States May Not Tax Foreign Income of Corporations Located in State
Description Ohio high court struck down a state franchise tax as unconstitutional because it allowed Ohio firms to deduct only 85 percent of their foreign operation dividends rather than 100 percent of such earnings. That clearly violates the Foreign Commerce Clause, which forbids states from interfering with foreign commerce.
Topic Constitutional Law
Key Words Foreign Commerce Clause; Foreign Franchise Tax
C A S E   S U M M A R Y
Facts Emerson Electric, an Ohio company, owns facilities in Ohio, other states, and in foreign nations. When it prepared its Ohio franchise tax reports, it deducted from its income base all of the dividends received from its domestic subsidiaries, but was required by Ohio law to deduct only 85 percent of its foreign dividends. Emerson contended that it was entitled to deduct all of its foreign source dividends and that the Ohio limit violated the Foreign Commerce Clause. The Board of Tax Appeals ruled against Emerson, which appealed.
Decision Reversed. A corporation franchise tax statute which requires taxpayers to reduce deductions for foreign source dividends, while dividends from domestic subsidiaries can be deducted in their entirety, discriminates against foreign commerce in violation of the Foreign Commerce Clause. Commerce includes the flow of dividends from a foreign subsidiary to its parent company. A state statute may not discriminate against foreign commerce.
Citation Emerson Electric Co. v. Tracy, 735 N.E.2d 445 (Sup. Ct., Ohio, 2000)

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