State Taxation and Regulation: The Modern Law

Clause 3. The Congress shall have Power * * * To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.


General Considerations.—Transition from the old law to the modern standard occurred relatively smoothly in the field of regulation,1054 but in the area of taxation the passage was choppy and often witnessed retreats and advances.1055 In any event, both taxation and regulation now are evaluated under a judicial balancing 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 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 outofstate 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 outofstate 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 outofstate 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 instate 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 outofstate 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 lawmaking,” 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 instate component of the activity being taxed. We thus examine the instate 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 instate 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 outofstate goods or activities than on competing instate 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 outofstate 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 outofstate residents. The claimant here operated a church camp for children, most of whom resided outofstate. 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 outofstate 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

Regulation.—The modern standard of Commerce Clause review of state regulation of, or having an impact on, interstate commerce was adopted in Southern Pacific Co. v. Arizona,1096 although it was presaged in a series of opinions, mostly dissents, by Chief Justice Stone.1097 Southern Pacific tested the validity of a state train-length law, justified as a safety measure. Revising a hundred years of doctrine, the Chief Justice wrote that whether a state or local regulation was valid depended upon a “reconciliation of the conflicting claims of state and national power [that] is to be attained only by some appraisal and accommodation of the competing demands of the state and national interests involved.”1098 Save in those few cases in which Congress has acted, “this Court, and not the state legislature, is under the commerce clause the final arbiter of the competing demands of state and national interests.”1099

That the test to be applied was a balancing one, the Chief Justice made clear at length, stating that, in order to determine whether the challenged regulation was permissible, “matters for ultimate determination are the nature and extent of the burden which the state regulation of interstate trains, adopted as a safety measure, imposes on interstate commerce, and whether the relative weights of the state and national interests involved are such as to make inapplicable the rule, generally observed, that the free flow of interstate commerce and its freedom from local restraints in matters requiring uniformity of regulation are interests safeguarded by the commerce clause from state interference.”1100

The test today continues to be the Stone articulation, although the more frequently quoted encapsulation of it is from Pike v. Bruce Church, Inc.: “Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits. If a legitimate local purpose is found, then the question becomes one of degree. And the extent of the burden that will be tolerated will of course depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities.”1101

Obviously, the test requires “evenhanded[ness].” Discrimination in regulation is another matter altogether. When on its face or in its effect a regulation betrays “economic protectionism”—an intent to benefit instate economic interests at the expense of outofstate interests—then no balancing is required. “When a state statute clearly discriminates against interstate commerce, it will be struck down . . . unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism, . . . . Indeed, when the state statute amounts to simple economic protectionism, a ‘virtually per se rule of invalidity’ has applied.”1102 Thus, an Oklahoma law that required coal-fired electric utilities in the state, producing power for sale in the state, to burn a mixture of coal containing at least 10% Oklahoma-mined coal was invalidated at the behest of a state that had previously provided virtually 100% of the coal used by the Oklahoma utilities.1103 Similarly, the Court invalidated a state law that permitted interdiction of export of hydroelectric power from the state to neighboring states, when in the opinion of regulatory authorities the energy was required for use in the state; a state may not prefer its own citizens over out-of-state residents in access to resources within the state.1104

States may certainly promote local economic interests and favor local consumers, but they may not do so by adversely regulating out-of-state producers or consumers. In Hunt v. Washington State Apple Advertising Comm’n,1105 the Court confronted a North Carolina requirement that closed containers of apples offered for sale or shipped into North Carolina carry no grade other than the applicable U. S. grade. Washington State mandated that all apples produced in and shipped in interstate commerce pass a much more rigorous inspection than that mandated by the United States. The inability to display the recognized state grade in North Carolina impeded marketing of Washington apples. The Court obviously suspected that the impact was intended, but, rather than strike down the state requirement as purposeful, it held that the regulation had the practical effect of discriminating, and, as no defense based on possible consumer protection could be presented, the Court invalidated the state law.1106 State actions to promote local products and producers, of everything from milk1107 to alcohol,1108 may not be achieved through protectionism.

Even garbage transportation and disposition is covered by the negative commerce clause. A New Jersey statute that banned the importation of most solid or liquid wastes that originated outside the state was struck down as “an obvious effort to saddle those outside the State with the entire burden of slowing the flow of refuse into New Jersey’s remaining landfill sites”; the state could not justify the statute as a quarantine law designed to protect the public health because New Jersey left its landfills open to domestic waste.1109 Further extending the application of the negative commerce clause to waste disposal,1110 the Court, in C & A Carbone, Inc. v. Town of Clarkstown,1111 invalidated as discriminating against interstate commerce a local “flow control” ordinance that required all solid waste within the town to be processed at a designated transfer station before leaving the municipality. Underlying the restriction was the town’s decision to have a solid waste transfer station built by a private contractor, rather than with public funds. To make the arrangement appealing to the contractor, the town guaranteed it a minimum waste flow, which the town ensured by requiring that all solid waste generated within the town be processed at the contractor’s station.

The Court saw the ordinance as a form of economic protectionism, in that it “hoard[ed] solid waste, and the demand to get rid of it, for the benefit of the preferred processing facility.”1112 The Court found that the town could not “justify the flow control ordinance as a way to steer solid waste away from out-of-town disposal sites that it might deem harmful to the environment. To do so would extend the town’s police power beyond its jurisdictional bounds. States and localities may not attach restrictions to exports or imports in order to control commerce in other states.”1113 The Court also found that the town’s goal of “revenue generation is not a local interest that can justify discrimination against interstate commerce. Otherwise States could impose discriminatory taxes against solid waste originating outside the State.”1114 Moreover, the town had other means to raise revenue, such as subsidizing the facility through general taxes or municipal bonds.1115 The Court did not deal with—indeed, did not notice—the fact that the local law conferred a governmentally granted monopoly—an exclusive franchise, indistinguishable from a host of local monopolies at the state and local level.1116

In United Haulers Ass’n, Inc. v. Oneida-Herkimer Solid Waste Management Authority,1117 the Court declined to apply Carbone where haulers were required to bring waste to facilities owned and operated by a state-created public benefit corporation instead of to a private processing facility, as was the case in Carbone. The Court found this difference constitutionally significant because “[d]isposing of trash has been a traditional government activity for years, and laws that favor the government in such areas—but treat every private business, whether instate or out-of-state, exactly the same—do not discriminate against interstate commerce for purposes of the Commerce Clause. Applying the Commerce Clause test reserved for regulations that do not discriminate against interstate commerce, we uphold these ordinances because any incidental burden they may have on interstate commerce does not outweigh the benefits they confer . . . .”1118

In Department of Revenue of Kentucky v. Davis,1119 the Court considered a challenge to the long-standing state practice of issuing bonds for public purposes while exempting interest on the bonds from state taxation.1120 In Davis, a challenge was brought against Kentucky for such a tax exemption because it applied only to government bonds that Kentucky issued, and not to government bonds issued by other states. The Court, however, recognizing the long pedigree of such taxation schemes, applied the logic of United Haulers Ass’n, Inc., noting that the issuance of debt securities to pay for public projects is a “quintessentially public function,” and that Kentucky’s differential tax scheme should not be treated like one that discriminated between privately issued bonds.1121 In what may portend a significant change in dormant commerce clause doctrine, however, the Court declined to evaluate the governmental benefits of Kentucky’s tax scheme versus the economic burdens it imposed, holding that, at least in this instance, the “Judicial Branch is not institutionally suited to draw reliable conclusions.”1122

Drawing the line between regulations that are facially discriminatory and regulations that necessitate balancing is not an easy task. Not every claim of unconstitutional protectionism has been sustained. Thus, in Minnesota v. Clover Leaf Creamery Co.,1123 the Court upheld a state law banning the retail sale of milk products in plastic, nonreturnable containers but permitting sales in other nonreturnable, nonrefillable containers, such as paperboard cartons. The Court found no discrimination against interstate commerce, because both instate and out-of-state interests could not use plastic containers, and it refused to credit a lower, state-court finding that the measure was intended to benefit the local pulpwood industry. In Exxon Corp. v. Governor of Maryland,1124 the Court upheld a statute that prohibited producers or refiners of petroleum products from operating retail service stations in Maryland. The statute did not on its face discriminate against out-of-state companies, but, as there were no producers or refiners in Maryland, “the burden of the divestiture requirements” fell solely on such companies.1125 The Court found, however, that “this fact does not lead, either logically or as a practical matter, to a conclusion that the State is discriminating against interstate commerce at the retail level,”1126 as the statute does not “distinguish between instate and out-of-state companies in the retail market.”1127

Still a model example of balancing is Chief Justice Stone’s opinion in Southern Pacific Co. v. Arizona.1128 At issue was the validity of Arizona’s law barring the operation within the state of trains of more than 14 passenger cars (no other state had a figure this low) or 70 freight cars (only one other state had a cap this low). First, the Court observed that the law substantially burdened interstate commerce. Enforcement of the law in Arizona, while train lengths went unregulated or were regulated by varying standards in other states, meant that interstate trains of a length lawful in other states had to be broken up before entering Arizona. As it was not practicable to break up trains at the border, that act had to be done at yards quite removed, with the result that the Arizona limitation controlled train lengths as far east as El Paso, Texas, and as far west as Los Angeles. Nearly 95 percent of the rail traffic in Arizona was interstate. The other alternative was to operate in other states with the lowest cap, Arizona’s, with the result that Arizona’s law controlled the railroads’ operations over a wide area.1129 If other states began regulating at different lengths, as they would be permitted to do, the burden on the railroads would burgeon. Moreover, the additional number of trains needed to comply with the cap just within Arizona was costly, and delays were occasioned by the need to break up and remake lengthy trains.1130

Conversely, the Court found that, as a safety measure, the state cap had “at most slight and dubious advantage, if any, over unregulated train lengths.” That is, although there were safety problems with longer trains, the shorter trains mandated by state law required increases in the numbers of trains and train operations and a consequent increase in accidents generally more severe than those attributable to longer trains. In short, the evidence did not show that the cap lessened rather than increased the danger of accidents.1131

Conflicting state regulations appeared in Bibb v. Navajo Freight Lines.1132 There, Illinois required the use of contour mudguards on trucks and trailers operating on the state’s highways, while adjacent Arkansas required the use of straight mudguards and banned contoured ones. At least 45 states authorized straight mudguards. The Court sifted the evidence and found it conflicting on the comparative safety advantages of contoured and straight mudguards. But, admitting that if that were all that was involved the Court would have to sustain the costs and burdens of outfitting with the required mudguards, the Court invalidated the Illinois law, because of the massive burden on interstate commerce occasioned by the necessity of truckers to shift cargoes to differently designed vehicles at the state’s borders.

Arguably, the Court in more recent years has continued to stiffen the scrutiny with which it reviews state regulation of interstate carriers purportedly for safety reasons.1133 Difficulty attends any evaluation of the possible developing approach, because the Court has spoken with several voices. A close reading, however, indicates that, although the Court is most reluctant to invalidate regulations that touch upon safety and that if safety justifications are not illusory it will not second-guess legislative judgments, the Court nonetheless will not accept, without more, state assertions of safety motivations. “Regulations designed for that salutary purpose nevertheless may further the purpose so marginally, and interfere with commerce so substantially, as to be invalid under the Commerce Clause.” Rather, the asserted safety purpose must be weighed against the degree of interference with interstate commerce. “This ‘weighing’ . . . requires . . . a sensitive consideration of the weight and nature of the state regulatory concern in light of the extent of the burden imposed on the course of interstate commerce.”1134

Balancing has been used in other than transportation-industry cases. Indeed, the modern restatement of the standard was in such a case.1135 There, the state required cantaloupes grown in the state to be packed there, rather than in an adjacent state, so that instate packers’ names would be associated with a superior product. Promotion of a local industry was legitimate, the Court, said, but it did not justify the substantial expense the company would have to incur to comply. State efforts to protect local markets, concerns, or consumers against outside companies have largely been unsuccessful. Thus, a state law that prohibited ownership of local investment-advisory businesses by out-of-state banks, bank holding companies, and trust companies was invalidated.1136 The Court plainly thought the statute was protectionist, but instead of voiding it for that reason it held that the legitimate interests the state might have did not justify the burdens placed on out-of-state companies and that the state could pursue the accomplishment of legitimate ends through some intermediate form of regulation. In Edgar v. MITE Corp.,1137 an Illinois regulation of take-over attempts of companies that had specified business contacts with the state, as applied to an attempted take-over of a Delaware corporation with its principal place of business in Connecticut, was found to constitute an undue burden, with special emphasis upon the extraterritorial effect of the law and the dangers of disuniformity. These problems were found lacking in the next case, in which the state statute regulated the manner in which purchasers of corporations chartered within the state and with a specified percentage of in-state shareholders could proceed with their take-over efforts. The Court emphasized that the state was regulating only its own corporations, which it was empowered to do, and no matter how many other states adopted such laws there would be no conflict. The burdens on interstate commerce, and the Court was not that clear that the effects of the law were burdensome in the appropriate context, were justified by the state’s interests in regulating its corporations and resident shareholders.1138

In other areas, although the Court repeats balancing language, it has not applied it with any appreciable bite,1139 but in most respects the state regulations involved are at most problematic in the context of the concerns of the Commerce Clause.

1054 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).

1055 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).

1056 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).

1057 358 U.S. 450 (1959).

1058 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).

1059 Hellerstein, State Taxation of Interstate Business: Perspectives on Two Centuries of Constitutional Adjudication, 41 Tax Law. 37, 54 (1987).

1060 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.

1061 430 U.S. 274 (1977).

1062 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)).

1063 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).

1064 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).

1065 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).

1066 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).

1067 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).

1068 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).

1069 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).

1070 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.

1071 United Air Lines v. Mahin, 410 U.S. 623 (1973).

1072 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.

1073 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).

1074 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).

1075 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).

1076 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).

1077 Moorman Mfg. Co. v. Bair, 437 U.S. 267, 278–80 (1978).

1078 Goldberg v. Sweet, 488 U.S. 252, 261, 262 (1989) (citations omitted).

1079 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.

1080 American Trucking Ass’ns v. Scheiner, 483 U.S. 266 (1987).

1081 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.

1082 Id. at 22–23.

1083 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.

1084 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.

1085 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).

1086 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).

1087 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).

1088 467 U.S. 638 (1984).

1089 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).

1090 Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984).

1091 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 outofstate companies did not violate dormant commerce clause because regulated and unregulated companies were not similarly situated).

1092 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.

1093 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.

1094 520 U.S. at 586.

1095 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.

1096 325 U.S. 761 (1945).

1097 E.g., DiSanto v. Pennsylvania, 273 U.S. 34, 43 (1927) (dissenting); California v. Thompson, 313 U.S. 109 (1941); Duckworth v. Arkansas, 314 U.S. 390 (1941); Parker v. Brown, 317 U.S. 341, 362–68 (1943) (alternative holding).

1098 Southern Pacific Co. v. Arizona, 325 U.S. 761, 768–69 (1941).

1099 325 U.S. at 769.

1100 325 U.S. at 770–71.

1101 397 U.S. 137, 142 (1970) (citation omitted).

1102 Wyoming v. Oklahoma, 502 U.S. 437, 454 (1992) (quoting City of Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978)). See also Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 579 (1986). In Maine v. Taylor, 477 U.S. 131 (1986), the Court upheld a protectionist law, finding a valid justification aside from economic protectionism. The state barred the importation of outofstate baitfish, and the Court credited lower-court findings that legitimate ecological concerns existed about the possible presence of parasites and nonnative species in baitfish shipments.

1103 Wyoming v. Oklahoma, 502 U.S. 437 (1992). See also Maryland v. Louisiana, 451 U.S. 725 (1981) (a tax case, invalidating a state first-use tax, which, because of exceptions and credits, imposed a tax only on natural gas moving outofstate, because of impermissible discrimination).

1104 New England Power Co. v. New Hampshire, 455 U.S. 331 (1982). See also Hughes v. Oklahoma, 441 U.S. 322 (1979) (voiding a ban on transporting minnows caught in the state for sale outside the state); Sporhase v. Nebraska, 458 U.S. 941 (1982) (invalidating a ban on the withdrawal of ground water from any well in the state intended for use in another state). These cases largely eviscerated a line of older cases recognizing a strong state interest in protection of animals and re-subject old antecedents. E.g., West v. Kansas Gas Co., 221 U.S. 229 (1911); Pennsylvania v. West Virginia, 262 U.S. 553 (1923).

1105 432 U.S. 333 (1977). Other cases in which a state was attempting to promote and enhance local products and businesses include Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) (state required producer of high-quality cantaloupes to pack them in the state, rather than in an adjacent state at considerably less expense, in order that the produce be identified with the producing state); Foster-Fountain Packing Co. v. Haydel, 278 U.S. 1 (1928) (state banned export of shrimp from state until hulls and heads were removed and processed, in order to favor canning and manufacture within the state).

1106 That discriminatory effects will result in invalidation, as well as purposeful discrimination, is also drawn from Dean Milk Co. v. City of Madison, 340 U.S. 349 (1951).

1107 E.g., H. P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525 (1949). See also Great Atlantic & Pacific Tea Co. v. Cottrell, 424 U.S. 366 (1976) (state effort to combat discrimination by other states against its milk through reciprocity provisions). In West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994), the Court held invalidly discriminatory against interstate commerce a state milk pricing order, which imposed an assessment on all milk sold by dealers to in-state retailers, the entire assessment being distributed to in-state dairy farmers despite the fact that about two-thirds of the assessed milk was produced out of state. The avowed purpose and undisputed effect of the provision was to enable higher-cost in-state dairy farmers to compete with lower-cost dairy farmers in other states.

1108 Healy v. Beer Institute, Inc., 491 U.S. 324 (1989); Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573 (1986). See also Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984) (a tax case). But cf. Pharmaceutical Research and Mfrs. of America v. Walsh, 538 U.S. 644 (2003) (state prescription drug program providing rebates to participating companies does not regulate prices of outofstate transactions and does not favor in-state over outofstate companies).

1109 City of Philadelphia v. New Jersey, 437 U.S. 617, 629 (1978), reaffirmed and applied in Chemical Waste Management, Inc. v. Hunt, 504 U.S. 334 (1992), and Fort Gratiot Sanitary Landfill v. Michigan Natural Resources Dept., 504 U.S. 353 (1992).

1110 See also Oregon Waste Systems, Inc. v. Department of Envtl. Quality, 511 U.S. 93 (1994) (discriminatory tax).

1111 511 U.S. 383 (1994).

1112 511 U.S. at 392. The Court added: “Discrimination against interstate commerce in favor of local business or investment is per se invalid, save in a narrow class of cases in which the municipality can demonstrate, under rigorous scrutiny, that it has no other means to advance a legitimate state interest.” Id.

1113 511 U.S. at 393.

1114 511 U.S. at 393–94.

1115 511 U.S. at 394.

1116 See The Supreme Court, Leading Cases, 1993 Term, 108 Harv. L. Rev. 139, 149–59 (1994). Weight was given to this consideration by Justice O’Connor, 511 U.S. at 401 (concurring) (local law an excessive burden on interstate commerce), and by Justice Souter, id. at 410 (dissenting).

1117 550 U.S. 330 (2007).

1118 550 U.S. at 334. The Commerce Clause test referred to is the test set forth in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). “Under the Pike test, we will uphold a nondiscriminatory statute . . . ‘unless the burden imposed on [interstate] commerce is clearly excessive in relation to the putative local benefits.’” Id. at 1797 (quoting Pike, 397 U.S. at 142). The fact that a state is seeking to protect itself from economic or other difficulties, is not, by itself, sufficient to justify barriers to interstate commerce. Edwards v. California, 314 U.S. 160 (1941) (striking down California effort to bar “Okies”—persons fleeing the Great Plains dust bowl during the Depression). Cf. Crandall v. Nevada, 73 U.S. (6 Wall.) 35 (1867) (without tying it to any particular provision of Constitution, Court finds a protected right of interstate movement). The right of travel is now an aspect of equal protection jurisprudence.

1119 128 S. Ct. 1801 (2008).

1120 This exemption from state taxes is also generally made available to bonds issued by local governmental entities within a state.

1121 128 S. Ct. at 1810–11. The Court noted that “[t]here is no forbidden discrimination because Kentucky, as a public entity, does not have to treat itself as being ‘substantially similar’ to the other bond issuers in the market.” Id. at 1811. Three members of the Court would have also found this taxation scheme constitutional under the “market participant” doctrine, despite the argument that the state, in this instance, was acting as a market regulator, not as a market participant. Id. at 1812–14 (Justice Souter, joined by Justices Stevens and Breyer).

1122 128 S. Ct. at 1817.

1123 449 U.S. 456, 470–74 (1981).

1124 437 U.S. 117 (1978).

1125 437 U.S. at 125.

1126 437 U.S. at 125.

1127 437 U.S. at 126.

1128 325 U.S. 761 (1945). Interestingly, Justice Stone had written the opinion for the Court in South Carolina State Highway Dep’t v. Barnwell Bros., 303 U.S. 177 (1938), in which, in a similar case involving regulation of interstate transportation and proffered safety reasons, he had eschewed balancing and deferred overwhelmingly to the state legislature. Barnwell Bros. involved a state law that prohibited use on state highways of trucks that were over 90 inches wide or that had a gross weight over 20,000 pounds, with from 85% to 90% of the Nation’s trucks exceeding these limits. This deference and refusal to evaluate evidence resurfaced in a case involving an attack on railroad “full-crew” laws. Brotherhood of Locomotive Firemen & Enginemen v. Chicago, R.I. & P. Railroad Co., 393 U.S. 129 (1968).

1129 The concern about the impact of one state’s regulation upon the laws of other states is in part a reflection of the Cooley national uniformity interest and partly a hesitation about the autonomy of other states. E.g., CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 88–89 (1987); Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 583–84 (1986).

1130 Southern Pacific Co. v. Arizona, 325 U.S. 761, 771–75 (1945).

1131 325 U.S. at 775–79, 781–84.

1132 359 U.S. 520 (1959).

1133 Raymond Motor Transp., Inc. v. Rice, 434 U.S. 429 (1978); Kassel v. Consolidated Freightways Corp., 450 U.S. 662 (1981).

1134 Kassel v. Consolidated Freightways Corp., 450 U.S. 662, 670–71 (1981), (quoting Raymond Motor Transp. v. Rice, 434 U.S. 429, 441, 443 (1978)). Both cases invalidated state prohibitions of the use of 65-foot single-trailer trucks on state highways.

1135 Pike v. Bruce Church, Inc., 397 U.S. 137 (1970).

1136 Lewis v. BT Investment Managers, Inc., 447 U.S. 27 (1980).

1137 457 U.S. 624 (1982) (plurality opinion).

1138 CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69 (1987).

1139 E.g., Northwest Central Pipeline Corp. v. Kansas Corp. Comm’n, 489 U.S. 493, 525–26 (1989); Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 472–74 (1981); Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 127–28 (1978). But see Bendix Autolite Corp. v. Midwesco Enterprises, Inc., 486 U.S. 888 (1988).