Supreme Court Holds Alabama Foreign Franchise Tax Unconstitutional TEI, Others Had Urged Court to Invalidate Tax.

A unanimous U.S. Supreme Court ruled in March that Alabama's franchise tax on foreign corporations impermissibly discriminates against interstate commerce in violation of the Commerce Clause. The Court noted that "Alabama law gives domestic corporations the ability to reduce their franchise tax simply by reducing the par value of their stock, while it denies foreign corporations that same ability." Because of the difference in the tax rates, the law facially discriminates against foreign corporations, the Court held. The Court also rejected any notion that the foreign franchise tax was a "complementary" or "compensatory" tax that offsets the tax burden borne by domestic corporations, finding instead that the tax burdens were not "roughly approximate."

South Central Bell Telephone Company v. Alabama technically involved whether Alabama's theory of res judicata operated to deny taxpayers due process and whether the State's franchise tax on out-of-state corporations contravened the Commerce Clause of the Constitution. After review was granted by the Court, however, the State abandoned its defense of the statute, position, in effect conceding the unconstitutionality of its franchise tax on foreign corporations -- at least as the Constitution is currently interpreted. Rather, the State turned to an argument that the Commerce Clause imposes no restraints on a state's power to tax unless Congress specifically says otherwise. In its opinion, the Supreme Court rejected the State's invitation to revisit more than 60 years of Commerce Clause jurisprudence. The Court also rejected the State's contention that the Eleventh Amendment to the Constitution immunized Alabama from being sued for imposing the unconstitutional tax.

TEI filed amicus briefs in support of the taxpayers' petition for a writ of certiorari and on the merits after the writ was granted. (TEI's briefs were reprinted in the July-August and November-December 1998 issues of The Tax Executive.)