Southern Natural Gas Corp. v. Alabama

Background

A natural gas company incorporated in another State qualified to do business in Alabama and made Birmingham its headquarters. It built long-distance pipelines from Louisiana and Mississippi and owned pipe and property in Alabama. The company sold gas to four Alabama buyers, including three public utility distributors and one industrial steel company. Alabama assessed a franchise tax based on capital employed in the State (about $5.5 million). The company challenged the tax as an improper burden on interstate commerce and as violating the Fourteenth Amendment.

Reasoning

The central question was whether Alabama’s tax directly burdened interstate commerce or instead taxed the privilege of doing local business. The Court found the company carried on substantial local activities in Alabama: a Birmingham headquarters, orders and collections handled there, installation of service lines, and metering for local industrial consumers. Because these actions were intrastate in character, the Court held Alabama could tax the privilege of doing local business and measure the tax by capital employed in the State. Any effect on interstate commerce was deemed indirect and incidental. The Alabama Supreme Court’s judgment upholding the tax was affirmed.

Real world impact

The ruling makes clear that states may impose franchise taxes on out-of-state corporations that perform local business activities and may base those taxes on capital used in the State. Firms that bring gas or goods across state lines but also establish local distribution, service lines, or a commercial headquarters in the State risk state taxation. The decision treats such taxation as constitutionally permissible when its impact on interstate commerce is incidental.