International Harvester Co. v. Wisconsin Dept. of Taxation

Background

Two out-of-state corporations that do business in Wisconsin challenged assessments under Wisconsin’s Privilege Dividend Tax. The tax, enacted in 1935 and later reenacted, requires corporations to deduct and remit a three percent tax from dividends that are paid out of income earned from property and business in Wisconsin. The challenged dividends were declared at directors’ meetings and paid from bank accounts outside Wisconsin to many nonresident shareholders.

Reasoning

The Court addressed whether Wisconsin could tax and require withholding on dividends tied to earnings made in the State. Relying on the tax’s practical operation rather than the state court’s label, the majority concluded the State may treat the tax as a levy on corporate earnings measured when distributed as dividends. The Court held personal presence of shareholders was not required, that corporations may be required to collect the tax, and that the challenged assessments did not unlawfully apply the law retroactively because the taxable distributions and deductions occurred after the statute.

Real world impact

This ruling lets Wisconsin collect taxes on portions of corporate dividends that are attributed to in-state earnings and forces corporations doing business there to act as collection agents. Nonresident shareholders receiving dividends tied to Wisconsin earnings can be affected even if they never enter the State. The decision affirms assessments at issue and leaves tax policy and fairness to the political process.

Dissents or concurrances

Justice Jackson dissented, arguing the tax is truly a tax on stockholders’ dividends paid outside Wisconsin and that the State lacks authority to tax nonresident shareholders for distributions made by a foreign corporation. He warned the decision could subject shareholders to multiple state taxes and criticized the majority’s characterization of the levy.