Opinion ID: 1729091
Heading Depth: 1
Heading Rank: 2

Heading: Alabama's Franchise-Tax Scheme[2]

Text: Alabama's franchise-tax scheme is composed of constitutional and statutory provisions. The Constitution of Alabama of 1901 provides for the imposition of franchise taxes on domestic corporations (§ 229) and on foreign corporations (§ 232). Section 229, as amended by Amendment No. 27, requires the imposition of a franchise tax on domestic corporations, providing in pertinent part: The Legislature shall, [3] by general laws, provide for the payment to the state of Alabama of a franchise tax by corporations organized under the laws of this state which shall be in proportion to the amount of capital stock .... (Emphasis added.) Pursuant to the mandate of § 229, the Legislature has enacted § 40-14-40, levying a franchise tax on domestic corporations. That section provides in pertinent part: Every corporation organized under the laws of this state ... shall pay annually to the state an annual franchise tax based on its capital stock as follows: For the tax year Rate on each $1000.00 beginning of capital stock January 1, 1984 $10.00 And all years thereafter $10.00 provided, that in no event shall the amount paid by any corporation for annual franchise tax be less than the sum of $50. (Emphasis added.) Neither the Constitution of Alabama of 1901 nor § 40-14-40 defines the term capital stock. Early in our post-1901 jurisprudence, this Court defined the term capital stock, as used in § 229, as the paid-in, or paid-up, capital stock, but never as par value. [4] Ultimately, for reasons not clear from the record in this present case, [5] the term capital stock, as it is used in the domestic-corporation franchise-tax statute, came to be interpreted by Alabama courts as meaning the par value of the corporation's shares of stock. [6] Thus, in practice, the term capital stock has consistently been interpreted strictly to refer to shares of equity ownership in the corporation. Section 232 of the Constitution of Alabama of 1901, as amended by Amendment No. 473, provides for the imposition of a franchise tax on foreign corporations. It states in pertinent part: The legislature shall, [7] by general law, provide for the payment to the state of Alabama of a franchise tax by such corporation, but such franchise tax shall be based on the actual amount of capital employed in this state. (Emphasis added.) The foreign-corporation franchise tax differs basically from the domestic-corporation franchise tax in that it is a tax on the foreign corporation's actual amount of capital employed in this state, rather than one on the corporation's  capital stock.  The Constitution of Alabama of 1901 does not define the term capital. Pursuant to the mandate of § 232, the Legislature has enacted § 40-14-41, levying a franchise tax on foreign corporations. [8] Section 40-14-41 provides in pertinent part: (a) Amount of levy.Every corporation organized under the laws of any other state, nation, or territory and doing business in this state ... shall pay... to the state an annual franchise tax of three dollars ($3) on each one thousand dollars ($1,000) of the actual amount of its capital employed in this state.... (Emphasis added.) The term capital, as it is used in § 232 and in the foreign-corporation franchise-tax statute, has been construed several times by this Court. This Court has construed capital to mean all assets which have an actual or a legal situs in Alabama and which are used or employed by the foreign corporation in Alabama in the exercise of any business whatsoever. Alabama Textile Prods. Corp. v. State, 263 Ala. 533, 544, 83 So.2d 42, 50 (1955) (noting that the phrase actual capital employed in this state does not mean the net worth of the corporation). 263 Ala. at 543, 83 So.2d at 50. [9] In 1961, the Legislature amended the foreign-corporation franchise-tax statute, expressly defining the term capital and specifying a method for determining the actual amount of capital employed by a foreign corporation in Alabama. [10] See Act No. 912, 1961 Ala. Acts 1462 (presently codified, as amended, at Ala.Code 1975, § 40-14-41(b)). The 1961 Act clearly intended capital to mean the property of the corporation, since it limited the actual amount of capital employed in this State to the sum of (1) [the foreign corporation's] tangible property located in the State and (2) its intangible property employed in the conduct of its business in the State. [11] Thus, the term capital has been consistently interpreted for purposes of § 232 and the foreign-corporation franchise-tax statute to apply to the assets of the corporation.