Stratton, Secretary of State of Illinois, v. St. Louis Southwestern Railway Co.

Background

A corporation doing business in Illinois challenged the state’s $1,000 minimum annual franchise tax after it faced possible loss of its certificate to operate for nonpayment. A three-judge federal district court had blocked the state from assessing and collecting the tax, holding it unconstitutional as a burden on interstate commerce and a due process violation. The company argued it would suffer irreparable harm if the state revoked its authority to do business.

Reasoning

The key question was whether the company had an adequate legal remedy under Illinois law so that a federal court should not use its equitable power to stop collection. The Court reviewed Illinois statutes and cases showing taxpayers can pay under protest and then sue at law to recover illegally collected taxes, and that state procedure can hold protested payments for thirty days if a bill in chancery and a temporary injunction are sought. The Court emphasized the historic law-versus-equity test in federal courts and concluded a legal remedy exists, so equity should not be used absent special circumstances. The Supreme Court therefore reversed the injunction.

Real world impact

Corporations subject to Illinois franchise taxes cannot normally get federal courts to block collection; they must use state-law refund suits or the state’s protest-and-hold procedure. The decision limits preventive federal equity relief and directs companies to seek money damages through the available legal process unless exceptional facts make that remedy inadequate.