CRS Annotated Constitution

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Foreign Corporations and Nonresidents.—The equal protection clause does not require identical taxes upon all foreign and domestic corporations in every case.211 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.212 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,”213 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.214 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.215 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.216 Even though the right of a foreign corporation to do business in a State rests on a license, yet the equal protection clause is held to insure it equality of treatment, at least so far as ad valorem taxation is concerned.217 The Court, in WHYY v. Glassboro218 held that a foreign nonprofit corporation licensed to do business in the taxing State is denied equal treatment in violation of the equal protection clause where an exemption from state property taxes granted to domestic cor[p.1825]porations 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,219 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.220 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.221

Income Taxes.—A state law which taxes the entire income of domestic corporations which do business in the State, including that derived within the State, while exempting entirely the income received outside the State by domestic corporations which do no local business, is arbitrary and invalid.222 In taxing the income of a nonresident, there is no denial of equal protection in limiting the deduction of losses to those sustained within the State, although residents are permitted to deduct all losses, wherever incurred.223 A retroactive statute imposing a graduated tax at rates different from those in the general income tax law, on dividends received in[p.1826]a prior year which were deductible from gross income under the law in effect when they were received, does not violate the equal protection clause.224


211 Baltic Mining Co. v. Massachusetts, 231 U.S. 68, 88 (1913) . See also Cheney Brothers Co. v. Massachusetts, 246 U.S. 147, 157 (1918) .
212 Philadelphia Fire Ass’n v. New York, 119 U.S. 110, 119 (1886) .
213 Hanover Fire Ins. Co. v. Harding, 272 U.S. 494, 511 (1926) .
214 Southern Ry. v. Green, 216 U.S. 400, 418 (1910) .
215 Concordia Ins. Co. v. Illinois, 292 U.S. 535 (1934) .
216 Lincoln Nat’l Life Ins. Co. v. Read, 325 U.S. 673 (1945) . This decision was described as “an anachronism” in Western & Southern 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.
217 Wheeling Steel Corp. v. Glander, 337 U.S. 562, 571, 572 (1949) .
218 393 U.S. 117 (1968) .
219 470 U.S. 869, 878 (1985) . The vote was 5–4, with Justice Powell’s opinion for the Court being joined by Chief Justice Burger and by Justices White, Blackmun, and Stevens. Justice O’Connor’s dissent was joined by Justices Brennan, Marshall, and Rehnquist.
220 470U.S. at 880 470U.S. at 880.
221 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. New York State Liquor Auth., 476 U.S. 573, 579 (1986) .
222 F.S. Royster Guano Co. v. Virginia, 253 U.S. 412 (1920) . See also Walters v. City of St. Louis, 347 U.S. 231 (1954) , sustaining municipal income tax imposed on gross wages of employed persons but only on net profits of business men and self–employed.
223 Shaffer v. Carter, 252 U.S. 37, 56, 57 (1920) ; Travis v. Yale & Towne Mfg. Co., 252 U.S. 60, 75, 76 (1920) .
224 Welch v. Henry, 305 U.S. 134 (1938) .
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