Today's economy is one of enormous complexity and interdependence. Even the smallest businesses may be tied to interstate markets by such commonplace items as the mailbox, the telephone, and the computer. Goods and services routinely cross state lines. Major corporations may have offices, factories, and distribution centers located in dozens of states. Mass media such as radio and television make it possible for businesses to reach a nationwide audience. It is apparent, then, that the modern business world is oblivious to state lines.
Expansion of businesses into interstate markets was not accomplished without some risk. One of these was the risk of multiple tax liability (see Tax Immunities). An inescapable fact of life is that states are quick to tax successful businesses. They are inclined to tax out‐of‐state businesses more readily and more severely. This is so for a simple reason: taxes are passed by politicians, and politicians prefer to tax those who cannot vote. A tax imposed on an out‐of‐state business is a politician's dream. Not only does it ensure an influx of tax money into the state's coffers, it does so with few adverse political consequences.
Exposure to multiple taxation is a harsh reality for businesses with multistate ties. Were the states' tax power unchecked, they could collectively tax out‐of‐state businesses to the point of extinction. Sadly, the drain on the assets of nonresident businesses and the welfare of communities hundreds of miles distant do not command the states' attention. Their only immediate concern is the tax dollar. The Commerce Clause, however, is an important historic check on the taxing power.
To understand fully the purposes that underlie the Commerce Clause, it is useful to sketch some of our country's earliest history. In the days of the American Confederation, there was no national control over commerce. Every state was free to regulate and tax all commerce that crossed its borders. It is therefore no surprise that taxes were laid on commodities as they were transported into and out of each state. Goods were even banned and subject to forfeiture. This practice tended to snuff out the development of a truly interstate commerce and drew a wave of criticism from merchants who wished to exploit out‐of‐state markets.
Early Cases
The framers of the Constitution resolved to promote interstate commerce by centralizing the power to control commerce. They first imposed certain limits on the states' power. Henceforth, states were forbidden to lay taxes on imports and exports, to enter into trade pacts, to coin their own money, or to alter retroactively commercial contracts by law. Beyond these specific limits, Congress was vested with a largely undefined power to “regulate Commerce … among the several States” (see Commerce Power). In the decades to come, this clause would lay the foundation for national control over commerce and become the source of a body of law that closely circumscribed the states' tax powers.
Early federal cases charted the development of this body of law. One of the country's earliest and most famous tax cases was McCulloch v. Maryland (1819). McCulloch did not discuss the Commerce Clause, but it sounded the same themes that would be repeated in subsequent commerce cases. It is, therefore, an appropriate point to start our inquiry. In the aftermath of the War of 1812, Congress formed the Second Bank of the United States as a depository for federal money. Maryland passed a law that taxed certain operations of the bank's Baltimore branch. The bank's cashier declined to pay the tax, and the battle lines were drawn.
Chief Justice John Marshall's opinion in the case is considered by some to be his greatest state paper. Marshall, in an oft‐quoted phrase, commented that “the power to tax involves the power to destroy” (p. 430). While the states possessed the power to tax, that power could not be used to weaken or destroy the purpose of a federal law. Congress was authorized to form the bank and the states were powerless to interfere with its lawful operations. Marshall concluded forcefully,
[T]he states have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control the operation of the constitutional laws enacted by Congress to carry into execution the powers vested in the general government. (p. 36)
McCulloch was followed by Brown v. Maryland (1827). A Maryland statute required all importers of foreign goods to secure a license for fifty dollars. To sell imported goods without a license was made a criminal offense. A Maryland importer, Brown, attacked the statute as a violation of the Commerce Clause. Marshall's opinion in Brown recognized the states' power to tax but stated that it must yield to the federal commerce power. The purpose of that power was to ensure a robust and unfettered flow of commerce. Marshall posed a simple question: Why would one import goods except to enter them into commerce? Maryland's statute was in effect a penalty on importers who wished to profit from commerce and was thus hostile to federal law.
A question asked in Brown, but not authoritatively answered, was whether a tax on sales of goods in interstate commerce would suffer the same fate. The Supreme Court in Woodruff v. Parham (1869) answered that question in the negative. The tax involved in Woodruff was imposed on all auction sales within the city of Mobile, Alabama. Distinguishing Brown, the Court stressed that Mobile's tax was one on sales and was not hostile per se to commerce. Added to that was the fact the tax applied equally to all goods, whether in‐state or out‐of‐state. This focus on discrimination between in‐state and interstate commerce foreshadowed future Commerce Clause analysis.
One of the principles that developed from these early cases was that a tax on interstate commerce was an undue burden on commerce and was void. This proved to be the catalyst for an economic explosion. New industries blossomed. East and West became linked by railroads, waterways, and early telecommunication systems. But this “tax exempt” status was short‐lived. States were anxious to ride the wave of economic boom, and they undertook efforts to require interstate commerce to “pay its way.” They soon laid taxes based on receipts that a business derived from interstate activity, but they proportioned these taxes to the activity that was actually carried on within the state. These efforts were fueled by the fact that states lend valuable services to out‐of‐state businesses. Consider a simple example. A trucker that hauls commodities in interstate commerce will have substantial ties to its home state. It will employ workers there, it will use that state's roads, it will own or lease real property, and it will receive the protection of the state's laws. These kinds of ties, the states contended, were sufficient to justify a tax. By the early twentieth century the federal courts were convinced of such taxes' validity.
One further principle, an anomaly of sorts, persisted. If a business was involved solely in interstate commerce, it was immune from taxation by any state. This led to some absurd results. In cases decided over a thirty‐year span, taxes were struck down for the sole reason that no in‐state business was carried on. There was widespread unhappiness with these cases and the courts quietly retreated. Taxes were upheld despite the lack of in‐state business where states did not purport to tax interstate commerce. And thus the law remained until the 1970s.
Recent Law
Possibly the most important state taxation case in recent history was Complete Auto Transit, Inc. v. Brady (1977), overruling cases that immunized interstate commerce from taxation. Little contained in that decision was new. Its importance lay instead in the fact that it synthesized strands of law from earlier cases. For the first time a reader could find, in one place, the questions that must be asked and answered for a tax to survive a Commerce Clause attack. These questions may be summarized as follows:
1. Nexus. Is the business activity “sufficiently connected” to the state to support the tax?
2. Impact. Does the tax discriminate against interstate commerce?
3. Fairness. Is the tax fairly related to the services provided by the state and is it fairly apportioned?
These questions mark the threefold inquiry that characterizes modern state taxation analysis. Each is traceable to the historic purposes of the Commerce Clause. Each is in search of balance. To justify a tax on commerce, a state must show that it has a sufficient connection to the business activity that is to be taxed. There are no absolutes, and courts must examine the facts on a case‐by‐case basis. A tax must also be evenhanded, so that it applies alike to in‐state and interstate commerce. States must draft their tax laws to ensure that interstate commerce is taxed equitably. Finally, a tax on commerce must fairly relate to the state's nexus with the business activity. Only when these factors are in proper balance will businesses be fully protected from the evils of multiple taxation.
Recent state taxation cases have attempted to refine these concepts, particularly the concept of nexus. It has not been an easy task. Many cases explore the kind of nexus that an out‐of‐state business must have before it may properly be taxed. The line they draw is, however, blurry. Does it suffice that the business has an in‐state office or facility or that it solicits customers within the state? Must the tax relate to the business's actual nexus with the state, or is it sufficient that the business has some nexus? Does the analysis of nexus depend, in part, on the kind of tax involved? These questions will continue to shape the future of the Commerce Clause as a limit on state taxation. In its state taxation cases, the Court has attempted to work a division of national and state responsibility in a way that furthers the framers' vision of the Commerce Clause.
See also Capitalism; State Taxation.
Bibliography
- Merrill Jensen, The New Nation (1950).
- John E. Nowak, Ronald D. Rotunda, and J. Nelson Young, Treatise on Constitutional Law: Substance and Procedure (1986).
- Laurence H. Tribe, American Constitutional Law,
2d ed. (1988)
— James B. Stoneking
