FRANCHISE TAX, a tax on public serv ice and private corporations for the purposes of governmental revenue and indirectly to effect a sharing of profits with the public. In its widest application it includes patents, copy rights, inheritance, etc., besides those franchises and rights conferred by government for con ducting an occupation in a particular way, or accompanied with particular privileges. Its application to public service corporations was justified as a payment for the right to use streets, highways and public places for special purposes. Between a domestic corporation with its state franchise and a corporation in a state with a foreign charter, a distinction exists. A state can impose a tax only on privileges which it grants; it, however, taxes foreign corpora tions as to the amount of their business, thus adding to state revenue.
The sharp distinction between a corporate franchise and a corporate charter must be recognized. A franchise is the permission given a private corporation to use public property in the public interest, to occupy a particular street or highway with its tracks, wires, pipes, etc. A charter is the state grant to an associ ation of individuals to do business as a cor poration. The development of the franchise tax arose chiefly on account of the difficulties in collecting the general property tax. The general method employed to determine the value of the franchise in regard to public service corporations which have monopolistic privileges is to subtract the value of the real estate and other physical property from the value of the securities and to consider the difference as the value of the franchise. This process is usually called the corporate excess. In Massachusetts the corporation pays the tax directly to the state. The receipts are distributed to the towns and cities in proportion to the number of shares owned, or in the case of street railways, ac cording to the miles of street railway owned in each town. With deductions made for real estate and other items locally taxed, shares are assessed at their market value. Plehn classifies four different methods of obtaining revenue from the franchise of a public service corporation: (1) to consider the privilege as property and to include this in the valuation of taxable property; this valuation may be arrived at in one of two ways: (a) by valuing the tangible property and then adding an amount equal to the difference between that and the value of the stock, including bonds; this is the °corporate excessp previously re ferred to, so termed in Illinois, or the °value of the franchise,* as in California, or °the )rth in express terms. Accordingly the
given by a franchise will be held not exclusive unless their exclusive character .cifically declared.
le Granting of The grant f a franchise is an exercise of legislative not restrained by constitutional bitions the State legislature may grant directly even over the protest of the npality concerned. The first period in istory of franchise grants in the United 3 was that in which State legislatures con I franchises by special laws upon corpora usually created by special laws. There is acker page in American political history this. Franchises were secured by the most n dishonesty and bribery, and reputable cal leaders openly bartered them for party sign funds. The terms of most of these franchises were naturally in gross viola of the public interest. Many of the grants perpetual. In return for the almost in ible rights with which the State parted it ved as a rule nothing. It received no :y and it retained no adequate power of lation over the grantee in the matter of cc, rates or extensions. It reserved no :r to prevent gross over-capitalization. y cities are still suffering from the cor and improvident franchise grants made rig this period. The second era of fran history began in the latter part of the 19th ury with the movement to forbid the crea of corporations or the granting of privi by special law. Municipalities, acting !r delegated authority as agents of the State, : over the power to grant franchises. This em did not prove to be a very substantial rovement. At the present time a third cy, that of vigorous control over franchise its, is in force in most parts of the United :es. Three types of restrictions are com ily found. First, no franchises may be ited by special act of the State legislature. ond, the people of the municipality con ied may be given the right to approve or ,pprove the franchise by voting on it. Third, lie utility commissions may be created either a very limited authority or with a high de e of power over the terms and conditions n. which the franchises shall be issued as 1 as over the grantee thereafter.