State Taxation and the Dormant Commerce Clause

U.S. Constitution Annotated

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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 1959, the Supreme Court acknowledged that, with respect to the taxing power of the states in light of the negative (or “dormant” ) commerce clause, “some three hundred full-dress opinions” as of that year had not resulted in “consistent or reconcilable” doctrine but rather in something more resembling a “quagmire.” 1 Although many of the principles still applicable in constitutional law may be found in the older cases, the Court has worked a revolution in this area, though at different times for taxation and for regulation. Thus, in this section we summarize the “old” law and then deal more fully with the “modern” law of the negative commerce clause.

The task of drawing the line between state power and the commercial interest has proved a comparatively simple one in the field of foreign commerce, the two things being in great part territorially distinct.2 With “commerce among the States” affairs are very different. Interstate commerce is conducted in the interior of the country, by persons and corporations that are ordinarily engaged also in local business; its usual incidents are acts that, if unconnected with commerce among the states, would fall within the state's powers of police and taxation, while the things it deals in and the instruments by which it is carried on comprise the most ordinary subject matter of state power. In this field, the Court consequently has been unable to rely upon sweeping solutions. To the contrary, its judgments have often been fluctuating and tentative, even contradictory, and this is particularly the case with respect to the infringement of interstate commerce by the state taxing power.3

The leading case dealing with the relation of the states' taxing power to interstate commerce—the case in which the Court first struck down a state tax as violating the Commerce Clause—was the State Freight Tax Case.4 Before the Court was the validity of a Pennsylvania statute that required every company transporting freight within the state, with certain exceptions, to pay a tax at specified rates on each ton of freight carried by it. The Court's reasoning was forthright. Transportation of freight constitutes commerce.5 A tax upon freight transported from one state to another effects a regulation of interstate commerce.6 Under the Cooley doctrine, whenever the subject of a regulation of commerce is in its nature of national interest or admits of one uniform system or plan of regulation, that subject is within the exclusive regulating control of Congress.7 Transportation of passengers or merchandise through a state, or from one state to another, is of this nature.8 Hence, a state law imposing a tax upon freight, taken up within the state and transported out of it or taken up outside the state and transported into it, violates the Commerce Clause.9

The principle thus asserted, that a state may not tax interstate commerce, confronted the principle that a state may tax all purely domestic business within its borders and all property “within its jurisdiction.” Inasmuch as most large concerns prosecute both an interstate and a domestic business, while the instrumentalities of interstate commerce and the pecuniary returns from such commerce are ordinarily property within the jurisdiction of some state or other, the task before the Court was to determine where to draw the line between the immunity claimed by interstate business, on the one hand, and the prerogatives claimed by local power on the other. In the State Tax on Railway Gross Receipts Case,10 decided the same day as the State Freight Tax Case, the issue was a tax upon gross receipts of all railroads chartered by the state, part of the receipts having been derived from interstate transportation of the same freight that had been held immune from tax in the first case. If the latter tax were regarded as a tax on interstate commerce, it too would fall. But to the Court, the tax on gross receipts of an interstate transportation company was not a tax on commerce. “[I]t is not everything that affects commerce that amounts to a regulation of it, within the meaning of the Constitution.” 11 A gross receipts tax upon a railroad company, which concededly affected commerce, was not a regulation “directly. Very manifestly it is a tax upon the railroad company. . . . That its ultimate effect may be to increase the cost of transportation must be admitted. . . . Still it is not a tax upon transportation, or upon commerce. . . .” 12

Insofar as it drew a distinction between these two cases, the Court did so in part on the basis of Cooley, that some subjects embraced within the meaning of commerce demand uniform, national regulation, whereas other similar subjects permit of diversity of treatment, until Congress acts; and in part on the basis of a concept of a “direct” tax on interstate commerce, which was impermissible, and an “indirect” tax, which was permissible until Congress acted.13 Confusingly, the two concepts were sometimes conflated and sometimes treated separately. In any event, the Court itself was clear that interstate commerce could not be taxed at all, even if the tax was a nondiscriminatory levy applied alike to local commerce.14 “Thus, the States cannot tax interstate commerce, either by laying the tax upon the business which constitutes such commerce or the privilege of engaging in it, or upon the receipts, as such, derived from it . . . ; or upon persons or property in transit in interstate commerce.” 15 However, some taxes imposed only an “indirect” burden and were sustained; property taxes and taxes in lieu of property taxes applied to all businesses, including instrumentalities of interstate commerce, were sustained.16 A good rule of thumb in these cases is that taxation was sustained if the tax was imposed on some local, rather than an interstate, activity or if the tax was exacted before interstate movement had begun or after it had ended.

An independent basis for invalidation was that the tax was discriminatory, that its impact was intentionally or unintentionally felt by interstate commerce and not by local, perhaps in pursuit of parochial interests. Many of the early cases actually involving discriminatory taxation were decided on the basis of the impermissibility of taxing interstate commerce at all, but the category was soon clearly delineated as a separate ground (and one of the most important today).17

Following the Great Depression and under the leadership of Justice, and later Chief Justice, Stone, the Court attempted to move away from the principle that interstate commerce may not be taxed and reliance on the direct-indirect distinction. Instead, a state or local levy would be voided only if in the opinion of the Court it created a risk of multiple taxation for interstate commerce not felt by local commerce.18 It became much more important to the validity of a tax that it be apportioned to an interstate company's activities within the taxing state, so as to reduce the risk of multiple taxation.19 But, just as the Court had achieved constancy in the area of regulation, it reverted to the older doctrines in the taxation area and reiterated that interstate commerce may not be taxed at all, even by a properly apportioned levy, and reasserted the direct-indirect distinction.20 The stage was set, following a series of cases in which through formalistic reasoning the states were permitted to evade the Court's precedents,21 for the formulation of a more realistic doctrine.

Much more diverse were the cases dealing with regulation by the state and local governments. Taxation was one thing, the myriad approaches and purposes of regulations another. Generally speaking, if the state action was perceived by the Court to be a regulation of interstate commerce itself, it was deemed to impose a “direct” burden on interstate commerce and impermissible. If the Court saw it as something other than a regulation of interstate commerce, it was considered only to “affect” interstate commerce or to impose only an “indirect” burden on it in the proper exercise of the police powers of the states.22 But the distinction between “direct” and “indirect” burdens was often perceptible only to the Court.23

A corporation's status as a foreign entity did not immunize it from state requirements, conditioning its admission to do a local business, to obtain a local license, and to furnish relevant information as well as to pay a reasonable fee.24 But no registration was permitted of an out-of-state corporation, the business of which in the host state was purely interstate in character.25 Neither did the Court permit a state to exclude from its courts a corporation engaging solely in interstate commerce because of a failure to register and to qualify to do business in that state.26

Interstate transportation brought forth hundreds of cases. State regulation of trains operating across state lines resulted in divergent rulings. It was early held improper for states to prescribe charges for transportation of persons and freight on the basis that the regulation must be uniform and thus could not be left to the states.27 The Court deemed “reasonable” and therefore constitutional many state regulations requiring a fair and adequate service for its inhabitants by railway companies conducting interstate service within its borders, as long as there was no unnecessary burden on commerce.28 A marked tolerance for a class of regulations that arguably furthered public safety was long exhibited by the Court,29 even in instances in which the safety connection was tenuous.30 Of particular controversy were “full-crew” laws, represented as safety measures, that were attacked by the companies as “feather-bedding” rules.31

Similarly, motor vehicle regulations have met mixed fates. Basically, it has always been recognized that states, in the interest of public safety and conservation of public highways, may enact and enforce comprehensive licensing and regulation of motor vehicles using its facilities.32 Indeed, states were permitted to regulate many of the local activities of interstate firms and thus the interstate operations, in pursuit of these interests.33 Here, too, safety concerns became overriding objects of deference, even in doubtful cases.34 In regard to navigation, which had given rise to Gibbons v. Ogden and Cooley, the Court generally upheld much state regulation on the basis that the activities were local and did not demand uniform rules.35

As a general rule, although the Court during this time did not permit states to regulate a purely interstate activity or prescribe prices for purely interstate transactions,36 it did sustain a great deal of price and other regulation imposed prior to or subsequent to the travel in interstate commerce of goods produced for such commerce or received from such commerce. For example, decisions late in the period upheld state price-fixing schemes applied to goods intended for interstate commerce.37

However, the states always had an obligation to act nondiscriminatorily. Just as in the taxing area, regulation that was parochially oriented, to protect local producers or industries, for instance, was not evaluated under ordinary standards but subjected to practically per se invalidation. The mirror image of Welton v. Missouri,38 the tax case, was Minnesota v. Barber,39 in which the Court invalidated a facially neutral law that in its practical effect discriminated against interstate commerce and in favor of local commerce. The law required fresh meat sold in the state to have been inspected by its own inspectors with 24 hours of slaughter. Thus, meat slaughtered in other states was excluded from the Minnesota market. The principle of the case has a long pedigree of application.40 State protectionist regulation on behalf of local milk producers has occasioned judicial censure. Thus, in Baldwin v. G.A.F. Seelig.,41 the Court had before it a complex state price-fixing scheme for milk, in which the state, in order to keep the price of milk artificially high within the state, required milk dealers buying out-of-state to pay producers, wherever they were, what the dealers had to pay within the state, and, thus, in-state producers were protected. And, in H. P. Hood & Sons, Inc. v. Du Mond,42 the Court struck down a state refusal to grant an out-of-state milk distributor a license to operate a milk receiving station within the state on the basis that the additional diversion of local milk to the other state would impair the supply for the in-state market. A state may not bar an interstate market to protect local interests.43

Transition from the old law to the modern standard occurred relatively smoothly in the field of regulation,44 but in the area of taxation the passage was choppy and often witnessed retreats and advances.45 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.

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.46 In Northwestern States Portland Cement Co. v. Minnesota,47 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.48 Northwestern States 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. “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.” 49 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.50 In Complete Auto Transit, Inc. v. Brady,51 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.” 52 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.” 53

Nexus.—The first prong of the Complete Auto test asks whether the tax applies to an activity with a “substantial nexus” with the taxing state, which requires the taxpayer to “avail[] itself of the substantial privilege of carrying on business in that jurisdiction.” 54 (internal citations and quotations omitted). This requirement runs parallel to the “minimum contacts” requirement under the Due Process Clause that a state must meet to exercise control over a person, that person's property, or a transaction involving the person.55 . Specifically, under the due process requirement, there must be “some definite link, some minimum connection between a state and the person, property, or transaction it seeks to tax.” 56 The “broad inquiry” under “both constitutional requirements” 57 is “whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state—” i.e., “whether the state has given anything for which it can ask return.” 58

The Court, however, imposed a relatively narrow interpretation of the minimum contacts test in two cases in the latter half of the Twentieth Century, both involving a state's ability to require an out-of-state seller to collect and remit tax from a sale to a consumer within that state. First, in the 1967 case of National Bellas Hess, Inc. v. Department of Revenue, the Court considered an Illinois law that required out-of-state retailers to collect and remit taxes on sales made to consumers who purchased goods for use within Illinois.59 The Bellas Hess Court concluded that a mail-order company “whose only connection with customers in the State is by common carrier or the United States mail” lacked the requisite minimum contacts with the state required under either the Due Process Clause or the Commerce Clause.60 In so doing, the case established a rule that unless the retailer maintained a physical presence with the state, the state lacked the power to require that retailer to collect a local use tax.61 A quarter of a century later, the Court reexamined Bellas Hess's physical presence rule in Quill v. North Dakota.62 In Quill, the Court overruled the Bellas Hess due process holding,63 but reaffirmed the Commerce Clause holding,64 concluding that the physical presence rule was grounded in the substantial nexus requirement of Complete Auto.65

Twenty-six years after Quill and more than half a century after Bellas Hess, the Court, in an opinion by Justice Kennedy, overruled both cases in South Dakota v. Wayfair, rejecting the rule that a retailer must have a physical presence within a state before the state may require the retailer to collect a local use tax.66 Several reasons undergirded the Wayfair Court's rejection of the physical presence rule. First, the Court noted that the rule did not comport with modern dormant Commerce Clause jurisprudence, which viewed the substantial nexus test as “closely related” to and having “significant parallels” with the due process minimum contacts analysis.67 Second, Justice Kennedy viewed the Quill rule as unmoored from the underlying purpose of the Commerce Clause: to prevent states from engaging in economic discrimination.68 Contrary to this purpose, the Quill rule created artificial market distortions that placed businesses with a physical presence in a state at a competitive disadvantage relative to remote sellers.69 Third, the Wayfair Court viewed the physical presence rule, in contrast with modern Commerce Clause jurisprudence, as overly formalistic.70 More broadly, the majority opinion criticized the Quill rule as ignoring the realities of modern e-commerce wherein a retailer may have “substantial virtual connections” to a state without having a physical presence.71 The Court also maintained that the physical presence rule undermined public confidence in the tax system and in the “Court's Commerce Clause decisions” by providing online retailers an arbitrary advantage over competitors who collect state sales tax.72 While acknowledging that caution is needed when reconsidering past precedent, the Wayfair Court concluded that the doctrine of stare decisis could “no longer support” Bellas Hess and Quill, as the Court “should be vigilant in correcting” an error that prevents the states from “exercising their lawful sovereign powers in our federal system.” 73 In particular, Justice Kennedy noted that the financial impact of the Quill rule had increased with the prevalence of the Internet, and in recent years, denied states already facing revenue shortages the ability to collect taxes on more than a half a trillion dollars in sales.74 Ultimately, the Wayfair Court concluded that the physical presence rule of Quill was “unsound and incorrect,” overruling both Bellas Hess and Quill.75

Outside of the anomalies of Bellas Hess and Quill, as the Court in Wayfair noted, the substantial nexus inquiry has tended to reject formal rules in favor of a more flexible inquiry.76 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.77 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 in-state independent contractor.78 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.79

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 out-of-state 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.” 80 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.'” 81

Apportionment.—This requirement is of long standing,82 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,83 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.84 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.85

“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 in-state component of the activity being taxed. We thus examine the in-state business activity which triggers the taxable event and the practical or economic effect of the tax on that interstate activity.” 86

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 in-state service address, regardless of where the telephone call was billed or paid.87 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.88 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.” 89 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.90

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.91 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.92

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.93

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.'” 94 That is, a tax that by its terms or operation imposes greater burdens on out-of-state goods or activities than on competing in-state goods or activities will be struck down as discriminatory under the Commerce Clause.95 In Armco, Inc. v. Hardesty,96 the Court voided as discriminatory the imposition on an out-of-state 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.97 A state excise tax on wholesale liquor sales, which exempted sales of specified local products, was held to violate the Commerce Clause.98 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.99 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.” 100

Expanding, although neither unexpectedly nor exceptionally, its dormant commerce jurisprudence, the Court in Camps Newfound/Owatonna, Inc. v. Town of Harrison,101 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 out-of-state residents. The claimant here operated a church camp for children, most of whom resided out-of-state. 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 out-of-state 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.” 102

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.103 , 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.

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,104 although it was presaged in a series of opinions, mostly dissents, by Chief Justice Stone.105 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.” 106 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.” 107

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.” 108

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.” 109

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 in-state economic interests at the expense of out-of-state interests—then no balancing is required.110 )). “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.” 111 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.112 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.113

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,114 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.115 State actions to promote local products and producers, of everything from milk116 to alcohol,117 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.118 Further extending the application of the negative commerce clause to waste disposal,119 the Court, in C & A Carbone, Inc. v. Town of Clarkstown,120 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.” 121 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.” 122 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.” 123 Moreover, the town had other means to raise revenue, such as subsidizing the facility through general taxes or municipal bonds.124 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.125

In United Haulers Ass'n, Inc. v. Oneida-Herkimer Solid Waste Management Authority,126 . 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 in-state 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 . . . .” 127

In Department of Revenue of Kentucky v. Davis,128 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.129 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.130 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.” 131

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.,132 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 in-state 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,133 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.134 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,” 135 as the statute does not “distinguish between in-state and out-of-state companies in the retail market.” 136

Still a model example of balancing is Chief Justice Stone's opinion in Southern Pacific Co. v. Arizona.137 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.138 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.139

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.140

Conflicting state regulations appeared in Bibb v. Navajo Freight Lines.141 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.142 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.” 143

Balancing has been used in other than transportation-industry cases. Indeed, the modern restatement of the standard was in such a case.144 There, the state required cantaloupes grown in the state to be packed there, rather than in an adjacent state, so that in-state 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.145 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.,146 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.147

In other areas, although the Court repeats balancing language, it has not applied it with any appreciable bite,148 but in most respects the state regulations involved are at most problematic in the context of the concerns of the Commerce Clause.

1: Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 457–58 (1959) (quoting Miller Bros. Co. v. Maryland, 347 U.S. 340, 344 (1954)). Justice Frankfurter was similarly skeptical of definitive statements. “To attempt to harmonize all that has been said in the past would neither clarify what has gone before nor guide the future. Suffice it to say that especially in this field opinions must be read in the setting of the particular cases and as the product of preoccupation with their special facts.” Freeman v. Hewit, 329 U.S. 249, 251–52 (1946). The comments in all three cases dealt with taxation, but they could just as well have included regulation.
2: See J. Hellerstein & W. Hellerstein, State and Local Taxation: Cases and Materials (8th ed. 2005), ch. 5.
3: In addition to the sources previously cited, see J. Hellerstein & W. Hellerstein (8th ed.), ch. 5, supra. For a succinct description of the history, see Hellerstein, State Taxation of Interstate Business: Perspectives on Two Centuries of Constitutional Adjudication, 41 Tax Law. 37 (1987).
4: Reading R.R. v. Pennsylvania, 82 U.S. (15 Wall.) 232 (1873).
5: 82 U.S. at 275.
6: 82 U.S. at 275–76, 279.
7: 82 U.S. at 279–80.
8: 82 U.S. at 280.
9: 82 U.S. at 281–82.
10: Reading R.R. v. Pennsylvania, 82 U.S. (15 Wall.) 284 (1872).
11: 82 U.S. at 293.
12: 82 U.S. at 294. This case was overruled 14 years later, when the Court voided substantially the same tax in Philadelphia Steamship Co. v. Pennsylvania, 122 U.S. 326 (1887).
13: See The Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 398–412 (1913) (reviewing and summarizing at length both taxation and regulation cases). See also Missouri ex rel. Barrett v. Kansas Natural Gas Co., 265 U.S. 298, 307 (1924).
14: Robbins v. Shelby County Taxing Dist., 120 U.S. 489, 497 (1887); Leloup v. Port of Mobile, 127 U.S. 640, 648 (1888).
15: The Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 400–401 (1913).
16: The Delaware R.R. Tax, 85 U.S. (18 Wall.) 206, 232 (1873). See Cleveland, Cincinnati, Chicago & St. Louis Ry. Co. v. Backus, 154 U.S. 439 (1894); Postal Telegraph Cable Co. v. Adams, 155 U.S. 688 (1895). See cases cited in J. Hellerstein & W. Hellerstein (8th ed.), supra, at 195 et seq.
17: E.g., Welton v. Missouri, 91 U.S. 275 (1876); Robbins v. Shelby County Taxing District, 120 U.S. 489 (1887); Darnell & Son Co. v. City of Memphis, 208 U.S. 113 (1908); Bethlehem Motors Co. v. Flynt, 256 U.S. 421 (1921).
18: Western Live Stock v. Bureau of Revenue, 303 U.S. 250 (1938); McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33 (1940); International Harvester Co. v. Department of Treasury, 322 U.S. 340 (1944); International Harvester Co. v. Evatt, 329 U.S. 416 (1947).
19: E.g., Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939); Joseph v. Carter & Weekes Stevedoring Co., 330 U.S. 422 (1947); Central Greyhound Lines v. Mealey, 334 U.S. 653 (1948). Notice the Court's distinguishing of Central Greyhound in Oklahoma Tax Comm'n v. Jefferson Lines, 514 U.S. 175, 188–91 (1995).
20: Freeman v. Hewit, 329 U.S. 249 (1946); Spector Motor Serv. v. O'Connor, 340 U.S. 602 (1951).
21: Thus, the states carefully phrased tax laws so as to impose on interstate companies not a license tax for doing business in the state, which was not permitted, Railway Express Agency v. Virginia, 347 U.S. 359 (1954), but as a franchise tax on intangible property or the privilege of doing business in a corporate form, which was permissible. Railway Express Agency v. Virginia, 358 U.S. 434 (1959); Colonial Pipeline Co. v. Traigle, 421 U.S. 100 (1975). Also, the Court increasingly found the tax to be imposed on a local activity in instances it would previously have seen to be an interstate activity. E.g., Memphis Natural Gas Co. v. Stone, 335 U.S. 80 (1948); General Motors Corp. v. Washington, 377 U.S. 436 (1964); Standard Pressed Steel Co. v. Department of Revenue, 419 U.S. 560 (1975).
22: Sedler, The Negative Commerce Clause as a Restriction on State Regulation and Taxation: An Analysis in Terms of Constitutional Structure, 31 Wayne L. Rev. 885, 924–925 (1985). In addition to the sources already cited, see the Court's summaries in The Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 398–412 (1913), and Southern Pacific Co. v. Arizona, 325 U.S. 761, 766–70 (1945). In the latter case, Chief Justice Stone was reconceptualizing the standards under the clause, but the summary represents a faithful recitation of the law.
23: See Di Santo v. Pennsylvania, 273 U.S. 34 (1927) (Justice Stone dissenting). The dissent was the precursor to Chief Justice Stone's reformulation of the standard in 1945. DiSanto was overruled in California v. Thompson, 313 U.S. 109 (1941).
24: Bank of Augusta v. Earle, 38 U.S. (13 Pet.) 519 (1839); Hanover Fire Ins. Co. v. Harding, 272 U.S. 494 (1926); Union Brokerage Co. v. Jensen, 322 U.S. 202 (1944).
25: Crutcher v. Kentucky, 141 U.S. 47 (1891); International Textbook Co. v. Pigg, 217 U.S. 91 (1910).
26: Dahnke-Walker Co. v. Bondurant, 257 U.S. 282 (1921); Allenberg Cotton Co. v. Pittman, 419 U.S. 20 (1974). But see Eli Lilly & Co. v. Sav-on Drugs, 366 U.S. 276 (1961).
27: Wabash, S. L. & P. Ry. v. Illinois, 118 U.S. 557 (1886). The power of the states generally to set rates had been approved in Chicago, B. & Q. R.R. v. Iowa, 94 U.S. 155 (1877), and Peik v. Chicago & N.W. Ry., 94 U.S. 164 (1877). After the Wabash decision, states retained power to set rates for passengers and freight taken up and put down within their borders. Wisconsin R.R. Comm'n v. Chicago, B. & Q. R.R., 257 U.S. 563 (1922).
28: Generally, the Court drew the line at regulations that provided for adequate service, not any and all service. Thus, one class of cases dealt with requirements that trains stop at designated cities and towns. The regulations were upheld in such cases as Gladson v. Minnesota, 166 U.S. 427 (1897), and Lake Shore & Mich. South. Ry. v. Ohio, 173 U.S. 285 (1899), and invalidated in Illinois Cent. R.R. v. Illinois, 163 U.S. 142 (1896). See Chicago, B. & Q. R.R. v. Wisconsin R.R. Comm'n, 237 U.S. 220, 226 (1915); St. Louis & S. F. Ry. v. Public Service Comm'n, 254 U.S. 535, 536–537 (1921). The cases were extremely fact-specific.
29: E.g., Smith v. Alabama, 124 U.S. 465 (1888) (required locomotive engineers to be examined and licensed by the state, until Congress should deem otherwise); New York, N.H. & H. R.R. v. New York, 165 U.S. 628 (1897) (forbidding heating of passenger cars by stoves); Chicago, R.I. & P. Ry. v. Arkansas, 219 U.S. 453 (1911) (requiring three brakemen on freight trains of more than 25 cars).
30: E.g., Terminal Ass'n v. Trainmen, 318 U.S. 1 (1943) (requiring railroad to provide caboose cars for its employees); Hennington v. Georgia, 163 U.S. 299 (1896) (forbidding freight trains to run on Sundays). But see Seaboard Air Line Ry. v. Blackwell, 244 U.S. 310 (1917) (voiding as too onerous on interstate transportation a law requiring trains to come to almost a complete stop at all grade crossings, when there were 124 highway crossings at grade in 123 miles, doubling the running time).
31: Four cases over a lengthy period sustained the laws. Chicago, R.I. & Pac. Ry. Co. v. Arkansas, 219 U.S. 453 (1911); St. Louis, I. Mt. & So. Ry. v. Arkansas, 240 U.S. 518 (1916); Missouri Pacific R.R. v. Norwood, 283 U.S. 249 (1931); Brotherhood of Locomotive Firemen & Enginemen v. Chicago, R.I. & P. R.R., 382 U.S. 423 (1966). In the latter case, the Court noted the extensive and conflicting record with regard to safety, but it then ruled that with the issue in so much doubt it was peculiarly a legislative choice.
32: Hendrick v. Maryland, 235 U.S. 610 (1915); Kane v. New Jersey, 242 U.S. 160 (1916).
33: E.g., Bradley v. Public Utility Comm'n, 289 U.S. 92 (1933) (state could deny an interstate firm a necessary certificate of convenience to operate as a common carrier on the basis that the route was overcrowded); Welch Co. v. New Hampshire, 306 U.S. 79 (1939) (maximum hours for drivers of motor vehicles); Eichholz v. Public Service Comm'n, 306 U.S. 268 (1939) (reasonable regulations of traffic). But compare Michigan Comm'n v. Duke, 266 U.S. 570 (1925) (state may not impose common-carrier responsibilities on business operating between states that did not assume them); Buck v. Kuykendall, 267 U.S. 307 (1925) (denial of certificate of convenience under circumstances was a ban on competition).
34: E.g., Mauer v. Hamilton, 309 U.S. 598 (1940) (ban on operation of any motor vehicle carrying any other vehicle above the head of the operator). By far, the example of the greatest deference is South Carolina Highway. Dep't v. Barnwell Bros., 303 U.S. 177 (1938), in which the Court upheld, in a surprising Stone opinion, truck weight and width restrictions prescribed by practically no other state (in terms of the width, no other).
35: E.g., Transportation Co. v. City of Chicago, 99 U.S. 635 (1879); Willamette Iron Bridge Co. v. Hatch, 125 U.S. 1 (1888). See Kelly v. Washington, 302 U.S. 1 (1937) (upholding state inspection and regulation of tugs operating in navigable waters, in absence of federal law).
36: E.g., Western Union Tel Co. v. Foster, 247 U.S. 105 (1918); Lemke v. Farmers Grain Co., 258 U.S. 50 (1922); State Comm'n v. Wichita Gas Co., 290 U.S. 561 (1934).
37: Milk Control Board v. Eisenberg Co., 306 U.S. 346 (1939) (milk); Parker v. Brown, 317 U.S. 341 (1943) (raisins).
38: 91 U.S. 275 (1876).
39: 136 U.S. 313 (1890).
40: E.g., Brimmer v. Rebman, 138 U.S. 78 (1891) (law requiring postslaughter inspection in each county of meat transported over 100 miles from the place of slaughter); Dean Milk Co. v. City of Madison, 340 U.S. 349 (1951) (city ordinance preventing selling of milk as pasteurized unless it had been processed and bottled at an approved plant within a radius of five miles from the central square of Madison). As the latter case demonstrates, it is constitutionally irrelevant that other Wisconsin producers were also disadvantaged by the law. For a modern application of the principle of these cases, see Fort Gratiot Sanitary Landfill v. Michigan Nat. Res. Dep't, 504 U.S. 353 (1992) (forbidding landfills from accepting out-of-county wastes). See also C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 391 (1994) (discrimination against interstate commerce not preserved because local businesses also suffer).
41: 294 U.S. 511 (1935). See also Polar Ice Cream & Creamery Co. v. Andrews, 375 U.S. 361 (1964). With regard to products originating within the state, the Court had no difficulty with price fixing. Nebbia v. New York, 291 U.S. 502 (1934).
42: 336 U.S. 525 (1949). For the most recent case in this saga, see West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994).
43: And the Court does not permit a state to combat discrimination against its own products by admitting only products (here, again, milk) from states that have reciprocity agreements with it to protect its own dealers. Great Atlantic & Pacific Tea Co. v. Cottrell, 424 U.S. 366 (1976).
44: 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).
45: 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).
46: 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).
47: 358 U.S. 450 (1959).
48: 358 U.S. at 461–62. See Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254 (1938).
49: Hellerstein, State Taxation of Interstate Business: Perspectives on Two Centuries of Constitutional Adjudication, 41 Tax Law. 37, 54 (1987).
50: 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.
51: 430 U.S. 274 (1977).
52: 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)).
53: 430 U.S. at 279.
54: See Polar Tankers, Inc. v. City of Valdez, 557 U.S. 1, 11 (2009) (internal citations and quotations omitted).
55: See MeadWestvaco Corp. v. Ill. Dep't of Revenue, 553 U.S. 16, 24 (2008).
56: See Miller Brothers Co. v. Maryland, 347 U.S. 340, 34445 (1954).
57: See MeadWestvaco Corp. 553 U.S. at 24 .
58: See Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444 (1940).
59: 386 U.S. 753, 754–55 (1967).
60: Id. at 758.
61: Id.
62: See 504 U.S. 298 (1992).
63: Id. at 307–08.
64: Id. at 317–18.
65: Id. at 311.
66: See South Dakota v. Wayfair, 585 U.S. ___, No. 17-494, slip op at 22 (2018).
67: Id. at 10–12. The Court, citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476 (1985), concluded that it is “settled law that a business need not have a physical presence in a State to satisfy the demands of due process.” See Wayfair, slip op. at 11.
68: See Wayfair, slip op. at 12 (noting that the purpose of the Commerce Clause was to prevent states from engaging in economic discrimination and not to “permit the Judiciary to create market distortions.” Id.
69: Id. at 12–13.
70: Id. at 14–15.
71: Id. at 15.
72: Id. at 16–17.
73: Id. at 17. In so concluding, the Wayfair Court responded to several arguments as to why stare decisis counseled toward maintaining the Quill rule. First, Justice Kennedy, while recognizing that Congress has the authority to change the physical presence rule, noted that “Congress cannot change the constitutional default rule,” and that it is improper “to ask Congress to address a false constitutional premise of this Court's own creation.” Id. at 18. The Wayfair Court also rejected the argument that the physical presence was either easy to apply or had engendered legitimate reliance interests, noting that “[a]ttempts to apply the physical presence rule to online retail sales are proving unworkable” as states are “already confronting the complexities of defining physical presence in the Cyber Age.” Id. at 19. As a result, the Court viewed the “arguments for reliance based on [the physical presence rule's] clarity” to be “misplaced.” Id. at 19–20. Likewise, Justice Kennedy rejected the argument that any reliance interests in the Quill rule were legitimate considerations, as the tax distortion created by Quill largely resulted from consumers “regularly fail[ing] to comply with lawful use taxes.” Id. at 20. Finally, the Wayfair Court, while noting the potential burdens of invalidating the physical presence rule for small businesses that may need to comply with thousands of state and local tax laws, observed that the development of modern software, coupled with legislative and judicial responses, could alleviate undue burdens on commerce. Id. at 21.
74: Id. at 19.
75: Id. at 22. Having overruled those two decisions, the Court concluded that the South Dakota law at issue, which required remote retailers delivering more than $100,000 of goods or services into South Dakota or annually engaging in 200 or more separate transactions in the state to collect and remit sales taxes, satisfied the substantial nexus requirement of Complete Auto. Id. at 23. The Court remanded the case for further consideration of whether the law otherwise complied with the Commerce Clause. Id. at 23–24.
76: See id. at 14
77: 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).
78: 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.
79: United Air Lines v. Mahin, 410 U.S. 623 (1973).
80: 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.
81: 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. 458 (2000) (interest deduction not properly apportioned between unitary and non-unitary business).
82: 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).
83: 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).
84: 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).
85: Moorman Mfg. Co. v. Bair, 437 U.S. 267, 278–80 (1978).
86: Goldberg v. Sweet, 488 U.S. 252, 261, 262 (1989) (citations omitted).
87: 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.
88: American Trucking Ass'ns v. Scheiner, 483 U.S. 266 (1987).
89: 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.
90: Id. at 22–23.
91: 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.
92: 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.
93: 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).
94: 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).
95: 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).
96: 467 U.S. 638 (1984).
97: 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).
98: Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984).
99: 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 out-of-state companies did not violate dormant commerce clause because regulated and unregulated companies were not similarly situated).
100: 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.
101: 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.
102: 520 U.S. at 586.
103: 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.
104: 325 U.S. 761 (1945).
105: 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).
106: Southern Pacific Co. v. Arizona, 325 U.S. 761, 768–69 (1941).
107: 325 U.S. at 769.
108: 325 U.S. at 770–71.
109: 397 U.S. 137, 142 (1970) (citation omitted).
110: See, e.g., Tenn. Wine and Spirits Retailers Ass’n v. Thomas, 588 U.S. ____, No. 18-96, slip op. at 10 (2019) ( “[I]f a state law discriminates against out-of-state goods or nonresident economic actors, the law can be sustained only on a showing that it is narrowly tailored to ‘advanc[e] a legitimate local purpose.’” (quoting Dep’t of Revenue of Ky. v. Davis, 553 U.S. 328, 338 (2008))).
111: 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 out-of-state 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.
112: 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 out-of-state, because of impermissible discrimination).
113: 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 resources. See Geer v. Connecticut, 161 U.S. 519 (1896). New England Power had rather old antecedents. E.g., West v. Kansas Gas Co., 221 U.S. 229 (1911); Pennsylvania v. West Virginia, 262 U.S. 553 (1923).
114: 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).
115: 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).
116: 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.
117: 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 out-of-state transactions and does not favor in-state over out-of-state companies).
118: 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).
119: See also Oregon Waste Systems, Inc. v. Department of Envtl. Quality, 511 U.S. 93 (1994) (discriminatory tax).
120: 511 U.S. 383 (1994).
121: 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.
122: 511 U.S. at 393.
123: 511 U.S. at 393–94.
124: 511 U.S. at 394.
125: 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).
126: 550 U.S. 330 (2007).
127: 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 (1868) (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.
128: 128 S. Ct. 1801 (2008).
129: This exemption from state taxes is also generally made available to bonds issued by local governmental entities within a state.
130: 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).
131: 128 S. Ct. at 1817.
132: 449 U.S. 456, 470–74 (1981).
133: 437 U.S. 117 (1978).
134: 437 U.S. at 125.
135: 437 U.S. at 125.
136: 437 U.S. at 126.
137: 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).
138: 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).
139: Southern Pacific Co. v. Arizona, 325 U.S. 761, 771–75 (1945).
140: 325 U.S. at 775–79, 781–84.
141: 359 U.S. 520 (1959).
142: Raymond Motor Transp., Inc. v. Rice, 434 U.S. 429 (1978); Kassel v. Consolidated Freightways Corp., 450 U.S. 662 (1981).
143: 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.
144: Pike v. Bruce Church, Inc., 397 U.S. 137 (1970).
145: Lewis v. BT Investment Managers, Inc., 447 U.S. 27 (1980).
146: 457 U.S. 624 (1982) (plurality opinion).
147: CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69 (1987).
148: 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).

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State Taxation and the Dormant Commerce Clause

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