Constitutional Law: Power of States to Tax Interstate Commerce Flashcards
General Considerations
The same general considerations applicable to state regulation of commerce (supra) apply to
taxation. Pursuant to the Commerce Clause, Congress has complete power to authorize or forbid
state taxation affecting interstate commerce. If Congress has not acted, look to see whether
the tax discriminates against interstate commerce. If it does, it is invalid. If it does not, assess
whether the burden on interstate commerce outweighs the benefit to the state. Three tests must be
met: (i) there must be a substantial nexus between the taxpayer and the state; (ii) the tax must be
fairly apportioned; and (iii) there must be a fair relationship between the tax and the services or
benefits provided by the state.
General Considerations: Discriminatory Taxes
Unless authorized by Congress, state taxes that discriminate against interstate commerce
violate the Commerce Clause. Such taxes may also be held to violate the Interstate Privileges
and Immunities Clause (see VII.B., supra) if they also discriminate against nonresidents of
the state [Austin v. New Hampshire, 420 U.S. 656 (1975)], as well as the Equal Protection
Clause if the discrimination is not rationally related to a legitimate state purpose [WHYY,
Inc. v. Borough of Glassboro, 393 U.S. 117 (1968)—denial of tax exemption solely because
taxpayer was incorporated in another state is invalid].
General Considerations: Discriminatory Taxes - Finding Discrimination (1) Tax Singles Out Interstate Commerce
If a state tax singles out interstate commerce for taxation, the Court ordinarily will not “save” the tax by finding other state taxes imposed only on local commerce
(which might arguably eliminate the “apparent” discrimination against interstate
commerce).
EXAMPLE
The Supreme Court invalidated an Ohio statute that gave a tax credit against the
Ohio motor vehicle fuel sales tax (paid by fuel dealers) for each gallon of ethanol
sold as a component of gasohol if, but only if, the ethanol was produced in Ohio or
in a state that granted a similar tax advantage to ethanol produced in Ohio. The Supreme Court found that this tax credit system constituted discrimination against interstate commerce. [New Energy Co. of Indiana v. Limbach, 486 U.S. 269 (1988)]
However, state taxes that single out interstate commerce are considered nondiscriminatory if the particular statutory section or scheme also imposes the same
type of tax on local commerce (e.g., sales and use taxes, discussed infra).
General Considerations: Discriminatory Taxes - Finding Discrimination (2) Tax with In-State Subsidy
A seemingly uniform tax may be ruled to be discriminatory if the proceeds from
the tax are “earmarked” for subsidies to in-state businesses.
EXAMPLE
A state imposed a tax on all milk dealers, but the tax law provided that revenue
from the tax would be put into a fund that would be used to pay subsidies to
in-state dairy farmers. This assessment-subsidy system violates the Commerce
Clause because it operates identically to a tax placed only on sales of milk produced outside the state. [West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994)]
General Considerations: Discriminatory Taxes - Finding Discrimination (3) Double Taxation on Out-of-state Income
A state must grant a credit against a local tax for income taxed by another state.
EXAMPLE
Maryland’s personal income tax on residents includes both a state and a county
tax. Residents who pay taxes to another state for income earned in that state are
allowed a credit against the state tax but not the county tax. Such a tax scheme
violates the Dormant Commerce Clause because it leads to double taxation on outof-state income and discriminates in favor of intrastate over interstate economic
activity. [Comptroller of Treasury of Maryland v. Wynne, 135 S. Ct. 1787 (2015)]
General Considerations: Discriminatory Taxes - Choosing the Proper Clause
While a state or local tax that discriminates against interstate commerce generally violates
the Commerce Clause, the Clause is not always the strongest argument against the tax.
General Considerations: Discriminatory Taxes - Choosing the Proper Clause (1) Interstate Privileges and Immunities Clause
If a state or local tax discriminates against a natural person who is a nonresident, the Article IV Interstate Privileges and Immunities Clause is the strongest
argument against the tax’s validity, because it is more direct than a Commerce
Clause argument.
General Considerations: Discriminatory Taxes - Choosing the Proper Clause (2) Equal Protection
(a) Where Congress Approves the Discrimination
Although the Supreme Court normally uses the Commerce Clause to invalidate discriminatory legislation, it may also find that such discrimination
violates the Equal Protection Clause. This is important where Congress has
given the states the power to do something that would otherwise violate the
Commerce Clause: Congress can give states the power to take actions that
otherwise would violate the Commerce Clause, but it cannot approve state
actions that would violate equal protection. Thus, if Congress has approved a
type of state tax that discriminates against out-of-state businesses, that state
tax will not be in violation of the Commerce Clause, but it might be found to
be a violation of equal protection.
EXAMPLE
In Metropolitan Life Insurance Co. v. Ward, 470 U.S. 869 (1985), the Court
invalidated a state tax on insurance companies that imposed a higher tax
on out-of-state insurance companies than was paid by in-state companies.
The Court found that federal statutes exempted state regulation of insurance businesses from Commerce Clause restrictions but found that the tax
violated equal protection because it did not relate to a legitimate interest of
government (i.e., the state does not have a legitimate interest in discriminating against out-of-state businesses simply to protect local economic interests
from competition).
General Considerations: Discriminatory Taxes - Choosing the Proper Clause (2) Equal Protection
(b) Taxes Based on Suspect Classifications or Infringing on Fundamental
Rights
The Court may use equal protection analysis rather than Commerce Clause
analysis to strike state taxes that are imposed on the basis of a suspect classification or that burden a fundamental right. A state tax system giving tax
exemptions only to long-time residents of the state and denying a similar
tax exemption to newer residents will be held to violate the Equal Protection
Clause.
EXAMPLE
The Court invalidated a state property tax provision that gave an exemption
from the property tax only to those Vietnam-era veterans who had been residents of the state before May 1976. [Hooper v. Bernalillo County Assessor,
472 U.S. 612 (1985)]
General Considerations: Nondiscriminatory Taxes
The Court reviews nondiscriminatory state and local taxes affecting interstate commerce
and balances the state need to obtain the revenue against the burden the tax imposes on the
free flow of commerce—an approach similar to the one used for examining nondiscriminatory regulations to see whether they impose an undue burden on interstate commerce (see
IX.B.2., supra).
General Considerations: Nondiscriminatory Taxes - (a) Factors
The Court generally considers three factors in determining whether the nondiscriminatory tax is valid:
- Substantial Nexus
- Fair Apportionment
- Fair Relationship
General Considerations: Nondiscriminatory Taxes - (a) Factors
- Substantial Nexus
A state tax will be valid under the Commerce Clause only if there is a substantial
nexus between the activity or property taxed and the taxing state. A substantial
nexus exists when the business that must collect the tax avails itself of the privilege of doing business in the state. A physical presence in the state is not necessary
EXAMPLE
Internet retailers that annually sold more than $100,000 of goods to or engaged in
more than 200 transactions with South Dakota customers had a substantial nexus
with South Dakota even though the retailers had no physical presence in the state.
[South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)]
General Considerations: Nondiscriminatory Taxes - (a) Factors
- Fair Apportionment
A state or local tax affecting interstate commerce will be valid under the
Commerce Clause only if it is fairly apportioned according to a rational formula
(i.e., the tax should be based on the extent of the taxable activity or property in
the state). Otherwise the activity or property would be subject to cumulative tax
burdens.
EXAMPLES
1) State A imposes a 1% tax on gross receipts of all businesses within the state.
Harvester is located in State A but makes a number of sales out of state. The tax
is invalid as to Harvester’s out-of-state sales since it potentially subjects those
sales to cumulative burdens—the tax by the seller’s state and a similar tax by the
buyer’s state—without apportioning the tax.
2) Chooch is a resident of State A. It owns railroad cars used in interstate commerce. The cars are in State A three months each year and State B three months
each year. For a State B property tax on the railroad cars to be valid, it must fairly
apportion the tax, so that the cars will not be subjected to a similar tax by State A,
thus cumulating Chooch’s tax burden.
Note: The taxpayer has the burden of proving an unfair apportionment.
General Considerations: Nondiscriminatory Taxes - (a) Factors
- Fair Relationship
A state or local tax affecting interstate commerce will be valid under the
Commerce Clause only if the tax is fairly related to the services or benefits
provided by the state.
EXAMPLE
A state may levy a tax on passengers enplaning at a state airport if the tax is
related to the benefits that the passengers receive from the state (e.g., the airport facilities). [See Evansville-Vanderburgh Airport Authority District v. Delta Airlines, Inc., 405 U.S. 707 (1972)]
What are Use Taxes?
Use taxes are taxes imposed on the users of goods purchased out of state.
