Article I, Section 8, Clause 3:

[The Congress shall have Power . . . ] To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes; . . .

In Complete Auto Transit, Inc. v. Brady,1 the Court held that a state 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.” 2 The second prong of the Complete Auto test, which this essay concerns, is the apportionment of the tax.3 This requirement is of long standing,4 but its importance has broadened as the scope of the states’ taxing powers has enlarged. When a business carries on a single integrated enterprise both within and without the state, the 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,5 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.6 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.7

In Goldberg v. Sweet, the Court articulated an “internally consistent test” and an “externally consistent test” when it 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.8 Explaining its “internally consistent test” and its “externally consistent test” for determining whether a tax has been fairly apportioned, the Goldberg Court wrote:

In American Trucking Ass’ns v. Scheiner, the Supreme Court held that 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.10 Similarly, in Comptroller of the Treasury of Maryland v. Wynne, 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.” 11 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.12

Deference to state taxing authority was evident in Oklahoma Tax Commission v. Jefferson Lines, Inc., 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.13 The tax was unapportioned to reflect the intrastate travel and the interstate travel.14 The tax in Oklahoma was different from the tax upheld in Central Greyhound, the Court held, because the tax in Central Greyhound constituted a levy on gross receipts, payable by the seller, whereas the tax in Oklahoma was a sales tax, also assessed on gross receipts, but payable by the buyer.15 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.16 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.17

In Fulton Corp. v. Faulkner, the Court, however, 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.18

Footnotes

1

430 U.S. 274 (1977).

2

Id. at 279. “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. Comm’r of Taxes, 445 U.S. 425, 443 (1980)).

3

ArtI.S8.C3.7.11.4 Nexus Prong of Complete Auto Test for Taxes on Interstate Commerce; ArtI.S8.C3.7.11.6 Discrimination Prong of Complete Auto Test for Taxes on Interstate Commerce; ArtI.S8.C3.7.11.7 Benefit Prong of Complete Auto Test for Taxes on Interstate Commerce.

4

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).

5

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 Am. 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. Idaho 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 v. Scheiner, 483 U.S. 266 (1987).

6

Comptroller of the Treasury of Md. v. Wynne, No. 13-485, slip op. at 13 (U.S. May 18, 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).

7

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

8

Goldberg v. Sweet, 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.

9

Id. at 261, 262 (citations omitted).

10

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

11

Comptroller of the Treasury of Md. v. Wynne, No. 13-485, slip op. at 22 (U.S. May 18, 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.

12

Id. at 22–23.

13

Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995).

14

Id. The Court distinguished Oklahoma Tax Comm’n v. Jefferson Lines, Inc. from Central Greyhound Lines v. Mealey, 334 U.S. 653 (1948), in which the Court struck down a state statute that failed to apportion its taxation of interstate bus ticket sales to reflect the distance traveled within the state.

15

Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995).

16

Id.

17

Id. 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.

18

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 S. Cent. Bell Tel. Co. v. Alabama, 526 U.S. 160 (1999) (tax not justified as compensatory).