International Harvester Co. v. Wisconsin Department of Taxation

Background

Two out-of-state corporations that did business in Wisconsin (a New Jersey and a Delaware company) challenged Wisconsin’s "privilege dividend tax." The state assessed the tax on dividends that were attributed to earnings from Wisconsin business. The dividends were declared and paid outside Wisconsin. The companies argued the tax violated the Constitution by reaching nonresident shareholders and by applying to earnings accumulated before the law.

Reasoning

The Court asked whether Wisconsin could tax earnings tied to business in the state and require the corporation to withhold the tax when those earnings were paid out as dividends. The Court said yes. It looked to the tax’s practical effect, not the state court’s label, and treated the levy as a tax on corporate earnings that was postponed until distribution. The Court found the corporations had standing to raise their shareholders’ objections. It also held there was no forbidden retroactive application because the taxable event was the dividend distribution after the law’s enactment.

Real world impact

States may collect taxes on portions of corporate earnings attributed to in-state business by measuring dividends paid to shareholders and requiring withholding by the corporation. Nonresident shareholders and national companies doing business in multiple states are affected. Corporations may be required to act as the state’s withholding agent.

Dissents or concurrances

Justice Jackson dissented. He argued the tax is really on stockholders receiving dividends, not on corporate income. He warned the ruling lets states tax nonresidents’ dividend receipts and criticized the withholding mechanism and retroactivity reasoning.