Air-Way Electric Appliance Corp. v. Day

Background

A Delaware corporation that manufactured and sold electrical appliances set up large plants and conducted business in Ohio. The State assessed an annual franchise fee by applying a per‑share charge to the corporation’s total number of authorized non‑par shares rather than to the shares actually outstanding or to the value of property and sales located in Ohio. State officers initially demanded $20,000; a lower federal court reduced the charge to $14,926. The company sued to stop collection, saying the law improperly taxed its interstate business and treated similar companies unequally.

Reasoning

The Court considered whether assessing fees on the number of authorized non‑par shares unconnected to a corporation’s Ohio property or local business unlawfully burdened interstate commerce and denied equal treatment. It held the statute’s practical effect was to tax the corporation’s interstate business and property beyond Ohio’s borders, which the Constitution forbids, and that basing fees on authorized shares bore no reasonable relation to the value of the privilege in Ohio. The Court found the classification arbitrary and in violation of the Fourteenth Amendment’s equal protection guarantee, and concluded the injunction should have been granted.

Real world impact

The ruling prevents states from imposing franchise fees measured by a corporation’s total authorized non‑par shares when that measure does not reflect the company’s property or business in the State. Companies doing interstate business are protected from being taxed on out‑of‑state operations through this method. The decision requires that fees relate reasonably to local property, business, or the value of the privilege exercised in the State.