Thank You For Submiting Feedback!
Absent a compelling justification a state may not advance its legitimate goals by means that facially discriminate against foreign commerce.
The Iowa statute that imposed a business tax on corporations used the federal tax code's definition of "net income" with certain adjustments. Like the federal scheme, Iowa allowed corporations to take a deduction for dividends received from domestic, but not foreign, subsidiaries. However, unlike the federal scheme, Iowa did not allow a credit for taxes paid to foreign countries. Petitioner Kraft General Foods, Inc., a unitary business with operations in the United States and several foreign countries, deducted its foreign subsidiary dividends from its taxable income on its 1981 Iowa return, notwithstanding the contrary provisions of Iowa law. Respondent Iowa Department of Revenue and Finance (Iowa) assessed a deficiency, which Kraft challenged in administrative proceedings and subsequently in Iowa courts. The Iowa Supreme Court rejected Kraft's argument that the disparate treatment of domestic and foreign subsidiary dividends violated the Commerce Clause of the Federal Constitution, holding that Kraft failed to demonstrate that the taxing scheme gave Iowa businesses a commercial advantage over foreign commerce. Kraft filed a petition for writ of certiorari.
Did the Iowa statute facially discriminate against foreign commerce in violation of the Commerce Clause of the Federal Constitution?
The Court held that the Iowa statute facially discriminated against foreign commerce in violation of the Foreign Commerce Clause. According to the Court, it was indisputable that the statute treated dividends received from foreign subsidiaries less favorably than those received from domestic subsidiaries by including the former, but not the latter, in taxable income. The Court averred that none of the several arguments made by Iowa and its amici -- that, since a corporation's domicile did not necessarily establish that it was engaged in either foreign or domestic commerce, the disparate treatment was not discrimination based on the business activity's location or nature; that a taxpayer can avoid the discrimination by changing a subsidiary's domicile from a foreign to a domestic location; that the statute did not treat Iowa subsidiaries more favorably than those located elsewhere; that the benefit to domestic subsidiaries might be offset by the taxes imposed on them by other States and the Federal Government; and that the statute was intended to promote administrative convenience rather than economic protectionism -- justified Iowa's differential treatment of foreign commerce. Accordingly, the Court reversed the judgment of the state supreme court upholding Iowa's corporate tax of dividends from foreign subsidiaries and remanded for further proceedings.