S. Central Bell Telephone v. Alabama

• Decision Date: 23 March 1999
• Docket Number: 972045
• Citation: 119 S.Ct. 1180,526 U.S. 160,143 L.Ed.2d 258
• Parties: 711 So. 2d 1005, reversed and remanded. SUPREME COURT OF THE UNITED STATES 119 S.Ct. 1180 143 L.Ed.2d 2582045 SOUTH CENTRAL BELL TELEPHONE COMPANY, et al., PETITIONERS v. ALABAMA et al. ON WRIT OF CERTIORARI TO THE SUPREME COURT OF ALABAMA [
• Court: U.S. Supreme Court

526 U.S. 160

119 S.Ct. 1180

143 L.Ed.2d 258

711 So. 2d 1005, reversed and remanded

SUPREME COURT OF THE UNITED STATES

119 S.Ct. 1180

143 L.Ed.2d 258

No. 97 2045

SOUTH CENTRAL BELL TELEPHONE COMPANY, et al., PETITIONERS v. ALABAMA et al.

ON WRIT OF CERTIORARI TO THE SUPREME COURT OF ALABAMA

[March 23, 1999]

Justice Breyer delivered the opinion of the Court.

The basic question in this case is whether the franchise tax Alabama assesses on foreign corporations violates the Commerce Clause. We conclude that it does.

I

Alabama requires each corporation doing business in that State to pay a franchise tax based upon the firm's capital. A domestic firm, organized under the laws of Alabama, must pay tax in an amount equal to 1% of the par value of the firm's stock. Ala. Const., Art. XII, §229; Ala. Code §40 14 40 (1993); App. to Pet. for Cert. 50a, 52a, 61a (Stipulated Facts). A foreign firm, organized under the laws of a State other than Alabama, must pay tax in an amount equal to 0.3% of the value of "the actual amount of capital employed" in Alabama. Ala. Const., Art. XII, §232; Ala. Code §40 14 41(a) (Supp. 1998). Alabama law grants domestic firms considerable leeway in controlling their own tax base and tax liability, as a firm may set its stock's par value at a level well below its book or market value. App. to Pet. for Cert. 52a 53a (Stipulated Facts). Alabama law does not grant a foreign firm similar leeway to control its tax base, however, as the value of the "actual" capital upon which Alabama calculates the foreign franchise tax includes not only the value of capital stock but also other accounting items (e.g., long-term debt, surplus), the value of which depends upon the firm's financial status. Id., at 53a 54a; Ala. Code §§40 14 41(b)(1) (5), (c).

In 1986, the Reynolds Metals Company and three other foreign corporations sued Alabama's tax authorities, seeking a refund of the foreign franchise tax they had paid on the ground that the tax discriminated against foreign corporations. Although the tax favored foreign firms in some respects (granting them a lower tax rate and excluding any capital not employed in Alabama), that favorable treatment was more than offset by the fact that a domestic firm, unlike a foreign firm, could shrink its tax base significantly simply by setting the par value of its stock at a low level. As a result, Reynolds Metals said, the tax burden borne by foreign corporations was much higher than the burden on domestic corporations, and the tax consequently violated both the Commerce and Equal Protection Clauses. U.S. Const., Art. I, §8, cl. 3, and Amdt. 14, §1.

The Alabama Supreme Court rejected these claims. White v. Reynolds Metals Co., 558 So. 2d 373 (1989). Without denying that the franchise tax imposed a special burden upon foreign corporations, the court nonetheless thought that this special burden simply offset a different burden imposed exclusively upon domestic corporations by Alabama's "domestic shares tax." This latter tax is a property tax on shares of domestic stock; it is assessed against shareholders based upon the value of the shares they hold, but in practice it is normally paid by the corporation itself. Id., at 386 388 (citing, e.g., Gregg Dyeing Co. v. Query, 286 U.S. 472 (1932) (permitting taxes that discriminate against interstate commerce when they compensate for burdens placed uniquely upon domestic commerce)). Any remaining discrimination, the court concluded, was constitutionally insignificant. 558 So. 2d, at 388 390.

While the Alabama courts were considering Reynolds Metals, a different foreign corporation, South Central Bell Telephone Company, brought the lawsuit now before us. Bell asserted the same Commerce Clause and Equal Protection Clause claims as had Reynolds Metals, though in respect to different tax years. Bell initially agreed to hold its suit in abeyance pending the resolution of Reynolds Metals's claims. Then, after the Alabama Supreme Court decided against the taxpayers in Reynolds Metals, Bell (joined by other foreign corporations with similar claims) went to trial.

The Bell plaintiffs introduced evidence designed to show that the empirical premises that underlay Reynolds Metals were wrong: Despite the differences in franchise tax rates, Alabama's franchise tax scheme in practice discriminates substantially against foreign corporations, and the Alabama tax on shares of domestic corporations does not offset the discrimination in the franchise tax. The Alabama trial court agreed with the Bell plaintiffs that their evidence, taken together with this Court's recent Commerce Clause cases, "clearly and abundantly demonstrates that the franchise tax on foreign corporations discriminates against them for no other reason than the state of their incorporation." Memorandum Opinion in App. to Pet. for Cert. 21a 22a (hereinafter Mem. Op.) (citing Oregon Waste Systems, Inc. v. Department of Environmental Quality of Ore., 511 U.S. 93 (1994); Associated Industries of Mo. v. Lohman, 511 U.S. 641 (1994); Fulton Corp. v. Faulkner, 516 U.S. 325 (1996)). But the trial court nonetheless dismissed their claims for a different reason, namely, that given the Alabama Supreme Court's decision in Reynolds Metals, "the Taxpayer[s'] claims [in this case] are barred by res judicata." Mem. Op. 17a.

The Alabama Supreme Court affirmed the trial court by a vote of 5 to 4. The majority's decision cited Reynolds Metals and a procedural rule regarding summary dispositions and simply said, "PER CURIAM. AFFIRMED. NO OPINION." 711 So. 2d 1005 (1998). One justice concurred specially to say that by requesting that their case be held in abeyance until Reynolds Metals was resolved, the Bell plaintiffs had agreed to be bound by Reynolds Metals. 711 So. 2d, at 1005 1007 (opinion of Maddox, J.). Three dissenters wrote that given the differences between this case and Reynolds Metals (e.g., different tax years, different plaintiffs), res judicata could not bind the Bell plaintiffs. 711 So. 2d, at 1008 (opinion of See, J.). On the merits, the dissenters concluded that the franchise tax violated the Commerce Clause. See id., at 1008 1011. (One other justice dissented without opinion.)

We granted the Bell plaintiffs' petition for certiorari, agreeing to decide (1) whether the Alabama courts' refusal to permit the Bell plaintiffs to raise their constitutional claims because of res judicata "deprived" the Bell plaintiffs "of the due process of law guaranteed by the Fourteenth Amendment," Pet. for Cert. (i); see Richards v. Jefferson County, 517 U.S. 793 (1996); and (2) whether the franchise tax "impermissibly discriminates against interstate commerce, in violation of the Commerce Clause," Pet. for Cert. (i). We decide both questions in favor of the Bell plaintiffs.

II

A

At the outset, the respondents the State of Alabama and its State Department of Revenue (collectively, the State) argue that this Court lacks "appellate jurisdiction over this case." Brief for Respondents 15. The State points to the Eleventh Amendment, which provides:

"The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State . . . ."

The State claims that this Amendment's literal language applies here because this case began in state court as a suit brought against one State, namely, Alabama, by citizens of another; because we, in hearing this case, would be exercising the "Judicial power of the United States"; and because Alabama has not waived its right to object to our exercise of that power.

This Court, however, has recently considered and rejected the very argument that the State now makes. In McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, Fla. Dept. of Business Regulation, 496 U.S. 18 (1990), we unanimously held that "[t]he Eleventh Amendment does not constrain the appellate jurisdiction of the Supreme Court over cases arising from state courts." Id., at 31. We explained:

"[I]t is 'inherent in the constitutional plan' . . . that when a state court takes cognizance of a case, the State assents to appellate review by this Court of the federal issues raised in the case 'whoever may be the parties to the original suit, whether private persons, or the state itself.' " Id., at 30 (quoting Principality of Monaco v. Mississippi, 292 U.S. 313, 329 (1934); Proprietors of Charles River Bridge v. Proprietors of Warren Bridge, 11 Pet. 420, 585 (1837) (Story, J., dissenting)).

Our holding in McKesson confirmed a long-established and uniform practice of reviewing state-court decisions on federal matters, regardless of whether the State was the plaintiff or the defendant in the trial court. 496 U.S., at 28; accord, General Oil Co. v. Crain, 209 U.S. 211, 233 (1908) (Harlan, J., concurring) ("[I]t was long ago settled" that the Eleventh Amendment does not bar "a writ of error to review the final judgment of a state court").

Although the State now asks us to "overrule McKesson," Brief for Respondents 27, it does not provide a convincing reason why we should revisit that relatively recent precedent, and we shall not do so. Cf. Planned Parenthood of Southeastern Pa. v. Casey, 505 U.S. 833, 854 855 (1992) (considerations relevant to overruling precedent include workability of prior precedent, its relation to other changes in law, and relevant reliance).

B

The State, in opposing Bell's petition for certiorari, argued that the Alabama Supreme Court's decision rested upon an adequate state ground, namely, state-law principles of res judicata. It now believes, however, that the Alabama Supreme Court's decision rejected the plaintiffs' claims on their merits and relied upon Reynolds Metals under principles of stare decisis, not res judicata. Brief for Respondents 3. For that reason, the State "offer[s] no defense of the decision as a valid application of the doctrine of...