In an earlier post, In Delaware, No Par Value Can Cost a Bundle, I discussed the two methods by which Delaware’s franchise tax for a corporation may be calculated. This post discusses the history of those two methods.
To some extent, this post is educated guesswork. It is based on a Quora question that I answered. Please seeÂ What is the rationale/reason (not math) behind the two methods of calculation for Delaware’s domestic franchise tax fee?
Delaware has two methods of calculating a corporationâ€™s annual franchise tax, theÂ Authorized Shares MethodÂ and theÂ Assumed Par Value Capital Method. Today, those methods are specified inÂ Delaware General Corporation Law Section 503.
Originally a Gross Receipts Tax
The original version of Delaware’s franchise tax statute, amended many times since enactment in 1899, was 21 Del. Laws, c. 166, Â§ 4. That statute specified a franchise tax that was a fraction of one percent of the corporationâ€™s annual gross receipts. At that time, the statute applied only to corporations in, and varied among, specified industries: telegraph, telephone, electricity, heat, power, gas, oil, insurance, etc. These were large corporations.
Authorized Shares Method for Small Corporations
In 1927, Delaware made many amendments pertaining to corporate finance. (See â€œA History of Delaware Corporation Lawâ€, page 11.) 35 Del. Laws, c. 5, Â§ 4Â provided the first version of what today is known as theÂ Authorized Shares Method for calculating Delaware’s franchise tax:
Where the amount of the authorized capital stock does not exceed two hundred and fifty shares, Five Dollars; where the amount of the authorized capital stock exceeds two hundred and fifty shares but is not more than one thousand shares, Ten Dollars; where the authorized capital stock exceeds one thousand shares but is not more than three thousand shares, Twenty Dollars ; where the authorized capital stock exceeds three thousand shares but is not more than five thousand shares, Twenty-five. Dollars; where the authorized capital stock exceeds five thousand shares but is not more than ten thousand shares, Fifty Dollars : and the further sum of Twenty-five Dollars per year on each ten thousand shares or part thereof in excess of ten thousand shares; provided, however, that any such corporation shall be required to pay only one-half of the amount of taxes scheduled above if the corporation shall show in its annual report that it is not engaged in any business, but in no case shall the amount of tax be less than Five Dollars for any year ; and provided further than any number of shares having par value but having a total par value of less than or equal to One Hundred Dollars shall be counted as only one share.
I believe that this method was oriented toward, and was an attempt to promote, the formation ofÂ small corporations. This method expressly did not apply to the large corporations that had been subject to franchise taxes since 1899.
Delaware’s Franchise Tax Adds Assumed Par Value Capital Method
It appears that a version of theÂ Assumed Par Value Capital MethodÂ first appeared in 1937 (41 Del. Laws, c. 5, Â§ 1):
Five dollars ($5.00), where the assumed no-par capital of the corporation, found in the manner hereinafter in this paragraph (2) provided, does not exceed twenty-five thousand dollars ($25,000.00); ten dollars ($10.00), where such assumed no-par capital exceeds twenty-five thousand dollars ($25,000.00) but is not more than one hundred thousand dollars ($100,000.00); twenty dollars ($20.00), where such assumed no-par capital exceeds one hundred thousand dollars ($100,000.00) but is not more than three hundred thousand dollars ($300,000.00); twenty-five dollars ($25.00), where such assumed no-par capital exceeds three hundred. thousand dollars ($300,000.00) but is not more than five hundred thousand dollars ($500,000.00); fifty dollars ($50.00), where such assumed no-par capital exceeds five hundred thousand dollars ($500,000.00) but is not more than one million dollars ($1,000,000.00); and the further sum of twenty-five dollars ($25.00) for each one million dollars ($1,000,000.00) or part thereof of such additional assumed no-par capital.
My hypothesis is that this method represented aÂ simplificationÂ of franchise tax calculations, andÂ stabilizationÂ of franchise tax revenue. No longer was it necessary to:
- Consider the industry in which a corporation did business (What if there were multiple such industries?);
- Determine the applicable tax rate; then
- Multiply that rate by the gross receipts for the applicable year (which could vary significantly from year to year).
Instead, there was a straightforward calculation based on the number of authorized shares, no matter how large the corporation was.
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
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