Foreign Corporations, Nonresidents, and State Taxes

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All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

The Equal Protection Clause does not require identical taxes upon all foreign and domestic corporations in every case.1 In 1886, a Pennsylvania corporation previously licensed to do business in New York challenged an increased annual license tax imposed by that state in retaliation for a like tax levied by Pennsylvania against New York corporations. This tax was held valid on the ground that the state, having power to exclude entirely, could change the conditions of admission for the future and could demand the payment of a new or further tax as a license fee.2 Later cases whittled down this rule considerably. The Court decided that “after its admission, the foreign corporation stands equal and is to be classified with domestic corporations of the same kind,” 3 and that where it has acquired property of a fixed and permanent nature in a state, it cannot be subjected to a more onerous tax for the privilege of doing business than is imposed on domestic corporations.4 A state statute taxing foreign corporations writing fire, marine, inland navigation and casualty insurance on net receipts, including receipts from casualty business, was held invalid under the Equal Protection Clause where foreign companies writing only casualty insurance were not subject to a similar tax.5 Later, the doctrine of Philadelphia Fire Association v. New York was revived to sustain an increased tax on gross premiums which was exacted as an annual license fee from foreign but not from domestic corporations.6 Even though the right of a foreign corporation to do business in a state rests on a license, the Equal Protection Clause is held to ensure it equality of treatment, at least so far as ad valorem taxation is concerned.7 The Court, in WHYY Inc. v. Glassboro,8 held that a foreign nonprofit corporation licensed to do business in the taxing state is denied equal protection of the law where an exemption from state property taxes granted to domestic corporations is denied to a foreign corporation solely because it was organized under the laws of a sister state and where there is no greater administrative burden in evaluating a foreign corporation than a domestic corporation in the taxing state.

State taxation of insurance companies, insulated from Commerce Clause attack by the McCarran-Ferguson Act, must pass similar hurdles under the Equal Protection Clause. In Metropolitan Life Ins. Co. v. Ward,9 the Court concluded that taxation favoring domestic over foreign corporations “constitutes the very sort of parochial discrimination that the Equal Protection Clause was intended to prevent.” Rejecting the assertion that it was merely imposing “Commerce Clause rhetoric in equal protection clothing,” the Court explained that the emphasis is different even though the result in some cases will be the same: the Commerce Clause measures the effects which otherwise valid state enactments have on interstate commerce, while the Equal Protection Clause merely requires a rational relation to a valid state purpose.10 However, the Court’s holding that the discriminatory purpose was invalid under equal protection analysis would also be a basis for invalidation under a different strand of Commerce Clause analysis.11

1: Baltic Mining Co. v. Massachusetts, 231 U.S. 68, 88 (1913). See also Cheney Bros. Co. v. Massachusetts, 246 U.S. 147, 157 (1918).
2: Phila. Fire Ass’n v. New York, 119 U.S. 110, 119 (1886).
3: Hanover Fire Ins. Co. v. Harding, 272 U.S. 494, 511 (1926).
4: S. Ry. v. Green, 216 U.S. 400, 418 (1910).
5: Concordia Ins. Co. v. Illinois, 292 U.S. 535 (1934).
6: Lincoln Nat’l Life Ins. Co. v. Read, 325 U.S. 673 (1945). This decision was described as “an anachronism” in W. & S. Life Ins. Co. v. State Bd. Of Equalization, 451 U.S. 648, 667 (1981), the Court reaffirming the rule that taxes discriminating against foreign corporations must bear a rational relation to a legitimate state purpose.
7: Wheeling Steel Corp. v. Glander, 337 U.S. 562, 571, 572 (1949).
8: 393 U.S. 117 (1968).
9: 470 U.S. 869, 878 (1985). The vote was 5-4, with Justice Lewis Powell’s opinion for the Court joined by Chief Justice Warren Burger and by Justices Byron White, Harry Blackmun, and John Paul Stevens. Justice Sandra Day O’Connor’s dissent was joined by Justices William Brennan, Thurgood Marshall, and William Rehnquist.
10: 470 U.S. at 880.
11: The first level of the Court’s “two-tiered” analysis of state statutes affecting commerce tests for virtual per se invalidity. “When a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, we have generally struck down the statute without further inquiry.” Brown-Forman Distillers Corp. v. NN.Y. State Liquor Auth., 476 U.S. 573, 579 (1986).