U.S. Supreme Court Air-Way Elec. Appliance Corp. v. Day, 266 U.S. 71 (1924)
Air-Way Elec. Appliance Corp. v. Day
Nos. 31 and 32
Argued April 30, May 1, 1924
Decided October 20, 1924
266 U.S. 71
APPEALS FROM THE DISTRICT COURT OF THE UNITED STATES
FOR THE SOUTHERN DISTRICT OF OHIO
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
the local business was of that value plus all the business, and by applying the rate to the result.
(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.
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
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. . . . "
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
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
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
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."
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
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,
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
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.
[ 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
[ 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