State Taxation of Interstate Commerce

Question 1

What is congress’s power to authorize/forbid state taxation that affects interstate commerce?

(Commerce Clause)

Answer 1

Congress has COMPLETE POWER to AUTHORIZE or FORBID state taxation that affects interstate commerce

Question 2

What is the rule if a state tax CONFLICTS with federal law, or if field is preempted by federal law?

(Dormant Commerce Clause)

Answer 2

State tax affecting interstate commerce is INVALID if:

1. conflicts w federal law; or
2. field is preempted

EXCEPTION: if congress authorizes it

Question 3

What is the rule if a state tax DISCRIMINATES against interstate commerce?

(Dormant Commerce Clause)

Answer 3

State tax that DISCRIMINATES against interstate commerce VIOLATES commerce clause.

EXAMPLE –> tax on out of state business higher than in state business.

NOTE –> discriminatory state tax may also implicate:

1. priv and immunities clause of art 4; AND
2. equal protection clause

Question 4

What is the rule if a NON-DISCRIMINATORY state tax burdens state commerce?

(Dormant Commerce Clause)

Answer 4

VALID if NOT “unduly burdensome”:

TEST:
1. “substantial nexus” - tax must apply to activity having a substantial nexus to the taxing state (significant activity in state)

2. “fair apportionment” - tax must be fairly apportioned according to a rational formula
   NOTE –> P has burden of proof to show
   unfair apportionment
   NOTE –> unfairly proportioned tax may also violate Equal Protection
3. “fair relationship” - tax must be fairly related to the services or benefits provided by the state

Question 5

What are use taxes?

Are they valid?

(Dormant Commerce Clause)

Answer 5

“use tax” = tax imposed on goods purchased outside the state, but used within it

YES, valid

Question 6

May interstate seller be required to COLLECT a use tax?

Dormant Commerce Clause

Answer 6

Interstate seller MAY be required to collect a use tax IF:
- Seller has a SUFFICIENT NEXUS with taxing state (ie.. maintains offices in taxing state)

NOT SUFFICIENT –> merely soliciting orders or shipping to state

Question 7

What are sales taxes?

What issues arise?

(Dormant Commerce Clause)

Answer 7

“sales taxes” - imposed on seller of goods for sales consummated within the state

GENERALLY, they are not discriminatory.
Issue is –>
1. whether there is a substantial nexus btwn tax payer and taxing state;
2. whether they are properly apportioned

Question 8

May state tax commodities in interstate commerce?

Dormant Commerce Clause - Ad valorem property taxes

Answer 8

No

• may only be subject to tax when they reach final destination

Question 9

May state tax instrumentalities of interstate commerce (trucks/airplanes etc)?

(Dormant Commerce Clause - Ad valorem property taxes)

Answer 9

1. instrumentality has a “taxable situs” in taxing state
   (IE - receives benefits/protection in the state)
2. fairly apportioned based on average physical presence in taxing state
   - taxpayer’s domiciliary state can tax full value UNLESS TP can prove that it has acquired a taxable situs elsewhere

Question 10

What is the rule w regards to state privilege, license, franchise, or occupational taxes?

(Dormant Commerce Clause - “doing business” taxes)

Answer 10

Generally –> valid

Requirements:

1. substantial nexus to taxing state
2. tax must be fairly apportioned
3. must not discriminate against interstate commerce
4. must fairly relate to services provided by the state

Question 11

May states tax foreign commerce?

Answer 11

Generally, no

Reason –> import/export clause