White v. Reynolds Metals Co.

• Decision Date: 28 November 1989
• Citation: 558 So.2d 367
• Parties: James C. WHITE, Jr., etc., and State Department of Revenue v. REYNOLDS METALS COMPANY, et al. Civ. 7246-X.
• Court: Alabama Court of Civil Appeals

Page 367

558 So.2d 367

James C. WHITE, Jr., etc., and State Department of Revenue v. REYNOLDS METALS COMPANY, et al.

Civ. 7246-X.

Court of Civil Appeals of Alabama.

Nov. 28, 1989.

Don Siegelman, Atty. Gen., and B. Frank Loeb, Chief Counsel, and Ron Bowden and Nancy I. Cottle, Asst. Counsel, Dept. of Revenue and Asst. Attys. Gen., for appellants.

Joseph W. Letzer, Bruce A. Rawls and Orion G. Callison III of Burr & Forman, Birmingham, for appellee Reynolds Metals Co.

Robert W. Bradford, Jr. and Laura L. Crum of Hill, Hill, Carter, Franco, Cole & Black, Montgomery, for appellees GMAC Leasing Corp., Gen. Motors Accept. Corp. and Gen. Motors Corp.

INGRAM, Presiding Judge.

These cases concern the constitutionality of Alabama's franchise tax on foreign corporations pursuant to § 40-14-41, Ala.Code 1975. On July 7, 1989, the trial court found that Ala.Code 1975, § 40-14-41, was unconstitutional because it impermissibly discriminates against foreign corporations in violation of the equal protection clause, U.S. Const. amend. XIV, § 1. On August 14, 1989, the trial court ordered that its decision be applied prospectively and denied the taxpayers' requests for refunds. All parties have appealed.

Facts

Reynolds Metals Company, GMAC Leasing Corporation, General Motors Acceptance Corporation, and General Motors Corporation (taxpayers) are foreign corporations qualified to do business in Alabama and were subject to the levy and payment of Alabama franchise taxes pursuant to Ala.Code 1975, § 40-14-41. However, the taxpayers initiated proceedings in the Circuit Court of Montgomery County seeking to invalidate the Alabama franchise tax on foreign corporations on grounds that it impermissibly discriminates against them in violation of the equal protection clause (U.S. Const. amend. XIV, § 1) and unduly burdens interstate commerce in violation of the commerce clause (U.S. Const. art. I, § 8, cl. 3). The taxpayers' cases were consolidated and submitted to the trial court on cross-motions for summary judgment.

On the issue of the constitutionality of the franchise tax, the trial court entered a detailed and comprehensive order. That order, in part, is as follows:

"The Court finds that § 40-14-41 facially discriminates against foreign corporations in favor of domestic corporations and likewise is discriminatory in its application. The statistics and figures quoted in the taxpayers' briefs, as supported by the discovery documents, clearly show a gross disparity of franchise taxes paid by a foreign corporation when compared to domestic corporations. In 1982 and 1983, Alabama collected almost $94,000,000 in franchise tax from approximately 29,000 foreign corporations; however, Alabama collected less than $10,000,000.00 in franchise tax from the 82,000 domestic corporations filing franchise tax returns for 1982 and 1983. The Court has considered the other facts and figures set out in the taxpayers' briefs, finds them supported by the evidence, and adopts them as a basis for its holding in this case. Significantly, the Department of Revenue (Department) has failed to advance any legitimate state purpose for this discrimination. Therefore, the Court is compelled to find that § 40-14-41 discriminates against foreign corporations qualified to do business in Alabama and is unconstitutional."

The trial court pretermitted any discussion of the taxpayers' argument concerning the commerce clause. Also, the trial court reserved any ruling on the appropriate remedy available to the taxpayers until after a hearing was held.

On July 31, 1989, briefs were submitted and arguments were heard on the appropriate remedy and final judgment. Again, the trial court issued a detailed and comprehensive order. The trial court held that whether refunds should be granted is governed by the application of the criteria announced in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971). The trial court then concluded that, based on Chevron Oil, its holding should be applied prospectively and denied the taxpayers' requests for refunds.

In the main, there are two questions presented to this court by way of appeal and cross-appeal: Whether the franchise tax ( § 40-14-41) is unconstitutional, and if so, what is the appropriate remedy? We will address each issue separately.

I.

First we will discuss whether the franchise tax on foreign corporations ( § 40-14-41) is unconstitutional in that it violates the equal protection clause of the United States Constitution.

The equal protection clause of the United States Constitution requires that a discriminatory tax be rationally related to a legitimate state purpose. Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751 (1985); Western & Southern Life Ins. Co. v. State Board of Equalization of California, 451 U.S. 648, 101 S.Ct. 2070, 68 L.Ed.2d 514 (1981). Unless there is such a legitimate state purpose, the State does not have the authority to impose more onerous taxes or other burdens on foreign corporations than those imposed on domestic corporations. Western, supra. The equal protection clause forbids a state to discriminate in favor of its own residents solely by burdening residents of other states. Metropolitan, supra. As set out by the United States Supreme Court,

"[t]he validity of the view that a state may not constitutionally favor its own residents by taxing foreign corporations at a higher rate solely because of their residence is confirmed by a long line of this court's cases so holding [cites omitted]."

Metropolitan, supra, 470 U.S. at 878, 105 S.Ct. at 1681. Furthermore, "promotion of domestic business within a state, by discriminating against foreign corporations ... is not a legitimate state purpose." Metropolitan, supra, at 880, 105 S.Ct. at 1682.

Here, the record is clear that the amount of franchise taxes paid by foreign corporations is enormously disproportionate to that paid by the domestic corporations. As set out in the trial court's order above, Alabama collected almost $94,000,000 in franchise taxes from approximately 29,000 foreign corporations in 1982 and 1983; however, Alabama collected less than $10,000,000 in franchise taxes from 82,000 domestic corporations for the same period. Based on the statistics before it, the trial court found, and we agree, that § 40-14-41 clearly discriminates against foreign corporations in favor of domestic corporations. Therefore, the question becomes whether the discriminatory franchise tax is rationally related to a legitimate state purpose.

The trial court found that there was no legitimate state purpose for imposing more onerous taxes on foreign corporations than on domestic corporations. After a review of the record, as well as the briefs before us, we agree.

From a review of the record before us, we find that the taxpayers sought to discover a purpose for the discrimination against them. During discovery, the Department of Revenue (department) was given several opportunities to account for the discrimination. However, the department failed to do so. In fact, the department was specifically requested in an interrogatory to state in detail each and every legitimate state purpose that the State of Alabama was advancing or exercising by distinguishing in the franchise tax scheme. The department's only response was that it relied on the franchise tax law as written. Similarly, the commissioner of revenue and the chief of the franchise tax division were both given opportunities to explain the purpose of the franchise tax system; however, neither of them could offer a reason for the discrimination.

On appeal, the department did advance a reason for the discrimination. It contended that the discrimination against foreign corporations rationally relates to the purpose of offsetting possible difficulties of enforcing the franchise tax against foreign corporations. In other words, the State contends that the relationship between the differing tax burdens could be a result of enforcement problems.

We do not find such argument to be persuasive. In fact, the chief of the franchise tax division testified in the trial court that foreign corporations were easier to regulate and the remedy against them easier and less costly to enforce.

We also point out that the franchise tax, as originally enacted, was never intended to discriminate against foreign corporations. In fact, it was determined that the sole purpose for different methods of computing the franchise tax was to ensure that there was no discrimination between foreign and domestic corporations. Louisville & N. R. R. v. State, 201 Ala. 317, 78 So. 93 (1918). The State intended for its policy toward "domestic and foreign corporations [to be] uniform as far as possible." State v. Southern Natural Gas Corp., 233 Ala. 81, 88, 170 So. 178, 183 (1936); aff'd, 301 U.S. 148, 57 S.Ct. 696, 81 L.Ed. 970 (1937).

We have little difficulty in finding that the franchise tax against foreign corporations is clearly a discriminatory tax with no legitimate state purpose. The State has advanced none, nor can we conceive of any legitimate state purpose which would be served by applying the grossly disproportionate tax. Therefore, we affirm the trial court's partial summary judgment order of July 7, 1989, which declared § 40-14-41, Ala.Code 1975, unconstitutional.

II.

We have concluded above that Alabama's franchise tax is indeed unconstitutional and have affirmed the trial court's July 7, 1989, order. Now, we turn our attention to the appropriate remedy. The trial court concluded that its decision should have prospective relief only, and the taxpayers have appealed.

The first point of inquiry is whether Alabama's statute or case law mandates refunds of the taxes paid prior to the judicial determination that § 40-14-41 is unconstitutional (July 7, 1989). In order to make such a determination, we must decide whether to apply the trial court's order prospectively or...