Fulton Corp. v. Faulkner

In Fulton Corp. v. Faulkner, 516 U.S. 325 (1996), the United States Supreme Court considered a North Carolina statute that imposed a one quarter of 1 percent "intangibles" tax on the fair market value of corporate stock owned by North Carolina residents. However, North Carolina residents were allowed to calculate their tax liability under this provision by "taking a taxable percentage deduction equal to the fraction of the issuing corporation's income subject to tax in North Carolina." (Id. at p. 327-328) This figure was determined by looking at the proportion of the issuing corporation's sales, payroll and property located in North Carolina. The net effect of the tax scheme was that a corporation doing all of its business within North Carolina would pay corporate income taxes on 100 percent of its income, meaning that a North Carolina resident who owned stock in that company would avoid the "intangibles" tax entirely. At the other extreme, a North Carolina resident who owned shares in a corporation that conducted no business within North Carolina would have to pay the .25 percent tax on the full (100 percent) market value of the stock. Similarly, the share values of corporations that conducted some (but not all) of their business within North Carolina would be subject to a sliding scale deduction. ( Id. at p. 328 116 S. Ct. at p. 852.) The Fulton court determined that this tax scheme facially discriminated against interstate commerce. The court reasoned: "A regime that taxes stock only to the degree that its issuing corporation participates in interstate commerce favors domestic corporations over their foreign competitors in raising capital among North Carolina residents and tends, at least, to discourage domestic corporations from plying their trades in interstate commerce." (Fulton, supra, 516 U.S. at p. 333.) In Fulton Corp. v. Faulkner, the United States Supreme Court examined North Carolina's "'intangibles tax,'" which imposed a .25 percent tax on the fair market value of corporate stock owned by North Carolina taxpayers. (Fulton, supra, 516 U.S. at p. 327.) The offending portion of the tax scheme was a corresponding "taxable percentage deduction equal to the fraction of the issuing corporation's income subject to tax in North Carolina." (Id. at p. 328.) "Thus, a corporation doing all of its business within the state would pay corporate income tax on 100 percent of its income, and the taxable percentage deduction allowed to resident owners of that corporation's stock under the intangibles tax would likewise be 100 percent. Stock in a corporation doing no business in North Carolina, on the other hand, would be taxable on 100 percent of its value." (Ibid.) This differential treatment led the court to conclude "there is no doubt that the intangibles tax facially discriminates against interstate commerce." (Id. at p. 333.)