# IN THE SUPREME COURT O F TEX AS

4 4 4 4 4 4 4 4 4 4 4 4 

## N O



## . 12-0518

4 4 4 4 4 4 4 4 4 4 4 4


# I N R E 

# N E S T L E 

# U S A , I N C



# . , R E L A T O R

4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4



## O N 

## P E T I T I O N F O R 

## W R I T O F 

## M A N D A M U S



### 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4



## Argued Septem ber 18, 2012

J U S T I C E 

## H E C H T 

## delivere d the opinion of the Court, joined by C H I E F J U S T I C E 

## J E F F E R S O N 

## , J U S T I C E 

## M E D I N A 

## , J U S T I C E 

## G R E E N 

## , J U S T I C E 

## J O H N S O N 

## , and J U S T I C E 

## G U Z M A N



## . J U S T I C E 

## W I L L E T T 

## delivere d a dissenting opinion, joined by J U S T I C E 

## L E H R M A N N



## . Since first imposing a fra

nchise tax in 1893, the L eg islature has restruc tured it sever al times,
draw ing various dis t inctions among taxpay ers with adjustments, deductions, and exemptions that
have become elabora te. P etitioner in this orig inal proce eding contends that the franchise tax now
in place bear s no rea sonable relationship to its object, the value of the privi leg e of doing business
in Texas, and there fore violates the Texas Constit ution’s mandate that “[t] axation shall be equal and

## uniform”, the Four teenth Amendment’s Equal Protection and D u e Pr ocess g uara ntees, and the U.S. 1 2


## Constit ution’s Comm erc e Clause. We conclude tha t petitioner’s cha lleng es ar e without merit. 3



## I

A
Texas’ first fra

nchise tax, enac ted in 1893, was $10 annually for “ea ch and ever y private
domestic corpor ation here tofore char tere d or that may be here afte r char tere d under the laws of this State, and eac h and ever

y fore ign corpor ation that has rec eived or may here afte r rec eive a permit to
do business und er t h e l aw s o f this State, in this State

. . . .” I n 1897, the L eg islature adopted a 4



## g radua ted rate that incre ased in steps with the amount of a corpor ation’s capital stock. The rate was 5 

## signific antly highe r for fore ign corpor ations. I n 1905, the L eg islature chang ed to a g radua ted rate 6

T E X

. C O N S T

. a r t

. V I I I , § 1 ( a )

. 1

U

. S

. C O N S T

. a m e n d

. X I V , § 1 ( “ N o S t a t e s h a l l

. . . d e p r i v e a n y p e r s o n o f l i f e , l i b e r t y , o r p r o p e r t y , w i t h o u t d u e 2 p r o c e s s o f l a w ; n o r d e n y t o a n y p e r s o n w i t h i n i t s j u r i s d i c t i o n t h e e q u a l p r o t e c t i o n o f t h e l a w s
. ” )

.

U

. S

. C O N S T

. a r t

. I , § 8 ( “ T h e C o n g r e s s s h a l l h a v e p o w e r
. . . [ t ] o r e g u l a t e C o m m e r c e
. . . a m o n g t h e s e v e r a l 3 S t a t e s
. . . . ” )

.

A c t a p p r o v e d M a y 1 1 , 1 8 9 3 , 2 3 d L e g
. , R

. S

. , c h

. 1 0 2 , § 5 , 1 8 9 3 T e x
. G e n
. L a w s 1 5 6 , 1 5 8 , r e p r i n t e d i n 1 0 4 H

. P

. N

. G a m m e l , T

h e L a w s o

f T e x a s 1 8 2 2

– 1 8 9 7 , a t 5 8 6 , 5 8 8 ( A u s t i n , G a m m e l B o o k C o
. 1 8 9 8 ) , c o d i f i e d a s T E X

. R E V

. C IV

. S T A T

. a r t

. 5 2 4 3 i

. T h e s a m e s t a t u t e i m p o s e d a g r o s s p r e m i u m r e c e i p t s t a x o f 0

. 5 %

- 1

. 2 5 % o n i n s u r a n c e c o m p a n i e s , a $ 0

. 2 5 / t e l e p h o n e t a x o n t e l e p h o n e c o m p a n i e s , a n d a 0

. 2 5 % t a x o n t h e c a p i t a l s t o c k o r s i m i l a r i n t e r e s t s o f c e r t a i n r a i l w a y c a r c o m p a n i e s o r u n i n c o r p o r a t e d b u s i n e s s e s
. I d

. § § 1

- 4

.
A c t a p p r o v e d A p r i l 3 0 , 1 8 9 7 , 2 5 t h L e g
. , R

. S

. , c h

. 1 0 4 , § 1 , 1 8 9 7 T e x
. G e n
. L a w s 1 4 0 , 1 4 1 r e p r i n t e d i n 1 0 5 H

. P

. N

. G a m m e l , T

h e L a w s o

f T e x a s 1 8 2 2

- 1 8 9 7 , a t 1 1 9 4

- 1 1 9 5 ( A u s t i n , G a m m e l B o o k C o
. 1 8 9 8 ) , a m e n d i n g T E X

. R E V

. C IV

. S T A T

. a r t

. 5 2 4 3 i

. F o r a d o m e s t i c c o r p o r a t i o n w i t h c a p i t a l s t o c k o f : $ 5 0 , 0 0 0 o r l e s s , $ 1 0 ; o v e r $ 5 0 , 0 0 0 b u t l e s s t h a n $ 1 0 0 , 0 0 0 , $ 2 0 ; $ 1 0 0 , 0 0 0 o r m o r e b u t l e s s t h a n $ 2 0 0 , 0 0 0 , $ 3 0 ; a n d $ 2 0 0 , 0 0 0 o r m o r e , $ 5 0

. I d

.
I d

. F o r a f

o r e i g n c o r p o r a t i o n w i t h c a p i t a l s t o c k : $ 2 5 , 0 0 0 o r l e s s , $ 2 5 ; $ 2 5 , 0 0 0 o r m o r e u p t o a n d i n c l u d i n g 6 $ 1 0 0 , 0 0 0 , $ 1 0 0 ; m o r e t h a n $ 1 0 0 , 0 0 0 , $ 1 p e r $ 1 0 , 0 0 0

. I d

. T h e c o u r t i n W

o e s s n e r v

. H

. T

. C o t t a m & C o

. , 4 7 S

. W

. 6 7 8 , 6 8 0 ( T e x
. C i v
. A p p
. 1 8 9 8 , w r i t d e n i e d ) , h e l d t h a t “ [ t ] h e s t a t u t e , i n s o f a r a s i t a t t e m p t s t o l a y a t a x o n i n t e r s t a t e c o m m e r c e , i s u n c o n s t i t u t i o n a l a n d v o i d

. ”


### 2

## that decr eas ed in steps with the amount of a corpor ation’s capital stock. As befor e, the rate for 7


## fore ign corpor ations was simil ar but highe r. Ex tensive amendments in 1907 kept the g radua ted rate 8


## for fore ign corpor ations but adopted a mostly flat rate for domestic corpor ations, one based not only

on authorized capital stock but in some instances on surplus and undivided profits as well. And for 9 

## the first time, the L eg islature cr eate d exemptions — for

corpor ations org anized for the purpose of relig ious worship; or for providing place s of burial not for private profit; or corpor ations org anized for the purpose of holding agricultural fairs and encour ag ing ag ricultural pursuits, or for strictly educati o n al purposes, or f

or pure ly public char ity

. 1 0


## The structure of the fra

nchise tax continued to evolve. The distinction in rate s betwee n
domestic and fore ign corpor ations was a b a n d o n e d in 1930. I n 1981, statutory provisions g overning 1 1


## the fra nchise tax wer e codified in Chapter 171 of the Texas Tax Code. The tax rema ined based on 1 2

A c t a p p r o v e d M a r c h 1 , 1 9 0 5 , 2 9 t h L e g
. , R

. S

. , c h

. 1 9 , § 1 , 1 9 0 5 T e x
. G e n
. L a w s 2 1 , 2 2 , r e p r i n t e d i n 1 2 H

. P

. N

. 7 G a m m e l , T

h e L a w s o

f T e x a s , a t 8 8 7

- 8 8 9 ( A u s t i n , G a m m e l B o o k C o
. 1 9 0 5 ) , a m e n d i n g T E X

. R E V

. C IV

. S T A T

. a r t

. 5 2 4 3 i

. F o r d o m e s t i c c o r p o r a t i o n s , t h e r a t e w a s $ 1 f o r e a c h $ 2 , 0 0 0 o f c a p i t a l s t o c k u p t o a n d i n c l u d i n g $ 1 0 0 , 0 0 0 ; p l u s $ 1 f o r e a c h $ 1 0 , 0 0 0 o f

c a p i t a l s t o c k o v e r $ 1 0 0 , 0 0 0 , u p t o a n d i n c l u d i n g $ 1 m i l l i o n ; p l u s $ 1 f o r e a c h $ 2 0 , 0 0 0 o f

c a p i t a l s t o c k
o v e r $ 1 m i l l i o n , u p t o a n d i n c l u d i n g $ 1 0 m i l l i o n ; p l u s $ 1 f o r e a c h $ 5 0 , 0 0 0 o f c a p i t a l s t o c k o v e r $ 1 0 m i l l i o n
. I d

.
I d

. F o r f o r e i g n c o r p o r a t i o n s , t h e r a t e w a s $ 1 f o r e a c h $ 1 , 0 0 0 o f c a p i t a l s t o c k u p t o $ 1 0 0 , 0 0 0 ; p l u s $ 1 f o r e a c h 8 $ 5 , 0 0 0 o f c a p i t a l s t o c k o v e r $ 1 0 0 , 0 0 0 , u p t o a n d i n c l u d i n g $ 1 m i l l i o n ; p l u s $ 1 f o r e a c h $ 2 0 , 0 0 0 o f c a p i t a l s t o c k o v e r $ 1 m i l l i o n , u p t o a n d i n c l u d i n g $ 1 0 m i l l i o n ; p l u s $ 1 f o r e a c h $ 5 0 , 0 0 0 o f c a p i t a l s t o c k o v e r $ 1 0 m i l l i o n
. I d

.
A c t a p p r o v e d M a y 1 6 , 1 9 0 7 , 3 0 t h L e g
. , R

. S

. , c h

. 2 3 , § § 1

- 2 , 1 9 0 7 T e x
. G e n
. L a w s 5 0 2 , 5 0 2

- 5 0 3 , r e p r i n t e d 9 i n 1 3 H

. P

. N

. G a m m e l , T h e L a w s o

f T e x a s , a t 5 0 2 , 5 0 2

- 5 0 3 ( 1 9 0 7 )

. T h e a n n u a l t a x f o r d o m e s t i c c o r p o r a t i o n s w a s $ 0

. 5 0 f o r e a c h $ 1 , 0 0 0 o f a u t h o r i z e d c a p i t a l s t o c k u p t o a n d i n c l u d i n g $ 1 m i l l i o n , o r f o r e a c h $ 1 , 0 0 0 o f i s s u e d s t o c k p l u s s u r p l u s a n d u n d i v i d e d p r o f

i t s , i f m o r e t h a n t h e a u t h o r i z e d c a p i t a l s t o c k

. F o r a u t h o r i z e d c a p i t a l o v e r $ 1 m i l l i o n t h e r a t e l o w e r e d t o $ 0

. 2 5 p e r $ 1 , 0 0 0

. T h e 1 8 9 7 s t r u c t u r e , w i t h d i f f e r e n t r a t e s , a p p l i e d t o f o r e i g n c o r p o r a t i o n s
. C

f

. s u p r a n o t e 6

.
I d

. § 1 3 , 1 9 0 7 T e x
. G e n
. L a w s a t 5 0 7

. 10

A c t o f M a r c h 2 0 , 1 9 3 0 , 4 1 s t L e g
. , 5 t h C

. S

. , c h

. 6 8 , § 1 , 1 9 3 0 T e x
. G e n
. L a w s 2 2 0 , 2 2 0 , a m e n d i n g T E X

. R E V

. 11 C IV

. S T A T

. a r t

. 7 0 8 4

.

S e e A c t o f M a y 3 1 , 1 9 8 1 , 6 7 t h L e g
. , R

. S

. , c h

. 3 8 9 , § 1 , 1 9 8 1 T e x
. G e n
. L a w s 1 4 9 0 , 1 6 9 1

- 1 7 1 0 , c o d i f y i n g 12 T E X

. T A X C O D E § § 1 7 1

. 0 0 1

- . 4 0 1

. 

### 3

## a corpor ation’s stated capital a nd surplus, but the rate was a flat .425%, with some exceptions.

1 3 1 4



## Over the y ear s, many exemptions we re ad d ed to those cre ated in 1907 — for railwa y terminal

corpor ations with no annual net income; saving s and loan associations, cre dit unions, and 1 5 1 6 1 7 

## banks; open-e nd investment companies; marke ting associations ; lodge s ; d evelopment

1 8 1 9 2 0 2 1



## corpor ations; various kinds of cooper ative corpor ations; various nonprofits; corpor ations with

2 2 2 3 2 4

I d

. § 1 7 1

. 1 0 1

. 13

I d

. § 1 7 1

. 0 0 2

. T h e m i n i m u m t a x w a s $ 5 5

. I d

. A l o w e r r a t e w a s a v a i l a b l e t o c e r t a i n c o r p o r a t i o n s t h a t d i d 14

n o t u s e p u b l i c h i g h w a y s b y a u t h o r i t y o f a c e r t i f i c a t e o f c o n v e n i e n c e a n d n e c e s s i t y i s s u e d b y t h e R a i l r o a d C o m m i s s i o n , i d

. § 1 7 1

. 0 0 3 , a n d a c o r p o r a t i o n w i t h l e s s t h a n $ 1 m i l l i o n i n a s s e t s c o u l d e l e c t t o b e t a x e d o n i t s a s s e t s , i d

. § 1 7 1

. 0 0 4

.

I d

. § 1 7 1

. 0 5 3

. 15

I d

. § 1 7 1

. 0 5 4

. 16

I d

. § 1 7 1

. 0 7 7

. 17

I d

. § 1 7 1

. 0 7 8

. 18

I d

. § 1 7 1

. 0 5 5

. 19

I d

. § 1 7 1

. 0 6 9

. 20

I d

. § 1 7 1

. 0 7 0

. 21

I d

. § 1 7 1

. 0 7 4

. 22

I d

. § § 1 7 1

. 0 7 1 ( f

a r m e r s ) , 1 7 1

. 0 7 3 ( l a u n d r y ) , 1 7 1

. 0 7 5 ( c o - o p s g e n e r a l l y ) , 1 7 1

. 0 7 6 ( c r e d i t ) , 1 7 1

. 0 7 9 ( e l e c t r i c 23

c o - o p s ) , & 1 7 1

. 0 8 0 ( t e l e p h o n e c o - o p s )

.

I d

. § § 1 7 1

. 0 6 3 ( f

e d e r a l l y t a x - e x e m p t ) , 1 7 1

. 0 6 4 ( o r g a n i z e d f o r c o n s e r v a t i o n p u r p o s e s ) , 1 7 1

. 0 6 5 ( o r g a n i z e d 24 t o p r o v i d e w a t e r s u p p l y o r s e w e r s e r v i c e s ) , 1 7 1

. 0 6 6 ( i n v o l v e d w i t h c i t y n a t u r a l g a s f a c i l i t y ) , 1 7 1

. 0 6 7 ( o r g a n i z e d t o p r o v i d e c o n v a l e s c e n t h o m e s f o r e l d e r l y ) , & 1 7 1

. 0 6 8 ( o r g a n i z e d t o p r o v i d e c o o p e r a t i v e h o u s i n g )

. 

### 4

## a business interest in solar ener g y device s; cer tain homeo wn ers’ associations; and emer g ency 2 5 2 6


## medical se rvice corpor ations. 2 7



## I n 1991, the L eg islature shifted the primary basis o f th e f r a n c hise tax profoundly , from capital
to “ net taxable e arne d surplus” — i.e. , income. Taxable ea rned sur plus was base d on an entity ’s 2 8



## “re portable fede ral taxable income”, with various adjustments and dedu ct i o ns. For example, a 2 9



## corpor ation’s repor

table fede ral taxable income was afte r fede ral Schedule C specia l deductions but
befor e net opera ting loss deductions, and excluded dividends from fore ign aff iliates but added
office rs’ and direc tors’ compensa tion. Id. Special deductions wer e permitted “ente rprise projec ts” 3 0


## and s o l ar ener g y device s. No new exemptions wer e cre ated, and the exemption for saving s and 3 1


## loan associatio n s wa s revoke d. (The exemption for banks had been repe aled in 1984, but the 3 2 3 3

I d

. § 1 7 1

. 0 5 6

. 25

A c t o f J u n e 1 , 1 9 8 1 , 6 7 t h L e g
. R

. S

. , c h

. 7 5 2 , § 4 , 1 9 8 1 T e x
. G e n
. L a w s 2 7 5 0 , 2 7 5 8 , c o d i f i e d a s T E X

. T A X 26 C O D E § 1 7 1

. 0 8 2

.

I d

. § 1 4 , c o d i f

i e d a s T E X

. T A X C O D E § 1 7 1

. 0 8 3

. 27

A c t o f A u g
. 1 3 , 1 9 9 1 , 7 2 n d L e g
. , 1 s t C

. S

. , c h

. 5 , § § 8

. 0 1

- . 2 7 , 1 9 9 1 T e x
. G e n
. L a w s 1 3 4 , 1 5 2

- 1 6 7

. S e e 2 8 B r a n d o n J a n e s & S t e v e M o o r e , T h e N e w T

e x a s F r a n c h i s e T

a x , 5 4 T E X

. B

. J

. 1 1 0 8 , 1 1 0 8 ( 1 9 9 1 ) ( “ I n e f f e c t , t h e n e w l e g i s l a t i o n a d d s t o t h e p r e v i o u s s y s t e m o f t a x i n g c a p i t a l a T e x a s c o r p o r a t e i n c o m e t a x
. ” )

.

A c t o f A u g
. 1 3 , 1 9 9 1 , 7 2 n d L e g
. , 1 s t C

. S

. , c h

. 5 , § 8

. 0 9 , a d d i n g T E X

. T A X C O D E § 1 7 1

. 1 1 0

. 29

I d

. § 8

. 0 5 1 , a m e n d i n g T E X

. T A X C O D E § 1 7 1

. 1 0 1 5

. 30

I d

. § 8

. 0 7 , a m e n d i n g T E X

. T A X C O D E § 1 7 1

. 1 0 7 ( b )

. 31

I d

. § 8

. 2 4 ( 2 ) , r e p e a l i n g T E X

. T A X C O D E § 1 7 1

. 0 5 4

. 32

A c t o f J u l y 3 , 1 9 8 4 , 6 8 t h L e g
. , 2 n d C

. S

. , c h

. 3 1 , a r t

. 3 , p a r t B , § 1 , 1 9 8 4 T e x
. G e n
. L a w s 1 9 3 , 2 1 2

. 33


### 5

## exemption for cr ed i t u n i ons rema ined, and exemptions had been added in 1987 for cer tain trade show participa

nts and re cy cling opera tions. ) 3 4 3 5



## B
The curr ent fra

nchise tax is the product of further leg islative restruc turing in 2006, with a 3 6


## few amendments since then. The tax is still based primarily on reve n u e an d o n l y seconda rily on capital, and now applies to ever y for- profit entity doing business or char tere d in Texas that is distinct
from its owner s ( i.e. , not a sole proprietor ship or a g ener al partne rship direc tly owned by an individual), excluding cer tain passive entit i es , t rusts, estates, escr ows, and a few other such 3 7


## entities. But the numerous exemptions cre ated over the y ear s rema in. Affiliated entities eng ag ed

3 8 3 9 

## in a unitary

business must report as a g roup. 4 0

A c t o f M a y 3 1 , 1 9 8 7 , 7 0 t h L e g
. , c h

. 7 7 8 , § 1 , 1 9 8 7 T e x
. G e n
. L a w s 2 7 6 1 , 2 7 6 1 , c o d i f i e d a s T E X

. T A X C O D E 34 § 1 7 1

. 0 8 4

.
A c t o f

M a y 2 9 , 1 9 8 9 , 7 1 s t L e g
. , c h

. 6 4 1 , § 3 , 1 9 8 9 T e x
. G e n
. L a w s 2 1 2 3 , 2 1 2 4 , c o d i f i e d a s T E X

. T A X C O D E 35 § 1 7 1

. 0 8 5

.
A c t o f M a y 2 , 2 0 0 6 , 7 9 t h L e g
. , 3 d C

. S

. , c h

. 1 , 2 0 0 6 T e x
. G e n
. L a w s 1 , 1

- 4 0 , c o d i f i e d a s T E X

. T A X C O D E § 36 1 7 1

.
T h e r e a s o n f o r t h i s e x c l u s i o n i s t h a t “ a t a x o n t h e n e t i n c o m e s o f n a t u r a l p e r s o n s , i n c l u d i n g a p e r s o n ’ s s h a r e 37

o f p a r t n e r s h i p a n d u n i n c o r p o r a t e d a s s o c i a t i o n i n c o m e , m u s t [ b e ] a p p r o v e d

. . . i n a s t a t e w i d e r e f e r e n d u m ”

. T E X

. C O N S T

. a r t

. V I I I , § 2 4 ( a )

. W e r e j e c t e d a n a r g u m e n t t h a t t h e f r a n c h i s e t a x i s s u c h a t a x i n I n r e A l l c a t C l a i m s S e r v

. , L

. P

. , 3 5 6 S

. W

. 3 d 4 5 5 , 4 7 0 ( T e x
. 2 0 1 1 )

.

T E X

. T A X C O D E § § 1 7 1

. 0 0 1 , 1 7 1

. 0 0 0 2

. 38

I d

. § § 1 7 1

. 0 5 2

- . 0 8 8

. 39

I d

. § § 1 7 1

. 0 0 0 1 ( 7 ) ( d e f i n i n g “ c o m b i n e d g r o u p ” ) , 1 7 1

. 0 0 0 1 ( 1 7 ) ( d e f i n i n g “ u n i t a r y b u s i n e s s ” ) , & 1 7 1

. 1 0 1 4 40 ( r e q u i r i n g c o m b i n e d g r o u p r e p o r t i n g )

. 

### 6

## The tax is calculated a ccor ding to the f ollowing f

ormula:
Total Revenue

- Ge n eral Deduc tion: the g rea ter of either the Cost of Goods Sold ,

Compensation, or 30%

= Marg in

x Perce ntag e of g ross rec eipts from Texas business

= Taxable Marg in

x Tax Rate (0.5% for entities primarily eng ag ed in wholes al e o r reta il trade ,

1% for all others)

= Fr anchise Tax

T o ta l Revenue is income repor ted to the fede ral I RS with various deductions, limit ations, an d exceptions. For example, all taxpay ers may deduct bad debts expensed for fede ral income tax

4 1



## purposes and cer

tain flow-throug h funds. Specific deductions include sales commissions to non- 4 2 4 3 

## employ ees, wholesale r reba tes to pharma cy cooper atives, p aym ents to artists by live event

4 4 4 5 

## promotion companies, pay ments for labor and materia ls by destination manag ement companies, 4 6 4 7

I d

. § § 1 7 1

. 1 0 1 , 1 7 1

. 1 0 1 1

. 41

I d

. § 1 7 1

. 1 0 1 1 ( c ) ( 1 ) ( B ) ( i ) , ( c ) ( 2 ) ( B ) ( i ) , ( c ) ( 3 )

. 42

T E X

. T A X C O D E § 1 7 1

. 1 0 1 1 ( f )

- ( g )

. 43

I d

. § 1 7 1

. 1 0 1 1 ( g ) ( 1 )

. 44

I d

. § 1 7 1

. 1 0 1 1 ( g - 4 )

. 45

I d

. § 1 7 1

. 1 0 1 1 ( g - 5 )

. 46

I d

. § 1 7 1

. 1 0 1 1 ( g - 6 )

. 47


### 7

## pay

ments to delivery subcontract o rs by courie r and logistics companies, client expenses by 4 8



## manag ement companies, and cer tain plan pay

ments to health car e providers. L awy er s ma y deduct 4 9 5 0


## $500 for e ach c ase ha

ndled pro bono. 5 1



## A taxpay er may elec t one of three Gene ral Deduc tions. One, the Cost of Goods Sold, 5 2


## includes “all direc t costs of acquir ing or producing g oods”, some indirect costs like i n s u ra n ce, 5 3


## utilit ies, and quality control, and up to 4% of other “indirec t or administrative overhe ad costs”. 5 4


## Public lending instit utions and lessors of motor vehicles, heavy construction equipment, and rolling
stock may include cer

tain other expenses in their Cost of Goods Sold. An alt er n at i ve, 5 5 

## Compensation, includes wag es and benef its to owner s, partne rs, office rs, direc tors, and employ ees,
but not independe nt contra ctors. The amount per person per y ear is cappe d at $300,000. I n lieu 5 6 5 7


## of either of these deductions, a taxpay er may choose simply to deduct 30% of

its Total Revenue. 5 8

I d

. § 1 7 1

. 1 0 1 1 ( g - 7 )

. 48

T E X

. T A X C O D E § 1 7 1

. 1 0 1 1 ( m - 1 )

. 49

I d

. § 1 7 1

. 1 0 1 1 ( n )

. 50

I d

. § 1 7 1

. 1 0 1 1 ( g - 3 ) ( 3 )

. 51

I d

. § 1 7 1

. 1 0 1 ( a )

. 52

I d

. § 1 7 1

. 1 0 1 2 ( a ) ( 1 ) , ( c )

. 53

I d

. § 1 7 1

. 1 0 1 2 ( d ) , ( f

)

. 54

T E X

. T A X C O D E § 1 7 1

. 1 0 1 2 ( k ) , ( k

- 1 )

. 55

I d

. § 1 7 1

. 1 0 1 3 ( b )

. 56

I d

. § 1 7 1

. 1 0 1 3 ( c )

. 57

I d

. § 1 7 1

. 1 0 1 ( a ) ( 1 ) ( A )

. 58


### 8

## S u b trac ting a Gene ral Deduc tion from Total Revenue y ields Marg in, which must then b e

apportioned, based on the perc entag e of the taxpay er’ s total g ross rec eipts ear ned from business done
in Texas. Fr om the result, Taxable Marg in, a taxpay er may deduct part of the cost of a solar ener g y

5 9


## device and a c lean c oal projec t.

6 0 6 1


## The standard Tax Rate is 1%, but for a taxpay er “primar ily eng ag ed in wholesale or reta il
trade ”, that rate is only 0.5%. To qualify for the lower rate , a taxpay er’ s reta il/wholesale reve nue 6 2



## must exceed its reve nue from other busine s s and must come mostly from the sale of products

p roduce d by others. There are also discounts for small businesses with total reve n u e b el o w 6 3 

## $900,000. And a taxpay er with no more than $10 milli on total reve nue may elec t a rate of 0.575%

6 4


## of Total Reve nue without taking the Gene ral De duction. 6 5



## C
Wit h its 2006 revisions to the fra nchise tax, the L egi s l at ure provided that “[t] he supreme
court ha s exclusive a

nd orig inal jurisdiction ove r a cha lleng e to the constitutionality of this Act or

I d

. § § 1 7 1

. 1 0 1 ( a ) ( 2 ) , 1 7 1

. 1 0 6 ( a )

. 59

I d

. § 1 7 1

. 1 0 7

. 60

T E X

. T A X C O D E § 1 7 1

. 1 0 8

. 61

I d

. § 1 7 1

. 0 0 2 ( a ) , ( b )

. 62

I d

. § 1 7 1

. 0 0 2 ( c )

. T h e t a x p a y e r a l s o m u s t n o t p r o v i d e r e t a i l o r w h o l e s a l e u t i l i t i e s
. 63

I d

. § 1 7 1

. 0 0 2 1

. 64

I d

. § 1 7 1

. 1 0 1 6

. 65


### 9

## any part of this Act and may issue injunctive or decla ratory relief in connec tion with the challeng e.” 6 6 

## Pursuant to this provisi on, petitioner Ne stle USA, I nc., initiated this procee ding in this Court.

Nest le manufa cture s and distributes food and bever ag es in the United States. Although
Nestle’s business in Texas is confine d to wholesale and reta il activities, its manufa cturing business
in other states subjects it to the 1% Texas fra nchise tax rate , rather t h an t h e lower 0.5% rate applicable to wholesale rs and reta ilers. Also, Ne s t l e an d i t s 32 aff iliates, require d to repor

t as a
g roup , m u s t toge ther choose a Gene ral Deduc tion that does not benef it eac h. I f the entities wer e
allowed to repor

t separ ately , eac h could choose the most benef icial Gene ral Deduc tion. And Nestle

rec eives no benef

it from other fra

nchise tax deductions and exe m ptions applicable to other
businesses.
Nestle paid its fra

nchise taxes throug h 2011 without p rot est to the Comptroller but challeng ed the constitutionalit y of the tax in this Court. We he ld tha t pa y ment under protest was 6 7



## a jurisdictional prer equisi t e to its challeng e and dismiss ed the proce eding

. Nestle then paid the 6 8 

## $8,682,998.99 due for

2012 under pr otest and re -filed its cha lleng e.
Nestle contends that the fra nchise tax must be measure d by its object, the privileg e of doing
busin ess in Texas, but beca use of its many deductions and exemptions , the tax assessed bear s no

rea sonable rela tionship to the value of the privileg e to the taxpay er and trea ts simil arly situated

tax p ay er s d iffer ently

. For these rea sons, Nestle asser ts, the fra

nchise tax violates the Texas

A c t o f M a y 2 , 2 0 0 6 , 7 9 t h L e g
. , 3 d C

. S

. , c h

. 1 , § 2 4 , 2 0 0 6 T e x
. G e n
. L a w s 1 , 4 0

. 66

I n r e N e s t l e U

S A , I n c

. 3 5 9 S

. W

. 3 d 2 0 7 ( T e x
. 2 0 1 2 )

. 67

I d

. a t 2 0 8

. 68


### 1 0

## Constit ution’s Equal and Uniform Clause, a s w e ll a s th e F o u r te e n th A me n d

me nt’s Equal Protection 6 9


## and Due Process g uara

ntees. Fur

ther, Nestl e ar gu es , beca use the fra

nchise tax is highe r for 7 0


## taxpay ers whose manufa cturing b usiness is outside Texas, the tax discriminates ag ainst interstate

commerc e in violation of the Commerce Clause of the U nited States Consti tution. 7 1



## D
Nestle char acte rizes its constitutional challeng es as both fac ial and as-a pplied, though it does

not attempt to specify which is whi ch

. T h e State arg ues that the Court has no jurisdiction to 7 2


## consider N estle’s a s-applied c halleng es, but the State, too, makes no e ffor t to identify

them.

In re Allcat Claims Servic e, L.P. , an orig i n al p ro cee ding like this one, also involved
constitutional challeng es to the fra nchise tax that the petitioner char acte rized as both fac ial and asapplied. We r eitera ted that while the L eg islature is e mpowere d to c onfer orig inal jurisdiction on

7 3


## this Court in case s involving “qu es t i o n s wh i ch are of g ener al publ ic i ntere st and call for a speedy
deter mination”, it lac ks authority to do so in case s for which there is no “strong and specia l r eason
for the exercise of th i s ex t raordinary orig inal jurisdiction” and case s “depe ndent upon the

I d

. a t 2 0 8

. T E X

. C O N S T

. a r t

. V I I I , § 1 ( a )

. 69

U

. S

. C O N S T

. a m e n d

. X I V , § 1

. 70

U

. S

. C O N S T

. a r t

. I , § 8 ( “ T h e C o n g r e s s s h a l l h a v e p o w e r
. . . [ t ] o r e g u l a t e C o m m e r c e
. . . a m o n g t h e s e v e r a l 71 S t a t e s
. . . . ” )

.

N e s t l e n a m e s a s r e s p o n d e n t s t h e C o m p t r o l l e r o f T e x a s a n d t h e A t t o r n e y G e n e r a l o f T e x a s
. J o i n i n g 72

r e s p o n d e n t s i n t h e i r b r i e f , t h e S t a t e c a l l s i t s e l f t h e r e a l p a r t y i n i n t e r e s t

. T h e p o s i t i o n s o f t h e t h r e e i n t h e c a s e a r e i d e n t i c a l , a n d w e r e f

e r t o t h e m t o g e t h e r a s t h e S t a t e
.
3 5 6 S

. W

. 3 d 4 5 5 , 4 5 7 ( T e x
. 2 0 1 1 )

. 73


### 1 1

## deter

mination of any doubtful question of fac t”. We held that the leg islative g rant of “jurisdiction 7 4



## to consider [a] fac ial challeng e to the

. . . constitutionalit y ” of the fra nchise tax was valid but did not
extend to “c halleng es to how the Comptroller assesses, enfor ces, or collects the fra nchise tax” in
individual situations, the latter being of less public importance and often involving fac tual dis p u te s. 7 5


## The State a

rg ues that Ne stle’s as-a

pplied challeng es to the fr anchise tax fall int o this latter

cate g ory simply beca

use they are as-a

pplied. But “the line betwee n fac ial and as-a pplied challeng es
is not so well define d that it has some automatic eff ect” , and in any event, it is not the line we drew 7 6



## in Allcat

. Nestle’s challeng es, striking at the foundations of a tax on which the State heavily depends
for reve nue, aff

ect not only milli ons of taxpay ers but the public at larg e. The importance to the state
fisc of quickly and finally resolving such challeng es is obviously the “strong and specia l rea son” the

L eg islature confe rre d orig inal, exclusive jurisdiction on th is Court. And unlike some of the 7 7 

## petitioner’s contentions in Allcat , Nestle’s challeng es do not require a resolution of disputed fac ts;
all materia l fac t s are established. Ba sed on Allcat , we clea rly have jurisdiction to consider all
Nestle’s c laims.

To which we now turn: first to the Equal and Uniform challeng e; next to Equal Protection;
then to Due Proc ess; and fina lly to the Commerce Clause

.

A l l c a t , 3 5 6 S

. W

. 3 d a t 4 6 1 n
. 6 ( q u o t i n g L o v e v

. W i l c o x , 2 8 S

. W

. 2 d 5 1 5 , 5 1 9 ( T e x
. 1 9 3 0 ) )

. 74

I d

. a t 4 6 3 , 4 7 0

- 4 7 1 ( T e x
. 2 0 1 1 )

. 75

S e e I n r e C a o , 6 1 9 F

. 3 d 4 1 0 , 4 3 9 ( 5 t h C i r
. 2 0 1 0 ) ( e n b a n c ) ( J o n e s , C

. J

. , c o n c u r r i n g i n p a r t a n d d i s s e n t i n g i n 76 p a r t ) ( i n t e r n a l c i t a t i o n a n d q u o t a t i o n s o m i t t e d ) ; s e e a l s o S c o t t A

. K e l l e r & M i s h a T s e y t l i n , A p p l y i n g C o n s t i t u t i o n a l D e c i s i o n R u l e s V

e r s u s I n v a l i d a t i n g S t a t u t e s i n T o t o , 9 8 V A

. L

. R E V

. 3 0 1 , 3 1 2 ( 2 0 1 2 ) ( “ c o u r t s r e m a i n h o p e l e s s l y b e f u d d l e d i n t h i s a r e a ” )

.
A l l c a t , 3 5 6 S

. W

. 2 d a t 4 6 1 n
. 6

. 77


### 1 2

## II
A
The Texas Constit ution has alway s provided that “[t] axation shall be equal and uniform”. 7 8 

## Equality and uniformity are char acte ristics of a rela tion betwee n or among multipl e objects. A $100

tax on eac h landowner , irrespe ctive of the value of his pr operty , is e qual and uniform as a poll tax,
but not as an ad valore m tax. The Equal and Uniform require ment does not itself specify the objects

on which it opera tes. I t say s only that taxation — not taxes — must be equal and uniform, indicating
that it is t he proc ess, not eac h individual result, that must satis fy the re quirement.
A constitutional provision “ must be construed in light of conditions exis ting at the time it was adopted.” We have found nothing in the history of the adoption of the Equal and Uniform Clause

7 9



## in 1845, or in any of the sever al Constit utions since, t o i ndicate its deriva tion or to illumi ne the
framers’ and ratifier s’ intention s as to its meaning

. I n Americ an law, the first use of the phrase “equa l and uniform” with ref ere nce to taxation appea

rs to have been in the Tenne ssee Constit ution
of 1796. Although it beca me popu l ar i n t he nineteenth centur y for states to adopt some 8 0

T E X

. C O N S T

. a r t

. V I I I , § 1 ( a ) ; T E X

. C O N S T

. O F 1 8 7 6 , a r t

. V I I I , § 1 ; T E X

. C O N S T

. O F 1 8 6 9 , a r t

. X I I , § 1 9 ; T E X

. 78 C O N S T

. O F 1 8 6 6 , a r t

. V I I , § 2 7 ; T E X

. C O N S T

. O F 1 8 6 1 , a r t

. V I I , § 2 7 ; T E X

. C O N S T

. O F 1 8 4 5 , a r t

. V I I , § 2 7

.

I n r e A l l c a t S e r v

. , L

. P

. , 3 5 6 S

. W

. 3 d 4 5 5 , 4 6 6 ( T e x
. 2 0 1 1 ) ( c i t a t i o n o m i t t e d )

. 79

S e e 2 W A D E N E W H O U S E , C O N S T IT U T I O N A L U N IF O R M IT Y A N D E Q U A L IT Y IN S T A T E T A X A T IO N 1 7 0 4 ( 2 d e d

. 80 1 9 8 4 ) ; W i l l i a m L

. M a t t h e w s , J r
. , T h e F u n c t i o n o

f C o n s t i t u t i o n a l P r o v i s i o n s R e q u i r i n g U n i f o r m i t y i n T a x a t i o n , 3 8 K Y

. L

. J

. 3 1 , 4 1 ( 1 9 4 9 )

. 

### 1 3

## constitutional require ment for tax uniformity , t h e genesis of the idea is obscure

. One 8 1 8 2



## commentator w rites:
These uniformity provisions in the state constitutions had their immediate orig ins in
an attempt to remove inequalities resulting from adoption by the states of the g ener al proper ty tax wi t h i t s ever -expanding tax base and, in some instances, in the mere acc eptanc e of such provisions from other states. They emer g ed by way of constitutional limit ations rathe r t han by statute beca use t heir origin coincided wit h
a g ener al movement to restric t the p o we r of the leg islatures at a time when the country was underg oing g rea t g rowth i n l and settlement and in the initial chang e from an a g ricultural to a c ommercia l and industrial economy

. 8 3


## The best indication of the meaning of Texas’ Equal and Uniform Clause lies in the provisions

acc ompany ing it. The 1845 Constit ution provided:
Taxation shall be equal and uniform throug hout the State. All pr operty in this State shall be taxed in proportion to its value, to be asce rtained as direc ted by law; except such p ro p erty as two-thirds of both Houses of the L eg islature may think proper to exempt from tax ation. The L eg islature shall have power to lay an income tax ; and to tax all persons pursuing any occupation, trade , or profession. Provided, that the term occup at i o n , s hall not be construed to apply to pursuits either ag ricultural or mecha nical. 8 4

O n e s c h o l a r n o t e s t h a t w h i l e o n l y s i x o f t h e o r i g i n a l s t a t e s h a d c o n s t i t u t i o n a l p r o v i s i o n s r e g a r d i n g u n i f o r m 81 t a x a t i o n , b y t h e e n d o f t h e n i n e t e e n t h c e n t u r y , 4 1 o f 4 4 d i d

. S e e N E W H O U S E , s u p r a n o t e 8 1 a t 1 7 1 6 ; S e e a l s o M a t t h e w s , s u p r a n o t e 8 0 a t 4 3

. B u t t h e p r o v i s i o n s “ v a r [ i e d ] c o n s i d e r a b l y i n t h e i r p h r a s e o l o g y ”

. T H O M A S M

. C O O L E Y , T H E L A W O F T A X A T IO N § 2 5 3 ( 4 t h e d

. 1 9 2 4 )

. T h e t y p e s o f p r o v i s i o n s a r e c a t e g o r i z e d i n v a r i o u s w a y s
. C o o l e y l i s t s “ [ v ] e r y g e n e r a l p r o v i s i o n s ” , “ [ p ] r o v i s i o n s r e q u i r i n g t a x e s t o b e i n ‘ p r o p o r t i o n ’ o r ‘ p r o p o r t i o n a l ’ t o v a l u e ” , “ [ p ] r o v i s i o n s m e r e l y r e q u i r i n g t a x e s t o b e u n i f

o r m ” , “ [ p ] r o v i s i o n s r e q u i r i n g t a x e s t o b e u n i f o r m ‘ u p o n t h e s a m e c l a s s o f s u b j e c t s ’ ” , a n d “ [ p ] r o v i s i o n s r e q u i r i n g t a x e s t o b e b o t h ‘ e q u a l ’ a n d ‘ u n i f o r m ’ ”

. I d

. S e e a l s o 1 W A D E N E W H O U S E , C O N S T IT U T IO N A L U N IF O R M IT Y A N D E Q U A L IT Y IN S T A T E T A X A T IO N 1 , 1 7

- 1 8 ( 2 d e d

. 1 9 8 4 ) ( l i s t i n g t w e l v e t y p e s o f u n i f o r m i t y c l a u s e )

.
S e e M a t t h e w s , s u

p r a n o t e 8 0 , a t 4 9 ( “ [ H ] i s t o r i c a l l y t h e o r i g i n s o f t h e i d e a o f u n i f o r m i t y i n t a x a t i o n a r e 82

o b s c u r e
. ” )

.
I

d

. a t 4 9

- 5 0

. 83

T E X

. C O N S T

. O F 1 8 4 5 , a r t

. V I I , § 2 7

. 84


### 1 4

## A virtually identical provision was included i n t h e C o n s tituti ons of 1861, 1866, and 1869. The 8 5


## Constit ution of 1876 expanded the provision into two sections, adding that “[a]ll occupation taxes
shall be equal and uniform upon the same class of subjects”, and repla cing the authorization of the

L eg islature to exempt proper ty from tax ation with specific , exclusive ex empt ions. The sections 8 6


## have sinc e bee n rew ritten and now pr ovide, as re levant for our purpose s: Sec. 1. (a ) Taxation shall be equa l and uniform. (b) All rea l proper

ty and tang ible persona l proper t y i n t his State, unless exempt as require d or permitted by this Constit ution,

. . . shall be taxed in proportion to its value, which shall be a scer tained as ma

y be provide d by

law. (c) The L eg islature may
. . . impose occupa tion taxes

. . . [and] may also tax incomes of both natura l p er s ons and corpor ations

. . . . Persons eng ag ed in mecha nical and ag ricultural pursuits shall never be require d to pay an occupation tax.
Sec. 2. (a) All occupa

tion taxes s h all be equal and uniform upon the same class of subjec ts . . . . 8 7

T E X

. C O N S T

. O F 1 8 6 1 , a r t

. V I I , § 2 7 ; T E X

. C O N S T

. O F 1 8 6 6 , a r t

. V I I , § 2 7 ; T E X

. C O N S T

. O F 1 8 6 9 , a r t

. X I I , § 1 9

. 85

“ S E C T I O N 1

. T a x a t i o n s h a l l b e e q u a l a n d u n i f o r m
. A l l p r o p e r t y i n t h i s S t a t e , w h e t h e r o w n e d b y n a t u r a l 86 p e r s o n s o r c o r p o r a t i o n s , o t h e r t h a n m u n i c i p a l , s h a l l b e t a x e d i n p r o p o r t i o n t o i t s v a l u e , w h i c h s h a l l b e a s c e r t a i n e d a s m a y b e p r o v i d e d b y l a w
. T h e L e g i s l a t u r e m a y i m p o s e a p o l l t a x
. I t m a y a l s o i m p o s e o c c u p a t i o n t a x e s , b o t h u p o n n a t u r a l p e r s o n s a n d u p o n c o r p o r a t i o n s , o t h e r t h a n m u n i c i p a l , d o i n g a n y b u s i n e s s i n t h i s S t a t e
. I t m a y a l s o t a x i n c o m e s o f b o t h
n a t u r a l p e r s o n s a n d c o r p o r a t i o n s , o t h e r t h a n m u n i c i p a l , e x c e p t t h a t p e r s o n s e n g a g e d i n m e c h a n i c a l a n d a g r i c u l t u r a l p u r s u i t s s h a l l n e v e r b e r e q u i r e d t o p a y a n o c c u p a t i o n t a x
. . . .

“ S E C

. 2

. A l l o c c u p a t i o n t a x e s s h a l l b e e q u a l a n d u n i f o r m u p o n t h e s a m e c l a s s o f s u b j e c t s w i t h i n t h e l i m i t s o f t h e a u t h o r i t y l e v y i n g t h e t a x ; b u t t h e L e g i s l a t u r e m a y , b y g e n e r a l l a w s , e x e m p t f r o m t a x a t i o n p u b l i c p r o p e r t y u s e d f o r p u b l i c p u r p o s e s ; a c t u a l p l a c e s o f r e l i g i o u s w o r s h i p ; p l a c e s o f b u r i a l n o t h e l d f o r p r i v a t e o r c o r p o r a t e p r o f i t , a l l b u i l d i n g s u s e d e x c l u s i v e l y a n d o w n e d b y p e r s o n s o r a s s o c i a t i o n s o f p e r s o n s f o r s c h o o l p u r p o s e s , ( a n d t h e n e c e s s a r y f u r n i t u r e o f
a l l s c h o o l s ) , a n d i n s t i t u t i o n s o f p u r e l y p u b l i c c h a r i t y ; a n d a l l l a w s e x e m p t i n g p r o p e r t y f r o m t a x a t i o n o t h e r t h a n t h e p r o p e r t y a b o v e m e n t i o n e d , s h a l l b e v o i d

. ”

T E X

. C O N S T

. a r t

. V I I I , § § 1

- 2

.

T E X

. C O N S T

. a r t

. V I I I , § § 1 ( a )

- ( c ) , 2 ( a )

. 87


### 1 5

## The two sec tions also provide for nume rous tax ex emptions. 8 8



## “No pr ovision in t he constitution should be rea d or construe d in isolation.” 8 9


## The Constit utio n m u s t b e rea d as a whole, and all amendments there to must be considere d as if ever

y part had been adopted at the same time and as one instrument, and eff ect m u s t b e gi v en t o eac h part of eac h clause

. . . . Diffe rent sections, amendments, or provisions of a Constit ution which rela te to the same subject-matter should be construe d toge ther a nd considere d in the light of e ach othe r. 9 0



## We rea d the provisions following the Equal and Uniform Clause as examples, not ex ceptions. A

proper ty tax is equal and uniform onl y if i t i s in proportion t o proper ty value. But ex emptions do

not destroy equality and uniformity , nor do occupation tax classifica tions, and even an income tax,
with its charac teristic adjustments and deduc tions, can be e qual and unifor m.
Acc ording ly , we have held that taxes on rea l and persona l proper ty must be uniform acr oss
all ty pes of proper

ty , but that “[t] he L eg islature' s authority to make classifica tions in lev y ing 9 1



## occupation, use, and sales taxes unquestionably is broade r than its authority to do so with respe ct to
ad valor em taxes”. We have a llowed occupation taxes to dif fer betwee n occupa

tions, upholdi ng 9 2



## a tax that was highe r for oil wholesale rs than for other wholesale rs. W e explained that 9 3 

## “[m]e r c h a n ts ma y be divided into wholesale rs and reta ilers, and, if there be rea sonable g rounds, these

I d

. 88

V i n s o n v

. B u r

g e s s , 7 7 3 S

. W

. 2 d 2 6 3 , 2 6 5 ( T e x
. 1 9 8 9 )

. 89

C o l l i n g s w o r t h C n t

y

. v

. A l l r e d , 4 0 S

. W

. 2 d 1 3 , 1 5 ( T e x
. 1 9 3 1 ) ( c i t a t i o n s o m i t t e d )

. 90

E n r o n C o r

p

. v

. S p r i n g I n d e p

. S c h

. D i s t

. , 9 2 2 S

. W

. 2 d 9 3 1 , 9 3 5 ( T e x
. 1 9 9 6 ) ( c i t i n g L i v e l y v

. M o

. , K

. & T

. R y

. , 91 1 2 0 S

. W

. 8 5 2 , 8 5 6 ( T e x
. 1 9 0 9 ) )

.

E n r o n C o r

p

. , 9 2 2 S

. W

. 2 d a t 9 3 6

. 92

T e x

. C o

. v

. S t e

p h e n s , 1 0 3 S

. W

. 4 8 1 , 4 8 5 ( T e x
. 1 9 0 7 )

. 93


### 1 6

## may be further divided acc ording to the particula r classes of business in which they may eng ag e.” 9 4


## We have a lso held that an occ upation tax i s equal a nd uniform even though the tax increase d with

eac h additional store in a chain beca use, “[a]s the number of stores incre ases, the differ ence s in the
methods of doing business incre ase.” And “we have long rec og nized that exact uniformity and 9 5 

## equality is unattainable.” 9 6



## I t is important to note that classify ing taxpay ers for purposes of an occupa tion tax is not a

n

exc ep t i o n t o the Equal and Uniform Clause but a conseque nce of it. The value of an occupation
derive s not from the fac t that it involves acti v i t y

— a mere expenditure of ener g y — but from its

nature , pursuits, and rewar ds. I n that sense, valuation is the s ame as for real property

. J ust as t he
value of a parc el of land depends on it char acte ristics, like location, use, and potential, so the value
of an oc cupation depe nds on its nature.
One scholarly trea tise conclude s that while constitutional uniform taxation provisions

g ener ally require that proper ty taxes be based on proper ty v al ues without distinctions, for

nonproper

ty taxes, the uniformity which is require d has alway s been stated as being a uniformity
with in c la s s e s. Consist ent with this conclusion, we note that the Constit utional Convention of 1845

9 7


## considere d and reje cted an amendment to the Equal and Uniform Clause that would have require d

I d

. 94

H u r t v

. C o o

p e r , 1 1 0 S

. W

. 2 d 8 9 6 , 9 0 3 ( T e x
. 1 9 3 7 )

. 95

E n r o n C o r

p

. 9 2 2 S

. W

. 2 d a t 9 3 5

. 96

N E W H O U S E , s u

p r a n o t e 8 0 a t 1 7 2 3

. 97


### 1 7

## any license or income tax to b e “a u n i fo rm ad valore m tax” based on the amount of money

involved. The fr amer s thus did not preclude c lassifications for a ll non-proper ty taxes. 9 8



## B
The Constit ution does not mention a fra nchise tax, but it is very simil ar to an occupation tax.
I n fac t, Black’

s Law Dictionary define s eac h the same way : a “tax imposed [for or on] the privileg e

o f ca rry ing on a business”. That privileg e cannot be valued apar t from its use, wheth er i n an 9 9



## occupation or in a business, to the extent the two can be distinguished. I t follows that classifica tions

nece ssary to assure equality and uniformity in oc cupation taxes a re equally nece ssary for fra nchise

taxes.
Fr om the i mplementation of t he Tex as franchise tax , nothing could be c l earer. Ex cept for
its fi rs t fo u r y ear s as a poll tax, from 1893 to 1897, it has been structure d on classifica tions. I n 1 0 0


## 1897, there wer e only two: whether a corpor ation was domestic or fore ign, and the amount of its capital. To these the L eg islature added sever al exemptions in 1907. Over the y ear s, the

1 0 1 1 0 2



## L eg islature incre ased the number of exemptions , added adjustments and deductions, and shifted the

J o u r n a l s o f t h e C o n v e n t i o n , A s s e m b l e d a t t h e C i t y o f A u s t i n o n t h e F o u r t h o f J u l y , 1 8 4 5 , f

o r t h e P u r p o s e o f 98 F r a m i n g a C o n s t i t u t i o n f o r t h e S t a t e ( A u s t i n , T e x
. , 1 8 4 5 ) ( “ A n d f u r t h e r p r o v i d e d , T h a t s u c h i n c o m e o r l i c e n s e t a x s h a l l
n o t e x c e e d i n a m o u n t w h a t w o u l d b e a u n i f o r m a d v a l o r e m t a x u p o n t h e s u m t a x e d a s i n c o m e , o r s t o c k v e s t e d i n s u c h
o c c u p a t i o n , t r a d e o r p r o f e s s i o n ” )

.
C o m p a r e B L A C K ’ S L A W D IC T IO N A R Y 1 5 9 5 ( 9 t h e d

. 2 0 0 9 ) ( f r a n c h i s e t a x d e f

i n i t i o n ) w i t h i d

. a t 1 5 9 6 99 ( o c c u p a t i o n t a x d e f

i n i t i o n )

.
S u p r a n o t e s 4

- 5 a n d a c c o m p a n y i n g t e x t

. 100

S u p r a n o t e s 5

- 6 a n d a c c o m p a n y i n g t e x t

. 101

S u p r a n o t e s 9

- 1 0 a n d a c c o m p a n y i n g t e x t

. 102


### 1 8

## basis of the tax from capital to income. But while the differ entiations made in the application of the

tax have unquestionably incre ased in complexit y , their nature as classifica tions to assist in achie ving tax equality

and uniformity

has not.

Four other states — L ou i s i ana, Mississ ippi, Neva da, and West Virg inia — have
constitutional tax uniformity provisions simil ar enoug h to ours to off er gu i d ance. All four

1 0 3 

## interpre t their provisions to allow classifica tions in t axes on the privileg e of doing business. 1 0 4



## C Having conclude d that the Equal and Uniform Clause permits classifica tions in the fra nchise
tax, we next consider what limit ations the Clause imposes on the L eg islature in providing such
classifica tions. The State arg ues that “the L eg islature h as wide latitude to pursue multipl e policy

g oals throug h the cr eation of rational classifica tions within tax leg islation.” We think the 1 0 5



## arg ument cuts much too wide a swath; it would reduc e the Equal and Uniform Clause to a

L A

. C O N S T

. A R T

. 7 § 4 ( A ) ( “ E q u a l a n d u n i f o r m t a x e s m a y b e l e v i e d o n n e t i n c o m e s , a n d t h e s e t a x e s m a y b e 103 g r a d u a t e d a c c o r d i n g t o t h e a m o u n t o f n e t i n c o m e
. ” ) ; M IS S

. C O N S T

. a r t

. I V , § 1 1 2 ( " T a x a t i o n s h a l l b e u n i f o r m a n d e q u a l t h r o u g h o u t t h e s t a t e
. A l l p r o p e r t y n o t e x e m p t f r o m a d v a l o r e m t a x a t i o n s h a l l b e t a x e d a t i t s a s s e s s e d v a l u e
. ” ) ; N E V

. C O N S T

. a r t

. 1 0 , § 1 ( 1 ) ( “ T h e l e g i s l a t u r e s h a l l p r o v i d e b y l a w f o r a u n i f o r m a n d e q u a l r a t e o f a s s e s s m e n t a n d t a x a t i o n , a n d s h a l l p r e s c r i b e s u c h r e g u l a t i o n s a s s h a l l s e c u r e a j u s t v a l u a t i o n f o r t a x a t i o n o f a l l p r o p e r t y , r e a l , p e r s o n a l a n d p o s s e s s o r y , e x c e p t m i n e s a n d m i n i n g c l a i m s , w h i c h s h a l l b e a s s e s s e d a n d t a x e d o n l y a s p r o v i d e d i n s e c t i o n 5 o f t h i s a r t i c l e
. ” ) ; W

. V A

. C O N S T

. a r t

. 1 0 , § 1 ( “ [ T ] a x a t i o n s h a l l b e e q u a l a n d u n i f o r m t h r o u g h o u t t h e s t a t e , a n d a l l p r o p e r t y , b o t h
r e a l a n d p e r s o n a l , s h a l l b e t a x e d i n p r o p o r t i o n t o i t s v a l u e ” )

.

M i r e v

. C i t

y o f L a k e C h a r l e s , 5 4 0 S o
. 2 d 9 5 0 , 9 5 6 ( L a
. 1 9 8 9 ) ( u p h o l d i n g a t a x o n a t t o r n e y s ’ g r o s s r e c e i p t s 104

a g a i n s t t h e c h a l l e n g e t h a t t h e m i n i m u m a n d m a x i m u m s e t o n t h i s t a x d i s c r i m i n a t e d a g a i n s t s m a l l p r a c t i t i o n e r s ) ; P e t e r s o n v

. S a n d o z , 4 5 1 S o
. 2 d 2 1 6 ( M i s s
. 1 9 8 4 ) ( u p h o l d i n g a t a x i m p o s e d o n d e a l e r s o f b a i l b o n d s b u t n o t o t h e r t y p e s o f b o n d s ) ; E d w a r d s v

. C i t

y o f R e n o , 7 4 2 P

. 2 d 4 8 6 ( N e v
. 1 9 8 7 ) ( u p h o l d i n g a t a x t h a t a p p l i e d d i f f e r e n t l y t o p e d d l e r s t h a n t o s o l i c i t o r s b e c a u s e p e d d l e r s a r e m o r e m o b i l e a n d t h u s l i k e l y t o a v o i d o t h e r t y p e s o f t a x e s ) ; A p p a l a c h i a n P o w e r C o

. v

. S t a t e T a x D e p ’ t , 4 6 6 S

. E

. 2 d 4 2 4 , 4 4 7 ( W

. V a
. 1 9 9 5 ) ( “ F o r t a x e s o t h e r t h a n t h o s e l e v i e d o n p r o p e r t y , [ t h e c o n s t i t u t i o n ] m e r e l y r e q u i r e s
. . . t h a t t a x e s b e e q u a l w i t h i n e a c h c l a s s o f p e r s o n s o r b u s i n e s s e s t a x e d , a n d ( p r e s u m a b l y ) t h a t t h e r e b e s o m e r e a s o n a b l e b a s i s f

o r t h e L e g i s l a t u r e 's c l a s s i f i c a t i o n s c h e m e
. ” )

.
B r i e f f o r R e s p o n d e n t 1

. 105


### 1 9

## prohibition ag ainst irrational leg islation. The L eg islatur e m ay p ursue policy g oals throug h tax

leg islation, but only g oals rela ted to the taxation. The fra nchise tax may be used to advanc e policies

re l at i ng to doing business in Texas, but it cannot be used, for example, to circ umvent t h e require ment that the ad v al o re m p ro p erty tax be based strictly on proper ty value. Fur

ther, tax
classifica tions must not only be rational but must attempt t o g roup similar things a nd differ entiate
dissimi lar things. Fur

ther, the fra

nchise tax’s classifica tions must rela te to differ ence s in doing
business that aff

ect the value of the privileg e. “The g ranting of the privileg e to transac t business in
this state confe rs economic benef its, including the opportunity to rea liz e g ross income and the rig ht

to invoke the protec tion of local law. Th e T ex as fr an ch i se tax is a tax on the value of this privileg e.” The Tax Commi ssion responsible for developing the 2006 amendments to the

1 0 6


## fra nchise tax confirme d that purpose by stating: “The clear intention of t he law’s orig inal framers

— that the fra

nchise tax should be imposed in exchang e for the state’s liability shield — rema ins the

g uiding light for th e Co mm is s io n ’ s r e c o mm e n d ation.” For this rea son, the Commi ssion explained, 1 0 7


## it reje cted net worth as a basis for the fra nchise tax bec au s e n et worth is not a measure of a
business’s ac tivity

in Texas. 1 0 8

B u l l o c k v

. N

a t ’ l B a n c s h a r e s C o r

p

. , 5 8 4 S

. W

. 2 d 2 6 8 , 2 7 0 ( T e x
. 1 9 7 9 ) ( c i t a t i o n s o m i t t e d )

. S e e a l s o G e n

. 106 D y n a m i c s C o r

p

. v

. B u l l o c k , 5 4 7 S

. W

. 2 d 2 5 5 , 2 5 7 ( T e x
. 1 9 7 6 ) ( s t a t i n g t h a t i t “ w a s t h e p u r p o s e o f t h e L e g i s l a t u r e t o l e v y a g a i n s t t h e c o r p o r a t i o n a t a x c o m m e n s u r a t e w i t h t h e v a l u e o f t h e p r i v i l e g e g r a n t e d ” ) ( c i t a t i o n a n d i n t e r n a l q u o t a t i o n m a r k s o m i t t e d )

.

T E X

. T A X R E F O R M C O M M ’ N , T A X F A IR N E S S : P R O P E R T Y T A X R E L IE F F O R T E X A N S 1 8 ( 2 0 0 6 )

. 107

I d

. 108


### 2 0

## Bullock v. Sage Energy Co. provides an example of an unrea sonable classifica tion in the 1 0 9


## fra nchise tax. By rule, intang ible development costs (“I DCs”) wer e excluded from capital, on which
the fra nchise tax was based at the time, if expensed on the taxpay er’ s books, but under fede ral law, Sag e Energ y , a publicly trade d company , was require d to capitalize I DCs. As a result of a fede ral 1 1 0



## acc ounting require ment, unrela ted to doing business in Texas, and not imposed on other companies

eng ag ed in the s ame business, Sag e Ene rg y ’s franchise tax was higher

. The court held t hat t his 1 1 1


## violated the Equal and Uniform Clause. Nestle points to lang uag e in the court’s opinion — that 1 1 2


## “taxation cannot be uniform unless the value of all proper ty is asce rtained by the same standard” 1 1 3



## — as supporting its position that the Equal and Uniform Clause does not permit any classifica tions
in the fra nchise tax. But the court’s point in Sage Ener g y was not that all classifica tions in the
fra nchise tax are impermissible, only that a classifica tion based on fede ral acc ounting require ments
was invalid bec ause it bore no rela tion to doing business in Texas. 1 1 4


## Nestle arg

ues that no classifica tion or differ entiation in the application of the fra nchise tax,
unrela t ed t o the value of the privileg e of doing business in Texas, is permitted by the Equal and
Uniform Clause. Whil e we ag ree that a classifica tion in a tax must be rela ted to the object of the tax,

7 2 8 S

. W

. 2 d 4 6 5 ( T e x
. A p p
. – A u s t i n 1 9 8 7 , w r i t r e f ’ d , n
. r
. e
. )

. 109

I d

. a t 4 6 6

- 4 6 7 110

I d

. 111

I d

. a t 4 6 7

- 4 6 8 ( c i t a t i o n o m i t t e d )

. 112

I d

. a t 4 6 8

. 113

I d

. 114


### 2 1

## we believe that the L eg islature must have discretion in structuring tax laws. This is espec ially true

wh en the object of the tax — occupa tions or the privileg e of doing business in the st at e

— i s n o t easily or exactly valued. “The re is alway s a presumption of constitutional validity wi t h reg ard to leg islation and it is espec ially strong in respe ct to statutes rela ting to taxation.” Wit h this in mind, 1 1 5



## we turn to Ne stle’s particula r cha lleng es.
D
Nestle attacks classifica tions in the curr ent fra nchise tax. For example, it arg ues, there is “no

appar ent rea son” to include employ ee wag es in the Gene ral Deduc tion for Compensa ti o n b u t e xclude

pay ments to independe nt contra ctors for the same work. But the L eg islature could c e r ta in ly c o n clude
that employ ers’ burdens — like compensa tion, unemploy ment insurance , and vicar ious liability

—

are g rea ter than those for a business whose work is done by independe nt contra ctors. Nestle arg ues
that a taxpay er whose Texas busine ss is e x clusively wholesale and reta il tra de should not be taxed

at a highe r rate b ec au s e i t has a manufa cturing business outside Texas. But the L eg islature could
conclude , as the Tax Commi ssion indicated, that such a tax p ay er ’s Texas business would benef it
from its manufa cturing activities out-of-state

. For the same rea son, the L eg islature could conclude 1 1 6


## that aff iliated entities should be require d to file as a g roup.

V i n s o n v

. B u r

g e s s , 7 7 3 S

. W

. 2 d 2 6 3 , 2 6 6 ( T e x
. 1 9 8 9 ) ( i n t e r n a l q u o t a t i o n m a r k s o m i t t e d ) ; s e e a l s o W a l t e r s 115

v

. C i t y o f S t

. L o u i s , 3 4 7 U

. S

. 2 3 1 , 2 3 7

- 2 3 8 ( 1 9 5 4 ) ( n o t i n g t h a t , w h e n a s t a t e t a x ’ s v a l i d i t y i s c h a l l e n g e d , “ e v e r y p r e s u m p t i o n i n i t s f

a v o r i s i n d u l g e d ” ) ( c i t a t i o n a n d i n t e r n a l q u o t a t i o n m a r k s o m i t t e d )

.
T E X

. T A X R E F O R M C O M M ’ N , T A X F A IR N E S S : P R O P E R T Y T A X R E L IE F F O R T E X A N S 1 9 n
. 4 ( 2 0 0 6 ) 116 ( “ [ B ] u s i n e s s e s
. . . e n g a g e d p r i m a r i l y i n w h o l e s a l e o r r e t a i l a c t i v i t i e s [ ] w o u l d p a y 0

. 5 % i n r e c o g n i t i o n o f t h e l o w p r o f

i t
m a r g i n s t h a t a r e b a s i c t o t h e i n d u s t r y ” )

. S e e a l s o G r e a t A t l

. & P a c

. T e a C o

. v

. G r o s

j e a n , 3 0 1 U

. S

. 4 1 2 , 4 2 4

- 4 2 5 ( 1 9 3 7 ) ( e x p l a i n i n g t h a t o u t

- o f

- s t a t e s t o r e s i n c r e a s e t h e v a l u e o f t h e p r i v i l e g e o f d o i n g b u s i n e s s w i t h i n a s t a t e b y g i v i n g a c o m p e t i t i v e a d v a n t a g e t o c h a i n s t o r e s w i t h i n t h e s t a t e )

. 

### 2 2

## Nestle complains that the my riad exemptions and s p e c ia l d e d u c ti ons allowed by the fra

nchise

tax are arbitra

ry and not rea sonably rela ted to the privileg e of doing business in Texas. Nestle points

t o the exclusion from Cost of Goods Sold allowed for renta l expenses of heavy constructi o n equipment, motor vehicles, and rolling stock. But in the House floor debate in 2006, leg islators expressed conce rn that lessors of construction equipment would be trea ted unequally without the
exclusion beca

use they do not sell g oods and have few employ ees, and their Gene ral Deduc tion for
Cost of Goods Sold or Compensation would be unfairly low. What Nestle criticizes as a depar ture 1 1 7 

## from uniformity

is actually

an attempt to trea t like tax pay ers a like.

Nest l e d o es not challeng e eac h and ever y deduction and exemption. I t arg ues that their
inclusion in the fra

nchise tax structure shows that the tax is not r easona bly rela ted to its object, the privileg e of doing business in Texas. Fr om the examples it cites, we disag ree
. Rather, we conclude
that the L eg islature’s structuring of the fra nchise tax is rea sonably rela ted to its object. Nestle has
not established that the fr anchise tax vi olates the Equa l and Uniform Clause.

III
Ne s t l es conce des, and we ag ree , that a failure of its challeng e based on the Equal an d
Uniform Clause fore closes its Equal Pro t ec t i o n challeng e. The Four teenth Amendment’s Equal
Protection Clause does not require t h at p roperty taxes be imposed without classifica tion. “I t 1 1 8

S e e , e

. g

. , D e b a t e o n T e x
. H

. B

. 3 o n t h e F l o o r o f t h e H o u s e , 7 9 t h L e g
. , 3 r d C

. S

. , A m e n d m e n t N o
. 3 7 , P a r t 117 6 , m i n u t e 2 9 ( A p r i l 2 4 , 2 0 0 6 ) ( “ t h e s e c a p i t a l i n t e n s i v e i n d u s t r i e s d e s e r v e t h e s a m e t r e a t m e n t t h a t o t h e r c a p i t a l i n t e n s i v e i n d u s t r i e s g e t ” ) , a v a i l a b l e a t h t t p : / / w w w
. h o u s e
. s t a t e
. t x
. u s / v i d e o - a u d i o / c h a m b e r / # 7 9

.

A l l e g h e n y P i t t s b u r

g h C o a l v

. W

e b s t e r C n t

y

. , 4 8 8 U

. S

. 3 3 6 , 3 4 4

- 3 4 5 ( 1 9 8 9 ) ( e x p l a i n i n g t h a t t h e E q u a l 1 1 8 P r o t e c t i o n C l a u s e w o u l d a l l o w a s t a t e t o “ d i v i d e d i f f e r e n t k i n d s o f p r o p e r t y i n t o c l a s s e s a n d a s s i g n t o e a c h c l a s s a d i f f e r e n t t a x b u r d e n ” b u t t h a t t h e W e s t V i r g i n i a e q u a l a n d u n i f o r m c l a u s e r e q u i r e d t h a t “ a l l p r o p e r t y o f t h e k i n d h e l d b y p e t i t i o n e r s s h a l l b e t a x e d a t a r a t e u n i f o r m t h r o u g h o u t t h e S t a t e a c c o r d i n g t o i t s e s t i m a t e d m a r k e t v a l u e
. ” )

.



### 2 3

## simply keeps g overnme ntal decisionmake rs from trea ting differ ently persons who are in all rele vant

respe cts alike.” The Equal and Uniform Clause is more strict. Having conclude d t h at the 1 1 9



## L eg islature had a rational basis for structuring the fra nchise tax the way it did, we hold that it did not violate Equal Protec tion in doing so.

IV
Due Process requi re s t h at “the taxi ng power exerted by the state bear s fiscal rela tion to
protec tion, o p portunities and benef its g iven by the state.” The rela tion must be to the activity 1 2 0 

## itself, not mere ly to the company
. We have conclude d that classifica tions in the fra nchise tax are 1 2 1



## rea sonably rela ted to the privileg e of doing business in Texas. Our analy sis is simil ar to that employ ed by the United States Supreme Court in Ford Motor Co. v. Beauc hamp , wher e a company complained that it was pay ing more fra nchise tax beca

use of its manufa cturing outside Texas even though it did no manufa cturing within Te x as. Noting that the Texas franc hise tax “is obvious ly 1 2 2



## pay ment for t h e p ri v i l eg e of car ry ing on business in Texas”, the Supreme Court held that the
fra nchise tax did not violate due proce ss beca use in “a unitary enter

prise, proper

ty outside the state,
when corr elated in use with pr operty within the state, nece ssarily aff ects the worth of the privileg e
within the state.” For

the same r easons, we conclude that Nestle’s D ue Proce ss challeng e fa ils. 1 2 3

N o r d l i n g e r v

. H a h n , 5 0 5 U

. S

. 1 , 1 0 ( 1 9 9 2 ) ( c i t a t i o n o m i t t e d )

. 119

W i s

. v

. J

. C

. P e n n e

y C o

. , 3 1 1 U

. S

. 4 3 5 , 4 4 4 ( 1 9 4 0 )

. 120

A l l i e d

- S i g n a l

, I n c

. v

. D i r

. , D i v

. o

f T a x a t i o n , 5 0 4 U

. S

. 7 6 7 , 7 7 8 ( 1 9 9 2 )

. 121

3 0 8 U

. S

. 3 3 1 , 3 3 3

- 3 3 4 ( 1 9 3 9 )

. 122

I d

. a t 3 3 4 , 3 3 6

. 123


### 2 4

## V

The United States Supre me Court has long held that the Commerce Clause' s express g rant

t o Congr ess of the power to “re g ulate Commerce

. . . among the sever al states” also contains a
neg ative command – know n as the ne g ative or dormant Commerce Clause – that prohibits cer tain
state taxation even whe n Congr ess has failed t o leg islate on the s ubject. I n this case, the hig her 1 2 4



## tax rate for manufa cturing would violate the dorm an t Commerce Clause if it: “(1) applies to an activity lacking a substantial nexus to the taxi ng State; (2) is not fairly apportioned; (3) discriminates

ag ainst interstate commerc e; or (4) is not fairl y re l at ed to the service s provided by the State.” 1 2 5


## Nestle claims that the manufa cturing rate discriminates ag ainst interstate commerc e and is not fairly
rela ted to the servic es provided by Texas.
The manufa cturing rate does not discrimi n at e against interstate commerc e. Taxes do not
discriminat e when the differ ing rate stems “solely from differ ence s betwee n the nature of their
b u s i nesses, not from the location of their activities.” That is the case here

. L ocation is not t h e 1 2 6


## basis for differ ent trea tment beca use in-state companies that manufa cture will pay the same rate as
Nestle and out-of-state companies that do only wholesaling and reta iling will qua lify for the lower

rate

. Nestle’s discrimination arg ument is simi l ar t o t h e arg ument that failed in Exx on Corp. v.

O k l a

. T a x C o m m '

n v

. J e f f e r s o n L i n e s , I

n c

. , 5 1 4 U

. S

. 1 7 5 , 1 7 9

- 8 0 ( 1 9 9 5 ) ; B a r c l a y s B a n k P L C v

. F r a n c h i s e 124 T a x B d

. , 5 1 2 U

. S

. 2 9 8 , 3 1 0

- 3 1 1 ( 1 9 9 4 ) ; Q u i l l C o r p v

. N o r t h D a k o t a , 5 0 4 U

. S

. 2 9 8 , 3 0 9 ( 1 9 9 2 )

.
J e f f e r s o n L i n e s , I

n c

. , 5 1 4 U

. S

. a t 1 7 9

- 8 0 ( e x p l a i n i n g a n d a p p l y i n g t h e f o u r - p a r t t e s t f

i r s t a d o p t e d i n C o m p l e t e 125 A u t o T r a n s i t , I n c

. v

. B r a d

y , 4 3 0 U

. S

. 2 7 4 ( 1 9 7 7 ) ) ; B a r c l a y s B a n k , 5 1 2 U

. S

. a t 3 1 0

- 3 1 1 ( 1 9 9 4 )

.
A m e r a d a H e s s C o r

p

. v

. D i r

. , D i v

. O

f T a x a t i o n , 4 9 0 U

. S

. 6 6 , 7 8 ( 1 9 8 9 ) ( c i t a t i o n o m i t t e d )

. 126


### 2 5

## Gove rnor of Maryland

. Exx on held that a law prohibiting oil produce rs from reta iling in Maryland

1 2 7


## does not disc riminate ag ainst interstate c ommerce . An outrig ht prohibition i s more suspect than a highe r tax rate

. The Supreme Court based its Exx on d ec i s i o n in part on the fac t that interstate

reta ilers that do not produce are fre e to compete with local reta ilers. That is also true in this case
. 1 2 8


## The manufa cturing rate is fairly rela ted to the service s provided by Texas. I n Oklahoma Tax
Commission v

. Jefferson Lines, I nc ., the Supreme Court stated that the f air re lation test “asks only
that t h e m ea sure of the tax be rea sonably rela ted to the taxpay er' s prese nce or activities in the
State”. The S upreme Court upheld a state bu s -t icket tax that applied the same rate to the t icket

1 2 9 

## price reg ardle ss of how much of that trip would occur within the state. The Court explained that 1 3 0



## i t need not do a detailed acc ounting of the service s provided or ensure that the tax is limit ed t o
offse tting the public costs g ener ated by the taxed activity

. J ust as t he tax in Jefferson Li nes did 1 3 1



## not need to prec isely alig n the tax rate with the value of the roads provided by the state, the fra nchise

tax need not prec isely alig n the tax rate with the value o f t h e Privilege

. I t is enoug h that
manufa cturing outside of t he st ate will often inc rea se the va lue of doing business within the s tate,

4 3 7 U

. S

. 1 1 7 , 1 2 5

- 1 2 9 ( 1 9 7 8 )

. 127

I d

. a t 1 2 6

. 128

5 1 4 U

. S

. 1 7 5 , 2 0 0 ( 1 9 9 5 ) ( c i t a t i o n o m i t t e d )

. 129

I d

. a t 1 9 9

– 2 0 0

. 130

I d

. a t 1 9 9

. 131


### 2 6

## just as it was enoug h that out-of-state stores in a chain often incre ase the “adva ntag es and capa cities”
of stores within the state. 1 3 2



## * * *
Acc ording ly , Nestle’s pe tition i s denied.

Nathan L . Hec ht J ustice
OPI NI ON DEL I VERED: Octobe r 19, 2012

G r e a t A t l

. & P a c

. T

e a C o

. v

. G r o s

j e a n , 3 0 1 U

. S

. 4 1 2 , 4 2 5 ( 1 9 3 7 )

. 132


### 2 7