OCTOBER TERM, 1991
Syllabus
KRAFT GENERAL FOODS, INC.
v. IOWA DEPARTMENT OF REVENUE
AND FINANCE
CERTIORARI TO THE SUPREME COURT OF IOWA No. 90-1918. Argued
April 22, 1992-Decided June 18, 1992
The Iowa statute that imposes a business tax on corporations
uses the federal tax code's definition of "net income" with certain
adjustments. Like the federal scheme, Iowa allows corporations to
take a deduction for dividends received from domestic, but not
foreign, subsidiaries. However, unlike the federal scheme, Iowa
does 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.
Held: The Iowa statute facially discriminates against
foreign commerce in violation of the Foreign Commerce Clause. It is
indisputable that the statute treats dividends received from
foreign subsidiaries less favorably than those received from
domestic subsidiaries by including the former, but not the latter,
in taxable income. None of the several arguments made by Iowa and
its
amici-that, since a corporation's domicile does not
necessarily establish that it is engaged in either foreign or
domestic commerce, the disparate treatment is 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
does 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 is intended to promote
administrative convenience rather than economic
protectionism-justifies Iowa's differential treatment of foreign
commerce. Pp.75-82.
465 N. W. 2d 664, reversed and remanded.
72
STEVENS, J., delivered the opinion of the Court, in which WHITE,
O'CONNOR, SCALIA, KENNEDY, SOUTER, and THOMAS, JJ., joined.
REHNQUIST, C. J., filed a dissenting opinion, in which BLACKMUN,
J., joined,
post, p.82.
Jerome B. Libin argued the cause for petitioner. With him
on the briefs were
Kathryn L. Moore and
John v:
Donnelly.
Marcia Mason, Assistant Attorney General of Iowa, argued
the cause for respondent. With her on the brief were
Bonnie
J. Campbell, Attorney General, and
Harry M.
Griger, Special Assistant Attorney General.
Kent L. Jones argued the cause for the United States as amicus
curiae urging affirmance. With him on the brief were Solicitor
General Starr, Acting Assistant Attorney General Bruton, Deputy
Solicitor General Wallace, Gary R. Allen, and Ernest
J.
Brown.
*
JUSTICE STEVENS delivered the opinion of the Court.
In 1981 petitioner Kraft General Foods, Inc. (Kraft), operated a
unitary business throughout the United States and in several
foreign countries. Because part of its business was conducted in
Iowa, Kraft was subject to the Iowa Business Tax on Corporations.1
At issue in this case is Iowa's inclusion in the tax base of the
dividends that Kraft received from six subsidiaries, each of which
was incorporated and conducted its business in a foreign country.2
While Iowa taxes
*Briefs of
amici curiae urging reversal were filed for
Avon Products, Inc., et al. by
Timothy B. Dyk, Edward K.
Bilich, and
Maryann B. Gall; for Chevron Corp. et al. by
Mark L. Evans, Alan I. Horowitz, and
Anthony F.
Shelley; and for the Washington Legal Foundation by
Stephan
Richard Ruda, Michael G.
Dzialo, Martin Lobel, and
James F.
Flug filed a brief for the National
Conference of State Legislatures et al. as
amici curiae
urging affirmance.
1 Iowa Code § 422.32
et seq. (1981).
2 See App. to Pet. for Cert. 29a. Kraft owned capital stock
representing more than 80% of the voting power and of the total
value of the subsidiaries.
Ibid.
73
the dividends that a corporation receives from its foreign
subsidiaries, Iowa does not tax dividends received from domestic
subsidiaries. The question presented is whether the disparate
treatment of dividends from foreign and from domestic subsidiaries
violates the Foreign Commerce Clause.3
I
The Iowa statute uses the federal definition of "net income"
with certain adjustments.4 For federal tax purposes, corporations
are generally allowed a deduction for dividends received from
domestic subsidiaries.5 As the earnings of the domestic
subsidiaries, themselves, are subject to federal taxation, this
deduction avoids a second federal tax on those earnings.6 The
Federal Government generally does not tax the earnings of foreign
subsidiaries, and the dividends paid by foreign subsidiaries are
not deductible. The parent corporation, however, does receive a
credit for the foreign taxes paid on the dividends and on the
underlying foreign earnings.7 Like the deduction for domestic
subsidiary dividends, the foreign tax credit is intended to
mitigate multiple taxation of corporate earnings.8
3 "The Congress shall have Power ... To regulate Commerce with
for-
eign Nations .... " u. S. Const., Art. I, §8. 4 See Iowa Code §
422.35 (1981).
5 See 26 U. S. C. § 243.
6 See 465 N. W. 2d 664, 665 (Iowa 1991); B. Bittker & J.
Eustice, Federal Income Taxation of Corporations and Shareholders ,
5.05 (5th ed. 1987).
7 See 26 U. S. C. §§ 901, 902. Instead of taking the credit, the
corporation may elect to deduct the foreign tax withheld on
dividends from foreign subsidiaries. See § 164. The taxpayer may
not take both the credit and the deduction. See §275(a)(4). The
credit is almost always more valuable to the taxpayer. See 3 B.
Bittker & L. Lokken, Federal Taxation of Income, Estates and
Gifts' 69.14 (2d ed. 1991).
8 See
United States v.
Goodyear Tire &
Rubber Co., 493 U. S. 132, 139
(1989); American Chicle Co. v.
United States,
316 U. S. 450,
452 (1942); see also Bittker & Eustice, Federal Income Taxation
of Corporations and Shareholders, 17.11.
74
In following the federal scheme for the calculation of taxable
income, Iowa allows a deduction for dividends received from
domestic subsidiaries, but not for those received from foreign
subsidiaries. Iowa does not directly tax the
income of a
subsidiary unless the subsidiary, itself, does business in Iowa.9
Thus, if a domestic subsidiary transacts business in Iowa, its
income is taxed, but if it does not do business in Iowa,
neither its income nor the dividends paid to its parent are taxed.
In the case of the foreign subsidiary doing business abroad, Iowa
does not tax the corporate income, but does tax the dividends paid
to the parent.10 Unlike the Federal Government, Iowa does not allow
a credit for taxes paid to foreign countries. See 465 N. W. 2d 664,
665 (Iowa 1991).11
In computing its taxable income on its 1981 Iowa return, Kraft
deducted foreign subsidiary dividends, notwithstanding contrary
provisions of Iowa law.12 Respondent Iowa Department of Revenue and
Finance (Iowa) assessed a defi-
9 Iowa is not a State that taxes an apportioned share of the
entire income of a unitary business, without regard for formal
corporate lines. See Tr. of Oral Arg. 37; cf.
Container Corp. of
America v.
Franchise Tax Ed., 463
10 At oral argument, counsel for Kraft offered the following
illustration:
"If an Iowa parent company had a Kentucky subsidiary, [that] did
all its business in Kentucky, and another subsidiary that did all
its business in Germany, Iowa would not tax the income of either of
those subsidiaries. If each paid a dividend to the Iowa parent,
Iowa would tax the German dividends and would not tax the Kentucky
dividends." Tr. of Oral Arg. 47-48.
11 If in calculating its federal tax liability, a taxpayer
elects to deduct foreign tax withheld on foreign subsidiary
dividends, a taxpayer may also deduct these tax payments in
calculating its Iowa taxes. Electing the deduction, then, allows
the taxpayer to reduce, but not eliminate, the Iowa tax on foreign
subsidiary dividends. In the relevant year, Kraft elected to take
the foreign tax credit, see 465 N. W. 2d, at 666, and thus could
not deduct the foreign taxes in computing its federal or Iowa
taxable income, see n. 7,
supra.
12 See 465 N. W. 2d, at 666.
75
ciency. After its administrative protest was denied,13 Kraft
challenged the assessment in Iowa courts, alleging that the
disparate treatment of domestic and foreign subsidiary dividends
violated the Commerce Clause and the Equal Protection Clause 14 of
the Federal Constitution. The Iowa Supreme Court rejected the
Commerce Clause claim because petitioner failed to demonstrate
"that Iowa businesses receive a commercial advantage over foreign
commerce due to Iowa's taxing scheme."
Id., at 668. In
considering Kraft's challenge under the Equal Protection Clause,
the court found that Iowa's use of the federal formula for
calculation of taxable income was convenient both for the taxpayer
and for the State. Concluding that the Iowa statute was rationally
related to the goal of administrative efficiency, the Iowa Supreme
Court held that the statute did not violate equal protection.
Id., at 669. We granted certiorari. 502 U. S. 1056
(1992).
II
The principal dispute between the parties concerns whether, on
its face, the Iowa statute discriminates against foreign commerce.
It is indisputable that the Iowa statute treats dividends received
from foreign subsidiaries less favorably than dividends received
from domestic subsidiaries. Iowa includes the former, but not the
latter, in the calculation of taxable income. While admitting that
the two kinds of dividends are treated differently, Iowa and its
amici advance several arguments in support of the
proposition that this differential treatment does not constitute
prohibited discrimination against foreign commerce.
Amicus United States notes that a subsidiary's place of
incorporation does not necessarily correspond to the locus of its
business operations. A domestic corporation might do
13 See App. to Pet. for Cert. 26a.
14 "No state shall ... deny to any person within its
jurisdiction the equal protection of the laws." U. S. Const.,
Arndt. 14, § 1.
76
business abroad, and its dividends might reflect earnings from
its foreign activity. Conversely, a foreign corporation might do
business in the United States, with its dividend payments
reflecting domestic business operations. On this basis, the United
States contends that the disparate treatment of dividends from
foreign and domestic subsidiaries does not translate into
discrimination based on the location or nature of business activity
and is thus not prohibited by the Commerce Clause.
We recognize that the domicile of a corporation does not
necessarily establish that it is engaged in either foreign or
domestic commerce. In this case, however, it is stipulated that the
foreign subsidiaries did, in fact, operate in foreign commerce and,
further, that the decision to do business abroad through foreign
subsidiaries is typically supported by legitimate business
reasons.15 By its nature, a unitary business is characterized by a
flow of value among its components. See
Container Corp. of
America v.
Franchise Tax Bd.,
463 U. S. 159, 178
(1983). The flow of value between Kraft and its foreign
subsidiaries clearly constitutes foreign commerce; this flow
includes the foreign subsidiary dividends, which, as Iowa
acknowledges, themselves constitute foreign commerce. 16
Moreover, through the interplay of the federal and Iowa tax
statutes, the applicability of the Iowa tax necessarily depends not
only on the domicile of the subsidiary, but also on the location of
the subsidiary's business activities. The
15 The parties stipulated as follows:
"Domestic Corporations typically do business in foreign
countries through corporations organized in the country in which
they are doing business for a variety of reasons. Reasons include,
but are not limited to, the requirements of the local country, a
better ability to limit their liability in that country, the
marketing advantage of being perceived by customers as a local
company, greater ease in repatriating funds, greater ease in
borrowing funds locally, and ability to own property and
manufacture in that country." App. to Pet. for Cert. 30a-31a.
16 See Tr. of Oral Arg. 24, 35.
77
Federal Government generally taxes the income that a foreign
corporation earns in the United States.17 To avoid multiple
taxation, the Government allows a deduction for foreign subsidiary
dividends that reflect such domestic earnings.18 In adopting the
federal pattern, Iowa also allows a deduction for dividends
received from a foreign subsidiary if the dividends reflect
business activity in the United States. Accordingly, while the
dividends of all domestic subsidiaries are excluded from the Iowa
tax base, the dividends of foreign subsidiaries are excluded only
to the extent they reflect domestic earnings.19 In sum, the only
subsidiary dividend payments taxed by Iowa are those reflecting the
foreign business activity of foreign subsidiaries. We do not think
that this discriminatory treatment can be justified on the ground
that some of the (untaxed) dividend payments from domestic
subsidiaries also reflect foreign earnings.
In a related argument, Iowa and
amicus United States
assert that Kraft could conduct its foreign business through
domestic subsidiaries instead of foreign subsidiaries or,
alternatively, could set up a domestic company to hold the stock of
the foreign subsidiaries and receive the foreign dividend payments.
In either case, Kraft, itself, would receive no dividends from
foreign subsidiaries and would thus avoid paying Iowa tax on income
attributable to the foreign operations. Iowa and the United States
contend that these alternatives further demonstrate that it is not
foreign commerce,
17 See 26 U. S. C. § 882. 18See §245.
19 The dissent presents the example of a subsidiary incorporated
in a foreign country, but engaged in business exclusively in the
United States. The dissent doubts whether a dividend payment from
such a subsidiary is properly characterized as "foreign commerce."
Post, at 85. As discussed above, however, a dividend payment
from such a subsidiary would
not be taxed by Iowa. Iowa
taxes foreign subsidiary dividends only to the extent that they
reflect
foreign earnings. The dissent does not dispute that
this kind of dividend payment does constitute "foreign commerce."
Post, at 84.
78
but, at most, a particular form of corporate organization that
is burdened.
This argument is not persuasive. Whether or not the suggested
methods of tax avoidance would be practical as a business matter,
and whether or not they might generate adverse tax consequences in
other jurisdictions, we do not think that a State can force a
taxpayer to conduct its foreign business through a domestic
subsidiary in order to avoid discriminatory taxation of foreign
commerce. Cf.
Metropolitan Life Ins. Co. v.
Ward,
470 U. S. 869,
878-879 (1985). We have previously found that the Commerce Clause
is not violated when the differential tax treatment of two
categories of companies "results solely from differences between
the nature of their businesses, not from the location of their
activities."
Amerada Hess Corp. v.
Director, Div. of
Taxation, N.
J. Dept. of Treasury, 490 U. S. 66, 78 (1989).20
We find no authority for the different proposition advanced here
that a tax that does discriminate against foreign commerce may be
upheld if a taxpayer could avoid that discrimination by changing
the domicile of the corporations through which it conducts its
business. Our cases suggest the contrary. See
Westinghouse
Electric Corp. v.
Tully, 466 U. S. 388, 406
(1984); Halliburton Oil Well Cementing Co. v.
Reily,
373 U. S. 64, 72 (1963).
Repeating the argument that prevailed in the Iowa Supreme Court,
Iowa next insists that its tax system does not violate the Commerce
Clause because it does not favor local interests. To the extent
corporations do business in Iowa, an apportioned share of their
entire corporate income is subject to Iowa tax. In the case of a
foreign subsidiary doing business abroad, Iowa would tax the
dividends paid to the domestic parent, but would not tax the
subsidiary's earnings.
20 In
Amerada Hess, we rejected the contention that a New
Jersey tax violated the Commerce Clause because it "discriminate[d]
against oil producers who market their oil in favor of independent
retailers who do not produce oil." 490 U. S., at 78.
79
Summarizing this analysis, Iowa asserts: "More earnings of the
domestic subsidiary, which has income producing activities in Iowa,
than earnings of the foreign subsidiary, which has no Iowa
activities, are included in the preapportioned net income base for
the unitary business as a whole." Brief for Respondent 19. Far from
favoring local commerce, Iowa argues, the tax system places
additional burdens on Iowa businesses.
We agree that the statute does not treat Iowa subsidiaries more
favorably than subsidiaries located elsewhere. We are not
persuaded, however, that such favoritism is an essential element of
a violation of the Foreign Commerce Clause. In
Japan Line,
Ltd. v.
County of Los Angeles, 441 U. S. 434 (1979), we
concluded that the constitutional prohibition against state
taxation of foreign commerce is broader than the protection
afforded to interstate commerce,
id., at 445446, in part
because matters of concern to the entire Nation are implicated,
id., at 448-451. Like the Import-Export Clause,21 the
Foreign Commerce Clause recognizes that discriminatory treatment of
foreign commerce may create problems, such as the potential for
international retaliation, that concern the Nation as a whole.
Id., at 450. So here, we think that a State's preference for
domestic commerce over foreign commerce is inconsistent with the
Commerce Clause even if the State's own economy is not a direct
beneficiary of the discrimination. As the absence of local benefit
does not eliminate the international implications of the
discrimination, it cannot exempt such discrimination from Commerce
Clause prohibitions.
Iowa and
amicus United States also assert the stronger
claim that Iowa's tax system does not favor business activity in
the United States generally over business activity abroad. If true,
this would indeed suggest that the statute does not
21 "No State shall, without the Consent of the Congress, lay any
Imposts or Duties on Imports or Exports, except what may be
absolutely necessary for executing its inspection Laws .... " u. S.
Const., Art. I, § 10, cl. 2.
80
discriminate against foreign commerce. We are not convinced,
however, that this description adequately characterizes the
relevant features of the Iowa statute. It is true that if a
subsidiary were located in another State, its earnings would be
subject to taxation by the Federal Government and by the other
State (assuming that the State was one of the great majority that
impose a corporate income tax).22 This state and federal tax burden
might exceed the sum of the foreign tax that a foreign subsidiary
would pay and the tax that Iowa collects on dividends received from
a foreign subsidiary. But whatever the tax burdens imposed by the
Federal Government or by other States, the fact remains that
Iowa imposes a burden on foreign subsidiaries that it does
not impose on domestic subsidiaries.23 We have no reason to doubt
the assertion of the United States that "[i]n evaluating the
alleged facial discrimination effected by the Iowa tax, it is not
proper to ignore the operation of other
22 Corporate income is taxed by 45 States and by the District of
Columbia. See 1 J. Hellerstein, State Taxation: Corporate Income
and Franchise Taxes' 1.6 (1983).
23 If one were to compare the aggregate tax imposed by Iowa on a
unitary business which included a subsidiary doing business
throughout the United States (including Iowa) with the aggregate
tax imposed by Iowa on a unitary business which included a foreign
subsidiary doing business abroad, it would be difficult to say that
Iowa discriminates against the business with the foreign
subsidiary. Iowa would tax an apportioned share of the domestic
subsidiary's entire earnings, but would tax only the amount of the
foreign subsidiary's earnings paid as a dividend to the parent.
In considering claims of discriminatory taxation under the
Commerce Clause, however, it is necessary to compare the taxpayers
who are "most similarly situated."
Halliburton Oil Well
Cementing Co. v.
Reily, 373 U. S. 64, 71 (1963). A
corporation with a subsidiary doing business in Iowa is not
situated similarly to a corporation with a subsidiary doing
business abroad. In the former case, the Iowa operations of the
subsidiary provide an independent basis for taxation not present in
the case of the foreign subsidiary. A more appropriate comparison
is between corporations whose subsidiaries do not do business in
Iowa.
81
provisions of the
same statute." Brief for United States
as
Amicus Curiae 14, n. 19 (emphasis added). We find no
authority, however, for the principle that discrimination against
foreign commerce can be justified if the benefit to domestic
subsidiaries might happen to be offset by other taxes imposed not
by Iowa, but by other States and by the Federal Government.
Finally, Iowa insists that even if discrimination against
foreign commerce does result, the statute is valid because it is
intended to promote administrative convenience rather than economic
protectionism. Iowa contends that the adoption of the federal
definition of "taxable income," which includes foreign subsidiary
dividends, provides significant advantages both to the taxpayers
and to the taxing authorities. Taxpayers may compute their Iowa tax
easily based on their federal calculations, and the Iowa
authorities may rely on federal regulations and interpretations and
may take advantage of federal efforts to monitor taxpayer
compliance. See 465 N. W. 2d, at 669.
We do not minimize the value of having state forms and auditing
procedures replicate federal practice. Absent a compelling
justification, however, a State may not advance its legitimate
goals by means that facially discriminate against foreign commerce.
See
Philadelphia v.
New Jersey, 437 U. S. 617, 626-628
(1978);
Maine v.
Taylor, 477 U. S. 131, 148, n. 19
(1986). In this instance, Iowa could enjoy substantially the same
administrative benefits by utilizing the federal definition of
taxable income, while making adjustments that avoid the
discriminatory treatment of foreign subsidiary dividends. Many
other States have adopted this approach.24 It is apparent, then,
that this is not a case in which the State's goals "cannot be
adequately served by reasonable nondiscriminatory alternatives."
New Energy Co. of Indiana v.
Limbach, 486 U. S. 269, 278
(1988). Even if such
24 See App. to Pet. for Cert. 74a-75a.
82
adjustments would diminish the administrative benefits of
adopting federal definitions, this marginal loss in convenience
would not constitute the kind of serious health and safety concern
that we have sometimes found sufficient to justify discriminatory
state legislation. Cf.
Maine v.
Taylor, 477 U. S., at
151;
Sporhase v.
Nebraska ex rel. Douglas, 458 U. S. 941, 956-957
(1982).
III
Iowa need not adopt the federal definition of taxable income.
Nor, having chosen to follow the federal system in part, must Iowa
duplicate that scheme in all respects. The adoption of the federal
system in whole or in part, however, cannot shield a state tax
statute from Commerce Clause scrutiny. The Iowa statute cannot
withstand this scrutiny, for it facially discriminates against
foreign commerce and therefore violates the Foreign Commerce
Clause.25
The judgment of the Supreme Court of Iowa is reversed, and the
case is remanded for further proceedings not inconsistent with this
opinion.
It is so ordered.
CHIEF JUSTICE REHNQUIST, with whom JUSTICE BLACKMUN joins,
dissenting.
Petitioner in this case limits its Commerce Clause challenge to
a single argument-that Iowa's taxing scheme unconstitutionally
discriminates against foreign commerce. It has brought a
facial challenge to the Iowa taxing scheme. The burden on
one making a facial challenge to the constitutionality of a statute
is heavy; the litigant must show that "no set of circumstances
exists under which the Act would be valid. The fact that [the tax]
might operate unconstitutionally under some conceivable set of
circumstances is
25 Having concluded that the Iowa statute violates the Foreign
Commerce Clause, we do not reach Kraft's challenge to the statute
under the Equal Protection Clause.
83
insufficient to render it wholly invalid."
United States
v.
Salerno, 481 U. S. 739, 745
(1987).
The only case dealing with the Foreign Commerce Clause
substantially relied on by the Court in its opinion upholding
petitioner's challenge to the Iowa statute is
Japan Line,
Ltd. v.
County of Los Angeles, 441 U. S. 434 (1979). It
is important, therefore, to note how different are the facts in
that case from those in the present one. In
Japan Line,
California had levied a nondiscriminatory ad valorem property tax
on cargo containers which were owned by Japanese shipping companies
based in Japan, had their home ports in Japan, and were used
exclusively in foreign commerce. The containers were physically
present in California for a fractional part of the year, but only
as a necessary incident of their employment in foreign commerce.
Japan levied no tax on similarly situated property of United States
shipping companies.
In
Container Corp. of America v.
Franchise Tax Bd.,
463 U. S. 159 (1983), where we upheld a California franchise
tax against a claim of violation of the Foreign Commerce Clause, we
noted at least two distinctions between that case and our earlier
decision in
Japan Line. First, the tax there imposed was not
on a foreign entity, but on a domestic corporation. Second, the
United States did not file a brief urging that the tax be struck
down. 463 U. S., at 196. In the present case, like
Container
Corporation, the Iowa tax is imposed on a domestic corporation,
not on a foreign entity. And in the present case, the Executive
Branch has not merely remained neutral, as it did in
Container
Corporation, but has filed a brief urging that the tax be
sustained against the Foreign Commerce Clause challenge.
The Court agrees that the Iowa tax involved here does not favor
subsidiaries incorporated in Iowa over foreign subsidiaries, but
points out that the tax does favor subsidiaries incorporated in
other States over foreign subsidiaries. Iowa obviously has no
selfish motive to accomplish such a result,
84
and the absence of such a motive is strong indication that none
of the local advantage which has so often characterized our
Commerce Clause decisions is sought here. See,
e. g.,
Bacchus Imports, Ltd. v.
Dias, 468 U. S. 263, 268
(1984). Indeed, petitioner carries on operations in Iowa, where the
"State's own political processes [can] serve as a check against
unduly burdensome regulations."
Kassel v.
Consolidated
Freightways Corp. of Del., 450 U. S. 662, 675
(1981).
But assuming that it is sufficient to show simply that nonIowa
domestic "commerce" enjoys a benefit not enjoyed by foreign
"commerce," the Court surely errs in concluding that such a showing
has been made in the present case. Because petitioner has chosen to
make a facial challenge to the Iowa statute, the record is largely
devoid of any evidence to suggest that Iowa's taxing scheme
systematically works to discourage foreign commerce to the
advantage of its domestic counterpart.
Petitioner's failures in this respect are severalfold. First, it
is unclear on the present record what amount of foreign commerce is
affected by the Iowa statute. The difficulty flows from our
inability to make any useful generalizations about a corporation's
business activity based solely on the corporation's country of
incorporation. The Court recognizes that, in this era of
substantial international trade, it is simple-minded to assume that
a corporation's foreign domicile necessarily reflects that it is
principally, or even substantially, engaged in foreign commerce.
Ante, at 76. To the contrary, foreign domiciled corporations
may engage in little or even zero foreign activity. In such cases,
the suggestion that Iowa's tax has any real effect on foreign
commerce is absurd; petitioner certainly has not demonstrated "by
'clear and cogent evidence' that [the state tax] results in
extraterritorial values being taxed" in all cases.
Franchise Tax
Bd., supra, at 175. In turn, Iowa's tax can hardly be found to
always unconstitutionally discriminate against foreign commerce.
Given that petitioner's burden is to demonstrate
85
that there are no circumstances in which Iowa's statute could be
constitutionally applied, the existence of such a possibility
should be fatal to petitioner's chances of success in this
case.
The Court suggests that, even if foreign domiciled corporations
are involved in no foreign trade, the dividend payments from
subsidiary to parent are themselves "foreign commerce."
Ante, at 76. Again, this may be true in certain
circumstances, as the payment of a dividend may represent a real
flow of capital across international boundaries. But certainly
there are other situations where the "foreign" aspects of a
transaction are extraordinarily attenuated, and any burdening of
such transactions concomitantly would not raise Foreign Commerce
Clause concerns. Consider, for example, the case of a "foreign"
subsidiary-i.
e., one that is incorporated in a foreign
country-but with operations exclusively in the United States. It
has no assets in the foreign country, no operations, nothing of
value whatsoever. The corporation declares a dividend payable to
its United States parent. The payment in such circumstance may well
be accomplished simply by debiting one New York bank account and
crediting another. To characterize this as "foreign commerce" seems
to me to stretch that term beyond all recognition. And again, the
existence of such a possibility is sufficient to undermine
petitioner's facial challenge.
The Court appears to think these problems are surmounted by the
parties' stipulation that petitioner's subsidiaries operated in
"foreign commerce" and that foreign subsidiaries are often
established for legitimate business reasons.
Ibid. Of
course, a stipulation between parties cannot bind this Court on a
question of law. Moreover, even the facts that the stipulation
establishes are sparse. It tells us nothing about the ratio in
modern commerce of "real" foreign subsidiaries to their
domestically oriented cousins. Indeed, on the present record it is
impossible even to establish the scope of operation of Kraft's
subsidiaries. Compare App. to Pet. for Cert. 52a-53a (reporting
foreign tax pay-
86
ments by 6 of petitioner's subsidiaries) with
id., at
76a-79a (listing petitioner's 86 nonwholly owned subsidiaries).
Without some greater detail, I think it is impossible to conclude
that the Iowa taxing scheme would have such real and substantial
effects that it could never survive constitutional muster.
Finally, I cannot agree that, even if the dividend payments made
taxable by the Iowa scheme are foreign commerce, that Iowa
impermissibly discriminates against such payments. To be sure, two
Iowa corporations, one with a foreign subsidiary and one with a
domestic non-Iowa subsidiary will in some cases pay a different
total tax. But this does not constitute unconstitutional
discrimination because, as far as the record demonstrates, Iowa's
taxing scheme does not result in foreign commerce being
systematically subject to higher tax burdens than domestic
commerce. Given that 45 of 50 States tax corporations on their net
income,
ante, at 80, n. 22, in deciding to tax only a
foreign subsidiary's dividend payments, rather than the
subsidiary's total income, Iowa assures that the subsidiary's tax
burden is less than that faced by its domestic counterpart. The
deduction that Iowa extends to domestically based dividend payments
simply helps to avoid what would otherwise be the near certainty
that the domestic income would be doubly taxed-once when earned as
income by the subsidiary and a second time when paid to the parent
corporation.
But Iowa's attempt to take account of this near certainty with
respect to domestic earnings does not in turn require it to make a
similar assumption with respect to income earned by foreign
sources. As
amicus United States correctly points out,
"[t]he record in this case fails to indicate even the existence,
much less the nature, of such local-level foreign taxes .... Nor is
there any evidence to reflect the credits or reductions that
foreign local governments would apply or allow." Brief for United
States as
Amicus Curiae 15, n. 21.
87
Finally, as I would reject petitioner's Foreign Commerce Clause
claim, I must go on to consider whether its Equal Protection Claim
fares any better. It does not. In defending a tax classification
such as this, a State need only demonstrate that the classification
is rationally related to legitimate state purposes.
Exxon
Corp. v.
Eagerton, 462 U. S. 176, 195 (1983). The
statute will be upheld if it could reasonably be concluded "that
the challenged classification would promote a legitimate state
purpose."
Id., at 196. Administrative efficiency is
certainly a legitimate state interest and Iowa's reliance on the
federal taxing scheme obviously furthers its achievement.
Petitioner's claim, therefore, must fail.
I would uphold the Iowa tax statute against this facial
challenge.
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