Facts
- Connecticut enacted a corporate tax applying to foreign and domestic corporations doing business in the state, imposing a 2% tax on net income from business carried on within Connecticut.
- For corporations operating both inside and outside Connecticut, the statute attributed in-state net income by apportionment.
- Where net profits were derived principally from the sale or use of tangible personal property, Connecticut used a property-ratio formula: the share of total net income taxable in Connecticut equaled the ratio of Connecticut real and tangible personal property value to the value of all such property everywhere.
- Underwood Typewriter Company was incorporated in Delaware, had its principal office in New York, and conducted all manufacturing in Connecticut, where it also maintained an office and stored products.
- Underwood conducted nationwide sales and earned substantial income outside Connecticut.
- For 1916, Underwood’s net profit was approximately $1.34 million; Underwood asserted about $43,000 was earned in Connecticut.
- The Connecticut tax commissioner found about 47% of Underwood’s real and tangible personal property was in Connecticut and applied the statutory formula, attributing about 47% of total net income (about $630,000) to Connecticut.
- Underwood paid the assessed tax under protest and sued for a refund, asserting the tax reached income earned outside Connecticut and was unconstitutional.
Issues
- Whether Connecticut’s tax, measured by an apportioned share of a multistate corporation’s net income, imposed an unconstitutional burden on interstate commerce under Article I, § 8.
- Whether applying a property-ratio apportionment formula violated the Fourteenth Amendment Due Process Clause by taxing income earned outside Connecticut.
- Whether the tax was unconstitutionally discriminatory or confiscatory under the Fourteenth Amendment, including in light of Southern Ry. Co. v. Greene.
Decision
- The U.S. Supreme Court affirmed the judgment upholding the tax.
- The Court held the tax did not violate the Commerce Clause because it was imposed on the proportion of net profits attributed to operations conducted within the taxing state and collected through ordinary tax means.
- The Court held the property-ratio apportionment method was not inherently unreasonable or calculated to tax extraterritorial income, and Underwood failed to show unconstitutional overreaching as applied.
- The Court rejected the discrimination argument, distinguishing Southern Ry. Co. v. Greene as involving a discriminatory tax not comparable to Connecticut’s generally applicable income-based levy.
Legal Principles
- A state may tax a foreign corporation on the portion of net income fairly attributable to business operations within the state without, by that fact alone, burdening interstate commerce.
- In assessing a Fourteenth Amendment challenge to an apportioned income-based levy, it is not necessary to decide whether the exaction is a direct income tax or an excise measured by income; the constitutional question turns on whether the apportionment reasonably relates the tax base to in-state activity.
- An apportionment formula that attributes to in-state processes the proportion of total net income corresponding to the ratio of in-state to total real and tangible personal property is constitutionally permissible unless shown to be arbitrary or to operate so as to tax income beyond the state’s jurisdiction.
- A large disparity between income allocated by formula and a taxpayer’s claimed in-state income does not, standing alone, establish unconstitutional taxation of extraterritorial income; the taxpayer bears the burden to prove distortion in operation.
- A nondiscriminatory corporate tax applying alike to domestic and foreign corporations is not invalid under the Fourteenth Amendment merely because the taxpayer has substantial in-state investments; discriminatory-tax precedent is inapplicable absent discriminatory treatment.
Conclusion
Connecticut could constitutionally apply a property-based apportionment formula to determine the share of a multistate corporation’s net income taxable in the state, and Underwood did not prove that the formula, as applied, reached income outside Connecticut or unlawfully burdened interstate commerce.