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Keywords

plaintiffliabilityappealcorporationdue process
plaintifftrialcorporationdue process

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South Central Bell Telephone Co. v. Alabama, 526 U.S. 160, 119 S.Ct. 1180, 143 L.Ed.2d 258, 67 USLW 4186, 99 Cal. Daily Op. Serv. 2063, 1999 Daily Journal D.A.R. 2652, 12 Fla. L. Weekly Fed. S 148

Facts

Alabama imposes a franchise tax on all corporations doing business in the state, calculated differently for domestic and foreign firms. Domestic corporations can set the par value of their stock, allowing them to reduce their tax liability, while foreign corporations are taxed based on the actual capital employed in the state, with no such flexibility. Reynolds Metals Company and others previously challenged this tax, but their claims were dismissed. South Central Bell Telephone Company and other foreign corporations later brought similar claims for different tax years, but their case was also dismissed on res judicata grounds, leading to the appeal.

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. 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.

Issue

Does Alabama's franchise tax on foreign corporations violate the Commerce Clause and Equal Protection Clause, and is the application of res judicata appropriate in this case?

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, 116 S.Ct. 1761, 135 L.Ed.2d 76 (1996); and (2) whether the franchise tax 'impermissibly discriminates against interstate commerce, in violation of the Commerce Clause,' Pet. for Cert. (i).

Rule

The Supreme Court held that the franchise tax discriminates against interstate commerce and that the application of res judicata in this context violates the Fourteenth Amendment's due process guarantee.

To the extent that the State Supreme Court based its decision on claim or issue preclusion (res judicata or collateral estoppel), that decision is inconsistent with the Fourteenth Amendment's due process guarantee.

Analysis

The Court found that Alabama's franchise tax scheme creates a discriminatory burden on foreign corporations by not allowing them the same flexibility in determining their tax base as domestic corporations. The Court emphasized that the tax structure unfairly penalizes foreign firms for their out-of-state status, and the state's justification for the tax as compensatory was insufficient. The Court also noted that the Bell plaintiffs were 'strangers' to the earlier judgment and thus could not be bound by it.

The Court found that Alabama's franchise tax scheme creates a discriminatory burden on foreign corporations by not allowing them the same flexibility in determining their tax base as domestic corporations.

Conclusion

The U.S. Supreme Court reversed the Alabama Supreme Court's decision and remanded the case, ruling that the franchise tax violated the Commerce Clause.

For these reasons, the judgment of the Alabama Supreme Court is reversed, and the case is remanded for further proceedings not inconsistent with this opinion.

Who won?

South Central Bell Telephone Company and other foreign corporations prevailed because the Supreme Court found that Alabama's franchise tax discriminated against them in violation of the Commerce Clause.

The Alabama trial court agreed with the Bell plaintiffs that the tax substantially discriminates against foreign corporations, but nonetheless dismissed their claims as barred by res judicata in light of the State Supreme Court's Reynolds Metals decision.

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