St. Louis Southwestern Railway Co. v. Arkansas

Background

Arkansas passed Act No. 112 to impose an annual franchise tax on corporations doing business in the State, measured by the portion of outstanding capital stock represented by property used in Arkansas. A foreign railroad company challenged the tax as violating the Constitution’s commerce clause and the Fourteenth Amendment’s due process and equal protection guarantees. A separate state law, Act No. 251, treats certain railroad franchises as property for assessment.

Reasoning

The Court accepted the Arkansas Supreme Court’s construction that the tax is imposed only on the franchise to do intrastate business and is measured solely by property located and used in the State. Because the tax is not based on receipts from interstate commerce, the Court held it does not place a direct burden on interstate commerce. The Court explained that states may tax property within their borders and may impose franchise taxes tied to in‑state property value, and that the Fourteenth Amendment does not forbid double taxation unless it reflects arbitrary discrimination.

Real world impact

The ruling allows Arkansas to collect franchise taxes from out‑of‑state corporations based on the in‑state portion of their capital or property, so long as the tax does not fluctuate with interstate receipts or operate as a condition on interstate commerce. A provision threatening forfeiture for nonpayment could be unconstitutional if applied to interstate rights, but the Court expected the state courts to limit that provision or treat it as severable.

Dissents or concurrances

One Justice, Mr. Justice McReynolds, did not participate in the case.