Amendment 14 — Corporate Privilege Taxes

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Fourteenth Amendment , Section 1:

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

A domestic corporation may be subjected to a privilege tax graduated according to paid-up capital stock, even though the stock represents capital not subject to the taxing power of the state, because the tax is levied not on property but on the privilege of doing business in corporate form.[1](https://www.law.cornell.edu/constitution-conan/amendment-14/corporate-privilege-taxes#fn1amd14 " Kansas City Ry. v. Kansas, 240 U.S. 227 (1916); Kansas City, Memphis & Birmingham R.R. v. Stiles, 242 U.S. 111 (1916). Similarly, the validity of a franchise tax, imposed on a domestic corporation engaged in foreign maritime commerce and assessed upon a proportion of the total franchise value equal to the ratio of local business done to total business, is not impaired by the fact that the total value of the franchise was enhanced by property and operations carried on beyond the limits of the state. Schwab v. Richardson, 263 U.S. 88 (1923). ") However, a state cannot tax property beyond its borders under the guise of taxing the privilege of doing an intrastate business. Therefore, a license tax based on the authorized capital stock of an out-of-state corporation is void,[2](https://www.law.cornell.edu/constitution-conan/amendment-14/corporate-privilege-taxes#fn2amd14 " W. Union Tel. Co. v. Kansas, 216 U.S. 1 (1910); Pullman Co. v. Kansas, 216 U.S. 56 (1910); Looney v. Crane Co., 245 U.S. 178 (1917); Int’l Paper Co. v. Massachusetts, 246 U.S. 135 (1918). ") even though there is a maximum fee,[3](https://www.law.cornell.edu/constitution-conan/amendment-14/corporate-privilege-taxes#fn3amd14 " Cudahy Co. v. Hinkle, 278 U.S. 460 (1929). ") unless the tax is apportioned based on property interests in the taxing state.[4](https://www.law.cornell.edu/constitution-conan/amendment-14/corporate-privilege-taxes#fn4amd14 " An example of such an apportioned tax is a franchise tax based on such proportion of outstanding capital stock as is represented by property owned and used in business transacted in the taxing state.St. Louis Sw. Ry. v. Arkansas, 235 U.S. 350 (1914). ") On the other hand, a fee collected only once as the price of admission to do intrastate business is distinguishable from a tax and accordingly may be levied on an out-of-state corporation based on the amount of its authorized capital stock.[5](https://www.law.cornell.edu/constitution-conan/amendment-14/corporate-privilege-taxes#fn5amd14 " Atl. Refining Co. v. Virginia, 302 U.S. 22 (1937). ")

A municipal license tax imposed on a foreign corporation for goods sold within and without the state, but manufactured in the city, is not a tax on business transactions or property outside the city and therefore does not violate the Due Process Clause.[6](https://www.law.cornell.edu/constitution-conan/amendment-14/corporate-privilege-taxes#fn6amd14 " Am. Mfg. Co. v. St. Louis, 250 U.S. 459 (1919). Nor does a state license tax on the production of electricity violate the due process clause because it may be necessary, to ascertain, as an element in its computation, the amounts delivered in another jurisdiction. Utah Power & Light Co. v. Pfost, 286 U.S. 165 (1932). A tax on chain stores, at a rate per store determined by the number of stores both within and without the state is not unconstitutional as a tax in part upon things beyond the jurisdiction of the state. ") But a state lacks jurisdiction to extend its privilege tax to the gross receipts of a foreign contracting corporation for fabricating equipment outside the taxing state, even if the equipment is later installed in the taxing state. Unless the activities that are the subject of the tax are carried on within its territorial limits, a state is not competent to impose such a privilege tax.[7](https://www.law.cornell.edu/constitution-conan/amendment-14/corporate-privilege-taxes#fn7amd14 " James v. Dravo Contracting Co., 302 U.S. 134 (1937). ")

Footnotes

1

Kansas City Ry. v. Kansas, 240 U.S. 227 (1916) ; Kansas City, Memphis & Birmingham R.R. v. Stiles, 242 U.S. 111 (1916) . Similarly, the validity of a franchise tax, imposed on a domestic corporation engaged in foreign maritime commerce and assessed upon a proportion of the total franchise value equal to the ratio of local business done to total business, is not impaired by the fact that the total value of the franchise was enhanced by property and operations carried on beyond the limits of the state. Schwab v. Richardson, 263 U.S. 88 (1923) .

2

W. Union Tel. Co. v. Kansas, 216 U.S. 1 (1910) ; Pullman Co. v. Kansas, 216 U.S. 56 (1910) ; Looney v. Crane Co., 245 U.S. 178 (1917) ; Int’l Paper Co. v. Massachusetts, 246 U.S. 135 (1918) .

3

Cudahy Co. v. Hinkle, 278 U.S. 460 (1929) .

4

An example of such an apportioned tax is a franchise tax based on such proportion of outstanding capital stock as is represented by property owned and used in business transacted in the taxing state.St. Louis Sw. Ry. v. Arkansas, 235 U.S. 350 (1914) .

5

Atl. Refining Co. v. Virginia, 302 U.S. 22 (1937) .

6

Am. Mfg. Co. v. St. Louis, 250 U.S. 459 (1919) . Nor does a state license tax on the production of electricity violate the due process clause because it may be necessary, to ascertain, as an element in its computation, the amounts delivered in another jurisdiction. Utah Power & Light Co. v. Pfost, 286 U.S. 165 (1932) . A tax on chain stores, at a rate per store determined by the number of stores both within and without the state is not unconstitutional as a tax in part upon things beyond the jurisdiction of the state.

7

James v. Dravo Contracting Co., 302 U.S. 134 (1937) .