Butler Bros. v. McColgan

Butler Brothers (plaintiff) was an Illinois corporation that purchased goods from manufacturers and sold the goods wholesale to retailers. Butler Brothers had a distribution center in San Francisco, California, which employed its own sales force and had its own supply of goods. All of Butler Brothers’ sales in California were credited to its San Francisco distribution center. Butler Brothers had common expenses shared among its distribution centers to pay for executive salaries, central buying and advertising, and certain accounting costs. Butler Brothers allocated those shared expenses among its distribution centers. In calculating its California-derived income for 1935, Butler Brothers subtracted its allocated common expenses and California-derived expenses from its California sales and reported a loss of approximately $83,000. Charles McColgan, the tax commissioner of California (defendant), assessed a tax deficiency against Butler Brothers after applying California’s statutory apportionment formula to Butler Brothers’ income and determining that 8 percent of Butler Brothers’ $1,150,000 profit was allocable to California. California’s Bank and Corporation Franchise Tax Act provided that a company doing business in California had to pay a franchise tax on its income generated in California. According to the act, a company’s tax liability on its income would be fairly calculated based on factors such as the company’s sales, purchases, expenses, and payroll and the value of property owned by the company that were reasonably attributable to California. Butler Brothers paid the deficiency and filed a lawsuit in state court seeking a refund and arguing that California’s apportionment formula violated the Fourteenth Amendment to the United States Constitution. The California Supreme Court upheld McColgan’s use of the apportionment formula. The United States Supreme Court granted certiorari.