ArtI.S8.C3.7.11.2 Early Dormant Commerce Clause Jurisprudence and State Taxation

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; . . .

The Supreme Court’s Dormant Commerce Clause jurisprudence dealing with how state taxing power relates to interstate commerce developed gradually with the Court first striking down a state tax as violating the Commerce Clause in 1873 in the State Freight Tax Case.1 In the State Freight Tax Case, the Court considered 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 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.4

Relying on the doctrine established in Cooley v. Board of Wardens,5 the Supreme Court stated:

[W]henever the subjects over which a power to regulate commerce is asserted are in their nature national or admit of one uniform system or plan of regulation, they may justly be said to be of such a nature as to require exclusive legislation by Congress. Surely transportation of passengers or merchandise through a State, or from one state to another, is of this nature. It is of national importance that over that subject there should be but one regulating power, for if one State can directly tax persons or property passing through it, or tax them indirectly by levying a tax upon their transportation, every other may, and thus commercial intercourse between States remote from each other may be destroyed. . . . It was to guard against the possibility of such commercial embarrassments, no doubt, that the power of regulating commerce among the States was conferred upon the Federal government.6

The principle thus established in the State Freight Tax Case—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.” 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, decided the same day as the State Freight Tax Case, the Supreme Court considered the constitutionality of a state tax upon gross receipts of all railroads chartered by the state, when part of the receipts had been derived from interstate transportation of the same freight that had been held immune from tax pursuant to the State Freight Tax Case.7 If the latter tax—the state tax upon gross receipts of all railroads chartered by the state—was regarded as a tax on interstate commerce, it too would violate the Constitution. But to the Court, the tax on gross receipts of an interstate transportation company was not a tax on commerce. The Court stated: “[I]t is not everything that affects commerce that amounts to a regulation of it, within the meaning of the Constitution.” 8 The Court reasoned that a gross receipts tax upon a railroad company, which concededly affected commerce, did not directly regulate commerce. The Court explained: “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

The Court differentiated these two cases in part on the basis of Cooley, reasoning 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 Those 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 In the Minnesota Rate Cases, the Court stated: “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, the Court sustained taxes that imposed only an “indirect” burden on interstate commerce. For instance, the Court sustained property taxes and taxes in lieu of property taxes applied to all businesses, including instrumentalities of interstate commerce.13 Generally, courts sustained taxes that were imposed on some local, rather than interstate, activity or if the tax was exacted before interstate movement had begun or after it had ended.

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 commerce—perhaps in pursuit of parochial interests. Many 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 for invalidation.14

Following the Great Depression and under the leadership of Justice, and later Chief Justice, Harlan Stone, the Court attempted to move away from the principle that interstate commerce may not be taxed and the use of the direct-indirect distinction. Instead, a state or local tax 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 in some cases, the Court continued to suggest that interstate commerce may not be taxed at all, even by a properly apportioned levy, and reasserted the direct-indirect tax distinction.17 Following a series of cases that suggested difficulty in applying the Court’s precedents,18 the Court adopted the modern standard which is discussed in the essay Modern Dormant Commerce Clause Jurisprudence on State Taxation Generally.19

Case of the State Freight Tax, 82 U.S. (15 Wall.) 232 (1873). back
Id. at 275. back
Id. at 275–76, 279. back
Id. at 281–82. back
53 U.S. (12 How.) 299 (1851). While the issue of exclusive federal power and the separate issue of the Dormant Commerce Clause was present in the License Cases, 46 U.S. (5 How.) 504 (1847) and the Passenger Cases, 48 U.S. (7 How.) 283 (1849), the Court did not establish a definitive rule. Chief Justice Roger Taney viewed the Commerce Clause only as a grant of power to Congress, containing no constraint upon the states, and the Court’s role was to void state laws in contravention of federal legislation. License Cases, 46 U.S. (5 How.) 504, 573 (1847); Passenger Cases, 48 U.S. (7 How.) 283, 464 (1849).

In Cooley, the Court, upholding a state law that required ships to engage a local pilot when entering or leaving the port of Philadelphia, enunciated a doctrine of partial federal exclusivity. According to Justice Benjamin Curtis’s opinion, the state act was valid on the basis of a distinction between those subjects of commerce that “imperatively demand a single uniform rule” operating throughout the country and those that “as imperatively” demand “that diversity which alone can meet the local necessities of navigation,” that is to say, of commerce. As to the former, the Court held Congress’s power to be “exclusive” ; as to the latter, it held that the states enjoyed a power of “concurrent legislation.” 48 U.S. at 317–20. The Philadelphia pilotage requirement was of the latter kind. Id.

Case of the State Freight Tax, 82 U.S. at 279–80. back
State Tax on Railway Gross Receipts, 82 U.S. (15 Wall.) 284 (1872). back
Id. at 293. back
Id. 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). back
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. Kan. Nat. Gas Co., 265 U.S. 298, 307 (1924). back
Robbins v. Shelby Cnty. Taxing Dist., 120 U.S. 489, 497 (1887); Leloup v. Port of Mobile, 127 U.S. 640, 648 (1888). back
The Minnesota Rate Cases, 230 U.S. at 400–401. back
The Del. R.R. Tax, 85 U.S. (18 Wall.) 206, 232 (1873). See Cleveland, Cincinnati, Chi. & St. Louis Ry. v. Backus, 154 U.S. 439 (1894); Postal Tel. Cable Co. v. Adams, 155 U.S. 688 (1895). See cases cited in J. Hellerstein & W. Hellerstein, State and Local Taxation: Cases and Materials 195 et seq (8th ed.). back
E.g., Welton v. Missouri, 91 U.S. 275 (1876); Robbins v. Shelby Cnty. Taxing Dist., 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). back
W. Live Stock v. Bureau of Revenue, 303 U.S. 250 (1938); McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33 (1940); Int’l Harvester Co. v. Dep’t of Treasury, 322 U.S. 340 (1944); Int’l Harvester Co. v. Evatt, 329 U.S. 416 (1947). back
E.g., Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939); Joseph v. Carter & Weekes Stevedoring Co., 330 U.S. 422 (1947); Cent. Greyhound Lines v. Mealey, 334 U.S. 653 (1948). Notice the Court’s distinguishing of Cent. Greyhound in Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 188–91 (1995). back
Freeman v. Hewit, 329 U.S. 249 (1946); Spector Motor Serv., Inc. v. O’Connor, 340 U.S. 602 (1951). back
For example, 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, Ry. 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. Ry. 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 be an interstate activity. E.g., Memphis Nat. Gas Co. v. Stone, 335 U.S. 80 (1948); Gen. Motors Corp. v. Washington, 377 U.S. 436 (1964); Standard Pressed Steel Co. v. Dep’t of Revenue, 419 U.S. 560 (1975). back
ArtI.S8.C3.7.4 Modern Dormant Commerce Clause Jurisprudence Generally. back