State franchise tax illegal, U.S. high court rules

WASHINGTON, D.C. (March 24) — The U.S. Supreme Court unanimously ruled that an Alabama corporate franchise tax is unconstitutional because it discriminates against out-of-state businesses, a decision that could affect the constitutionality of similar taxes in other states.

Businesses based in the state must pay $10 per $1000 of the par value of their stock, which is determined by the corporation and usually reflects a small percentage of the stock’s market value. Out-of-state corporations are taxed based on a rate of $3 per $1000 of actual amount of capital employed in the state.

However, Alabama law gives in-state corporations the ability to reduce the par value of their stock while it denies out-of-state businesses the same ability.

As a result, out-of-state businesses typically pay five times more in franchise taxes — a total of about $100 million a year — than those companies based in Alabama, lawyers for BellSouth and CSX, which brought the suit, said in a Reuters report.

Nearly eight years ago, the Ontario Trucking Association challenged New York State over its ability to impose a similar tax, arguing that the tax contravened the foreign commerce clause of the U.S. Constitution. The New York State Franchise Tax is imposed on the gross receipts of out-of-state companies that perform as few as one of two pick-ups or deliveries a year in that state.

The problem, the association has said, is that these taxes are not income taxes per se. Therefore, they fall outside of the Canada-U.S. Tax Treaty and are not eligible for foreign tax credits in Canada. The result is double taxation.

OTA director of government affairs Michael Burke said he was unaware of the Supreme Court decision, and was conferring with legal counsel as to whether the tax applied to trucking operations.

“Not all state franchise taxes apply to trucking, or they apply to trucking in varying ways,” Burke said. “Whether this ruling can be applied more broadly has yet to be seen, but we’re looking into it now.”

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