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.1056 In Northwestern States Portland Cement Co. v. Minnesota,1057 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.1058 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.”1059 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.
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.1060 In Complete Auto Transit, Inc. v. Brady,1061 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.”1062 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.”1063 All subsequent cases have been decided in this framework.
Nexus.—“The Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State’s power to tax out-of-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.”1064 “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—that is, whether the state has given anything for which it can ask return.”1065
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,1066 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.”1067 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.1068 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.1069 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.1070 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.1071
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.”1072 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—even on a proportional basis—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.’ ”1073
Apportionment.—This requirement is of long standing,1074 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 has been seen as both a Commerce Clause and a due process requisite,1075 although, as one recent Court decision notes, some tax measures that are permissible under the Due Process Clause nonetheless could run afoul of the Commerce Clause.1076 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 law-making,” for which it was ill-suited and for which Congress had ample power and ability to legislate.1077
“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.”1078
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.1079 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.1080 Similarly, the Court held that Maryland’s personal income tax scheme—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—“fails the internal consistency test.”1081 The Court did so because, if every state adopted the same approach, taxpayers who “earn income interstate” would be taxed twice on a portion of that income, while those who earned income solely within their state of residence would be taxed only once.1082
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.1083 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.1084
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.1085
Discrimination.—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.’ ”1086 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.1087 In Armco, Inc. v. Hardesty,1088 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.1089 A state excise tax on wholesale liquor sales, which exempted sales of specified local products, was held to violate the Commerce Clause.1090 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.1091 The Court reached the same conclusion as to Maryland’s personal income tax scheme, previously noted, 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.”1092
Expanding, although neither unexpectedly nor exceptionally, its dormant commerce jurisprudence, the Court in Camps Newfound/Owatonna, Inc. v. Town of Harrison,1093 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.”1094
Benefit Relationship.—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.1095
- 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).
- 358 U.S. 450 (1959).
- 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).
- Hellerstein, State Taxation of Interstate Business: Perspectives on Two Centuries of Constitutional Adjudication, 41 TAX LAW. 37, 54 (1987).
- 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.
- 430 U.S. 274 (1977).
- 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)).
- 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).
- 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).
- 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).
- 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).
- 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).
- 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).
- 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).
- Tyler Pipe Indus. 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.
- United Air Lines v. Mahin, 410 U.S. 623 (1973).
- 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.
- Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 165–66 (1983) (internal quotation marks omitted). See also ASARCO Inc. v. Id. 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 non-unitary business).
- 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).
- See Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (1992); Tyler Pipe Indus. v. Dep’t of Revenue, 483 U.S. 232, 251 (1987); Container Corp. of Amer. v. Franchise Tax Bd., 463 U.S. 159 (1983); F. W. Woolworth Co. v. N.M. Tax. & Revenue Dep’t, 458 U.S. 354 (1982); ASARCO Inc. v. Id. State Tax Comm’n, 458 U.S. 307 (1982); Exxon Corp. v. Wis. Dep’t of Revenue, 447 U.S. 207 (1980); Mobil Oil Corp. v. Comm’r of Taxes, 445 U.S. 425 (1980); Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978). Cf. Am. Trucking Ass’ns Inc. v. Scheiner, 483 U.S. 266 (1987).
- Comptroller of the Treasury of Md. v. Wynne, 575 U.S. ___, No. 13–485, slip op. at 13 (2015) (“The Due Process Clause allows a State to tax ‘all the income of its residents, even income earned outside the taxing jurisdiction.’ But ‘while a State may, consistent with the Due Process Clause, have the authority to tax a particular taxpayer, imposition of the tax may nonetheless violate the Commerce Clause.”) (internal citations omitted). The challenge in Wynne was brought by Maryland residents, whose worldwide income three dissenting Justices would have seen as subject to Maryland taxation based on their domicile in the state, even though it resulted in the double taxation of income earned in other states. Id. at 2 (Ginsburg, J., dissenting) (“For at least a century, ‘domicile’ has been recognized as a secure ground for taxation of residents’ worldwide income.”). However, the majority took a different view, holding that Maryland’s taxing scheme was unconstitutional under the dormant Commerce Clause because it did not provide a full credit for taxes paid to other states on income earned from interstate activities. Id. at 21–25 (majority opinion).
- Moorman Mfg. Co. v. Bair, 437 U.S. 267, 278–80 (1978).
- Goldberg v. Sweet, 488 U.S. 252, 261, 262 (1989) (citations omitted).
- 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.
- American Trucking Ass’ns v. Scheiner, 483 U.S. 266 (1987).
- Comptroller of the Treasury of Md. v. Wynne, 575 U.S. ___, No. 13–485, slip op. at 22 (2015). The Court in Wynne expressly declined to distinguish between taxes on gross receipts and taxes on net income or between taxes on individuals and taxes on corporations. Id. at 7, 9. The Court also noted that Maryland could “cure the problem with its current system” by granting a full credit for taxes paid to other states, but the Court did “not foreclose the possibility” that Maryland could comply with the Commerce Clause in some other way. Id. at 25.
- Id. at 22–23.
- 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.
- 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.
- 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).
- 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).
- 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).
- 467 U.S. 638 (1984).
- 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).
- Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984).
- 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-of-state companies did not violate dormant commerce clause because regulated and unregulated companies were not similarly situated).
- Comptroller of the Treasury of Md. v. Wynne, 575 U.S. ___, No. 13–485, slip op. at 23 (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.
- 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.
- 520 U.S. at 586.
- 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 per-truck rather than per-mile basis was permissible in view of the objectives of defraying costs of administering various size, weight, safety, and insurance requirements.