Matson Nav. Co. v. State Bd. of Equalization of Cal.
Headline: California may include the portion of a corporation’s interstate and foreign income attributable to the state when computing a franchise tax, upholding the state’s ability to tax income tied to in-state business.
Holding:
- Allows states to tax portion of interstate and foreign income tied to in-state business.
- Requires companies with both in-state and out-of-state business to include attributable income in franchise tax.
- Leaves corporations doing only interstate or foreign commerce in California untaxed under this statute.
Summary
Background
Two California-incorporated shipping companies and a related terminal company filed a consolidated 1930 tax return showing income from business inside California and a larger amount from interstate and foreign routes (including Hawaii, the South Sea Islands, Australia and New Zealand). California’s tax commissioner determined that 22.2% of the interstate and foreign net income was attributable to California and assessed an additional franchise tax. The state board of equalization and the California Supreme Court sustained that assessment. The companies challenged the inclusion of that portion of outside income as violating the Constitution’s commerce clause and the Fourteenth Amendment’s protections for due process and equal protection.
Reasoning
The Court explained that California can tax the privilege of using corporate franchises it grants — in other words, the right to operate as a corporation under California law. It held that net income properly attributable to business done in California, even if earned in interstate or foreign commerce, may be used as the base for the franchise tax. The opinion distinguished earlier cases that invalidated taxes on gross interstate earnings, relied on precedents allowing taxation of net income attributable to a State, and noted the 22.2% attribution was not challenged here. The Court found no arbitrary deprivation of property and no unconstitutional discrimination in how the tax was applied. It also acknowledged that a foreign corporation whose only activity in California is interstate or foreign commerce would not be subject to this tax.
Real world impact
Companies that do both in-state and out-of-state business can be taxed on the portion of overall profits that reasonably tie to California. Businesses solely engaged in interstate or foreign commerce in California remain outside this tax. Tax officials and corporations will rely on attribution measures like the one used here when computing similar franchise taxes.
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