What's next in South Central Bell?

• Author: Griffen, Richard H.
• Position: U.S. Supreme Court tax case concerning state discrimination against nonresident businesses

On March 23, 1999, the Supreme Court released its long-awaited decision in South Central Bell Telephone Co. v. Alabama. The Court rejected Alabama's Eleventh Amendment challenge to the Court's jurisdiction, and upheld the taxpayer's Fourteenth Amendment due process rights and the Commerce Clause restriction against nonresident discrimination. (For a discussion, see News Notes, "Alabama Foreign Franchise Tax," TTA, May 1999, p. 284.) Bell marks the second time in 14 years that the Supreme Court has struck down an Alabama tax designed to impose a heavier tax burden on nonresident businesses. As in its earlier decision in Metropolitan Life Insurance Co. v. Ward, 470 US 869 (1985), the Court remanded the case to the state court to determine an appropriate remedy.

At this time, there can only be speculation as to what the remedy might be. The plaintiffs in Metropolitan Life settled their refund claims outside the court system, with the state agreeing to redesign the objectionable taxing system. This redesigned system of taxation was implemented eight years after the Court directed the state to develop a solution. If Alabama is to achieve a similar resolution of the current issue, it will likely be more difficult. To begin with, unlike the tax involved in Metropolitan Life, the corporate franchise taxes are imposed by the state constitution. The state constitution restricts the taxation of both domestic corporations and foreign corporations to the scheme found objectionable by the Federal court. Therefore, one or more constitutional amendments will be required to eliminate the existing taxing system. An amendment removing the constitutional provisions related to corporate franchise taxes has already passed the first steps in the process. Assuming the proposed amendment is ultimately approved, it will then be up to the Alabama legislature to craft a replacement for the lost revenue. Presumably, this will be in the form of a constitutionally acceptable replacement corporate franchise tax.

Will the plaintiffs in Bell eventually abandon their claims for refunds in exchange for a prospective remedy? Certainly, the state will correct the taxing system with or without an agreement from the Bell plaintiffs to abandon their claims. One initial proposal would have limited the tax to an amount less than $9,000, regardless of the assets the corporation employs in Alabama. To taxpayers like the plaintiffs in Bell, this limitation most likely is very...