Fourteenth Amendment, Section 1 — Due Process Limits on State Action

Amdt14.S1.7.1.1 Overview of Personal Jurisdiction and Due Process

“Personal jurisdiction” or in personam jurisdiction refers to a court’s power over a person (or entity) who is a party to, or involved in, a case or controversy before the court, including its power to render judgments affecting that person’s rights.¹ Prior to the states’ ratification of the Fourteenth Amendment and the Supreme Court’s 1877 decision in Pennoyer v. Neff, a nonresident who received an adverse judgment from one state court would often wait until the winning party sought to obtain enforcement of the judgment² in the nonresident’s state before challenging the issuing court’s exercise of personal jurisdiction over the nonresident.³ State (and, in some cases, federal)⁴ courts considering whether such judgments were enforceable would typically resolve such jurisdictional challenges on the basis of general, customary law principles⁵ that had been shaped by the rules for recognition of foreign judgments under international law.⁶

However, since the Supreme Court’s decision in Pennoyer, the Court has interpreted the Due Process Clause of the Fourteenth Amendment⁷ to limit the power of state courts to render judgments affecting the personal rights of defendants⁸ who do not reside within the state’s territory.⁹ Pennoyer converted the issue of personal jurisdiction into a question of federal constitutional law, allowing a party to obtain direct review of a state court’s judgment in federal court (i.e., review of the judgment on appeal) on the grounds that the state court lacked personal jurisdiction over the party.¹⁰ Under the Supreme Court’s interpretation of the Fourteenth Amendment, a state court that issued a judgment affecting a nonresident without jurisdiction had violated the constitutional rights of that person by depriving the individual of property without due process of law.¹¹

Over the years, the Supreme Court has offered three main justifications for the constitutional constraints on a court’s assertion of personal jurisdiction over nonresident persons and corporations. First, each state’s status as a “co-equal sovereign” in a federal system of government implies at least some limits on the power of its courts to render judgments affecting the rights of entities outside of that state’s boundaries.¹² Second, constitutional limits on personal jurisdiction attempt to address concerns about the unfairness of subjecting defendants to litigation in a distant or inconvenient forum.¹³ Finally, constitutional limits on the exercise of personal jurisdiction recognize that the Due Process Clause protects defendants from being deprived of life, liberty, or property by a tribunal without lawful power.¹⁴

The Supreme Court’s jurisprudence addressing the doctrine of personal jurisdiction as applied in state courts spans a period of American history that has witnessed a significant expansion of interstate and global commerce, as well as major technological advancements in transportation and communication.¹⁵ These changes produced a fundamental shift in the Court’s views concerning the doctrine.¹⁶ Although the Court initially considered the defendant’s physical presence within the forum state to be the touchstone of the exercise of personal jurisdiction over him or her,¹⁷ it later rejected strict adherence to this rule in favor of a more flexible standard that examines a nonresident defendant’s contacts with the forum state to determine whether those contacts make it reasonable to require him to respond to a lawsuit there.¹⁸

The Supreme Court’s opinions in International Shoe Co. v. Washington and subsequent cases have established a two-part test for determining when a state court’s exercise of personal jurisdiction over each nonresident defendant sued by a plaintiff comports with due process: (1) the defendant must have established minimum contacts with the forum state that demonstrate an intent to avail itself of the benefits and protections of state law; and (2) it must be reasonable to require the defendant to defend the lawsuit in the forum.¹⁹ Since that fundamental shift, much of the Court’s jurisprudence addressing the limits that the Constitution places on state courts’ exercise of personal jurisdiction has addressed the quality and nature of the “minimum contacts” among the defendant, the forum, and litigation that the Constitution requires before a court may exercise jurisdiction over the defendant.²⁰ Questions over personal jurisdiction have become one of the most frequent constitutional issues resolved by lower federal courts,²¹ and are the basis for a dismissal of complaints in a considerable number of cases lodged in both federal and state court.²²

When determining whether a defendant has minimum contacts with the court in which the action is initially filed, the Court has distinguished the types of contacts sufficient for a court’s exercise of “specific” personal jurisdiction over the defendant from those contacts sufficient for its exercise, alternatively, of “general” jurisdiction. A court’s exercise of specific jurisdiction may be constitutional when the defendant: (1) “purposefully avails itself of the privilege of conducting activities” within the forum state; and (2) the defendant’s contacts with the forum give rise to, or are related to, the plaintiff ’s claims.²³ By contrast, a court’s exercise of general jurisdiction over a nonresident defendant for any claim—even if all the incidents underlying the claim occurred in a different state—may be constitutional when the defendant’s activities in the forum state are so substantial that it is reasonable to require it to defend a lawsuit that did not arise out of its activities in the forum state and is unrelated to those activities.²⁴ In more recent years, the Court has significantly limited the types of activities or affiliations of the defendant in the forum state sufficient for general jurisdiction, holding that those contacts must be so substantial as to render the defendant “essentially at home” in the forum state.²⁵ The Court has clarified that, absent exceptional circumstances, a corporate defendant is “at home” when it is incorporated in the forum state or maintains its principal place of business there (e.g., the corporation is headquartered in the state).²⁶

Although the Supreme Court has adopted a more flexible standard for evaluating a state court’s assertion of personal jurisdiction, it has also confirmed that several traditional bases for the exercise of judicial power over a nonresident defendant for claims against him enjoy a presumption of constitutionality without requiring an independent inquiry into the contacts among the defendant, the forum, and the litigation. These traditional bases include: a defendant who is domiciled in the forum;²⁷ a defendant who has consented to jurisdiction;²⁸ and a defendant who is a natural person (i.e., not a business or governmental entity) and is served with process while physically present within the forum.²⁹ The Court has also indicated that a state court may adjudicate the personal status of a plaintiff in relation to the defendant (e.g., marital status) without considering whether personal jurisdiction over the defendant is constitutionally valid.³⁰

Although the Supreme Court has decided several cases addressing the Fourteenth Amendment’s limits on state courts’ exercise of personal jurisdiction, it has generally declined to resolve questions about the extent to which the Fifth Amendment³¹ may place similar jurisdictional limitations on federal courts. For example, the Supreme Court has declined to rule on whether it is constitutional for Congress to authorize nationwide service of process so that any federal court may exercise personal jurisdiction over a foreign defendant who has, in the aggregate, substantial contacts with the United States.³² Consequently, this essay focuses on the Court’s cases addressing the Fourteenth Amendment, which imposes due process requirements on actions by state governments.³³ However, it is important to note that the Federal Rules of Civil Procedure give federal district courts power to assert personal jurisdiction over a defendant to the same extent that a state court in the state where the federal district court is located may assert that power, meaning the same Fourteenth Amendment limits on personal jurisdiction generally apply to federal courts.³⁴

Amdt14.S1.7.1.2 Personal Jurisdiction from Founding Era to 1945

Prior to ratification of the Fourteenth Amendment and the Supreme Court’s 1877 decision in Pennoyer v. Neff, a defendant that objected to the plaintiff ’s state court exercising personal jurisdiction over him would typically wait to object to such exercise of jurisdiction until the plaintiff sought to have the defendant’s state court recognize and enforce the first court’s judgment.¹ State (and, in some cases, federal)² courts considering whether such judgments were enforceable would resolve such jurisdictional challenges on the basis of general, customary law principles derived from English common law and international law addressing the recognition of foreign judgments rather than by applying the federal Constitution.³ However, in Pennoyer, the Supreme Court stated that the Fourteenth Amendment’s Due Process Clause imposes constitutional limits on state courts’ exercise of personal jurisdiction over nonresident defendants.⁴ Pennoyer converted the issue of personal jurisdiction into a question of federal constitutional law, allowing a party to obtain direct review of a state court’s judgment in a federal court that was not bound to apply state statutes or judicial precedent when deciding whether the issuing court had personal jurisdiction over the parties.⁵

In Pennoyer, the Court indicated that, absent a defendant’s consent, a state court’s jurisdiction generally extends only to persons or property within its territory.⁶ The Court grounded this “physical presence” approach in principles of federalism: each state of the union is a coequal and independent sovereign in the federal system, and thus possesses exclusive authority over persons and property within its domain.⁷ Although the Court’s decision in Pennoyer addressed personal jurisdiction over natural persons or people, the Court’s early jurisprudence following the 1877 case established that state courts could potentially exercise jurisdiction over foreign corporations doing business in the state because the law presumed that those corporations had implicitly consented to personal jurisdiction, or could be deemed “present” within the state, based on their in-state activities.⁸

The Pennoyer Court’s “physical presence” test established the constitutional foundation for strict limits on state courts’ authority to exercise in personam jurisdiction over a nonresident defendant—that is, to render judgments concerning that defendant’s personal rights and obligations.⁹ Thus, for example, service upon a defendant by publishing notice of the lawsuit in a newspaper circulating in the forum state was insufficient to confer jurisdiction on a court to adjudicate the personal liability of a defendant who had left the state and did not intend to return.¹⁰ Nevertheless, even in the absence of a nonresident defendant’s physical presence or consent, courts could still attain jurisdiction over the defendant indirectly through the attachment (i.e., seizure) of the defendant’s property interests within the forum and the provision of notice to the defendant.¹¹ In particular, a state court could exercise in rem jurisdiction¹² over a nonresident defendant’s property interest in the state in order to adjudicate all of the rights or claims in a piece of property.¹³ It could also exercise quasi in rem jurisdiction¹⁴ over a nonresident defendant by adjudicating a plaintiff ’s claim to the property in relation to the defendant or to satisfy the claims of its own citizens against the defendant personally.¹⁵ However, judgments resting upon the exercise of in rem or quasi in rem jurisdiction would not personally bind the defendant to an extent greater than the value of the property.¹⁶

Amdt14.S1.7.1.3 Modern Doctrine on Personal Jurisdiction

Although Pennoyer’s physical presence test informed the Supreme Court’s jurisprudence related to jurisdiction for several decades, a significant expansion of the U.S. economy in the mid-twentieth century altered that focus. As commerce and travel among the states and between the states and foreign countries increased,¹ corporations expanded the geographical scope of their activities.² A more interconnected, global economy meant that a corporation’s activities had greater potential to cause harm in distant jurisdictions, but also meant that businesses could more easily defend lawsuits arising from that harm in distant fora.³ Faced with these new realities, the Court reconsidered the nature of the due process limitations on the jurisdiction of state courts over non-resident individuals and corporations that conducted activities in the states.⁴ In the 1945 case International Shoe Co. v. Washington, the Court explained its rejection of a strict adherence to the physical presence test, holding that a state could authorize its courts to subject an out-of-state entity to in personam jurisdiction, consistent with due process, and thus require it to defend a lawsuit, if that entity had “certain minimum contacts” with the forum state “such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”⁵ The Court rested its holding in part on the notion that an entity conducting activities in a state benefits from the protections of state law, and thus should have to respond to legal complaints arising out of its actions in the forum even if it is not “physically present” in the state.⁶

Thus, the Supreme Court’s opinions in International Shoe and subsequent cases have established a more flexible two-part test for determining when a court’s exercise of personal jurisdiction over a nonresident defendant sued by a plaintiff comports with due process: (1) the defendant has established minimum contacts with the forum state that demonstrate an intent to avail itself of the benefits and protections of state law; and (2) it is reasonable to require the defendant to defend the lawsuit in the forum.⁷

Nevertheless, as noted, the Court has confirmed that several traditional bases for exercising judicial power over a nonresident defendant continue to enjoy a presumption of constitutionality without requiring an independent inquiry into the contacts among the defendant, the forum, and the litigation. Specifically, the traditional bases for jurisdiction include if: (1) the defendant is domiciled in the forum state (e.g., a defendant who is a natural person intends to establish a permanent home in the forum or a corporation intends to establish a permanent headquarters);⁸ (2) the defendant has consented to jurisdiction;⁹ or (3) a defendant who is a natural person is served with process while he is physically present—even temporarily—within the forum.¹⁰ The Court has also indicated that a state court may adjudicate the personal status of a plaintiff in relation to the defendant (e.g., marital status) without considering whether personal jurisdiction over the defendant is constitutionally valid.¹¹

Amdt14.S1.7.1.4 Minimum Contact Requirements for Personal Jurisdiction

Since its 1945 decision in International Shoe, the Supreme Court has elaborated on the nature and quality of the minimum contacts that a defendant must have with the forum in order for a court to subject him or her to personal jurisdiction in that forum consistent with due process. When determining whether a defendant has minimum contacts with the forum, the Court has distinguished the types of contacts sufficient for a court’s exercise of “specific” personal jurisdiction over the defendant from those contacts sufficient for its exercise, alternatively, of “general” jurisdiction.

A court’s exercise of specific jurisdiction may be constitutional when the defendant: (1) “purposefully avails itself of the privilege of conducting activities” within the forum state; and (2) the defendant’s contacts with the forum give rise to, or are related to, the plaintiff ’s claims.¹ A defendant’s contacts with the forum may “relate” to the plaintiff ’s claims even in the absence of a “strict causal relationship” between the contacts and claims.² However, when there is “no such connection [between the forum and the particular claims at issue], specific jurisdiction is lacking regardless of the extent of a defendant’s unconnected activities in the State.”³

By contrast, a state court’s exercise of general jurisdiction over a nonresident defendant for any claim—even if all the incidents underlying the claim occurred in a different state—may be constitutional when the defendant’s activities in the forum state are so substantial that it is reasonable to require it to defend a lawsuit that did not arise out of its activities in the forum state and is unrelated to those activities.⁴ Perhaps in order to ensure greater predictability for defendants attempting to discern where they may be subject to suits on claims arising anywhere in the world,⁵ in more recent years, the Court has significantly limited the types of activities or affiliations of the defendant in the forum state sufficient for general jurisdiction, holding that those contacts must be so substantial as to render the defendant “essentially at home” in the forum state.⁶ The Court has clarified that, absent exceptional circumstances, a corporate defendant is “at home” when it is incorporated in the forum state or maintains its principal place of business there.⁷ Insubstantial in-state business, in and of itself, does not suffice to permit an assertion of jurisdiction over claims that are unrelated to any activity occurring in a state.⁸ For example, the Court in 2017 held in BNSF Railway v. Tyrrell that Montana courts could not exercise general jurisdiction over a railroad company that had over 2,000 miles of track and more than 2,000 employees in the state because the company was not incorporated or headquartered in Montana and the overall activity of the company in Montana was not “so substantial” as compared to its activities throughout all of the jurisdictions in which it conducted business so as to render the corporation “at home” in the state.⁹

Although the Supreme Court has decided only a few cases that explore the scope of general personal jurisdiction since its opinion in International Shoe, leaving the bulk of such determinations to lower federal and state courts, it has decided several cases elaborating on the quality and nature of the defendant’s contacts with the forum and litigation necessary for a court’s exercise of specific jurisdiction over the defendant.¹⁰ A common theme throughout many of these decisions is that “unilateral activity” in the forum state by a person who has some family, business, or other relationship with a nonresident defendant will not suffice to establish a defendant’s minimum contacts with the forum.¹¹ In other words, jurisdiction is not proper merely because the defendant could have foreseen that a third party with which it has a family or business relationship (for example, a defendant’s family member or customer of a defendant corporation) would have contacts with the forum.¹² Rather, the defendant must “purposefully avail” itself “of the privilege of conducting activities within the forum State,” thus invoking the benefits and protections of its laws.¹³ The defendant must have reasonably anticipated being haled into court there—a standard that potentially allows a defendant to predict where it will be subject to suit and plan the geographic scope of its activities or insure against the risk of being sued in a distant forum accordingly.¹⁴ The Court has also emphasized that the minimum contacts inquiry should not focus on the location of the resulting injury to the plaintiff; instead, the proper question is whether the defendant’s conduct connects him to the forum in a meaningful way.¹⁵

Since the Supreme Court decided International Shoe in 1945, many of its decisions on the minimum contacts test have addressed specific categories of contacts between the defendant and forum, such as the alleged tortious conduct of the defendant in the forum state; a contract between the defendant and an entity in the forum state; a business relationship between the defendant and a party in the forum state; and property interests of the defendant in the forum state. For example, in cases in which the plaintiff alleged that a nonresident had committed the tort of libel causing harm in the forum state, the Court upheld the exercise of specific personal jurisdiction over a defendant that intentionally targeted the state with publication of allegedly libelous material.¹⁶ The Court determined that regularly publishing a widely circulated magazine with knowledge that harm could occur to the state’s residents amounted to a sufficient contact between the defendant, the forum, and the litigation.¹⁷ As a result, the Court has recognized that, provided there is a sufficient connection between the defendant and the forum, states have a “significant interest” in permitting their courts to exercise jurisdiction over defendants in order to redress harm that occurs within state boundaries.¹⁸

Particularly since the 1980s, there has been disagreement among the Supreme Court Justices, however, as to when a nonresident corporation whose product causes injury within the forum state has “purposefully availed” itself of the privilege of conducting business within the state, and should therefore be subject to personal jurisdiction in that state in a tort action for products liability. In the 1987 case Asahi Metal Industry Co. v. Superior Court, four Justices agreed that a nonresident defendant’s awareness that a product it manufactured would end up in the forum state through its intentional placement of the product in the stream of commerce outside of the forum did not by itself constitute an act directed at the forum sufficient for specific personal jurisdiction.¹⁹ Writing for a plurality of the Court, Justice Sandra Day O’Connor maintained that a tribunal lacked the authority to exercise personal jurisdiction over a defendant that had not performed additional actions in the forum state that demonstrated an intent to serve that state’s market.²⁰ According to her plurality opinion, because the defendant did not have clear notice that it could be subject to suit in California, it would have been unfair to subject the defendant to suit there.²¹ However, another four Justices would have held that the defendant’s intentional placement of a product into the stream of commerce by itself was sufficient for personal jurisdiction because the defendant could foresee being sued in any state in which the product was regularly sold and marketed.²² Those Justices would have grounded this result in the benefits that defendants derive from the regular retail sale of their products in the forum and the protections of state law.²³

The Justices’ disagreement over when a nonresident corporation whose product causes injury within the forum state has “purposefully availed” itself of the privilege of conducting business within the state, and should therefore be subject to personal jurisdiction in that state in a tort action for products liability, appears to remain unresolved after a 2011 case. In J. McIntyre Machinery, Ltd. v. Nicastro, a plurality of the Court indicated that a foreign manufacturer of a product cannot be subject to the jurisdiction of a state court based on its mere expectation that the products it manufactures in its home country and ships to an independent U.S. distributor might be distributed in the forum state.²⁴ Instead, according to the plurality written by Justice Anthony Kennedy and joined by Chief Justice John Roberts, Justice Antonin Scalia, and Justice Clarence Thomas, the defendant must have directly targeted the individual state with its goods, thereby “purposefully availing” itself of the privilege of conducting in-state business.²⁵ However, the plurality’s view did not command a majority of the Court, and a narrower concurring opinion authored by Justice Stephen Breyer and joined by Justice Samuel Alito would have found jurisdiction lacking under any of the various tests for personal jurisdiction articulated in the Justices’ opinions in Asahi because the shipment of products into, or their sale in, the forum state did not occur regularly, and there was no additional sales-related conduct (for example, marketing) by the defendant in the forum.²⁶

In addition to addressing cases involving a defendant’s alleged tortious conduct, the Supreme Court has also addressed minimum contacts in the context of out-of-state defendants reaching out to a forum state to establish a continuing business relationship in that state. For example, the Court upheld a California court’s exercise of specific personal jurisdiction over a Texas mail order insurance company that had no office or agent in California because the Texas company mailed an offer of insurance to the plaintiff ’s son in California.²⁷ The son accepted the offer and continued to send the company premium payments through the mail to Texas from California until the son died in California.²⁸ The Court noted that the suit arose from a contract that had a “substantial connection” with California, holding that the state had a significant interest in providing redress for its residents in cases in which insurance companies refuse to pay claims.²⁹ Similarly, when a nonresident defendant establishes an office in a state to conduct business through agents in the state, he may have to answer a lawsuit related to those business activities when an agent is served in the forum, regardless of whether he consented to service of process through his agent.³⁰

Another context in which the Supreme Court has addressed the minimum contacts test involves contractual disputes between the parties to a lawsuit. Thus, when a franchisor headquartered in Florida brought suit in a local federal court against Michigan franchisees for the alleged breach of a franchise agreement to make required payments in Florida, the Court held that specific jurisdiction over defendants was proper based on the specific circumstances surrounding the contractual relationship.³¹ The Court stated that a contract between an out-of-state party and an individual in the forum state is insufficient by itself to establish personal jurisdiction if the contract lacks a substantial connection to the state as established by, among other things, an (1) examination of the parties’ prior negotiations (for example, whether the defendant reached into the forum to negotiate the contract); (2) the terms of the contract (for example, where payments were to be made and which state’s law was to govern); and (3) the course of dealing (for example, whether the defendant established a “substantial and continuing relationship” in the forum state).³²

The Court has also opined on when a defendant’s property interests in the forum may serve as a contact for purposes of personal jurisdiction. In Shaffer v. Heitner, the Supreme Court held that a state court could not exercise quasi in rem jurisdiction over a nonresident defendant by attaching the defendant’s property interests in the state without inquiring separately into whether these property interests and any other connections between the defendant, forum, and litigation established sufficient minimum contacts to satisfy the first prong of the International Shoe test.³³ Thus, a Delaware court could not subject nonresident officers and directors of a Delaware corporation to personal jurisdiction for the alleged breach of duties to the corporation based solely on the court’s attachment of their stock and stock options in the corporation.³⁴ The Court noted that jurisdiction over property must in fact have a direct effect on the interests of the defendant in that property and therefore affect its personal rights.³⁵ However, the Court also noted that in some cases, such as cases establishing title to real property, ownership of the property itself may establish sufficient contacts among the defendant, forum, and litigation.³⁶

Amdt14.S1.7.1.5 Reasonableness Test for Personal Jurisdiction

Even if a nonresident defendant has minimum contacts with the forum, the Supreme Court has, at times, considered whether a state court’s exercise of personal jurisdiction over him would comport with due process by examining the reasonableness of the exercise of jurisdiction.¹ In International Shoe and its subsequent opinions, the Court has established a multi-factor test that seeks to ensure that the maintenance of the suit does not offend “traditional notions of fair play and substantial justice.”² The Court has subsequently clarified that in applying this test to evaluate the reasonableness of the exercise of jurisdiction in light of the defendant’s contacts with the forum and litigation, it will examine several factors, including: (1) “the burden on the defendant”; (2) “the forum State’s interest in adjudicating the dispute”; (3) “the plaintiff ’s interest in obtaining convenient and effective relief”; (4) “the interstate judicial system’s interest in obtaining the most efficient resolution of controversies”; (5) and the “shared interest of the several States in furthering fundamental substantive social policies.”³

Although the Supreme Court has addressed the reasonableness prong of the International Shoe test for personal jurisdiction only in Asahi and Daimler, it has provided some guidance as to when courts may deem it reasonable to subject a defendant to suit. Thus, the Justices have, for example, suggested that courts should remain cautious about exercising personal jurisdiction over corporations domiciled abroad, particularly when most of the conduct at issue occurred overseas.⁴ Courts may therefore evaluate the risks that subjecting a foreign corporation to suit in the United States for overseas conduct would have on international relations between the United States and its trading partners.⁵ In a case involving the exercise of personal jurisdiction over a foreign corporation, moreover, the policies of other nations are relevant and must be carefully considered.⁶

In addition, when considering the burden on the defendant of litigating the case in the forum state, the Court may consider it a heavy burden for a company domiciled abroad to travel from its foreign headquarters to have a dispute with another foreign corporation litigated in U.S. courts.⁷ This concern may stem in part from the notion that the interests of the plaintiff and forum are minimal when the claim is based on overseas transactions, the plaintiff is not a resident of the United States, and the allegedly tortious conduct could be deterred by subjecting companies over which the court has lawful judicial power to suit.⁸

Amdt14.S1.7.2.1 State Taxing Power

It was not contemplated that the adoption of the Fourteenth Amendment would restrain or cripple the taxing power of the states.¹ When the power to tax exists, the extent of the burden is a matter for the discretion of the lawmakers,² and the Court will refrain from condemning a tax solely on the ground that it is excessive.³ Nor can the constitutionality of taxation be made to depend upon the taxpayer’s enjoyment of any special benefits from use of the funds raised by taxation.⁴

Theoretically, public moneys cannot be expended for other than public purposes. Some early cases applied this principle by invalidating taxes judged to be imposed to raise money for purely private rather than public purposes.⁵ However, modern notions of public purpose have expanded to the point where the limitation has little practical import.⁶ Whether a use is public or private, although ultimately a judicial question, “is a practical question addressed to the law-making department, and it would require a plain case of departure from every public purpose which could reasonably be conceived to justify the intervention of a court.”⁷

The authority of states to tax income is “universally recognized.”⁸ Years ago the Court explained that “[e]njoyment of the privileges of residence in the state and the attendant right to invoke the protection of its laws are inseparable from responsibility for sharing the costs of government. . . . A tax measured by the net income of residents is an equitable method of distributing the burdens of government among those who are privileged to enjoy its benefits.”⁹ Also, a tax on income is not constitutionally suspect because it is retroactive. The routine practice of making taxes retroactive for the entire year of the legislative session in which the tax is enacted has long been upheld,¹⁰ and there are also situations in which courts have upheld retroactive application to the preceding year or two.¹¹

A state also has broad tax authority over wills and inheritance. A state may apply an inheritance tax to the transmission of property by will or descent, or to the legal privilege of taking property by devise or descent,¹² although such tax must be consistent with other due process considerations.¹³ Thus, an inheritance tax law, enacted after the death of a testator but before the distribution of his estate, constitutionally may be imposed on the shares of legatees, notwithstanding that under the law of the state in effect on the date of such enactment, ownership of the property passed to the legatees upon the testator’s death.¹⁴ Equally consistent with due process is a tax on an inter vivos transfer of property by deed intended to take effect upon the death of the grantor.¹⁵

The taxation of entities that are franchises within the jurisdiction of the governing body raises few concerns. Thus, a city ordinance imposing annual license taxes on light and power companies does not violate the Due Process Clause merely because the city has entered the power business in competition with such companies.¹⁶ Nor does a municipal charter authorizing the imposition upon a local telegraph company of a tax upon the lines of the company within its limits at the rate at which other property is taxed but upon an arbitrary valuation per mile, deprive the company of its property without due process of law, inasmuch as the tax is a mere franchise or privilege tax.¹⁷

States have significant discretion in how to value real property for tax purposes. Thus, assessment of properties for tax purposes over real market value is allowed as merely another way of achieving an increase in the rate of property tax, and does not violate due process.¹⁸ Likewise, land subject to mortgage may be taxed for its full value without deduction of the mortgage debt from the valuation.¹⁹

A state also has wide discretion in how to apportion real property tax burdens. Thus, a state may defray the entire expense of creating, developing, and improving a political subdivision either from funds raised by general taxation, by apportioning the burden among the municipalities in which the improvements are made, or by creating (or authorizing the creation of) tax districts to meet sanctioned outlays.²⁰ Or, where a state statute authorizes municipal authorities to define the district to be benefited by a street improvement and to assess the cost of the improvement upon the property within the district in proportion to benefits, their action in establishing the district and in fixing the assessments on included property, cannot, if not arbitrary or fraudulent, be reviewed under the Fourteenth Amendment upon the ground that other property benefited by the improvement was not included.²¹

On the other hand, when the benefit to be derived by a railroad from the construction of a highway will be largely offset by the loss of local freight and passenger traffic, an assessment upon such railroad violates due process,²² whereas any gains from increased traffic reasonably expected to result from a road improvement will suffice to sustain an assessment thereon.²³ Also the fact that the only use made of a lot abutting on a street improvement is for a railway right of way does not make invalid, for lack of benefits, an assessment thereon for grading, curbing, and paving.²⁴ However, when a high and dry island was included within the boundaries of a drainage district from which it could not be benefited directly or indirectly, a tax imposed on the island land by the district was held to be a deprivation of property without due process of law.²⁵ Finally, a state may levy an assessment for special benefits resulting from an improvement already made²⁶ and may validate an assessment previously held void for want of authority.²⁷

Amdt14.S1.7.2.2 State Jurisdiction to Tax

The operation of the Due Process Clause as a jurisdictional limitation on the taxing power of the states has been an issue in a variety of different contexts, but most involve one of two basic questions. First, is there a sufficient relationship between the state exercising taxing power and the object of the exercise of that power? Second, is the degree of contact sufficient to justify the state’s imposition of a particular obligation? Illustrative of the factual settings in which such issues arise are 1) determining the scope of the business activity of a multi-jurisdictional entity that is subject to a state’s taxing power; 2) application of wealth transfer taxes to gifts or bequests of nonresidents; 3) allocation of the income of multi-jurisdictional entities for tax purposes; 4) the scope of state authority to tax income of nonresidents; and 5) collection of state use taxes.

The Court’s opinions in these cases have often discussed Due Process and Dormant Commerce Clause issues as if they were indistinguishable.¹ A later decision, Quill Corp. v. North Dakota,² however, used a two-tier analysis that found sufficient contact to satisfy Due Process but not Dormant Commerce clause requirements. In Quill,³ the Court struck down a state statute requiring an out-of-state mail order company with neither outlets nor sales representatives in the state to collect and transmit use taxes on sales to state residents, but did so based on Commerce Clause rather than due process grounds. In 2018, the Court, however, reversed course in South Dakota v. Wayfair, overturning Quill’s Commerce Clause holding and upholding a South Dakota law that required certain large retailers that lacked a physical presence in the state to collect and remit sales taxes from retail sales to South Dakota residents.⁴ In so holding, the Wayfair Court concluded that while the Due Process and Commerce Clause standards “may not be identical or coterminous,” they are “closely related,” and there are “significant parallels” between the two standards.⁵

Amdt14.S1.7.2.3 Real Property and Tangible Personalty

Even prior to the ratification of the Fourteenth Amendment, it was a settled principle that a state could not tax land situated beyond its limits. Subsequently elaborating upon that principle, the Court has said that, “we know of no case where a legislature has assumed to impose a tax upon land within the jurisdiction of another State, much less where such action has been defended by a court.”¹ Insofar as a tax payment may be viewed as an exaction for the maintenance of government in consideration of protection afforded, the logic sustaining this rule is self-evident.

A state may tax tangible property located within its borders (either directly through an ad valorem tax or indirectly through death taxes) irrespective of the residence of the owner.² By the same token, if tangible personal property makes only occasional incursions into other states, its permanent situs remains in the state of origin, and, subject to certain exceptions, is taxable only by the latter.³ The ancient maxim, mobilia sequuntur personam, which originated when personal property consisted in the main of articles appertaining to the person of the owner, yielded in modern times to the “law of the place where the property is kept and used.” The tendency has been to treat tangible personal property as “having a situs of its own for the purpose of taxation, and correlatively to . . . exempt [it] at the domicile of its owner.”⁴

Thus, when rolling stock is permanently located and used in a business outside the boundaries of a domiciliary state, the latter has no jurisdiction to tax it.⁵ Further, vessels that merely touch briefly at numerous ports never acquire a taxable situs at any one of them, and are taxable in the domicile of their owners or not at all.⁶ Thus, where airplanes are continually in and out of a state during the course of a tax year, the entire fleet may be taxed by the domicile state.⁷

Conversely, a nondomiciliary state, although it may not tax property belonging to a foreign corporation that has never come within its borders, may levy a tax on movables that are regularly and habitually used and employed in that state. Thus, although the fact that cars are loaded and reloaded at a refinery in a state outside the owner’s domicile does not fix the situs of the entire fleet in that state, the state may nevertheless tax the number of cars that on the average are found to be present within its borders.⁸ But no property of an interstate carrier can be taken into account unless it can be seen in some plain and fairly intelligible way that it adds to the value of the road and the rights exercised in the state.⁹ Or, a state property tax on railroads, which is measured by gross earnings apportioned to mileage, is constitutional unless it exceeds what would be legitimate as an ordinary tax on the property valued as part of a going concern or is relatively higher than taxes on other kinds of property.¹⁰

Amdt14.S1.7.2.4 Intangible Personalty

To determine whether a state may tax intangible personal property, the Court has applied the fiction mobilia sequuntur personam (movable property follows the person) and has also recognized that such property may acquire, for tax purposes, a permanent business or commercial situs. The Court, however, has never clearly disposed of the issue whether multiple personal property taxation of intangibles is consistent with due process. In the case of corporate stock, however, the Court has obliquely acknowledged that the owner thereof may be taxed at his own domicile, at the commercial situs of the issuing corporation, and at the latter’s domicile. Constitutional lawyers speculated whether the Court would sustain a tax by all three jurisdictions, or by only two of them. If the latter, the question would be which two—the state of the commercial situs and of the issuing corporation’s domicile, or the state of the owner’s domicile and that of the commercial situs.¹

Thus far, the Court has sustained the following personal property taxes on intangibles: (1) a debt held by a resident against a nonresident, evidenced by a bond of the debtor and secured by a mortgage on real estate in the state of the debtor’s residence;² (2) a mortgage owned and kept outside the state by a nonresident but on land within the state;³ (3) investments, in the form of loans to a resident, made by a resident agent of a nonresident creditor;⁴ (4) deposits of a resident in a bank in another state, where he carries on a business and from which these deposits are derived, but belonging absolutely to him and not used in the business;⁵ (5) membership owned by a nonresident in a domestic exchange, known as a chamber of commerce;⁶ (6) membership by a resident in a stock exchange located in another state;⁷ (7) stock held by a resident in a foreign corporation that does no business and has no property within the taxing state;⁸ (8) stock in a foreign corporation owned by another foreign corporation transacting its business within the taxing state;⁹ (9) shares owned by nonresident shareholders in a domestic corporation, the tax being assessed on the basis of corporate assets and payable by the corporation either out of its general fund or by collection from the shareholder;¹⁰ (10) dividends of a corporation distributed ratably among stockholders regardless of their residence outside the state;¹¹ (11) the transfer within the taxing state by one nonresident to another of stock certificates issued by a foreign corporation;¹² and (12) promissory notes executed by a domestic corporation, although payable to banks in other states.¹³

The following personal property taxes on intangibles have been invalidated: (1) debts evidenced by notes in safekeeping within the taxing state, but made and payable and secured by property in a second state and owned by a resident of a third state;¹⁴ (2) a tax, measured by income, levied on trust certificates held by a resident, representing interests in various parcels of land (some inside the state and some outside), the holder of the certificates, though without a voice in the management of the property, being entitled to a share in the net income and, upon sale of the property, to the proceeds of the sale.¹⁵

The Court also invalidated a property tax sought to be collected from a life beneficiary on the corpus of a trust composed of property located in another state and as to which the beneficiary had neither control nor possession, apart from the receipt of income therefrom.¹⁶ However, a personal property tax may be collected on one-half of the value of the corpus of a trust from a resident who is one of the two trustees thereof, not withstanding that the trust was created by the will of a resident of another state in respect of intangible property located in the latter state, at least where it does not appear that the trustee is exposed to the danger of other ad valorem taxes in another state.¹⁷ The first case, Brooke v. Norfolk,¹⁸ is distinguishable by virtue of the fact that the property tax therein voided was levied upon a resident beneficiary rather than upon a resident trustee in control of nonresident intangibles. Also different is Safe Deposit & Trust Co. v. Virginia,¹⁹ where a property tax was unsuccessfully demanded of a nonresident trustee with respect to nonresident intangibles under its control. Likewise, the more recent case of North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust, which saw the Court invalidating a state tax imposed on trust income of an in-state beneficiary, appears to be limited to its facts, where the beneficiaries (1) had not received any trust income, (2) had no right to demand that income, and (3) were uncertain to ever receive that income.²⁰

A state in which a foreign corporation has acquired a commercial domicile and in which it maintains its general business offices may tax the corporation’s bank deposits and accounts receivable even though the deposits are outside the state and the accounts receivable arise from manufacturing activities in another state. Similarly, a nondomiciliary state in which a foreign corporation did business can tax the “corporate excess” arising from property employed and business done in the taxing state.²¹ On the other hand, when the foreign corporation transacts only interstate commerce within a state, any excise tax on such excess is void, irrespective of the amount of the tax.²²

Also a domiciliary state that imposes no franchise tax on a stock fire insurance corporation may assess a tax on the full amount of paid-in capital stock and surplus, less deductions for liabilities, notwithstanding that such domestic corporation concentrates its executive, accounting, and other business offices in New York, and maintains in the domiciliary state only a required registered office at which local claims are handled. Despite “the vicissitudes which the so-called ‘jurisdiction-to-tax’ doctrine has encountered,” the presumption persists that intangible property is taxable by the state of origin.²³

A property tax on the capital stock of a domestic company, however, the appraisal of which includes the value of coal mined in the taxing state but located in another state awaiting sale, deprives the corporation of its property without due process of law.²⁴ Also void for the same reason is a state tax on the franchise of a domestic ferry company that includes in the valuation of the tax the worth of a franchise granted to the company by another state.²⁵

Amdt14.S1.7.2.5 Transfer (Inheritance, Estate, Gift) Taxes

As a state has authority to regulate transfer of property by wills or inheritance, it may base its succession taxes upon either the transmission or receipt of property by will or by descent.¹ But whatever may be the justification of their power to levy such taxes, since 1905 the states have consistently found themselves restricted by the rule in Union Transit Co. v. Kentucky,² which precludes imposition of transfer taxes upon tangible which are permanently located or have an actual situs outside the state.

In the case of intangibles, however, the Court has oscillated in upholding, then rejecting, and again sustaining the levy by more than one state ,of death taxes upon intangibles. Until 1930, transfer taxes upon intangibles by either the domiciliary or the situs (but nondomiciliary) state, were with rare exceptions approved. Thus, in Bullen v. Wisconsin,³ the domiciliary state of the creator of a trust was held competent to levy an inheritance tax on an out-of-state trust fund consisting of stocks, bonds, and notes, as the settlor reserved the right to control disposition and to direct payment of income for life. The Court reasoned that such reserved powers were the equivalent to a fee in the property. It took cognizance of the fact that the state in which these intangibles had their situs had also taxed the trust.⁴

On the other hand, the mere ownership by a foreign corporation of property in a nondomiciliary state was held insufficient to support a tax by that state on the succession to shares of stock in that corporation owned by a nonresident decedent.⁵ Also against the trend was Blodgett v. Silberman,⁶ in which the Court defeated collection of a transfer tax by the domiciliary state by treating coins and bank notes deposited by a decedent in a safe deposit box in another state as tangible property.⁷

In the course of about two years following the Depression, the Court handed down a group of four decisions that placed the stamp of disapproval upon multiple transfer taxes and—by inference—other multiple taxation of intangibles.⁸ The Court found that “practical considerations of wisdom, convenience and justice alike dictate the desirability of a uniform rule confining the jurisdiction to impose death transfer taxes as to intangibles to the State of the [owner’s] domicile.”⁹ Thus, the Court proceeded to deny the right of nondomiciliary states to tax intangibles, rejecting jurisdictional claims founded upon such bases as control, benefit, protection or situs. During this interval, 1930–1932, multiple transfer taxation of intangibles came to be viewed, not merely as undesirable, but as so arbitrary and unreasonable as to be prohibited by the Due Process Clause.

The Court has expressly overruled only one of these four decisions condemning multiple succession taxation of intangibles. In 1939, in Curry v. McCanless, the Court announced a departure from “[t]he doctrine, of recent origin, that the Fourteenth Amendment precludes the taxation of any interest in the same intangible in more than one state . . . .”¹⁰ Taking cognizance of the fact that this doctrine had never been extended to the field of income taxation or consistently applied in the field of property taxation, the Court declared that a correct interpretation of constitutional requirements would dictate the following conclusions: “From the beginning of our constitutional system control over the person at the place of his domicile and his duty there, common to all citizens, to contribute to the support of government have been deemed to afford an adequate constitutional basis for imposing on him a tax on the use and enjoyment of rights in intangibles measured by their value. . . . But when the taxpayer extends his activities with respect to his intangibles, so as to avail himself of the protection and benefit of the laws of another state, in such a way as to bring his person or property within the reach of the tax gatherer there, the reason for a single place of taxation no longer obtains . . . . [However], the state of domicile is not deprived, by the taxpayer’s activities elsewhere, of its constitutional jurisdiction to tax . . . .”¹¹

In accordance with this line of reasoning, the domicile of a decedent (Tennessee) and the state where a trust received securities conveyed from the decedent by will (Alabama) were both allowed to impose a tax on the transfer of these securities. “In effecting her purposes, the testatrix brought some of the legal interests which she created within the control of one state by selecting a trustee there and others within the control of the other state by making her domicile there. She necessarily invoked the aid of the law of both states, and her legatees, before they can secure and enjoy the benefits of succession, must invoke the law of both.”¹²

On the authority of Curry v. McCanless, the Court, in Pearson v. McGraw,¹³ sustained the application of an Oregon transfer tax to intangibles handled by an Illinois trust company, although the property was never physically present in Oregon. Jurisdiction to tax was viewed as dependent, not on the location of the property in the state, but on the fact that the owner was a resident of Oregon. In Graves v. Elliott,¹⁴ the Court upheld the power of New York, in computing its estate tax, to include in the gross estate of a domiciled decedent the value of a trust of bonds managed in Colorado by a Colorado trust company and already taxed on its transfer by Colorado, which trust the decedent had established while in Colorado and concerning which he had never exercised any of his reserved powers of revocation or change of beneficiaries. It was observed that “the power of disposition of property is the equivalent of ownership. It is a potential source of wealth and its exercise in the case of intangibles is the appropriate subject of taxation at the place of the domicile of the owner of the power. The relinquishment at death, in consequence of the non-exercise in life, of a power to revoke a trust created by a decedent is likewise an appropriate subject of taxation.”¹⁵

The costliness of multiple taxation of estates comprising intangibles can be appreciably aggravated if one or more states find that the decedent died domiciled within its borders. In such cases, contesting states may discover that the assets of the estate are insufficient to satisfy their claims. Thus, in Texas v. Florida,¹⁶ the State of Texas filed an original petition in the Supreme Court against three other states who claimed to be the domicile of the decedent, noting that the portion of the estate within Texas alone would not suffice to discharge its own tax, and that its efforts to collect its tax might be defeated by adjudications of domicile by the other states. The Supreme Court disposed of this controversy by sustaining a finding that the decedent had been domiciled in Massachusetts, but intimated that thereafter it would take jurisdiction in like situations only in the event that an estate was valued less than the total of the demands of the several states, so that the latter were confronted with a prospective inability to collect.

Amdt14.S1.7.2.6 Corporate Privilege Taxes

A domestic corporation may be subjected to a privilege tax graduated according to paid-up capital stock, even though the stock represents capital not subject to the taxing power of the state, because the tax is levied not on property but on the privilege of doing business in corporate form.¹ However, a state cannot tax property beyond its borders under the guise of taxing the privilege of doing an intrastate business. Therefore, a license tax based on the authorized capital stock of an out-of-state corporation is void,² even though there is a maximum fee,³ unless the tax is apportioned based on property interests in the taxing state.⁴ On the other hand, a fee collected only once as the price of admission to do intrastate business is distinguishable from a tax and accordingly may be levied on an out-of-state corporation based on the amount of its authorized capital stock.⁵

A municipal license tax imposed on a foreign corporation for goods sold within and without the state, but manufactured in the city, is not a tax on business transactions or property outside the city and therefore does not violate the Due Process Clause.⁶ But a state lacks jurisdiction to extend its privilege tax to the gross receipts of a foreign contracting corporation for fabricating equipment outside the taxing state, even if the equipment is later installed in the taxing state. Unless the activities that are the subject of the tax are carried on within its territorial limits, a state is not competent to impose such a privilege tax.⁷

Amdt14.S1.7.2.7 Individual Income Taxes

A state may tax annually the entire net income of resident individuals from whatever source received,¹ as jurisdiction is founded upon the rights and privileges incident to domicile. A state may also tax the portion of a nonresident’s net income that derives from property owned by him within its borders, and from any business, trade, or profession carried on by him within its borders.² This state power is based upon the state’s dominion over the property he owns, or over activity from which the income derives, and from the obligation to contribute to the support of a government that secures the collection of such income. Accordingly, a state may tax residents on income from rents of land located outside the state; from interest on bonds physically outside the state and secured by mortgage upon lands physically outside the state;³ and from a trust created and administered in another state and not directly taxable to the trustee.⁴ Further, the fact that another state has lawfully taxed identical income in the hands of trustees operating in that state does not necessarily destroy a domiciliary state’s right to tax the receipt of income by a resident beneficiary.⁵

Amdt14.S1.7.2.8 Corporate Income Taxes and Foreign Corporations

A tax based on the income of a foreign corporation may be determined by allocating to the state a proportion of the total,¹ unless the income attributed to the state is out of all appropriate proportion to the business transacted in the state.² Thus, a franchise tax on a foreign corporation may be measured by income, not just from business within the state, but also on net income from interstate and foreign business.³ Because the privilege granted by a state to a foreign corporation of carrying on business supports a tax by that state, it followed that a Wisconsin privilege dividend tax could be applied to a Delaware corporation despite its having its principal offices in New York, holding its meetings and voting its dividends in New York, and drawing its dividend checks on New York bank accounts. The tax could be imposed on the “privilege of declaring and receiving dividends” out of income derived from property located and business transacted in Wisconsin, equal to a specified percentage of such dividends, the corporation being required to deduct the tax from dividends payable to resident and nonresident shareholders.⁴

Amdt14.S1.7.2.9 Insurance Company Taxes

A privilege tax on the gross premiums received by a foreign life insurance company at its home office for business written in the state does not deprive the company of property without due process,¹ but such a tax is invalid if the company has withdrawn all its agents from the state and has ceased to do business there, merely continuing to receive the renewal premiums at its home office.² Also violating due process is a state insurance premium tax imposed on a nonresident firm doing business in the taxing jurisdiction, where the firm obtained the coverage of property within the state from an unlicensed out-of-state insurer that consummated the contract, serviced the policy, and collected the premiums outside that taxing jurisdiction.³ However, a tax may be imposed upon the privilege of entering and engaging in business in a state, even if the tax is a percentage of the “annual premiums to be paid throughout the life of the policies issued.” Under this kind of tax, a state may continue to collect even after the company’s withdrawal from the state.⁴

A state may lawfully extend a tax to a foreign insurance company that contracts with an automobile sales corporation in a third state to insure customers of the automobile sales corporation against loss of cars purchased through the automobile sales corporation, insofar as the cars go into the possession of a purchaser within the taxing state.⁵ On the other hand, a foreign corporation admitted to do a local business, which insures its property with insurers in other states who are not authorized to do business in the taxing state, cannot constitutionally be subjected to a 5% tax on the amount of premiums paid for such coverage.⁶ Likewise a Connecticut life insurance corporation, licensed to do business in California, which negotiated reinsurance contracts in Connecticut, received payment of premiums on such contracts in Connecticut, and was liable in Connecticut for payment of losses claimed under such contracts, cannot be subjected by California to a privilege tax measured by gross premiums derived from such contracts, notwithstanding that the contracts reinsured other insurers authorized to do business in California and protected policies effected in California on the lives of California residents. The tax cannot be sustained whether as laid on property, business done, or transactions carried on, within California, or as a tax on a privilege granted by that state.⁷

Amdt14.S1.7.3 Void for Vagueness

The Supreme Court has invalidated both federal and state criminal statutes that lack sufficient definiteness or specificity as “void for vagueness.” Such legislation “may run afoul of the Due Process Clause because it fails to give adequate guidance to those who would be law-abiding, to advise defendants of the nature of the offense with which they are charged, or to guide courts in trying those who are accused.”¹ A statute may also be unconstitutionally vague because the statute is worded in a standardless way that invites arbitrary enforcement or so broadly as to threaten constitutionally protected activity.

With respect to state and local actions, the Supreme Court has, for instance, voided for vagueness a state criminal law that subjects a “gangster” to fine or imprisonment, where neither common law nor the statute gave the words “gang” or “gangster” definite meaning;² an ordinance that required police to disperse all persons in the company of “criminal street gang members” while in a public place with “no apparent purpose”;³ and an ordinance that punished, among others, “persons wandering or strolling around from place without any lawful purpose or object.”⁴