516 U.S. 325 (1996), 94-1239, Fulton Corp. v. Faulkner

Docket Nº:Case No. 94-1239
Citation:516 U.S. 325, 116 S.Ct. 848, 133 L.Ed.2d 796, 64 U.S.L.W. 4088
Case Date:February 21, 1996
Court:United States Supreme Court

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516 U.S. 325 (1996)

116 S.Ct. 848, 133 L.Ed.2d 796, 64 U.S.L.W. 4088




Case No. 94-1239

United States Supreme Court

February 21, 1996

Argued October 31, 1995



During the period in question here, North Carolina levied an "intangibles tax" on a fraction of the value of corporate stock owned by state residents inversely proportional to the corporation's exposure to the State's income tax. Petitioner Fulton Corporation, a North Carolina company, filed a state-court action against respondent State Secretary of Revenue, seeking a declaratory judgment that this tax violated the Commerce Clause and a refund of the 1990 tax it had paid on stock it owned in out-of-state corporations that did only part or none of their business in the State. The trial court ruled for the Secretary, but the Court of Appeals reversed. In reversing the Court of Appeals, the North Carolina Supreme Court found that the State's scheme imposed a valid compensatory tax under Darnell v. Indiana, 226 U.S. 390. It thus rejected Fulton's contention that Darnell had been overruled by this Court's more recent decisions and found that the intangibles tax imposed less of a burden on interstate commerce than the corporate income tax placed on intrastate commerce.


North Carolina's intangibles tax discriminates against interstate commerce in violation of the dormant Commerce Clause. Pp. 330-347.

(a) State laws discriminating against interstate commerce on their face are "virtually per se invalid." Oregon Waste Systems, Inc. v. Department of Environmental Quality of Ore., 511 U.S. 93, 99. However, a facially discriminatory tax may survive Commerce Clause scrutiny if it is a truly " 'compensatory tax' designed simply to make interstate commerce bear a burden already borne by intrastate commerce." Associated Industries of Mo. v. Lohman, 511 U.S. 641, 647. The tax at issue is clearly facially discriminatory, and therefore it must meet three conditions to be considered a valid compensatory tax, see Oregon Waste, supra, at 103. The Secretary has failed to show that the tax satisfies any of the requirements. Pp. 330-334.

(b) To meet the first condition, a State must identify the intrastate tax burden for which it is attempting to compensate, Oregon Waste, supra, at 103, and the intrastate tax must serve some purpose for which the State may otherwise impose a burden on interstate commerce. See Maryland v. Louisiana, 451 U.S. 725, 759. The Secretary claims that the intangibles tax compensates for the burden of the general corporate

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income tax paid by corporations doing business in North Carolina and that the state service supported by the corporate income tax is the maintenance of an intrastate capital market. This Court, however, has recognized the danger of treating general revenue measures as relevant intrastate burdens for purposes of the compensatory tax doctrine. Oregon Waste, supra, at 105, n. 8. Moreover, it can reasonably be assumed that the State's blue sky laws, not its general corporate income tax, provide for the capital market's upkeep. Thus, the Secretary has pointed to no in-state activity or benefit that justifies the compensatory levy. Pp. 334-336.

(c) The second condition requires that the tax on interstate commerce approximate, but not exceed, the tax on intrastate commerce. Oregon Waste, supra, at 103. The relevant comparison—between the size of the intangibles tax and that of the corporate income tax component that purportedly funds the capital market—is for practical purposes impossible. The corporate income tax is a general form of taxation, not assessed according to the taxpayer's use of particular services, and before its revenues are earmarked for particular purposes they have been commingled with funds from other sources. Hence, the Secretary cannot show what proportion of that tax goes to support the capital market, or whether that proportion represents a burden greater than the one the intangibles tax imposes on interstate commerce. Pp. 336-338.

(d) The third condition requires the compensating taxes to fall on substantially equivalent events. The purpose of this requirement is to ensure that the actual payers of each tax are members of the same class, so that the effect of the compensating tax is to enable in-state and out of-state businesses to compete on a footing of equality. Henneford v. Silas Mason Co., 300 U.S. 577. Evaluating whether this requirement has been met will ordinarily require an analysis of the economic incidence of the respective taxes, an issue usually unsuited for judicial resolution. Here there are reasons to doubt that the relevant taxes have the same incidences, and while it is unlikely that a State can ever show that two taxes are equivalent outside the limited confines of sales and use taxes, it is enough to say here that no such showing has been made. Pp. 338-344.

(e) Darnell, supra, does not dictate a different result. That case appears to have evaluated a compensatory tax scheme under the rational basis standard generally employed under the Equal Protection Clause. In that respect, Darnell, along with Kidd v. Alabama, 188 U.S. 730, has been bypassed by later Commerce Clause decisions, which require discriminatory restrictions on commerce to pass the strictest scrutiny. Pp. 344-346.

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(f) The state courts should determine in the first instance the proper remedy and whether Fulton has complied with the procedural requirements of the State's tax refund statute. Pp. 346-347.

338 N.C. 472, 450 S.E.2d 728, reversed and remanded.

Souter, J., delivered the opinion for a unanimous Court. Rehnquist, C. J., filed a concurring opinion, post, p. 348.

Jasper L. Cummings, Jr., argued the cause and filed briefs for petitioner.

Charles Rothfeld argued the cause for respondent. With him on the brief were Michael F. Easley, Attorney General of North Carolina, Marilyn R. Mudge, Assistant Attorney General, and Laurie R. Rubenstein.[*]

Justice Souter delivered the opinion of the Court.

In this case we decide whether North Carolina's "intangibles tax" on a fraction of the value of corporate stock owned by North Carolina residents inversely proportional to the corporation's exposure to the State's income tax violates the Commerce Clause. We hold that it does.


During the period in question here, North Carolina levied an "intangibles tax" on the fair market value of corporate stock owned by North Carolina residents or having a "business, commercial, or taxable situs" in the State. N. C. Gen. Stat. § 105-203 (1992).[1] Although the tax was assessed at

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a stated rate of one quarter of one percent, residents were entitled to calculate their tax liability by taking a taxable percentage deduction equal to the fraction of the issuing corporation's income subject to tax in North Carolina. Ibid. This figure was set by applying a corporate income tax apportionment formula averaging the portion of the issuing corporation's sales, payroll, and property located in the State. See § 105-130.4(i).

Thus, a corporation doing all of its business within the State would pay corporate income tax on 100% of its income, and the taxable percentage deduction allowed to resident owners of that corporation's stock under the intangibles tax would likewise be 100%. Stock in a corporation doing no business in North Carolina, on the other hand, would be taxable on 100% of its value. For the intermediate cases, holders of stock were able to look up the taxable percentage for a large number of corporations as determined and published annually by the North Carolina Secretary of Revenue (Secretary). In 1990, for example, the Secretary determined the appropriate taxable percentage of IBM stock to be 95%, meaning that IBM did 5% of its business in North Carolina, with its stock held by North Carolina residents being taxable on 95% of its value. N. C. Dept. of Revenue, Stock and Bond Values as of December 31, 1990, p. 39.

Petitioner Fulton Corporation is a North Carolina company owning stock in other corporations that do business out of state. In the 1990 tax year, at issue in this case, Fulton owned shares in six corporations, five of which did no business or earned no income in North Carolina and therefore were not subject to the State's corporate income tax. Fulton's stock in these corporations was accordingly subject to the intangibles tax on 100% of its value. Fulton also owned stock in Food Lion, Inc., which did 46% of its business in North Carolina, with the result that its stock was subject to the intangibles tax on 54% of its value. App. 11.

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Fulton's intangibles tax liability for the 1990 tax year amounted to $10,884. It paid the tax and brought this action in state court under Rev. Stat. § 1979, as amended, 42 U.S.C. § 1983, seeking a declaratory judgment that the scheme based on the taxable percentage deduction violated the Commerce Clause by discriminating against interstate commerce. Fulton also sought a refund under the terms of the appropriate state statute, N. C. Gen. Stat. § 105-267(1992), and attorney's fees under Rev. Stat. § 722, as amended, 42 U.S.C. § 1988. On the parties' cross-motions for summary judgment, the state trial court ruled in favor of the Secretary.

On appeal, North Carolina's Court of Appeals reversed, holding that the taxable percentage deduction violated the Commerce Clause. Fulton Corp. v. Justus, 110 N. C. App. 493, 430 S.E.2d 494 (1993). The Court of Appeals saw a facial discrimination against shareholders in out-of-state corporations in forcing them to pay tax on a higher percentage of...

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