STATE REGULATION OR TAXATION OF COMMERCE: REGULATION OF FOREIGN COMMERCE

Question 1

Power to Regulate Foreign Commerce: LIES EXCLUSIVELY WITH CONGRESS

Answer 1

• Congress has exclusive power to regulate foreign commerce.
• “Foreign” commerce includes traffic on high seas, even though both terminal ports are w/in US

Question 2

MINOR EXCEPTIONS WHERE STATE REGULATION PERMITTED

Answer 2

Few minor exceptions:
- States are free to regulate local aspects of port pilotage & navigation of ships in foreign commerce (aspects such as safety of handling)
- Ct allowed state regulation of excursion boat traffic between Detroit & Canadian island (state barred racial discrimination among boat passengers) since no Canadians/Canadian products/services were involved.

Question 3

REGULATION OF INTERSTATE COMMERCE: REGULATION OF COMMERCE BY CONGRESS

Answer 3

• Congress’s power over interstate commerce is very broad & pervasive.
• However, power is nonexclusive—it is shared w/ states to some degree.

Question 4

Power of Congress to Supersede or Preempt State Regulation

Answer 4

• Supremacy Clause: federal law supreme.
• If a state law regulating commerce conflicts w/ fed law, state law will be void.
• Congress can preempt an entire area of regulation, preventing states from making any laws concerning area preempted.

Question 5

Power of Congress to Permit or Prohibit State Regulation

Answer 5

• Although Congress’s commerce power is nonexclusive, states’ power to regulate interstate commerce is restricted by Commerce Clause, even w/o fed legislation—states generally may not discriminate against interstate commerce.
• Nevertheless, Congress may allow states to adopt legislation that would otherwise violate Commerce Clause.
• Congress may also prohibit states from adopting legislation that would otherwise be permitted under Commerce Clause.

Question 6

Limitation

Answer 6

• While Congress may permit states to adopt regulations that would otherwise violate Commerce Clause, consent will not prevent other constitutional objections to the regulation.
• Thus, Congress may not give states power to restrict civil liberties

Question 7

STATE REGULATION OF COMMERCE IN THE ABSENCE OF CONGRESSIONAL ACTION

Answer 7

If Congress has not enacted laws regarding the subject, state/local gov may regulate local aspects of interstate commerce if regulation:
(i) Does not discriminate against out-of-state competition to benefit local economic interests; and
(ii) Is not unduly burdensome (incidental burden on interstate commerce does not outweigh legit local benefits produced by regulation).
- If either test is not met, regulation will be void for violating Commerce Clause (“Dormant Commerce Clause”/“Negative Commerce Clause”).

Question 8

Discriminatory Regulations

Answer 8

• Generally Invalid
• State/local regulations that discriminate against interstate commerce to protect local economic interests are almost always invalid.

Question 9

Examples: Regulations Protecting Local Businesses

Answer 9

• Laws designed to protect local businesses against interstate competition generally will be invalid.

Question 10

Examples: Regulations Requiring Local Operations

Answer 10

• If state law requires a business to perform specific business operations in the state to engage in other business activity w/in the state, law will normally be invalid as an attempt to discriminate against other states where business operations could be performed more efficiently.

Question 11

Examples: Regulations Limiting Access to In-State Products

Answer 11

• State law that makes it difficult/impossible for out-of-state purchasers to have access to in-state products (other than products owned by state itself) is likely invalid.

Question 12

Examples: Regulations Prohibiting Out-of-State Wastes

Answer 12

• State may not prohibit private landfill/waste disposal facilities from accepting out-of-state garbage/waste/ surcharge such waste unless Congress authorizes such discrimination
• Fed statute allowing states to surcharge on certain out-of-state nuclear wastes was upheld.
• This rule applies even to hazardous wastes.

Question 13

Exceptions: Necessary to Important State Interest

Answer 13

• Discriminatory state/local law may be valid if it furthers an important, noneconomic state interest (health/safety) & there are no reasonable alternatives available.

Question 14

Exceptions: State as Market Participant

Answer 14

• Commerce Clause does not prevent a state from preferring its own citizens when state is acting as a market participant (buying/selling products, hiring labor, giving subsidies).

Question 15

Exceptions: State as Market Participant Limitation—Interstate Privileges and Immunities Clause

Answer 15

• No market participant exception to Interstate Privileges & Immunities Clause.
• Thus, a regulation that interferes w/ private sector employment may violate Privileges & Immunities Clause unless regulating entity can show a substantial justification for regulation

Question 16

Exceptions: Limitation—“Downstream” Restrictions

Answer 16

• While a state may choose to sell only to state residents, it may not place conditions on sales that would discriminate against interstate commerce.

Question 17

Exceptions: Favoring Government Performing Traditional Government Functions

Answer 17

• More lenient standard is applied when law favors gov action involving performance of traditional gov functions (waste disposal).
• Discrimination against interstate commerce in such a case is permissible b/c it is likely motivated by legit objectives rather than by economic protectionism.

Question 18

Nondiscriminatory Laws—Balancing Test

Answer 18

• Sometimes a nondiscriminatory state /local law that regulates commerce may impose a burden on interstate commerce (ex. state law regulating size of trucks w/in that state may burden interstate commerce b/c interstate trucking operations will be subject to the law when their trucks enter the state)
• A nondiscriminatory law will be invalid only if burden on interstate commerce outweighs promotion of legit (not discriminatory) local interests
• This is a case-by-case balancing test.
• Thus, some regulations of trucks will be upheld, b/c they do not impose an undue burden on interstate commerce, whereas other truck regulations will be invalid, b/c they would make it extremely difficult for interstate trucking operators to have their trucks travel into/through the state.

Question 19

Nondiscriminatory Laws—Balancing Test: Absence of Conflict with Other States

Answer 19

• State & local laws regulating commerce are more likely to be valid when there is little chance states would have conflicting regulations of same SM

Question 20

Nondiscriminatory Laws—Balancing Test: State Control of Corporations

Answer 20

• Different standard for statutes regulating internal governance of a corp adopted by state of incorporation.
• statute that heavily impacts interstate commerce may be valid.

Question 21

TWENTY-FIRST AMENDMENT—STATE CONTROL OVER INTOXICATING LIQUOR: Intrastate Regulations

Answer 21

• 21st Amend (repealed prohibition) gives state govs wide latitude over importation of liquor & conditions under which liquor is sold/used w/in the state.
• State liquor regulations that constitute only an economic preference for local liquor manufacturers may violate Commerce Clause.
• Commerce Clause prohibits both outright economic favoritism for local businesses & attempts to regulate out-of-state transactions in order to guarantee competitive position of in-state businesses.

Question 22

Interstate Regulations

Answer 22

• Transitory liquor (liquor bound for out-of-state destinations) is subject to Commerce Clause.
• Thus, a state prohibition on transporting liquor through the state would likely violate Commerce Clause.

Question 23

Federal Power

Answer 23

• 21st Amend does not prohibit Congress from controlling economic transactions involving alcoholic beverages under fed commerce power.
• Thus, fed antitrust law can prohibit a practice of liquor dealers that has the effect of fixing min prices.
• Similarly, Congress may “regulate” liquor distribution by imposing conditions on grant of fed funds given under spending power.

Question 24

BAR EXAM APPROACH

Answer 24

• Whenever bar question involves a state regulation that affects free flow of interstate commerce, you should proceed as follows:
• First, see if question refers to any fed legislation that might be held either to:
  (1) supersede state regulation/preempt the field, or
  (2) authorize state regulation otherwise impermissible.
• Second, if neither of these possibilities is dispositive of the question, ask if state legislation either discriminates against interstate/out-of-state commerce/places an undue burden on free flow of interstate commerce
• If legislation is discriminatory, it will be invalid unless
  (1) it furthers important state interest & there are no reasonable nondiscriminatory alternatives, or
  (2) state is a market participant.
• If legislation does not discriminate but burdens interstate commerce, it will be invalid if burden on commerce outweighs state’s interest.
• Consider whether there are less restrictive alternatives.

Question 25

POWER OF STATES TO TAX INTERSTATE COMMERCE: GENERAL CONSIDERATIONS

Answer 25

• The same general considerations applicable to state regulation of commerce apply to taxation.
• Pursuant to Commerce Clause, Congress has complete power to authorize/forbid state taxation affecting interstate commerce.
• If Congress has not acted, look to see whether tax discriminates against interstate commerce.
• If it does, it is invalid.
• If it does not, assess whether the burden on interstate commerce outweighs benefit to state.
• 3 tests must be met:
  (1) there must be a substantial nexus between taxpayer & state;
  (2) tax must be fairly apportioned; and
  (3) there must be a fair relationship between tax & services/benefits provided by state.

Question 26

Discriminatory Taxes

Answer 26

• Unless authorized by Congress, state taxes that discriminate against interstate commerce violate Commerce Clause.
• Such taxes may also violate Interstate Privileges & Immunities Clause if they also discriminate against nonresidents of state, as well as Equal Protection Clause if discrimination is not rationally related to a legit state purpose
• Ex. denial of tax exemption solely b/c taxpayer was incorporated in another state is invalid.

Question 27

Discriminatory Taxes: Finding Discrimination

Answer 27

• If state tax singles out interstate commerce for taxation, Ct ordinarily will not “save” tax by finding other state taxes imposed only on local commerce (which might arguably eliminate the “apparent” discrimination against interstate commerce).
• However, state taxes that single out interstate commerce are considered nondiscriminatory if the particular statutory section/scheme also imposes the same type of tax on local commerce (sales & use taxes, discussed infra).

Question 28

Tax with In-State Subsidy

Answer 28

• A seemingly uniform tax may be discriminatory if proceeds from tax are designated for subsidies to in-state businesses.

Question 29

Double Taxation on Out-of-State Income

Answer 29

• State must grant a credit against a local tax for income taxed by another state.

Question 30

Discriminatory Taxes: Choosing the Proper Clause

Answer 30

• While a state/local tax that discriminates against interstate commerce generally violates Commerce Clause, Clause is not always the strongest argument against tax.

Question 31

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Answer 31

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Question 32

Interstate Privileges and Immunities Clause

Answer 32

• If a state/local tax discriminates against a natural person who is a nonresident, Article IV Interstate Privileges and Immunities Clause is the strongest argument against the tax

Question 33

Equal Protection: Where Congress Approves the Discrimination

Answer 33

• Although SC normally uses Commerce Clause to invalidate discriminatory legislation, it may also find that discrimination violates Equal Protection Clause
• This is important where Congress has given states power to do something that would otherwise violate Commerce Clause:
• Congress can give states power to take actions that otherwise would violate 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 Commerce Clause, but it might be found to be a violation of equal protection.

Question 34

Taxes Based on Suspect Classifications or Infringing on Fundamental Rights

Answer 34

• Ct may use equal protection analysis rather than Commerce Clause analysis to strike state taxes that are imposed on basis of suspect classification/that burden a fundamental right.
• A state tax system giving tax exemptions only to long-time residents of the state & denying a similar tax exemption to newer residents will be held to violate Equal Protection Clause.

Question 35

Nondiscriminatory Taxes

Answer 35

• Ct reviews nondiscriminatory state & local taxes affecting interstate commerce & balances the state need to obtain revenue against burden tax imposes on 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

Question 36

Factors

Answer 36

The Court generally considers three factors in determining whether the nondiscriminatory tax is valid:
(1) Substantial nexus
(2) Fair apportionment
(3) Fair relationship

Question 37

Substantial Nexus

Answer 37

• State tax will be valid under Commerce Clause only if there is a substantial nexus between activity /property taxed & taxing state.
• Substantial nexus exists when business that must collect tax benefits from doing business in the state.
• Physical presence in state is not necessary.

Question 38

Fair Apportionment

Answer 38

• State/local tax affecting interstate commerce will be valid under the Commerce Clause only if it is fairly apportioned according to a rational formula (tax should be based on extent of taxable activity/ property in the state).
• Otherwise activity/property would be subject to cumulative tax burdens.
• Note: Taxpayer has burden of proving unfair apportionment.

Question 39

Fair Relationship

Answer 39

• State/local tax affecting interstate commerce will be valid under Commerce Clause only if the tax is fairly related to services/benefits provided by the state.

Question 40

USE TAX

Answer 40

• Use taxes are taxes imposed on users of goods purchased out of state.

Question 41

Permissible in Buyer’s State

Answer 41

Use taxes do not discriminate against interstate commerce even though they single out interstate commerce for taxation (they are imposed only on goods purchased outside the state), if use tax rate is not higher than sales tax rate.

Question 42

State May Force Seller to Collect Use Tax

Answer 42

• Often, states force user to come forward & pay state use tax owed
• However, a state may force a nonresident, interstate seller to collect use tax from local buyer & remit it to state if seller has substantial nexus required by Commerce Clause.

Question 43

SALES TAXES

Answer 43

• Sales taxes: taxes imposed on seller of goods for sales consummated wi/n the state.
• Generally do not discriminate against interstate commerce; rather issue usually is whether there is a substantial nexus between taxpayer & taxing state, or whether tax is properly apportioned

Question 44

AD VALOREM PROPERTY TAXES

Answer 44

• Ad valorem property taxes are based on a % of assessed value of property in question.
• Such taxes are generally valid.
• However, Commerce Clause issue arises when property taxed moves in interstate commerce.
• Goods in transit are totally exempt from taxation.
• Once goods come to a halt in a state (obtain a taxable situs), they may be taxed.
• Then, issue usually revolves around whether tax imposes undue cumulative burden

Question 45

No Tax on Commodities in the Course of Interstate Commerce

Answer 45

• Commodities in course of interstate commerce are entirely exempt from local taxation
• Thus, states may not levy an ad valorem property tax on commodities being shipped in interstate commerce, even if goods happen to be in state on tax day

Question 46

When Is Property “in the Course of” Interstate Commerce?

Answer 46

Only property “in the course of” interstate commerce is immune from local property taxation.

Question 47

When Does Interstate Transportation Begin?

Answer 47

• Interstate transportation begins when
• (1) cargo is delivered to an interstate carrier (shipper relinquishing further control), or
  (2) cargo actually starts its interstate journey.
• Goods merely being prepared for transit are not in course of interstate commerce.

Question 48

Effect of a “Break” in Transit

Answer 48

• Once started, shipment remains in course of interstate commerce unless actually diverted.
• Breaks in continuity of transit will not destroy interstate character of shipment, unless break was intended to end/suspend (rather than temporarily interrupt) shipment.

Question 49

When Does Interstate Shipment End?

Answer 49

• Interstate shipment usually ends when it reaches its destination, & thereafter goods are subject to local tax.

Question 50

No Apportionment Required

Answer 50

• Validity of state taxes on goods in interstate commerce is strictly a Commerce Clause question; (either goods are “in the course of” interstate commerce & exempt from tax/they are not).
• There is no need for apportionment.

Question 51

Tax on Instrumentalities Used to Transport Goods Interstate

Answer 51

• Validity of ad valorem property taxes on instrumentalities of commerce (airplanes, railroad cars, etc.) depends on
  (1) whether instrumentality has acquired a “taxable situs” in taxing state (whether there are sufficient “contacts” w/ taxing state to justify tax), and
  (2) since physical situs of instrumentalities may change from state to state during the year, whether the value of instrumentality has been properly apportioned according to amount of “contacts” w/ each taxing state. (The taxable situs (“nexus”) is required by Due Process Clause to establish the state’s power to tax at all, & apportionment is required by Commerce Clause to prevent an intolerable burden on interstate commerce.)

Question 52

Taxable Situs (“Nexus”)

Answer 52

• Instrumentality has a taxable situs in a state if it receives benefits/protection from the state.
• Ex. airplanes have taxable situs in nondomiciliary state where airline company owned no property but made 18 regularly scheduled flights per day from rented depot space, even though same aircraft did not land every day
• Note: instrumentality may have more than one taxable situs, upon each of which states can impose a tax subject to required apportionment (infra).

Question 53

Apportionment Requirement

Answer 53

• If instrumentality has only one situs, the domiciliary state can tax at full value.
• If instrumentality has more than one taxable situs, a tax apportioned on the value of instrumentality will be upheld if it fairly approximates average physical presence of instrumentality w/in taxing state.
• Taxpayer has burden of proving that an instrumentality has acquired a taxable situs outside his domiciliary state.

Question 54

Proper Apportionment

Answer 54

The following methods have been upheld:
1) Using proportion of miles traveled w/in taxing state to total number of miles traveled by instrumentalities in entire operation.
2) Computing the average number of instrumentalities (tank cars) physically present in the taxing state on any one day during tax year & taxing that portion at full value—i.e., as if in the state all year.
- Note: B/c different states may use different apportionment formulas to tax same property, there may still be some double taxation of same instrumentalities.
- However, double taxation should be minimal if proper apportionment formulas have been used.

Question 55

PRIVILEGE, LICENSE, FRANCHISE, OR OCCUPATION TAXES

Answer 55

• Privilege, license, franchise, & occupation taxes are cumulatively known as “doing business” taxes.
• States generally can impose such taxes—on companies engaged exclusively in interstate commerce, & on interstate companies engaged in local commerce—for the privilege of doing business w/in the state.
• Such taxes may be measured by a flat amount/ proportional rate based on revenue derived from taxing state.
• In either case, tax must meet basic requirements—activity taxed must have a substantial nexus to taxing state; & tax must be fairly apportioned, must not discriminate against interstate commerce, & must fairly relate to services provided by the state.

Question 56

Taxpayer Has Burden of Proof

Answer 56

• Taxpayer has burden of showing that state’s apportionment formula is unfair.
• However, state tax that discriminates against interstate commerce will be held invalid regardless of whether taxpayer can show that an actual, unfair multiple burden is imposed on his business