Interstate Taxation and the Commerce Clause
The issue: What limitations does the Commerce Clause (and, to a lesser
extent, the Due Process Clause)
place on how states can tax interstate businesses?
Introduction
Cases
It is always poular tax strategy to shift the
tax-burden as much as possible to out-ofstate residents and corporations. Legislators
would much prefer to tax non-voters than
voters. Unsuprisingly, however, the
Constitution imposes limitations on the
ability of states to shift tax burdens to out-ofstate corporations.
Quill Corp. v North Dakota (1992)
Commonwealth Edison v Montana
(1981)
Oklahoma Tax Comm'n v Jefferson
Lines (1995)
Since the 1977 case of Complete Auto Transit
v Brady, the Court has used a four-part test
to evaluate the constitutionality of taxes
burdening out-of-state interests (see test in
left column).
THE FOUR-PRONG TEST OF
COMPLETE AUTO TRANSIT v BRADY
(1977):
1. Does the activity taxed have a
In Commonwealth Edison v Montana (1981),
substantial nexus with the taxing
the Court considered the constitutionality of
a 30% severence tax that Montana--America's state?
"Saudi Arabia" of low sulfur coal--imposed
on removed coal. Most of the coal came from 2. Is the tax fairly apportioned?
federally owned land. About 90% of the coal
3. Does the tax discriminate against
was for shipment out of state. The Court's
interstate commerce?
primary focus was on the fourth prong of the
Complete Auto Transit test, requiring that the 4. Is the tax fairly related to
state show the tax is "fairly related" to
services the state provides the
services the state provides the taxpayer. The
taxpayer?
Court, noting certain state benefits received
by Commonwealth Edison, found the test
met. Three dissenters argued that the
Commerce Clause was violated whenever
Questions
states asked interstate commerce to bear
more than their fair share of the tax burden-1. What taxing strategies might a state adopt for
which this tax, they believed, did.
an out-of-state corporation's assets that are in
the state only temporarily--for example, airplanes
In Quill Corporation v North Dakota (1992),
the Court looked at a North Dakota "use" tax that fly into a state twice a day or an out-of-state
applied to sales by out-of-state corporations professional sports team that may play a few
games in the state? What prong of the
(primarily catalog companies such as L. L.
Complete Auto Transit test would be most
Bean and Land's End) to North Dakota
important to analysis of these questions?
residents. Quill Corporation raised several
2. Does the Commonwealth Edison case give a
constitutional objections to the tax. Although
the Court found Quill's mailing catalogs into
a state was sufficient to satisfy the "minimum
contacts" test for due process purposes, it
was NOT sufficient to satisfy the "substantial
nexus" requirement of Complete Auto
Transit. The Court noted that Quill had no
physical presence in North Dakota--no
salespersons, no outlets, no warehouse, no
office. In dissent, Justice White argued that it
was silly to make a state's ability to tax
depend upon whether or not a corporation
has one travelling salesperson in the state,
but the majority saw advantages in a bright
line "physical presence" test.
greenlight to state severence taxes, no matter
what the rate might be? Could Montana have
imposes a 60% severence tax? What if a state
had a monopoly on a critical resource?
3. What would be an example of a tax that
unconstitutionally discriminates against out-ofstate corporations? Consider Boston Stock
Exchange v State Tax Comm'n (1977), in which
the Supreme Court struck down a New York law
that imposes a tax on the delivery of corporate
shares that varied in rate depending upon
whether or not the shares were bought on a New
York stock exchange ( the rate was twice as high
for stocks bought on non-New York exchanges).
4. What business incentives are created by the
Quill holding that a use tax cannot be imposed
on sales to residents by an out-of-state
Oklahoma Tax Comm'n v Jefferson Lines
corporation lacking a physical presence in the
(1995) focused on the "fair apportionment"
taxing state?
prong of the Complete Auto Transit
5. Is Congress free after Quill to authorize state
test. Oklahoma imposed a sales tax on
Jefferson Lines for the full cost of every bus use taxes? Is it likely to do so? What
ticket sold in Oklahoma, regardless of where constitutional limitations, if any, would apply to
state laws taxing internet sales from out-of-states
the trip ticketed started or ended. Jefferson
corporations?
Lines argued that the Commerce Clause
6. Who has the better argument in Oklahoma
prohibited Oklahoma from imposing a sales
tax on that portion of the ticket reflecting the Tax Comm'n v Jefferson, the majority or the
dissent? Why? Could a state impose a tax on
cost of miles travelled outside of
Oklahoma. The Court disagreed, viewing that travel by bus within that state, even when the
ticket was purchased (and fully taxed) out-ofsale of the ticket as "a discrete event
state?
facilitated at the point of sale." In dissent,
Justices Breyer and O'Connor argued that
Oklahoma must apportion its tax to the
percentage of miles of the trip on Oklahoma
roads.