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 the area of taxation, the transition from the earliest formulations to the modern standard was gradual.1 Both taxation and regulation now, however, 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.

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 Dormant Commerce Clause protected against the risk of double taxation.2 In Northwestern States Portland Cement Co. v. Minnesota,3 the Court reasserted the principle expressed 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.4 In Northwestern States, the Court 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. The Court stated: “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.” 5 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.

Subsequent years, however, 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 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, notwithstanding the similarity of the taxes.6

In Complete Auto Transit, Inc. v. Brady,7 the Court overruled the cases embodying the distinction and articulated a standard that has governed subsequent cases. 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.” 8

Footnotes

1

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).

2

Compare Freeman v. Hewit, 329 U.S. 249, 252–256 (1946), with W. Live Stock v. Bureau of Revenue, 303 U.S. 250, 258, 260 (1938).

3

358 U.S. 450 (1959).

4

Id. at 461–62. See W. Live Stock, 303 U.S. at 254.

5

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

6

Spector Motor Serv., 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.

7

430 U.S. 274 (1977).

8

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)).