic corporations employed only 45% of the capital employed by foreign corporations. What his figures in fact show is that domestic corporations employ 45% of the entire capital employed in the state by corporations while foreign corporations employ 55%.
Broadhead's affidavit shows that his estimates of the stock tax are almost certainly low, because Birmingham, Huntsville, and Mobile have tax rates
Perhaps the most significant fact about these calculations is that they are based on figures that Broadhead derived by examining domestic corporations' stock tax returns. This illustrates the point that the legislature has instituted the domestic stock tax to overcome the perceived restrictions imposed by § 229 (the absence of an apportionment provision and the "paid-in capital" interpretation) and to reach a tax base that is more nearly equivalent to that of foreign corporations. Also of great significance is the fact that, in deriving a hypothetical "capital employed" franchise tax for domestic corporations, Broadhead was not able to apply an allocation factor:
Thus, his figure of $991 as a "capital-employed" tax on domestic corporations is obviously high, and the discrepancy between the capital employed by domestic and foreign corporations is larger than his calculations show it to be and, correspondingly, the discrepancy in allocation of the tax burden is smaller than his calculations show it to be.
The point that the legislature has designed the domestic stock tax to complement the foreign franchise tax is made also by a comparison of § 40-14-41 with § 40-14-70. Although the definition of capital in § 40-14-41(b) is somewhat different from the factors set out in § 40-14-70(a) and (c) to be used in valuing a domestic corporation's stock, those methods of valuation reach largely the same elements of corporate worth. The investments of domestic corporations in other states are deducted from the value of the corporate stock before the tax is calculated, § 40-14-70(d)(1), so the domestic stock tax is apportioned to some degree as the foreign corporation franchise tax is apportioned. Another fact that shows that the
The United States Supreme Court has upheld taxing statutes that appeared to discriminate against interstate commerce by holding that the state's tax scheme compensated for the tax by a substantially equivalent tax on intrastate commerce. Gregg Dyeing Co. v. Query, 286 U.S. 472, 52 S.Ct. 631, 76 L.Ed. 1232 (1932) (use tax on out-of-state purchases brought into state compensated for by sales tax on in-state purchases); Alaska v. Arctic Maid, 366 U.S. 199, 81 S.Ct. 929, 6 L.Ed.2d 227 (1961) (exemption from tax on Alaska fish catches for fish to be canned in Alaska justified because of tax on Alaska fish canners); Public Util. Dist. v. Washington, 82 Wn.2d 232, 510 P.2d 206, appeal dismissed for want of a substantial Federal question, 414 U.S. 1106, 94 S.Ct. 833, 38 L.Ed.2d 734 (1973) (deduction, from tax on sale of electric power, for sales for resale within state not discriminatory because resales within state would be subject to the same tax).
The above-cited cases are analyzed at J. Hellerstein, State Taxation, vol. 1, "Corporate Income and Franchise Taxes," paragraph 4.12, pp. 147-48 (1983). Hellerstein questions the rationales of such cases at pages 149-51 and, in the 1988 cumulative supplement, notes that more recent United States Supreme Court cases have not allowed the comparison of complementary taxes to validate taxes that, by themselves, impose an undue burden on interstate commerce. American Trucking Ass'ns, Inc. v. Scheiner, 483 U.S. 266, 107 S.Ct. 2829, 97 L.Ed.2d 226 (1987); Tyler Pipe Industries, Inc. v. Washington State Dep't of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987); Armco, Inc. v. Hardesty, 467 U.S. 638, 104 S.Ct. 2620, 81 L.Ed.2d 540 (1984); Maryland v. Louisiana, 451 U.S. 725, 101 S.Ct. 2114, 68 L.Ed.2d 576 (1981).
Hellerstein elsewhere says, however, that a capital stock tax is a corporate franchise tax:
Hellerstein, op cit., paragraph 11.1, pp. 691-92 (footnotes omitted).
Because of the perceived restrictions in our Constitution, the legislature has divided the franchise tax on domestic corporations into the "franchise tax" as such and the corporate stock tax. No such restrictions exist with respect to foreign corporations, so the franchise tax on those corporations has not been so divided. There is no
When the franchise tax on foreign corporations is compared to the aggregate of the franchise tax and the corporate stock tax on domestic corporations, taking into account the large amount of capital employed in this state by foreign corporations and the relatively smaller amount employed by domestic corporations, the alleged unequal treatment of and discrimination against foreign corporations diminishes to a point that no discrimination of constitutional significance exists. The legislature is not required to reach equality with mathematical exactness, and legislation will be presumed constitutional unless shown otherwise by clear and convincing proof.
Even assuming that the lack of uniformity in the taxes on domestic and foreign corporations rose to a level of discrimination that would invoke equal protection or commerce clause analysis, we would hold that § 40-14-41 does not violate those provisions, for the following reasons.
The Court held in Louisville & N. R.R. v. State, supra, that the purpose behind §§ 229 and 232 and the taxes enacted pursuant thereto was to collect franchise taxes that did not discriminate against foreign corporations. That is concededly a legitimate state purpose. We find that the purpose behind the historical amendments to the foreign corporation franchise tax, the domestic corporation franchise tax, and the domestic corporation stock tax has been to maintain that lack of discrimination as nearly as was feasible within the framework imposed on the legislature by §§ 229 and 232 and the cases interpreting them. In determining whether "it was reasonable for the lawmakers to believe that use of the challenged classification would promote that purpose," Western & Southern Life, supra, we need only inquire whether the legislature engaged in "invidious" or "hostile and oppressive discrimination," Lehnhausen, supra.
There is no showing of invidious discrimination or hostile purpose. Rather, a tax that was originally imposed under an express state constitutional mandate not to discriminate against foreign corporations, and that originally did not so discriminate, developed, in its application and over time, to be somewhat more discriminatory. This came about, not through an increase of the tax on foreign corporations, but by a decrease of taxes paid under the franchise tax by domestic corporations. The decrease of the domestic franchise tax came about, not through legislative action, but through actions taken by domestic corporations to pay less money in franchise taxes.
It can be seen that the legislature, rather than invidiously fostering any such discrimination, took steps within the perceived restrictions of the Alabama Constitution to offset any unequal treatment, primarily by the use of the corporate stock tax. In the ongoing efforts to maintain the constitutionally required level of equal treatment, certain legislators introduced bills in the 1983 session that would have proposed an amendment to § 229 of the Constitution and thereby imposed a capital-employed franchise tax on domestic corporations. When it became clear that those bills were not likely to pass, the legislature substituted a bill that raised the rate and the minimum for the franchise tax on domestic corporations.
Other than the bare fact of that legislative activity in 1983, there is no evidence that, prior to the institution of this lawsuit, the legislature had any indication that its chosen means of implementing the corporate franchise taxes was not reasonably related to the purpose of imposing a nondiscriminatory tax system. Indeed, the evidence that was developed in this case shows that consideration of the relative amounts of capital employed (even under Broadhead's unapportioned analysis of a capital-employed tax on domestic corporations), together with the domestic stock tax, brings the relative tax burdens much closer than they would appear to be under the isolated facts cited in the opinion of the Court of Civil Appeals.
The Court of Civil Appeals quoted the trial court's statement that, aggregating the taxes paid and the returns filed in 1982 and 1983, 29,000 foreign corporations paid
Furthermore, the plaintiffs in this case have not presented sufficient evidence under Lehnhausen, supra, to negate a number of legitimate purposes of the present legislation that are apparent to this Court and that are reasonably likely to be promoted by the statutory distinction. Legitimate purposes for the statutory distinction between foreign and domestic corporations could certainly include, in addition to the mandate of the Alabama Constitution, ease of regulation and enforcement, differences in the utilization of state natural resources between foreign and domestic corporations, and differences in the employment of state residents and utilization of state services between foreign and domestic corporations.
With respect to the purpose of ease of regulation and supervision, we are aware that the legislature has enacted various provisions for the dissolution of domestic corporations or for proceeding against individual shareholders for collection of taxes that cannot apply to foreign corporations. The United States Supreme Court has held that ease of regulation can serve as a rational basis for a distinction between "persons" under equal protection analysis. See G.D. Searle & Co. v. Cohn, 455 U.S. 404, 102 S.Ct. 1137, 71 L.Ed.2d 250 (1982) (difficulty of obtaining jurisdiction over nonresident corporation justified distinction in statute of limitations); Madden v. Kentucky, 309 U.S. 83, 60 S.Ct. 406, 84 L.Ed. 590 (1940) (differences in ability to enforce state remedies justifies different treatment of foreign organizations); Metropolitan Casualty Ins. Co. v. Brownell, 294 U.S. 580, 55 S.Ct. 538, 79 L.Ed. 1070 (1935) (domicile of insurer relevant to limitations statutes because such insurers' offices were generally located outside of the state); Board of Education v. Illinois, 203 U.S. 553, 27 S.Ct. 171, 51 L.Ed. 314 (1906) (state's greater control over domestic corporations justified a discriminatory inheritance tax as to foreign corporations).
Thus, we hold that § 40-14-41 does not violate the Equal Protection Clause.
Turning to the Commerce Clause, we must inquire whether the taxes in question impose an undue burden on interstate commerce. The weighing of factors pertinent to the franchise taxes and the corporate stock tax leads to case-by-case differences as to whether Alabama citizens wishing to incorporate a business would find it advantageous to form an Alabama corporation or to incorporate in another state. At oral argument, the amicus curiae indicated that, for example, if a business has large intangible assets, the domestic stock tax would be so burdensome that the incorporators would inevitably choose to incorporate in another state, such as Delaware.
These considerations are affected by the kind of business the corporation would be doing in this state and by the nature of its assets, not by the distinction between intrastate business and interstate business. The same considerations would apply to the decision of a foreign corporation in deciding whether to form a subsidiary Alabama corporation to conduct its business here or to conduct its business through a division of the existing corporation.
In the United States, which has 50 sovereigns that tax corporations, there will inevitably be incentives for incorporating in one state for certain types of business and in
Thus, Alabama's taxation of domestic and foreign corporations does not violate the Commerce Clause.
For the foregoing reasons, we hold that there is no unconstitutional unequal treatment of foreign corporations and no unconstitutional discrimination against them. Therefore, § 40-14-41 does not offend either the Equal Protection Clause or the Commerce Clause. The judgment of the Court of Civil Appeals is therefore reversed, and a judgment is hereby rendered for the State on its motion for summary judgment.
REVERSED AND JUDGMENT RENDERED.
HORNSBY, C.J., and MADDOX, JONES, SHORES, ADAMS, HOUSTON, STEAGALL and KENNEDY, JJ., concur.