International Harvester Co. v. Evatt

1947-02-03

Headline: Ohio’s corporate franchise tax apportionment is upheld, allowing the State to include parts of in-state manufacturing and sales when taxing multistate companies, affecting companies with factories and selling agencies across states.

Holding:

Real World Impact:

Allows states to include in-state manufacturing value when apportioning franchise taxes for multistate firms.
Makes it harder for companies to avoid state franchise tax by routing sales out of state.
Affirms that rough apportionment, not exact precision, can satisfy constitutional limits on state taxation.

Topics: state taxes, corporate taxation, interstate commerce, tax apportionment, manufacturing

Summary

Background

A large manufacturing company with factories, warehouses, selling agencies, and retail stores both in Ohio and in other states challenged Ohio’s franchise tax for certain years. Ohio taxed the company for the “privilege of doing business” in the State and used a formula that counted part of the value of goods made in Ohio, even when those goods were later sold or delivered outside Ohio. The company argued that this method effectively taxed out-of-state and interstate sales and violated constitutional protections.

Reasoning

The Court considered whether Ohio’s formula unlawfully reached sales outside the State or unfairly burdened interstate commerce. The Justices explained that Ohio was taxing the local privilege of doing business, including the business of manufacturing conducted in Ohio. Measuring that privilege by the value of goods produced in Ohio did not convert the tax into a tax on out-of-state sales. The Court emphasized that the State adopted its formula to fairly apportion local and interstate business and that a rough approximation, rather than exact precision, is acceptable unless a result is palpably disproportionate.

Real world impact

The ruling means states may use similar apportionment formulas to calculate franchise taxes on companies with multistate operations, so long as the result is not clearly disproportionate. Companies with factories in one state and sales spread across others will likely continue to face state franchise taxes based on in-state business measures. The decision affirms the tax for the years at issue but leaves open other hypothetical boundaries of such formulas.

Dissents or concurrances

A concurring Justice added that the specific transactions included in Ohio’s measure had sufficient factual connections to Ohio to justify their use in the apportionment, and thus agreed the apportionment was valid.