CRS Annotated Constitution

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State Taxation and Regulation: The Modern Law

General Considerations.—Transition from the old law to the modern standard occurred relatively smoothly in the field of regulation,932 but in the area of taxation the passage was choppy and often witnessed retreats and advances.933 In any event, both taxation and regulation now are evaluated under a judicial balancing[p.228]formula comparing the burden on interstate commerce with the importance of the state interest, save for discriminatory state action that cannot be justified at all.

Taxation.—During the 1940s and 1950s, there was engaged within the Court a contest 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.934 In Northwestern States Portland Cement Co. v. Minnesota,935 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.936 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.”937 Thus, in Northwestern States, foreign corporations, which 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.

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.938 In Complete Auto Transit,[p.229]Inc. v. Brady,939 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.”940 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.”941 All subsequent cases have been decided in this framework.


932 Formulation of a balancing test was achieved in Southern Pacific Co. v. Arizona, 325 U.S. 761 (1945),and was thereafter maintained more or less consistently. The Court’s current phrasing of the test was in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970).
933 Indeed, scholars dispute just when the modern standard was firmly adopted. The conventional view is that it was articulated in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), but there also seems little doubt that the foundation of the present law was laid in Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959).
934 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).
935 358 U.S. 450 (1959).
936 Id., 461–462. 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, 112 S.Ct. 1904, 1912 n. 5 (1992) (citing cases).
937 Hellerstein, State Taxation of Interstate Business: Perspectives on Two Centuries of Constitutional Adjudication, 41Tax Law.37,54 (1987).
938 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.
939 430 U.S. 274 (1977).
940 Id., 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. Comr. of Taxes, 445 U.S. 425, 443 (1980)).
941 Id., 279. The rationale of these four parts of the test is set out in Quill Corp. v. North Dakota ex rel. Heitkamp, 112S.Ct.1904,1913 (1992).

Supplement: [P. 229, add to n.941:]

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) .

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