Article I, Section 8, Clause 3:

[The Congress shall have Power . . . ] To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes; . . .

In Complete Auto Transit, Inc. v. Brady,1 the Court held that a state 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.” 2 The third prong of the Complete Auto test, which this essay concerns, goes to whether the tax discriminates against interstate commerce.3

The “fundamental principle” governing the discrimination factor is simple and fully consonant with the broader application of the Dormant Commerce Clause. As the Supreme Court recognized in Boston Stock Exchange v. State Tax Commission: “'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.’” 4 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.5 In Armco, Inc. v. Hardesty,6 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.7 Similarly, in Bacchus Imports, Ltd. v. Dias, the Court held a state excise tax on wholesale liquor sales, which exempted sales of specified local products, to violate the Commerce Clause.8 The Court also held that 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, to be discriminatory and in violation of the Commerce Clause in New Energy Co. of Indiana v. Limbach.9 The Court reached the same conclusion as to Maryland’s personal income tax scheme in Comptroller of the Treasury of Maryland v. Wynne, which taxed Maryland residents on their worldwide income and nonresidents on income earned in the state and did not offer Maryland residents a full credit for income taxes they paid to other states, finding the scheme “inherently discriminatory.” 10

Expanding, although neither unexpectedly nor exceptionally, its dormant commerce jurisprudence, the Court in Camps Newfound/Owatonna, Inc. v. Town of Harrison11 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. As such, the tax scheme was designed to encourage entities to care for local populations and to discourage attention to out-of-state individuals and groups. Camps Newfound/Owatonna Inc., however, operated a church camp for children, most of whom resided out-of-state. In holding the tax to violate the Commerce Clause, the Court underscored that there was no reason to distinguish nonprofits from for-profit companies for Commerce Clause purposes.

Footnotes

1

430 U.S. 274 (1977).

2

Id. at 279. “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. Comm’r of Taxes, 445 U.S. 425, 443 (1980)).

3

ArtI.S8.C3.7.11.4 Nexus Prong of Complete Auto Test for Taxes on Interstate Commerce; ArtI.S8.C3.7.11.5 Apportionment Prong of Complete Auto Test for Taxes on Interstate Commerce; ArtI.S8.C3.7.11.7 Benefit Prong of Complete Auto Test for Taxes on Interstate Commerce.

4

Boston Stock Exchange v. State Tax Comm’n, 429 U.S. 318, 329 (1977) (quoting Nw. 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).

5

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 Or. Waste Sys., Inc. v. Dep’t of Env’t 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).

6

467 U.S. 638 (1984).

7

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 Indus. v. Wash. Dept. of Revenue, 483 U.S. 232 (1987); Am. Trucking Ass’ns v. Scheiner, 483 U.S. 266 (1987); Amerada Hess Corp. v. Dir., N.J. Tax’n Div., 490 U.S. 66 (1989); Kraft Gen. Foods v. Iowa Dep’t of Revenue, 505 U.S. 71 (1992).

8

Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984).

9

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 Gen. 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-of-state companies did not violate Dormant Commerce Clause because regulated and unregulated companies were not similarly situated).

10

Comptroller of the Treasury of Md. v. Wynne, No. 13-485, slip op. at 23 (U.S. May 18, 2015) ( “[T]he internal consistency test reveals what the undisputed economic analysis shows: Maryland’s tax scheme is inherently discriminatory and operates as a tariff.” ). In so doing, the Court noted that Maryland could “cure the problem with its current system” by granting a full credit for taxes paid to other states, but it did “not foreclose the possibility” that Maryland could comply with the Commerce Clause in some other way. Id. at 25.

11

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

12

520 U.S. at 586.