The California Bank and Franchise Tax Act declares: Every business corporation, with exceptions not here material, 'shall annually pay to the state, for the privilege of exercising its corporate franchises within this state, a tax according to or measured by its net income' to be computed at the rate of 4 per cent. upon that income for the preceding year. Section 4 (St.1929, p. 20). If all the corporation's business is done in California, the tax shall be computed on its entire net income; if not, on that portion which is derived from business done within the state. Section 10 (St.1929, p. 24). Net income is the revenue from all sources less expenses, losses, bad debts, taxes, depreciation, depletion, etc. Sections 6, 7, and 8 (St.1929, pp. 20, 21).
Appellants were incorporated under the laws of California and, for purposes of taxation, are deemed affiliated. Section 14 (St.1929, p. 26). Matson Navigation Company and the Oceanic Steamship Company, in addition to doing substantial intrastate business in California, were engaged in transportation between ports on the Pacific Coast in the United States and ports in Hawaii, the South Sea Islands, Australia, and New Zealand. The Matson Terminals, Inc., had no 1930 net income from interstate or foreign commerce. In March, 1931, appellants made a consolidated return showing for 1930 net income from intrastate business of $730,357.81, and from interstate and foreign business of $2,526,148.22. They maintained that the tax should not be more than 4 per cent. of their net income from intrastate business. But the tax commissioner held that there should be included in the computation the part of their net income from interstate and foreign commerce that was attributable to California, found to be 22.2 per cent., and on that basis he assessed an additional tax. The state board of equalization sustained the additional assessment. The case was taken on writ of review to the state Supreme Court and there, contrary to appellants' contentions, it was held that the act as construed by the tax commissioner is not repugnant to the Commerce Clause of the Federal Constitution (article 1, § 8, cl. 3) or to the due process or equal protection clause of the Fourteenth Amendment. 3 Cal.(2d) 1, 43 P.(2d) 805.
The only question here is whether consistently with these constitutional provisions there may be included in the base, to which the rate of 4 per cent. was applied, any part of net income derived from appellants' interstate and foreign commerce.