1. With respect to domestic and foreign corporations, Wisconsin
imposes a tax "for the privilege of declaring and receiving
dividends" out of income derived from property located and business
transacted in the State, equal to a specified percentage of such
dividends, the payor corporation being required to deduct the tax
from the dividends payable to residents or nonresidents and to
report and pay it over to the State.
Held:
(1) That the practical operation is to impose a tax on corporate
earnings within Wisconsin, in addition to the general tax on
corporate income, but to postpone liability for the tax until such
earnings are paid out in dividends. P.
311 U. S.
441.
(2) The tax is constitutional -- consistent with the due process
clause of the Fourteenth Amendment -- as applied to a Delaware
corporation having its principal offices in New York, holding its
meetings and voting its dividends in New York, and drawing its
dividend checks on New York bank accounts. P.
311 U. S.
442.
2. The constitutionality of a state tax depends upon its
operating incidence, and not upon the name or description assigned
to it by the state Supreme Court. P.
311 U. S.
443.
3. The privilege granted by a State to a foreign corporation of
carrying on local business supports a tax by that State on the
income derived from that business. P.
311 U. S.
444.
4. The fact that such a tax is, by the state law imposing it,
made contingent upon the happening of events outside of the taxing
State -- as, in this case, upon the declaration and payment of
dividends from the local earnings -- does not destroy the nexus
between the tax and the local transactions for which it is an
exaction. P.
311 U. S.
445.
5.
Connecticut General Co. v. Johnson, 303 U. S.
77, distinguished. P.
311 U. S.
445.
233 Wis. 286, 289 N.W. 677, reversed.
CERTIORARI, 310 U.S. 618, to review the reversal of a judgment
which confirmed all order of the Wisconsin Tax Commission assessing
a tax.
Page 311 U. S. 439
MR. JUSTICE FRANKFURTER delivered the opinion of the Court.
Whether the tax imposed by ยง 3 of Chapter 505 of the Wisconsin
Laws of 1935 may apply to a foreign corporation licensed to do
business in Wisconsin without offending the Fourteenth Amendment of
the Constitution is the question before us. The statute is quoted
in
Page 311 U. S. 440
the margin.
* When this
question originally came before the Supreme Court of Wisconsin, it
found no constitutional
Page 311 U. S. 441
infirmity in such an exaction.
State ex rel. Froedtert G.
& M. Co. v. Tax Commission, 221 Wis.225, 265 N.W. 672, 267
N.W. 52. But deeming itself constrained by its reading of this
Court's decision in
Connecticut General Co. v. Johnson,
303 U. S. 77, the
Wisconsin Supreme Court in the present case found that the statute
ran afoul the Due Process Clause insofar as it covered locally
licensed foreign corporations. 233 Wis. 286, 289 N.W. 677. Inasmuch
as important issues affecting the exertion of the taxing power of
the states are involved, we brought this and its companion cases
here. 310 U.S. 618-619.
For many years, corporations chartered by other states but
permitted to carry on business in Wisconsin have been subject to a
general corporate income tax act on earnings attributable to their
Wisconsin activities. The state has, of course, power to impose
such a tax.
United States Glue Co. v. Oak Creek,
247 U. S. 321;
Underwood Typewriter Co. v. Chamberlain, 254 U.
S. 113. "For the privilege of declaring and receiving
dividends, out of income derived from property located and business
transacted in" Wisconsin, an exaction "equal to two and one-half
percentum of the amount of such dividends declared and paid by all
corporations (foreign and local)" is the additional tax now before
us. In the enforcement of this measure against foreign
corporations, the amount of income
Page 311 U. S. 442
attributable to Wisconsin is calculated according to the same
formula as that employed in assessing the general corporate income
tax paid by such foreign corporations. The practical operation of
this legislation is to impose an additional tax on corporate
earnings within Wisconsin, but to postpone the liability for this
tax until such earnings are paid out in dividends. In a word, by
its general income tax, Wisconsin taxes corporate income that is
taken in; by the Privilege Dividend Tax of 1935, Wisconsin
superimposed upon this income tax a tax on corporate income that is
paid out.
As pressures for new revenues become more and more insistent,
ways and means of meeting them present to a state not only the
baffling task of tapping fresh sources of revenue but of doing so
with due regard to a state's existing taxing system. The tax now
assailed gains nourishing significance when placed in the context
of the Wisconsin taxing system of which it became a part. Wisconsin
relied heavily upon taxation of incomes, and largely looked to this
source to meet the increasing demands of the depression years. But
a special Wisconsin feature was exemption of dividends from
personal taxation.
See Welch v. Henry, 305 U.
S. 134,
305 U. S.
142-43. This exemption persisted while regular and
surtax rates against personal incomes were raised. Attempts at
relief from the unfairness charged against this exemption of
dividends, particularly advantageous to the higher brackets, were
steadily pressed before the Wisconsin Legislature. To relieve local
earnings of foreign corporations from a dividend tax would have had
a depressive effect on wholly local enterprises. The Privilege
Dividend Tax was devised to reduce, at least in part, the state's
revenue losses due to dividend exemptions, and also to equalize the
burdens on all Wisconsin earnings, regardless of the formal home of
the corporation.
Had Wisconsin, as part of its price for the privileges it
afforded foreign corporations within its borders, explicitly
Page 311 U. S. 443
provided for a supplementary tax on the Wisconsin earnings of
such corporations, but postponed liability for the tax until such
earnings were to be paid out in dividends, the power of Wisconsin
to do so would hardly be questioned.
Compare Continental
Assurance Co. v. Tennessee, ante, p.
311 U. S. 5. But
because the legislative language ran "For the privilege of
declaring and receiving dividends, out of income derived from
property located and business transacted in this state," the court
below raised the barrier of the Fourteenth Amendment. Respondent is
a Delaware corporation having its principal offices in New York;
its meetings are held in the latter state, where the dividends are
voted and the dividend checks are drawn on New York bank accounts.
Since the process for declaring dividends and the details attending
their distribution among the stockholders transpired outside
Wisconsin, although the exaction was apportioned to the earnings
derived from Wisconsin, the state court concluded that the tax was
an attempt by Wisconsin to levy an exaction on transactions beyond
Wisconsin's borders.
The case thus reduces itself to the inquiry whether Wisconsin
has transgressed its taxing power because its supreme court has
described the practical result of the exertion of that power by one
legal formula, rather than another -- has labeled it a tax on the
privilege of declaring dividends, rather than a supplementary
income tax.
A tax is an exaction. Ascertainment of the scope of the exaction
-- what is included in it -- is for the state court. But the
descriptive pigeon-hole into which a state court puts a tax is of
no moment in determining the constitutional significance of the
exaction. "In whatever language a statute may be framed, its
purpose must be determined by its natural and reasonable effect."
Henderson v. Mayor of New York, 92 U. S.
259,
92 U. S. 268.
Such has been the repeated import of the cases which only recently
were well summarized by the guiding formulation
Page 311 U. S. 444
for adjudicating a tax measure that,
"in passing on its constitutionality, we are concerned only with
its practical operation, not its definition or the precise form of
descriptive words which may be applied to it."
Lawrence v. State Tax Commission, 286 U.
S. 276,
286 U. S.
280.
The Constitution is not a formulary. It does not demand of
states strict observance of rigid categories nor precision of
technical phrasing in their exercise of the most basic power of
government, that of taxation. For Constitutional purposes, the
decisive issue turns on the operating incidence of a challenged
tax. A state is free to pursue its own fiscal policies,
unembarrassed by the Constitution, if, by the practical operation
of a tax, the state has exerted its power in relation to
opportunities which it has given, to protection which it has
afforded, to benefits which it has conferred by the fact of being
an orderly, civilized society.
Constitutional provisions are often so glossed over with
commentary that imperceptibly we tend to construe the commentary,
rather than the text. We cannot, however, be too often reminded
that the limits on the otherwise autonomous powers of the states
are those in the Constitution, and not verbal weapons imported into
it. "Taxable event," "jurisdiction to tax," "business situs,"
"extraterritoriality," are all compendious ways of implying the
impotence of state power because state power has nothing on which
to operate. These tags are not instruments of adjudication, but
statements of result in applying the sole constitutional test for a
case like the present one. That test is whether property was taken
without due process of law, or, if paraphrase we must, whether the
taxing power exerted by the state bears fiscal relation to
protection, opportunities, and benefits given by the state. The
simple but controlling question is whether the state has given
anything for which it can ask return. The substantial privilege of
carrying on
Page 311 U. S. 445
business in Wisconsin, which has here been given, clearly
supports the tax, and the state has not give the less merely
because it has conditioned the demand of the exaction upon
happenings outside its own borders. The fact that a tax is
contingent upon events brought to pass without a state does not
destroy the nexus between such a tax and transactions within a
state for which the tax is an exaction.
See Continental
Assurance Co. v. Tennessee, supra. See also Equitable Life
Society v. Pennsylvania, 238 U. S. 143;
Maxwell v. Bugbee, 250 U. S. 525;
Compania de Tabacos v. Collector, 275 U. S.
87,
275 U. S. 98;
New York ex rel. Cohn v. Graves, 300 U.
S. 308;
Atlantic & Pacific Tea Co. v.
Grosjean, 301 U. S. 412;
Atlantic Refining Co. v. Virginia, 302 U. S.
22;
Curry v. McCanless, 307 U.
S. 357.
This analysis is merely a reformulation of the classic approach
of this Court to the taxing power of the states.
Lawrence v.
State Tax Commission, supra, p.
286 U. S. 280.
Ambiguous intimations of general phrases in opinions torn from the
significance of concrete circumstances, or even occasional
deviations over a long course of years, not unnatural in view of
the confusing complexities of tax problems, do not alter the
limited nature of the function of this Court when state taxes come
before it. At best, the responsibility for devising just and
productive sources of revenue challenges the wit of legislators.
Nothing can be less helpful than for courts to go beyond the
extremely limited restrictions that the Constitution places upon
the states and to inject themselves in a merely negative way into
the delicate processes of fiscal policymaking. We must be on guard
against imprisoning the taxing power of the states within formulas
that are not compelled by the Constitution, but merely represent
judicial generalizations exceeding the concrete circumstances which
they profess to summarize.
Nor does
Connecticut General Co. v. Johnson, supra,
present a barrier against what Wisconsin has done. Its
Page 311 U. S. 446
presuppositions recognize the scope of the state taxing power we
have outlined. 303 U.S.
303 U. S. 77,
303 U. S. 80,
303 U. S. 82. In
the precise circumstances presented by the record, it was found
that the tax neither in its measure nor in its incidence was
related to California transactions. Here, on the contrary, the
incidence of the tax, as well as its measure, is tied to the
earnings which the State of Wisconsin has made possible, insofar as
government is the prerequisite for the fruits of civilization for
which, as Mr. Justice Holmes was fond of saying, we pay taxes.
See, for instance, his dissent in
Compania de Tabacos
v. Collector, supra, p.
275 U. S.
100.
Because the Wisconsin Supreme Court found the statute to be
invalid as to foreign corporations in the position of the
respondent, it had no occasion to pass on certain claims relating
to the application of the statute to the specific dividends here
involved. We therefore remand the case for the determination of
such questions as are open in the light of this opinion.
Reverse.
* Section 3, Chapter 505, Laws of Wisconsin, 1935, as amended by
Chapter 552, Laws of Wisconsin, 1935:
"Section 3. Privilege Dividend Tax."
"(1) For the privilege of declaring and receiving dividends, out
of income derived from property located and business transacted in
this state, there is hereby imposed a tax equal to two and one-half
percentum of the amount of such dividends declared and paid by all
corporations (foreign and local) after the passage and publication
of this act and prior to July 1, 1937. Such tax shall be deducted
and withheld from such dividends payable to residents and
nonresidents by the payor corporation."
"(2) Every corporation required to deduct and withhold any tax
under this section shall, on or before the last day of the month
following the payment of the dividend, make return thereof and pay
the tax to the tax commission, reporting such tax on the forms to
be prescribed by the tax commission."
"(3) Every such corporation hereby made liable for such tax,
shall deduct the amount of such tax from the dividends so
declared."
"(4) In the case of corporations doing business within and
without the state of Wisconsin, such tax shall apply only to
dividends declared and paid out of income derived from business
transacted and property located within the state of Wisconsin. The
amount of income attributable to this state shall be computed in
accordance with the provisions of chapter 71. In the absence of
proof to the contrary, such dividends shall be presumed to have
been paid out of earnings of such corporation attributable to
Wisconsin under the provisions of chapter 71, for the year
immediately preceding the payment of such dividend. If a
corporation had a loss for the year prior to the payment of the
dividend, the tax commission shall, upon application, determine the
portion of such dividend paid out of corporate surplus and
undivided profits derived from business transacted and property
located within the state."
"(5) Dividends paid by a subsidiary corporation to its parent
shall not be subject to the tax herein imposed provided that the
subsidiary and its parent report their income for taxation under
the provisions of chapter 71 on a consolidated income return basis,
or both corporations report separately."
"(6) The provisions of this section shall not apply to dividends
declared and paid by a Wisconsin corporation out of its income
which it has reported for taxation under the provisions of chapter
71, to the extent that the business of such corporation consists in
the receipts of dividends from which a privilege dividend tax has
been deducted and withheld and the distribution thereof to its
stockholders."
"(7) For the purposes of this section, dividends shall be
defined as in section 71.02, except that the tax herein imposed
shall not apply to stock dividend or liquidating dividends."
"(8) The tax hereby levied, if not paid within the time herein
provided, shall become delinquent and when delinquent shall be
subject to a penalty of two percent on the amount of the tax and
interest at the rate of one-half percent per month until paid."
"(9) The tax hereby imposed shall, when collected by the tax
commission, be paid by it into the state treasury."
MR. JUSTICE ROBERTS.
I assume that the principle still holds good that a state, a
member of the sisterhood of states in the Republic, cannot extend
her sovereignty by legislation so as to prohibit, to regulate, or
to tax property or transactions of citizens of other sovereign
states lying outside her boundaries and regulated by the law of the
state of domicile or residence. I assume also that where a state
has, by law, fixed the conditions upon which a corporate citizen of
another state may enter to transact business, she may not
thereafter extend her sovereignty to matters not within her
competence in the guise of annexing other and further conditions or
burdens upon the transaction
Page 311 U. S. 447
of the corporation's business within her borders. Those
activities which have a real and substantial relation to the
business transacted by the citizen of another state within her
confines are, of course, subject to regulation and to taxation. It
would be mere affectation to cite the adjudications of this court
which are founded upon these propositions. I have thought that
these principles were of the very warp and woof of the
constitutional system which binds the states together in a federal
union. Attempted transgressions of these limits of state
sovereignty have time and again run afoul of the Fourteenth
Amendment.
The respondent admittedly receives income in Wisconsin. No one
questions the power of Wisconsin to lay a tax upon the receipt of
that income. It has done so. It is said that the challenged
exaction is merely an additional income tax -- this notwithstanding
that the tax is not called an income tax, has been held by the
highest court of Wisconsin not to be an income tax, but an excise
upon a privilege -- in the view that, in testing the
constitutionality of an exaction this court examines for itself the
nature and incidence of the tax and disregards mere names and
descriptive epithets. With that principle I have no quarrel, but I
think the opinion of the court demonstrates that the tax here in
question is, and can be, sustained only by a disregard of it. Let
me illustrate my meaning. Assuming that, by statute, an
ad
valorem tax on property is prohibited, and an income tax
permitted. The terms used in the statute necessarily have a
conventional connotation. One cannot intelligently discuss things
or actions except by using the names commonly employed to describe
them. Concepts of
ad valorem taxation on property and
taxation of income are clear and easily discriminable. What would
be
Page 311 U. S. 448
said of a decision construing such a statutory provision so as
to hold a tax of so many cents on the dollar upon property an
income tax because, forsooth, all the property assessed has been
received as the fruits of labor, of industry, or of capital, upon
the theory that, as the property had come into existence at some
remote date as income, the tax was an income tax? I think that is
precisely what has been done in this case.
The facts are not in dispute. The respondent receives income in
many states. That income is forwarded to its home office after
bearing whatever tax is laid upon its receipt in the state of
receipt. Thereupon, the funds so forwarded become a portion of the
general mass of the respondent's property, held and administered at
its general office. The funds may be employed in the extension of
its business; they may be held as insurance against future business
losses, or they may be distributed to its stockholders in
dividends. Their management and their disbursement have no relation
to the original receipt of income, save only the fact that, like
most property, they are built up as the fruits of income. Their use
and their disbursement does not depend on any law of Wisconsin, and
cannot be controlled by any such law. The act of disbursing them,
whether in payment of corporate obligations or as dividends, is one
wholly beyond the reach of Wisconsin's sovereign power, one which
it cannot effectively command or prohibit or condition. That
distribution cannot be the subject of an excise tax by the State of
Wisconsin. So much the state admits.
Under the challenged statute, a presumption is created which is
shown in the case of the assessment against the respondent for the
years in question to be contrary to the fact -- namely, that an
arbitrarily assumed proportion of the dividend is paid out of the
respondent's earnings in Wisconsin for the year immediately
preceding the payment of such dividend. By the very terms of the
Act,
Page 311 U. S. 449
the tax is laid not on the corporation, but on the stockholder
receiving the dividend, and, by confession, thousands of such
stockholders are not residents of Wisconsin. The corporation is the
mere collector of the tax, and the penalty for failure to collect
it is that the corporation must pay it. If the exaction is an
income tax in any sense, it is such upon the stockholder, and is
obviously bad. It cannot, except by a perversion of the term and
the affixing of an arbitrary label, be denominated a tax upon the
income of the respondent.
The explanation of the reason and purpose for imposing the tax,
disclosed in the opinion of the court, serves to condemn it. If
Wisconsin found that dividend income of stockholders of domestic
corporations escaped taxation, and should bear it, an effective way
to reach the dividend receipts of the stockholders of such
corporations was to place a tax upon the receipt of dividends by
them. But such a levy upon the stockholders of a foreign
corporation, not resident within Wisconsin, obviously was
impossible, although that is exactly what was attempted by the
statute in question. We are now told that this is not a fair
exposition of the law, but that, on the contrary, and in the teeth
of the known facts, what Wisconsin did was to lay a supplementary
income tax upon foreign corporations. This is simply to take the
name of a well understood concept and assign that name as a label
to something which in ordinary understanding never fell within such
concept. By this process, any exaction can be tortured into
something else and then justified under an assumed name.
The respondent owns property in various states of the Union. It
is reasonable to suppose that much of that property has been
purchased out of corporate surplus, that is, out of past earnings.
An
ad valorem tax by Wisconsin on property so acquired
could be quite as easily justified under the label of an income tax
because
Page 311 U. S. 450
the property represented income once received, as the present
tax, on the declaration and receipt of dividends out of earned
surplus.
Upon the facts, the tax is levied on what lies outside the
sovereignty of Wisconsin. Its attempted collection is a violation
of the Due Process Clause of the Fourteenth Amendment and should be
stricken down.
The Supreme Court of Wisconsin could not have decided otherwise
in the light of a recent expression of this court on the subject.
In reaching its decision, it professedly followed and applied
Connecticut General Life Insurance Co. v. Johnson,
303 U. S. 77.
There, a Connecticut life insurance company did business in
California under license from that state. It entered into contracts
with other insurance companies, also licensed to do business in
California, reinsuring them against loss on policies written by
them in California on the lives of California residents. The
contracts were made in Connecticut, premiums were paid there, and
the losses, if any, were there payable. California imposed a tax
upon the privilege of the company to do business within California.
The tax was measured by the gross premiums received. California
officials attempted to collect the tax on the premiums received by
the Connecticut corporation under the reinsurance contracts in
question. The Supreme Court of California sustained the tax. In
that case, as in this, the highest state court described and
defined the tax. There, the tax was denominated "a franchise tax
enacted for the privilege of doing business in the state." Here,
the Supreme Court of Wisconsin has denominated the exaction as a
privilege or excise tax imposed upon the transfer of property. By
the very process the court now professes to employ of disregarding
the name given to the tax by the state court, this court, in the
Connecticut General Life Insurance Co.
Page 311 U. S. 451
case, reached the conclusion that the State of California could
not impose the tax on the activities of the Connecticut company
which were not within its jurisdiction. Citing many decisions of
this court, it was there said:
"But the limits of the state's legislative jurisdiction to tax,
prescribed by the Fourteenth Amendment, are to be ascertained by
reference to the incidence of the tax upon its objects, rather than
the ultimate thrust of the economic benefits and burdens of
transactions within the state."
The very argument now invoked in support of the present decision
was repudiated by the court in the
Connecticut case in
these words:
"It is said that the state could have lawfully accomplished its
purpose if the statute had further stipulated that the deduction
should be allowed only in those cases where the reinsurance is
effected in the state or the reinsurance premiums paid there. But,
as the state has placed no such limitation on the allowance of
deductions, the end sought can be attained only if the receipt by
appellant of the reinsurance premiums paid in Connecticut upon the
Connecticut policies is within the reach of California's taxing
power. Appellee argues that it is, because the reinsurance
transactions are so related to business carried on by appellant in
California as to be a part of it and properly included in the
measure of the tax, and because, in any case, no injustice is done
to appellant, since the effect of the statute as construed is to
redistribute the tax, which the state might have exacted from the
original insurers but did not, by assessing it upon appellant to
the extent to which it has received the benefit of the allowed
deductions."
In describing the incidence of the void tax, this court said, as
it might with equal accuracy be said of the instant tax:
Page 311 U. S. 452
"Apart from the facts that appellant was privileged to do
business in California, and that the risks reinsured were
originally insured against in that state by companies also
authorized to do business there, California had no relationship to
appellant or to the reinsurance contracts. No act in the course of
their formation, performance or discharge took place there. The
performance of those acts was not dependent upon any privilege or
authority granted by it, and California laws afforded to them no
protection."
And finally, the court concluded:
"All that appellant did in effecting the reinsurance was done
without the state, and for its transaction no privilege or license
by California was needful. The tax cannot be sustained either as
laid on property, business done, or transactions carried on within
the state or as a tax on a privilege granted by the state."
I think that the judgment below should be affirmed.
The CHIEF JUSTICE, MR. JUSTICE McREYNOLDS and MR. JUSTICE REED
concur in this opinion.