Schwab v. Richardson

Background

A California corporation, the Oceanic Steamship Company, ran ships between San Francisco, the Hawaiian Islands, and some foreign ports and bought fuel and supplies in California. The Company filed the required report with the State Board of Equalization. The Board valued the corporate franchise at $120,000, took 15% as the share attributable to California business, and levied a 1% franchise tax of $1,200. The Company paid under protest, assigned the claim to Edwin Schwab, and sued in state court. The case reached the courts on a motion for judgment on the pleadings without additional evidence.

Reasoning

The central question was whether California could tax the franchise of a company it created when the franchise’s value was in part connected to property and commerce outside the State. The Court held that the tax was on an intangible franchise—the right granted by the State—and that a franchise’s value may include its use in interstate or foreign commerce. The Court found the Board’s apportionment method was not illegally oppressive and did not unlawfully burden interstate or foreign commerce. The state judgment against the taxpayer was therefore affirmed.

Real world impact

The ruling confirms that a State may tax the corporate franchise it grants and may measure franchise value by its in‑state portion of business, even if that value is enhanced by out‑of‑state commerce. The decision is confined to intangible franchise taxation and does not decide questions about taxing tangible property located outside the State. The judgment was final on the facts and law presented.