State Taxation

Congressional Regulation: State Taxation in the Old Way

The leading case dealing with the relation of the states' taxing power to interstate commerce&emdash;the case in which the Court first struck down a state tax as violating the Commerce Clause&emdash; was the State Freight Tax Case.1 Before the Court was the validity of a Pennsylvania statute that required every company transporting freight within the state, with certain exceptions, to pay a tax at specified rates on each ton of freight carried by it. The Court's reasoning was forthright. Transportation of freight constitutes commerce. 2 A tax upon freight transported from one state to another effects a regulation of interstate commerce.3 Under the Cooley doctrine, whenever the subject of a regulation of commerce is in its nature of national interest or admits of one uniform system or plan of regulation, that subject is within the exclusive regulating control of Congress.4 Transportation of passengers or merchandise through a state, or from one state to another, is of this nature.5 Hence, a state law imposing a tax upon freight, taken up within the state and transported out of it or taken up outside the state and transported into it, violates the Commerce Clause.6

More about Congressional Regulation: State Taxation in the Old Way

The principle thus asserted, that a state may not tax interstate commerce, confronted the principle that a state may tax all purely domestic business within its borders and all property “within its jurisdiction.” Inasmuch as most large concerns prosecute both an interstate and a domestic business, while the instrumentalities of interstate commerce and the pecuniary returns from such commerce are ordinarily property within the jurisdiction of some state or other, the task before the Court was to determine where to draw the line between the immunity claimed by interstate business, on the one hand, and the prerogatives claimed by local power on the other. In the State Tax on Railway Gross Receipts Case,7 decided the same day as the State Freight Tax Case, the issue was a tax upon gross receipts of all railroads chartered by the state, part of the receipts having been derived from interstate transportation of the same freight that had been held immune from tax in the first case. If the latter tax were regarded as a tax on interstate commerce, it too would fall. But to the Court, the tax on gross receipts of an interstate transportation company was not a tax on commerce. “[I]t is not everything that affects commerce that amounts to a regulation of it, within the meaning of the Constitution.” 8 A gross receipts tax upon a railroad company, which concededly affected commerce, was not a regulation “directly. Very manifestly it is a tax upon the railroad company. . . . That its ultimate effect may be to increase the cost of transportation must be admitted. . . . Still it is not a tax upon transportation, or upon commerce. . . .” 9

State Taxation in the Old Way: Developments

Insofar as it drew a distinction between these two cases, the Court did so in part on the basis of Cooley, that some subjects embraced within the meaning of commerce demand uniform, national regulation, whereas other similar subjects permit of diversity of treatment, until Congress acts; and in part on the basis of a concept of a “direct” tax on interstate commerce, which was impermissible, and an “indirect” tax, which was permissible until Congress acted.10 Confusingly, the two concepts were sometimes conflated and sometimes treated separately. In any event, the Court itself was clear that interstate commerce could not be taxed at all, even if the tax was a nondiscriminatory levy applied alike to local commerce.11 “Thus, the States cannot tax interstate commerce, either by laying the tax upon the business which constitutes such commerce or the privilege of engaging in it, or upon the receipts, as such, derived from it . . . ; or upon persons or property in transit in interstate commerce.” 12 However, some taxes imposed only an “indirect” burden and were sustained; property taxes and taxes in lieu of property taxes applied to all businesses, including instrumentalities of interstate commerce, were sustained.13 A good rule of thumb in these cases is that taxation was sustained if the tax was imposed on some local, rather than an interstate, activity or if the tax was exacted before interstate movement had begun or after it had ended.

Other Aspects

An independent basis for invalidation was that the tax was discriminatory, that its impact was intentionally or unintentionally felt by interstate commerce and not by local, perhaps in pursuit of parochial interests. Many of the early cases actually involving discriminatory taxation were decided on the basis of the impermissibility of taxing interstate commerce at all, but the category was soon clearly delineated as a separate ground (and one of the most important today). 14

Other Issues

Following the Great Depression and under the leadership of Justice, and later Chief Justice, Stone, the Court attempted to move away from the principle that interstate commerce may not be taxed and reliance on the direct-indirect distinction. Instead, a state or local levy would be voided only if in the opinion of the Court it created a risk of multiple taxation for interstate commerce not felt by local commerce.15 It became much more important to the validity of a tax that it be apportioned to an interstate company's activities within the taxing state, so as to reduce the risk of multiple taxation. 16 But, just as the Court had achieved constancy in the area of regulation, it reverted to the older doctrines in the taxation area and reiterated that interstate commerce may not be taxed at all, even by a properly apportioned levy, and reasserted the directindirect distinction.17 The stage was set, following a series of cases in which through formalistic reasoning the states were permitted to evade the Court's precedents,18 for the formulation of a more realistic doctrine.

Resources

References

This text about State Taxation is based on “The Constitution of the United States of America: Analysis and Interpretation”, published by the U.S. Government Printing Office.

[Footnote 1] Reading R.R. v. Pennsylvania, 82 U.S. (15 Wall.) 232 (1873).

[Footnote 2] 82 U.S. at 275.

[Footnote 3] 82 U.S. at 275-76, 279.

[Footnote 4] 82 U.S. at 279-80.

[Footnote 5] 82 U.S. at 280.

[Footnote 6] 82 U.S. at 281-82.

[Footnote 7] Reading R.R. v. Pennsylvania, 82 U.S. (15 Wall.) 284 (1872).

[Footnote 8] 82 U.S. at 293.

[Footnote 9] 82 U.S. at 294. This case was overruled 14 years later, when the Court voided substantially the same tax in Philadelphia Steamship Co. v. Pennsylvania, 122 U.S. 326 (1887).

[Footnote 10] See The Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 398- 412 (1913) (reviewing and summarizing at length both taxation and regulation cases). See also Missouri ex rel. Barrett v. Kansas Natural Gas Co., 265 U.S. 298, 307 (1924).

[Footnote 11] Robbins v. Shelby County Taxing Dist., 120 U.S. 489, 497 (1887); Leloup v. Port of Mobile, 127 U.S. 640, 648 (1888).

[Footnote 12] The Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 400-401 (1913).

[Footnote 13] The Delaware R.R. Tax, 85 U.S. (18 Wall.) 206, 232 (1873). See Cleveland, Cincinnati, Chicago & St. Louis Ry. Co. v. Backus, 154 U.S. 439 (1894); Postal Telegraph Cable Co. v. Adams, 155 U.S. 688 (1895). See cases cited in J. HELLERSTEIN & W. HELLERSTEIN (8th ed.), supra, at 195 et seq.

[Footnote 14] E.g., Welton v. Missouri, 91 U.S. 275 (1875); Robbins v. Shelby County Taxing District, 120 U.S. 489 (1887); Darnell & Son Co. v. City of Memphis, 208 U.S. 113 (1908); Bethlehem Motors Co. v. Flynt, 256 U.S. 421 (1921).

[Footnote 15] Western Live Stock v. Bureau of Revenue, 303 U.S. 250 (1938); McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33 (1940); International Harvester Co. v. Department of Treasury, 322 U.S. 340 (1944); International Harvester Co. v. Evatt, 329 U.S. 416 (1947).

[Footnote 16] E.g., Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939); Joseph v. Carter & Weekes Stevedoring Co., 330 U.S. 422 (1947); Central Greyhound Lines v. Mealey, 334 U.S. 653 (1948). Notice the Court's distinguishing of Central Greyhound in Oklahoma Tax Comm'n v. Jefferson Lines, 514 U.S. 175, 188-91 (1995).

[Footnote 17] Freeman v. Hewit, 329 U.S. 249 (1946); Spector Motor Serv. v. O'Connor, 340 U.S. 602 (1951).

[Footnote 18] Thus, the states carefully phrased tax laws so as to impose on interstate companies not a license tax for doing business in the state, which was not permitted, Railway Express Agency v. Virginia, 347 U.S. 359 (1954), but as a franchise tax on intangible property or the privilege of doing business in a corporate form, which was permissible. Railway Express Agency v. Virginia, 358 U.S. 434 (1959); Colonial Pipeline Co. v. Traigle, 421 U.S. 100 (1975). Also, the Court increasingly found the tax to be imposed on a local activity in instances it would previously have seen to an interstate activity. E.g., Memphis Natural Gas Co. v. Stone, 335 U.S. 80 (1948); General Motors Corp. v. Washington, 377 U.S. 436 (1964); Standard Pressed Steel Co. v. Department of Revenue, 419 U.S. 560 (1975).

Taxation

During the 1940s and 1950s, there was conflict within the Court between the view that interstate commerce could not be taxed at all, at least “directly,” and the view that the negative commerce clause protected against the risk of double taxation.19 In Northwestern States Portland Cement Co. v. Minnesota,20 the Court reasserted the principle expressed earlier in Western Live Stock, that the Framers did not intend to immunize interstate commerce from its just share of the state tax burden even though it increased the cost of doing business.21 Northwestern States held that a state could constitutionally impose a nondiscriminatory, fairly apportioned net income tax on an out-of-state corporation engaged exclusively in interstate commerce in the taxing state. “For the first time outside the context of property taxation, the Court explicitly recognized that an exclusively interstate business could be subjected to the states' taxing powers.” 22 Thus, in Northwestern States, foreign corporations that maintained a sales office and employed sales staff in the taxing state for solicitation of orders for their merchandise that, upon acceptance of the orders at their home office in another jurisdiction, were shipped to customers in the taxing state, were held liable to pay the latter's income tax on that portion of the net income of their interstate business as was attributable to such solicitation.

More about State Taxation

Yet, the following years saw inconsistent rulings that turned almost completely upon the use of or failure to use “magic words” by legislative drafters. That is, it was constitutional for the states to tax a corporation's net income, properly apportioned to the taxing state, as in Northwestern States, but no state could levy a tax on a foreign corporation for the privilege of doing business in the state, both taxes alike in all respects.23 In Complete Auto Transit, Inc. v. Brady,24 the Court overruled the cases embodying the distinction and articulated a standard that has governed the cases since. The tax in Brady was imposed on the privilege of doing business as applied to a corporation engaged in interstate transportation services in the taxing state; it was measured by the corporation's gross receipts from the service. The appropriate concern, the Court wrote, was to pay attention to “economic realities” and to “address the problems with which the commerce clause is concerned.” 25 The standard, a set of four factors that was distilled from precedent but newly applied, was firmly set out. A tax on interstate commerce will be sustained “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” 26 All subsequent cases have been decided in this framework.

State Taxation: Developments

Nexus.&emdash;”The Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State's power to tax outof- state activities. The Due Process Clause demands that there exist some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax, as well as a rational relationship between the tax and the values connected with the taxing State. The Commerce Clause forbids the States to levy taxes that discriminate against interstate commerce or that burden it by subjecting activities to multiple or unfairly apportioned taxation.” 27 “The broad inquiry subsumed in both constitutional requirements is whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state&emdash;that is, whether the state has given anything for which it can ask return.” 28

Other Aspects

The question of the presence of a substantial nexus often arises when a state imposes on out-of-state vendors an obligation to collect use taxes on goods sold in the taxing state, and a determinative factor is whether the vendor is physically present in the state. The Court has sustained such an imposition on mail order sellers with retail outlets, solicitors, or property within the taxing state,29 but it has denied the power to a state to tax a seller whose “only connection with customers in the State is by common carrier or the United States mail.” 30 The validity of general business taxes on interstate enterprises may also be determined by the nexus standard. However, again, only a minimal contact is necessary.31 Thus, maintenance of one full-time employee within the state (plus occasional visits by non-resident engineers) to make possible the realization and continuance of contractual relations seemed to the Court to make almost frivolous a claim of lack of sufficient nexus.32 The application of a state business-and-occupation tax on the gross receipts from a large wholesale volume of pipe and drainage products in the state was sustained, even though the company maintained no office, owned no property, and had no employees in the state, its marketing activities being carried out by an in-state independent contractor.33 The Court also upheld a state's application of a use tax to aviation fuel stored temporarily in the state prior to loading on aircraft for consumption in interstate flights.34

Other Issues

When “there is no dispute that the taxpayer has done some business in the taxing State, the inquiry shifts from whether the State may tax to what it may tax. To answer that question, [the Court has] developed the unitary business principle. Under that principle, a State need not isolate the intrastate income-producing activities from the rest of the business but may tax an apportioned sum of the corporation's multistate business if the business is unitary. The court must determine whether intrastate and extrastate activities formed part of a single unitary business, or whether the out-of-state values that the State seeks to tax derive[d] from unrelated business activity which constitutes a discrete business enterprise. . . . If the value the State wishe[s] to tax derive[s] from a 'unitary business' operated within and without the State, the State [may] tax an apportioned share of the value of that business instead of isolating the value attributable to the operation of the business within the State. Conversely, if the value the State wished to tax derived from a discrete business enterprise, then the State could not tax even an apportioned share of that value.” 35 But, even when there is a unitary business, “[t]he Due Process and Commerce Clauses of the Constitution do not allow a State to tax income arising out of interstate activities&emdash;even on a proportional basis&emdash;unless there is a 'minimal connection' or 'nexus' between the interstate activities and the taxing State and 'a rational relationship between the income attributed to the State and the intrastate values of the enterprise.' ” 36

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Apportionment.&emdash;This requirement is of long standing,37 but its importance has broadened as the scope of the states' taxing powers has enlarged. It is concerned with what formulas the states must use to claim a share of a multistate business' tax base for the taxing state, when the business carries on a single integrated enterprise both within and without the state. A state may not exact from interstate commerce more than the state's fair share. Avoidance of multiple taxation, or the risk of multiple taxation, is the test of an apportionment formula. Generally speaking, this factor is both a Commerce Clause and a due process requisite, and it necessitates a rational relationship between the income attributed to the state and the intrastate values of the enterprise.38 The Court has declined to impose any particular formula on the states, reasoning that to do so would be to require the Court to engage in “extensive judicial lawmaking,” for which it was ill-suited and for which Congress had ample power and ability to legislate.39

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“Instead,” the Court wrote, “we determine whether a tax is fairly apportioned by examining whether it is internally and externally consistent. To be internally consistent, a tax must be structured so that if every State were to impose an identical tax, no multiple taxation would result. Thus, the internal consistency test focuses on the text of the challenged statute and hypothesizes a situation where other States have passed an identical statute. . . . The external consistency test asks whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed. We thus examine the in-state business activity which triggers the taxable event and the practical or economic effect of the tax on that interstate activity.” 40

In Goldberg v. Sweet, the Court upheld as properly apportioned a state tax on the gross charge of any telephone call originated or terminated in the state and charged to an in-state service address, regardless of where the telephone call was billed or paid.41 A complex state tax imposed on trucks displays the operation of the test. Thus, a state registration tax met the internal consistency test because every state honored every other states', and a motor fuel tax similarly was sustained because it was apportioned to mileage traveled in the state, whereas lump-sum annual taxes, an axle tax and an identification marker fee, being unapportioned flat taxes imposed for the use of the state's roads, were voided, under the internal consistency test, because if every state imposed them, then the burden on interstate commerce would be great.42

Deference to state taxing authority was evident in a case in which the Court sustained a state sales tax on the price of a bus ticket for travel that originated in the state but terminated in another state. The tax was unapportioned to reflect the intrastate travel and the interstate travel.43 The tax in this case was different from the tax upheld in Central Greyhound, the Court held. The previous tax constituted a levy on gross receipts, payable by the seller, whereas the present tax was a sales tax, also assessed on gross receipts, but payable by the buyer. The Oklahoma tax, the Court continued, was internally consistent, because if every state imposed a tax on ticket sales within the state for travel originating there, no sale would be subject to more than one tax. The tax was also externally consistent, the Court held, because it was a tax on the sale of a service that took place in the state, not a tax on the travel.44

However, the Court found discriminatory and thus invalid a state intangibles tax on a fraction of the value of corporate stock owned by state residents inversely proportional to the state's exposure to the state income tax.45

Discrimination.&emdash;The “fundamental principle” governing this factor is simple. ” 'No State may, consistent with the Commerce Clause, impose a tax which discriminates against interstate commerce . . . by providing a direct commercial advantage to local business.' ” 46 That is, a tax that by its terms or operation imposes greater burdens on out-of-state goods or activities than on competing in-state goods or activities will be struck down as discriminatory under the Commerce Clause.47 In Armco, Inc. v. Hardesty,48 the Court voided as discriminatory the imposition on an out-of-state wholesaler of a state tax that was levied on manufacturing and wholesaling but that relieved manufacturers subject to the manufacturing tax of liability for paying the wholesaling tax. Even though the former tax was higher than the latter, the Court found that the imposition discriminated against the interstate wholesaler.49 A state excise tax on wholesale liquor sales, which exempted sales of specified local products, was held to violate the Commerce Clause.50 A state statute that granted a tax credit for ethanol fuel if the ethanol was produced in the state, or if it was produced in another state that granted a similar credit to the state's ethanol fuel, was found discriminatory in violation of the clause.51 Expanding, although neither unexpectedly nor exceptionally, its dormant commerce jurisprudence, the Court in Camps Newfound/Owatonna, Inc. v. Town of Harrison,52 applied its nondiscrimination element of the doctrine to invalidate the state's charitable property tax exemption statute, which applied to nonprofit firms performing benevolent and charitable functions, but which excluded entities serving primarily out-of-state residents. The claimant here operated a church camp for children, most of whom resided out-of-state. The discriminatory tax would easily have fallen had it been applied to profit-making firms, and the Court saw no reason to make an exception for nonprofits. The tax scheme was designed to encourage entities to care for local populations and to discourage attention to out-of-state individuals and groups. “For purposes of Commerce Clause analysis, any categorical distinction between the activities of profit-making enterprises and not-for-profit entities is therefore wholly illusory. Entities in both categories are major participants in interstate markets. And, although the summer camp involved in this case may have a relatively insignificant impact on the commerce of the entire Nation, the interstate commercial activities of nonprofit entities as a class are unquestionably significant.” 53

Benefit Relationship.&emdash;Although, in all the modern cases, the Court has stated that a necessary factor to sustain state taxes having an interstate impact is that the levy be fairly related to benefits provided by the taxing state, it has declined to be drawn into any consideration of the amount of the tax or the value of the benefits bestowed. The test rather is whether, as a matter of the first factor, the business has the requisite nexus with the state; if it does, then the tax meets the fourth factor simply because the business has enjoyed the opportunities and protections that the state has afforded it.54

Resources

References

This text about State Taxation is based on The Constitution of the United States of America: Analysis and Interpretation, published by the U.S. Government Printing Office.

[Footnote 19] Compare Freeman v. Hewit, 329 U.S. 249, 252-256 (1946), with Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 258, 260 (1938).

[Footnote 20] 358 U.S. 450 (1959).

[Footnote 21] 358 U.S. at 461-62. See Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254 (1938). For recent reiterations of the principle, see Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 310 n.5 (1992) (citing cases).

[Footnote 22] Hellerstein, State Taxation of Interstate Business: Perspectives on Two Centuries of Constitutional Adjudication, 41 TAX LAW. 37, 54 (1987).

[Footnote 23] Spector Motor Service, Inc. v. O'Connor, 340 U.S. 602 (1951). The attenuated nature of the purported distinction was evidenced in Colonial Pipeline Co. v. Traigle, 421 U.S. 100 (1975), in which the Court sustained a nondiscriminatory, fairly apportioned franchise tax that was measured by the taxpayer's capital stock, imposed on a pipeline company doing an exclusively interstate business in the taxing state, on the basis that it was a tax imposed on the privilege of conducting business in the corporate form.

[Footnote 24] 430 U.S. 274 (1977).

[Footnote 25] 430 U.S. at 279, 288. “In reviewing Commerce Clause challenges to state taxes, our goal has instead been to 'establish a consistent and rational method of inquiry' focusing on 'the practical effect of a challenged tax.' ” Commonwealth Edison Co. v. Montana, 453 U.S. 609, 615 (1981) (quoting Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 443 (1980)).

[Footnote 26] 430 U.S. at 279. The rationale of these four parts of the test is set out in Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 312-13 (1992). A recent application of the four-part Complete Auto Transit test is Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175 (1995).

[Footnote 27] Meadwestvaco Corp. v. Illinois Dept. of Revenue, 128 S. Ct. 1498, 1505 (2008) (citations and internal quotation marks omitted). “[T]he due process nexus analysis requires that we ask whether an individual's connections with a State are substantial enough to legitimate the State's exercise of power over him. . . . In contrast, the Commerce Clause and its nexus requirement are informed not so much by concerns about fairness for the individual defendant as by structural concerns about the effects of state regulation on the national economy.” Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 312 (1992).

[Footnote 28] 128 S. Ct. at 1505 (internal quotation marks omitted). It had been thought, prior to the decision in Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 305 (1992), that the tests for nexus under the Commerce Clause and the Due Process Clause were identical, but the Court in that case, although stating that the two tests “are closely related” (citing National Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 386 U.S. 753, 756 (1967)), held that they “differ fundamentally” and found a state tax to satisfy the Due Process Clause but to violate the Commerce Clause. Compare Quill at 325-28 (Justice White concurring in part and dissenting in part). However, the requirement for “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax” probably survives the bifurcation of the tests in Quill. National Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 386 U.S. 753, 756 (1967) (Commerce Clause), quoting Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-45 (1954) (Due Process Clause).

[Footnote 29] Scripto v. Carson, 362 U.S. 207 (1960); National Geographic Soc'y v. California Bd. of Equalization, 430 U.S. 551 (1977). In Scripto, the vendor's agents that were in the state imposing the tax were independent contractors, rather than employees, but this distinction was irrelevant. See also Tyler Pipe Indus. v. Washington State Dept. of Revenue, 483 U.S. 232, 249-50 (1987) (reaffirming Scripto on this point). See also D. H. Holmes Co. v. McNamara, 486 U.S. 24 (1988) (upholding imposition of use tax on catalogs, printed outside state at direction of an in-state corporation and shipped to prospective customers within the state).

[Footnote 30] National Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 386 U.S. 753, 758 (1967), reaffirmed with respect to the Commerce Clause in Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298 (1992).

[Footnote 31] Reacting to Northwestern States, Congress enacted Pub. L. 86-272, 15 U.S.C. § 381, providing that mere solicitation by a company acting outside the state did not support imposition of a state income tax on a company's proceeds. See Heublein, Inc. v. South Carolina Tax Comm'n, 409 U.S. 275 (1972).

[Footnote 32] Standard Pressed Steel Co. v. Department of Revenue, 419 U.S. 560 (1975). See also General Motors Corp. v. Washington, 377 U.S. 436 (1964).

[Footnote 33] Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232, 249-51 (1987). The Court agreed with the state court's holding that “the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales.” Id. at 250.

[Footnote 34] United Air Lines v. Mahin, 410 U.S. 623 (1973).

[Footnote 35] Meadwestvaco Corp. v. Illinois Dept. of Revenue, 128 S. Ct. 1498, 1505-06

(2008) (citations and internal quotation marks omitted). The holding of this case

was that the concept of “operational function,” which the Court had introduced in

prior cases, was “not intended to modify the unitary business principle by adding a

new ground for apportionment.” Id. at 1507-08. In other words, the Court declined

to adopt a basis upon which a state could tax a non-unitary business.

[Footnote 36] Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 165-66 (1983) (internal quotation marks omitted). See also ASARCO Inc. v. Idaho State Tax Comm'n, 458 U.S. 307, 316-17 (1982); Hunt-Wesson, Inc. v. Franchise Tax Bd. of Cal., 528 U.S. 58 (2000) (interest deduction not properly apportioned between unitary and nonunitary business).

[Footnote 37] E.g., Pullman's Palace Car Co. v. Pennsylvania, 141 U.S. 18, 26 (1891); Maine v. Grand Trunk Ry., 142 U.S. 217, 278 (1891).

[Footnote 38] See Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978); Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980); Exxon Corp. v. Wisconsin Dep't of Revenue, 447 U.S. 207 (1980); ASARCO Inc. v. Idaho State Tax Comm'n, 458 U.S. 307 (1982); F. W. Woolworth Co. v. New Mexico Taxation & Revenue Dep't, 458 U.S. 354 (1982); Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983); Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232, 251 (1987); Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768 (1992). Cf. American Trucking Ass'ns Inc. v. Scheiner, 483 U.S. 266 (1987).

[Footnote 39] Moorman Mfg. Co. v. Bair, 437 U.S. 267, 278-80 (1978).

[Footnote 40] Goldberg v. Sweet, 488 U.S. 252, 261, 262 (1989) (citations omitted).

[Footnote 41] 488 U.S. 252 (1989). The tax law provided a credit for any taxpayer who was taxed by another state on the same call. Actual multiple taxation could thus be avoided, the risks of other multiple taxation was small, and it was impracticable to keep track of the taxable transactions.

[Footnote 42] American Trucking Ass'ns v. Scheiner, 483 U.S. 266 (1987).

[Footnote 43] Indeed, there seemed to be a precedent squarely on point: Central Greyhound Lines v. Mealey, 334 U.S. 653 (1948). The Court in that case struck down a state statute that failed to apportion its taxation of interstate bus ticket sales to reflect the distance traveled within the state.

[Footnote 44] Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175 (1995). Indeed, the Court analogized the tax to that in Goldberg v. Sweet, 488 U.S. 252 (1989), a tax on interstate telephone services that originated in or terminated in the state and that were billed to an in-state address.

[Footnote 45] Fulton Corp. v. Faulkner, 516 U.S. 325 (1996). The state had defended on the basis that the tax was a “compensatory” one designed to make interstate commerce bear a burden already borne by intrastate commerce. The Court recognized the legitimacy of the defense, but it found the tax to meet none of the three criteria for classification as a valid compensatory tax. Id. at 333-44. See also South Central Bell Tel. Co. v. Alabama, 526 U.S. 160 (1999) (tax not justified as compensatory).

[Footnote 46] Boston Stock Exchange v. State Tax Comm'n, 429 U.S. 318, 329 (1977) (quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 457 (1959)). The principle, as we have observed above, is a long-standing one under the Commerce Clause. E.g., Welton v. Missouri, 91 U.S. 275 (1876).

[Footnote 47] Maryland v. Louisiana, 451 U.S. 725, 753-760 (1981). But see Commonwealth Edison Co. v. Montana, 453 U.S. 609, 617-619 (1981). See also Oregon Waste Systems, Inc. v. Department of Environmental Quality, 511 U.S. 93 (1994) (surcharge on in-state disposal of solid wastes that discriminates against companies disposing of waste generated in other states invalid).

[Footnote 48] 467 U.S. 638 (1984).

[Footnote 49] The Court applied the “internal consistency” test here too, in order to determine the existence of discrimination. 467 U.S. at 644-45. Thus, the wholesaler did not have to demonstrate it had paid a like tax to another state, only that if other states imposed like taxes it would be subject to discriminatory taxation. See also Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232 (1987); American Trucking Ass'ns, Inc. v. Scheiner, 483 U.S. 266 (1987); Amerada Hess Corp. v. Director, New Jersey Taxation Div., 490 U.S. 66 (1989); Kraft Gen. Foods v. Iowa Dep't of Revenue, 505 U.S. 71 (1992).

[Footnote 50] Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984).

[Footnote 51] New Energy Co. of Indiana v. Limbach, 486 U.S. 269 (1988). Compare Fulton Corp. v. Faulkner, 516 U.S. 325 (1996) (state intangibles tax on a fraction of the value of corporate stock owned by in-state residents inversely proportional to the corporation's exposure to the state income tax violated dormant commerce clause), with General Motors Corp. v. Tracy, 519 U.S. 278 (1997) (state imposition of sales and use tax on all sales of natural gas except sales by regulated public utilities, all of which were in-state companies, but covering all other sellers that were out-ofstate companies did not violate dormant commerce clause because regulated and unregulated companies were not similarly situated).

[Footnote 52] 520 U.S. 564 (1997). The decision was 5-to-4 with a strong dissent by Justice Scalia, id. at 595, and a philosophical departure by Justice Thomas. Id. at 609.

[Footnote 53] 520 U.S. at 586.

[Footnote 54] Commonwealth Edison Co. v. Montana, 453 U.S. 609, 620-29 (1981). Two state taxes imposing flat rates on truckers, because they did not vary directly with miles traveled or with some other proxy for value obtained from the state, were found to violate this standard in American Trucking Ass'ns, Inc. v. Scheiner, 483 U.S. 266, 291 (1987). But see American Trucking Ass'ns v. Michigan Pub. Serv. Comm'n, 545 U.S. 429 (2005), upholding imposition of a flat annual fee on all trucks engaged in intrastate hauling (including trucks engaged in interstate hauling that “top off ” loads with intrastate pickups and deliveries) and concluding that levying the fee on a pertruck rather than per-mile basis was permissible in view of the objectives of defraying costs of administering various size, weight, safety, and insurance requirements.

Tables of Contents

• State Taxation and other Topics in the Contents – Article 1 of the U.S. Constitution
• U.S. Constitutional Law Category
• List of amendments to the U.S. Constitution
• State Taxation and other Topics in the Constitution Contents
• Interpretation of the U.S. Constitution (Table of Contents)
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