International Shoe Co. v. Shartel

Background

A Missouri shoe manufacturer challenged state tax officials after Missouri assessed its non-par stock by treating each no-par share as equivalent to a $100 par share under a 1921 law. The company has 100,000 preferred shares with $100 par and 3,760,000 no-par shares sold at $9.60 each. Using the $100 equivalent, Missouri assigned the non-par stock a value of $376,000,000, raising the company’s annual franchise tax from about $25,000 to more than $100,000. The company sought an injunction arguing the tax denied equal protection; a three-judge district court denied the injunction, and the case came directly to the Supreme Court.

Reasoning

The Court addressed whether Missouri’s method of valuing no-par shares violates equal protection or improperly taxes business outside the state. It held the statute does not deny equal protection, explaining the tax is a charge for the privilege of doing business, not a direct tax on property, and that assigning a statutory value only measures the tax rate without reaching property beyond the state. The Court also rejected commerce clause challenges because the company conducted substantial local business and the tax is apportioned to in-state activity. The Court affirmed the lower court’s order.

Real world impact

This ruling allows Missouri to continue computing franchise taxes by valuing no-par shares at the statutory equivalent, making higher tax bills likely for corporations with large amounts of no-par stock located in the state. Companies doing substantial local business in Missouri remain subject to such apportioned franchise taxes. The decision is final here, so affected corporations must base tax planning on the state’s valuation method.

Dissents or concurrances

One Justice (McReynolds) disagreed, believing the statute’s effect was to tax property beyond Missouri and thus was improper.