Fulton Corp. v. Faulkner

Background

A North Carolina company that owned stock in other firms challenged the State’s “intangibles tax,” which taxed the value of corporate stock held by residents and reduced that tax by the percentage of a corporation’s income apportioned to North Carolina. Fulton paid the tax, sued for a refund, and claimed the scheme discriminated against interstate commerce. After mixed rulings in state courts, the case reached the United States Supreme Court.

Reasoning

The Court considered whether the tax discriminated against interstate commerce and whether the State could justify it as a compensatory tax (a tax meant to equalize burdens between in-state and out-of-state commerce). The Court found the tax was facially discriminatory and rejected North Carolina’s defenses. It held the State failed all three required showings to sustain a compensatory tax: identifying a specific in-state burden being compensated, showing the out-of-state tax roughly matched that burden in size, and demonstrating the two taxed events were substantially equivalent.

Real world impact

Because the tax was unconstitutional, North Carolina may not keep a scheme that taxes out-of-state corporations’ stock more heavily than in-state firms. The Court reversed the state supreme court and returned the case for state courts to decide remedies like refunds or statutory adjustments. The opinion notes the intangibles tax was later repealed but that repeal did not affect the tax years at issue.

Dissents or concurrances

Chief Justice Rehnquist wrote a short concurrence agreeing the tax failed under the Court’s modern “substantial equivalence” test and joined the Court’s judgment.