Alabama Foreign Franchise Tax.

• Author: Laffie, Lesli S.

In a unanimous decision, South Central Bell Telephone Co. v. Alabama, 3/23/99, the Supreme Court struck down as unconstitutional Alabama's franchise tax on foreign corporations as violative of the Commerce Clause. According to the Court, the tax facially discriminates against interstate commerce.

Alabama franchise tax is imposed on a domestic corporation based on its capital stock at the rate of 1% of par value. State law does not define "capital stock" but the state has long defined it as par value (for stock with par value) or stated value (for stock with no par value). Because the par or stated value of a domestic corporation's stock is determined by the corporation itself (regardless of the stock's market or book value), a domestic corporation can minimize its franchise tax liability by assigning to its stock a token par or stated value.

On the other hand, a foreign corporation's franchise tax liability is computed as .3% of the actual amount of capital employed in the state. Thus, while the rate of tax is set at 1% of par value for domestic corporations, a corporation's ability to arbitrarily set a low par or stated value has enabled domestic corporations to pay, on average, less than one-fifth of the franchise tax than if they were incorporated outside Alabama.

Writing for the Court, Justice Stephen Breyer rejected Alabama's attempt to strip the...