Article I, Section 8, Clause 3 — Dormant Commerce Clause

ArtI.S8.C3.7.1 Overview of Dormant Commerce Clause

Even as the Commerce Clause empowers Congress to pass federal laws, it has also come to limit state authority to regulate commerce. In contrast to the doctrine of preemption, which generally applies in areas where Congress has acted,¹ the so-called “Dormant” Commerce Clause may bar state or local regulations even where there is no relevant congressional legislation. Although the Commerce Clause “is framed as a positive grant of power to Congress” and not an explicit limit on states’ authority,² the Supreme Court has also interpreted the Clause to prohibit state laws that unduly restrict interstate commerce even in the absence of congressional legislation—i.e., where Congress is “dormant.” This “negative” or “dormant” interpretation of the Commerce Clause “prevents the States from adopting protectionist measures and thus preserves a national market for goods and services.”³

The Supreme Court has identified two principles that animate its modern Dormant Commerce Clause analysis. First, subject to certain exceptions, states may not discriminate against interstate commerce.⁴ Second, states may not take actions that are facially neutral but unduly burden interstate commerce.⁵

ArtI.S8.C3.7.2 Historical Background on Dormant Commerce Clause

The Supreme Court has long rooted its Dormant Commerce Clause jurisprudence in historical circumstances, characterizing the doctrine as a response to the state barriers to trade that served as an impetus for developing a new Constitution.¹ Under the Articles of Confederation, Congress lacked the authority to regulate interstate and foreign commerce.² The Annapolis Convention of 1786 was convened out of a desire to remove the protectionist barriers to trade that some states had imposed.³ At the Philadelphia Convention in 1787, the Framers discussed Congress’s authority to regulate interstate commerce in the context of that goal.⁴

In the Federalist Papers, Alexander Hamilton and James Madison discussed the benefits of a free national market, such as improving the circulation of commodities for export to foreign markets, increasing the diversity and scope of production, facilitating aid between the states, and providing for more advantageous terms of foreign trade.⁵ They also warned that protectionism could lead to interstate conflicts.⁶

Despite these concerns, the Framers did not adopt a constitutional provision expressly addressing state and local regulations affecting interstate commerce. The Import-Export Clause provides that “[n]o State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection laws.”⁷ That clause has not been held to apply to trade among the states, however.⁸ Similarly, in the Federalist No. 32, Hamilton asserted that the states’ taxing authority “remains undiminished” save for imposts or duties on imports or exports.⁹ He did not specify, however, whether Congress and the states also enjoyed concurrent power over interstate and foreign commerce. Instead, the Supreme Court has developed its Dormant Commerce Clause jurisprudence to serve as a limitation on some state regulations and taxes, and has linked that jurisprudence with the concerns and goals expressed by the various Framers.

ArtI.S8.C3.7.3 Early Dormant Commerce Clause Jurisprudence

The Supreme Court first described the principles that would become the dormant Commerce Clause doctrine in 1824. In Gibbons v. Ogden, the Court struck down New York’s grant of a monopoly on steamboat traffic in New York waters.¹ The Court decided the case on Supremacy Clause grounds, ruling that the Federal Coastal Act of 1793 preempted the state law. Accordingly, the Court did not decide whether the Commerce Clause barred states from regulating interstate commerce. Chief Justice John Marshall recognized, however, the “great force” of Daniel Webster’s argument that the state law violated the Commerce Clause because that clause conferred upon Congress an exclusive power to regulate national commerce.² In dicta, Chief Justice Marshall suggested that the power to regulate commerce between the states might be exclusively federal.³ At the same time, he also recognized that any national power to regulate commerce coexisted with state regulatory authority over matters that could affect commerce, such as laws governing inspection, quarantine, and health, as well as “laws for regulating the internal commerce of a State.”⁴

Chief Justice Marshall again addressed the nascent Dormant Commerce Clause doctrine in Willson v. Black-Bird Creek Marsh Co.⁵ In that case, a sloop owner whose vessel ran into a dam across a navigable creek challenged a state law authorizing the construction of the dam, arguing that the law conflicted with the federal power to regulate interstate commerce. The Supreme Court rejected this argument, concluding that the state law could not “be considered as repugnant to the [federal] power to regulate commerce in its dormant state . . . .”⁶ The Court did not explain the basis for its holding, however, or attempt to square it with the ruling in Gibbons.

Over time, the Court came to add more nuance than was present in its earliest dicta. In Cooley v. Board of Wardens,⁷ the Court enunciated a doctrine of partial federal exclusivity that inquired into the subject of a regulation. The Court distinguished between subjects of interstate commerce that “imperatively demand a single uniform rule” nationwide, and subjects of commerce that do not demand such uniformity and which may require “that diversity, which alone can meet the local necessities.”⁸ While the Court held that Congress’s power over the former category was exclusive, it also held that Congress and the states could concurrently regulate the latter category. Concluding that the regulation of pilotage was “incapable of uniformity throughout all the states,” the Court upheld a Pennsylvania state law that required ships to hire a local pilot when entering or leaving the Port of Philadelphia.⁹

The Court first struck down a state law solely on Commerce Clause grounds more than two decades later. In the State Freight Tax Case, the Court held unconstitutional a 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.¹⁰ Two years later, in Welton v. Missouri,¹¹ the Court held unconstitutional a state law that required a peddler’s license for merchants selling goods that came from other states. In doing so, it identified two separate goals that the dormant Commerce Clause might serve. First, it adopted Cooley’s consideration of the goal of uniformity of commercial regulation. It then provided the additional justification that Congress had not enacted specific legislation governing interstate commerce, which was “equivalent to a declaration that inter-State commerce shall be free and untrammelled.” In other words, Congress’s silence on the subject was an indication that states could not regulate it.¹²

Prior to 1945, the Court considered whether state regulations imposed unreasonable or undue burdens on interstate commerce, but did not generally weigh a regulation’s burdens against its benefits. Instead, the Court distinguished between instances where a state regulated interstate commerce and thus imposed a “direct” and impermissible burden on interstate commerce, and those where it imposed an “indirect” burden or merely “affected” interstate commerce, such as in the course of exercising its police powers.¹³ The Court indicated that “a state enactment [that] imposes a direct burden upon interstate commerce . . . must fall regardless of federal legislation,” indicating that such laws would be invalid even if they were not actually discriminatory.¹⁴

The distinction between direct and indirect burdens was not always clear, however.¹⁵ Then-Justice (and later Chief Justice) Harlan Stone criticized the direct-or-indirect framework “too mechanical, too uncertain in its application, and too remote from actualities, to be of value,” and argued that the Court was “doing little more than using labels to describe a result rather than any trustworthy formula by which it is reached.”¹⁶ The same Justice later articulated the modern balancing test for review of state regulations of or affecting interstate commerce.¹⁷

Many early Dormant Commerce Clause cases addressed regulation of interstate transportation, including trains and motor vehicles. For example, in the Minnesota Rate Cases, the Supreme Court applied the direct/indirect burden test to invalidate Minnesota’s adoption of maximum charges for freight and passenger transportation.¹⁸ Other transportation-related cases did not yield a uniform application of the doctrine. In one case, the Court held that states could not set charges for the transportation of persons and freight because such regulation must be uniform.¹⁹ In another case, the Court struck down a Louisiana law requiring that all businesses engaged in interstate transportation of passengers provide equal treatment to all passengers regardless of race or color when transiting through Louisiana.²⁰ In other cases, the Court upheld a variety of state regulations of trains that had been justified on public safety grounds.²¹

Similarly, the Court recognized that states may enact and enforce comprehensive schemes for licensing and regulation of motor vehicles,²² though it did not uphold all such schemes.²³ As with regulation of trains, the Court was particularly deferential towards laws that were rooted in safety concerns.²⁴ The Court also upheld state regulations related to navigation on the basis that the activities were local and did not require nationally uniform rules.²⁵ By contrast, the Court tended to invalidate facially neutral laws that had an impermissibly protectionist purpose or effect, such as the protection of local producers or industries.²⁶ For example, in Minnesota v. Barber, the Court invalidated a law requiring fresh meat sold in Minnesota to have been inspected in the state within 24 hours of slaughter, effectively excluding meat slaughtered in other states from the Minnesota market.²⁷

Finally, the Supreme Court’s early Dormant Commerce Clause jurisprudence also shows an effort to grapple with what constituted “commerce.” In some cases, the Court found that a state action had not violated the Dormant Commerce Clause because interstate commerce had not yet begun. For example, the Court upheld a municipal tax that covered cut logs that floated in a river until the spring thaw permitted them to be floated to another state, reasoning that interstate commerce did not begin until the logs were committed to a common carrier for transportation or transport actually began.²⁸ In a case regarding limitations on the manufacture and sale of “intoxicating liquors,” the Court distinguished between the purchase, sale, and incidental transportation of manufactured goods including alcohol, which constituted commerce; and the manufacture of alcohol, which was “the fashioning of raw materials into a change of form for use” and did not constitute commerce.²⁹

ArtI.S8.C3.7.4 Modern Dormant Commerce Clause Jurisprudence Generally

In its modern Dormant Commerce Clause jurisprudence, the Supreme Court has applied two primary principles. First, subject to certain exceptions, state and local laws that “discriminate[ ] against out-of-state goods or nonresident economic actors” are considered per se invalid and are generally struck down absent a showing that they are narrowly tailored to advance a legitimate local purpose.¹ Second, for laws that regulate “evenhandedly” and are not facially discriminatory, the Court applies a balancing test and upholds laws that serve a “legitimate local purpose” unless the burden on interstate commerce clearly exceeds the local benefits.² While the Court has acknowledged Congress’s primacy in regulating interstate commerce, it has also asserted its own role in interpreting the scope of that authority.³

The application of these two principles in modern Dormant Commerce Clause jurisprudence has been highly fact-specific. While the Court has articulated a basic framework for reviewing state regulations, it has not successfully defined clear rules that can be consistently applied, resulting in holdings that sometimes appear unpredictable. In particular, some Justices have criticized the balancing test, arguing that facially nondiscriminatory laws should be upheld without the need for balancing.⁴

ArtI.S8.C3.7.5 General Prohibition on Facial Discrimination

Subject to limited exceptions, the Supreme Court has struck down state laws that discriminate against out-of-state goods or nonresident economic actors, allowing such laws only when the regulatory entity meets the burden of showing that it is “narrowly tailored to advance a legitimate local purpose” and that there is no reasonable, nondiscriminatory regulatory alternative.¹ A law that “clearly discriminates against interstate commerce [ ] will be struck down . . . unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism.”² Put another way, the Court applies a “virtually per se rule of invalidity” to state laws that evince economic protectionism.³

Applying this rule, the Court has struck down as discriminatory some regulations that expressly treat out-of-state or interstate interests less favorably, or that expressly grant advantages to in-state businesses. For example, the Court invalidated an Oklahoma law that required coal-fired electric utilities in the state, producing power for sale in the state, to burn a mixture containing at least 10% Oklahoma-mined coal.⁴ Similarly, the Court invalidated a state law that permitted a state public utility commission to restrict the export of hydroelectric power to neighboring states when the commission determined that the energy was required for use within the state.⁵

Since the advent of the modern framework for evaluating Dormant Commerce Clause challenges, the Court has also continued to strike down state laws that purport to be facially neutral, but which have either the purpose or the effect of depriving out-of-state businesses of a competitive advantage. In Hunt v. Washington State Apple Advertising Commission, the Court invalidated a North Carolina regulation requiring apples shipped in closed containers to display no grade other than the applicable federal grade.⁶ Washington State mandated that all apples produced and shipped in interstate commerce pass a much more rigorous inspection than that mandated by the United States. The Court held that the inability to display the recognized state grade in North Carolina had the practical effect of discriminating against interstate commerce, could not be defended as a consumer protection measure, and therefore was unconstitutional.⁷

In some cases, the Supreme Court has emphasized the availability of less discriminatory alternatives for achieving a regulatory goal. In Dean Milk Co. v. Madison, an Illinois-based dairy processor challenged a local ordinance in Madison, Wisconsin that required all milk sold in the city to be pasteurized at an approved plant within five miles of the city.⁸ The Court concluded that the ordinance “plainly discriminates against interstate commerce,” and noted that it was “immaterial” that the ordinance discriminated against Wisconsin milk from outside the Madison area as well as out-of-state milk.⁹ The Court also reasoned that “reasonable nondiscriminatory alternatives” were available for the inspection of milk or implementation of safety standards, and that the ordinance could not “be justified in view of the character of the local interests and the available methods of protecting them.”¹⁰

The Court has rejected some claims that state regulations are facially discriminatory. In Minnesota v. Clover Leaf Creamery Co., 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.¹¹ The Court found no discrimination against interstate commerce, despite a state-court finding that the measure was intended to benefit the local pulpwood industry, because both in-state and out-of-state interests could not use plastic containers. In Exxon Corp. v. Governor of Maryland, the Court upheld a statute that prohibited producers or refiners of petroleum products from operating retail service stations in Maryland.¹² 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. The Court held, 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,” as the statute does not “distinguish between in-state and out-of-state companies in the retail market.”¹³

ArtI.S8.C3.7.6 State Proprietary Activity (Market Participant) Exception

The Supreme Court has recognized limited exceptions to the per se invalidity of discriminatory state laws under the Dormant Commerce Clause. Under the market participant exception, states that “themselves ‘participat[e] in the market’” may “‘exercis[e] the right to favor [their] own citizens over others.’”¹ For example, a state does not unconstitutionally discriminate against out-of-state businesses when it chooses to buy or sell goods or services with its own residents or businesses

In Hughes v. Alexandria Scrap Corp., the Court upheld a Maryland bounty scheme by which the state paid scrap processors for each “hulk” automobile destroyed, and which substantially disadvantaged out-of-state processors.² Reasoning that the scheme was a means of participating in the market to bid up the price of hulks rather than a regulation of the market, the Court held that “entry by the State itself into the market itself as a purchaser, in effect, of a potential article of interstate commerce [does not] create[ ] a burden upon that commerce if the State restricts its trade to its own citizens or businesses within the State.”³ In Reeves, Inc. v. Stake, the Court held that South Dakota could limit the sale of cement from a government-operated plant to in-state residents in times of shortage.⁴ The Court noted that “[t]here is no indication of a constitutional plan to limit the ability of States themselves to operate freely in the free market.”⁵

Despite these decisions, the scope of the market participant exception has not been carefully defined, particularly with respect to whether a state acts as a market participant in “downstream regulation.”⁶

ArtI.S8.C3.7.7 Congressional Authorization of Otherwise Impermissible State Action

In general, the Court has recognized that Congress’s plenary authority over interstate commerce enables Congress to “keep the way open, confine it broadly or closely, or close it entirely, subject only to the restrictions placed upon its authority by other constitutional provisions and the requirement that it shall not invade the domains of action reserved exclusively for the states.”¹ Because the Dormant Commerce Clause protects this legislative domain, Congress may authorize state laws that otherwise would be considered discriminatory.² For example, in 1852, the Supreme Court held that the Wheeling Bridge unlawfully obstructed the free navigation of the Ohio River.³ Soon thereafter, Congress enacted legislation declaring the bridge to be a “lawful structure[ ].”⁴ In a subsequent opinion, the Court acknowledged that the act of Congress superseded its earlier ruling.⁵ Some Justices, however, have questioned whether Congress may in fact override the dormant Commerce Clause.⁶

Congress’s intent to permit otherwise impermissible state actions must “be unmistakably clear,” however.⁷ The Court has struck down various state regulations where it held that there was no federal law expressing a sufficiently clear intent to authorize a particular burden on interstate commerce.⁸

One line of cases has addressed states’ authority to regulate and tax the insurance business. In United States v. South-Eastern Underwriters Association, the Court held that insurance transactions across state lines constituted interstate commerce and thus could not be subjected to discriminatory state taxation.⁹ Less than a year later, Congress passed the McCarran-Ferguson Act, which provided that “the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.”¹⁰ Following the enactment of that law, the Court upheld a South Carolina statute that taxed the premiums of business done in that state by foreign insurance companies.¹¹

In a series of cases relating to state prohibition laws enacted in the 1890s, the Court emphasized that states could prohibit the manufacture and sale of alcohol within their boundaries, but could not prevent the importation or sale of alcohol in its original package from another state so long as Congress remained silent on the issue.¹² Congress then enacted the Wilson Act, which empowered states to regulate imported liquor on the same terms as domestic liquor.¹³ But the Court interpreted the Wilson Act narrowly to authorize states to regulate the resale of imported liquor, and not direct shipment to consumers for personal use.¹⁴ Congress then responded in 1913 by enacting the Webb-Kenyon Act, which authorized states to limit direct shipments of liquor for personal use.¹⁵

Following the repeal of Prohibition, the Supreme Court has repeatedly considered the relationship between the Twenty-First Amendment and the Dormant Commerce Clause as they govern state alcohol laws.¹⁶ Section 2 of the Amendment prohibited the “transportation or importation into any State, Territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof.”¹⁷ In its recent case law, the Court has emphasized that “the aim of § 2 was not to give States a free hand to restrict the importation of alcohol for purely protectionist purposes.”¹⁸ The Court has thus invalidated various state alcohol laws that discriminated in favor of in-state businesses where it has determined that a challenged requirement “[cannot] be justified as a public health or safety measure or on some other legitimate nonprotectionist ground.”¹⁹

ArtI.S8.C3.7.8 Facially Neutral Laws and Dormant Commerce Clause

For laws that are neither facially discriminatory nor protectionist in purpose or effect, the Supreme Court now applies a balancing approach to determine if they impermissibly burden interstate commerce. The Court first articulated the modern balancing test in 1945, in Southern Pacific Co. v. Arizona.¹ In that case, the Court held that an Arizona train-length law imposed an unconstitutional burden on interstate commerce. Writing for the majority, Justice Harlan Stone explained that courts would generally uphold regulations as within state authority “[w]hen the regulation of matters of local concern is local in character and effect, and its impact on the national commerce does not seriously interfere with its operation, and the consequent incentive to deal with them nationally is slight.”²

According to the Court, determining whether a state or local regulation was valid required a “reconciliation of the conflicting claims of state and national power,” which “is to be attained only by some appraisal and accommodation of the competing demands of the state and national interests involved.”³ To weigh those conflicting claims, the Court would consider “the nature and extent of the burden which the state regulation . . . 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.”⁴ Applying that balancing test to the Arizona law under review, the Court concluded that it was “obstructive to interstate train operation,” would have “a seriously adverse effect on transportation efficiency and economy,” and “passes beyond what is plainly essential for safety.”⁵

A more commonly cited articulation of the modern balancing test comes from Pike v. Bruce Church, Inc.⁶ In that case, the Court explained:

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.⁷

Since the adoption of the balancing test for evaluating facially neutral laws under the Dormant Commerce Clause, the Court has issued divergent rulings on state regulations.⁸ It has not expressly identified what constitutes an intolerable burden on interstate commerce, though it has held that a state law does not necessarily impose an undue burden on interstate commerce merely because it increases compliance costs or causes some entities to stop doing business in that state.⁹ Likewise, the Court has not articulated a definition of “legitimate local purpose,” though it has identified categories of interests that could be considered legitimate or illegitimate. In Pike, for example, the Court indicated that states had a legitimate interest in addressing safety (particularly in the context of long-standing local regulation), protecting in-state consumers, protecting or promoting in-state businesses, and maxmimizing the financial return to in-state industries.¹⁰ Under the Court’s balancing approach, however, the existence of a legitimate local interest is not alone a sufficient basis to uphold a law that burdens interstate commerce. The Court has also explained that “[s]hielding in-state industries from out-of-state competition is almost never a legitimate local purpose.”¹¹

Cases that have arisen in the context of financial regulation illustrate the fact-specific nature of the balancing test. In Lewis v. BT Investment Managers, Inc., the Court struck down a state law prohibiting ownership of local advisory businesses by out-of-state banks, holding companies, and trust companies. It acknowledged that “banking and related financial activities are of profound local concern” and that “[d]iscouraging economic concentration and protecting the citizenry against fraud are undoubtedly legitimate state interests.”¹² The Court nevertheless held that “disparate treatment of out-of-state bank holding companies cannot be justified as an incidental burden necessitated by legitimate local concerns,” in part because “some intermediate form of regulation” could accomplish the same goals.¹³ Likewise, in CTS Corp. v. Dynamics Corp. of America, the Court recognized the state’s legitimate interest in regulating its corporations and resident shareholders. In that case, it upheld the state law, finding that the state’s interest outweighed any burden on interstate commerce from the effects of the law.¹⁴ By contrast, in Edgar v. MITE Corp., the Court reasoned that states did not have a legitimate interest in protecting nonresident shareholders.¹⁵

At times, the Court has applied an extraterritoriality principle in its Dormant Commerce Clause analysis, holding that certain facially neutral state laws are unconstitutional because they attempt to regulate beyond a state’s borders.¹⁶ The Court has recognized that this principle “protects against inconsistent legislation arising from the projection of one state regulatory regime into the jurisdiction of another State” and “precludes the application of a state statute to commerce that takes place wholly outside of the State’s borders, whether or not the commerce has effects within the [regulating] State.”¹⁷ The Court has not articulated a general rule for when it will consider a state’s law to have the practical effect of regulating extraterritorial commerce.¹⁸

For both discriminatory and facially neutral laws, the Court’s “critical consideration” is a law’s “overall effect . . . on both local and interstate activity.”¹⁹ Yet determining whether a law is discriminatory and per se invalid, or facially netural and subject to the balancing test, is not straightforward. While the Court has cautioned that “no clear line” separates these two categories of regulations,²⁰ it has identified some categories of laws that are generally discriminatory: laws that aim to create “barriers to allegedly ruinous outside competition,” “to create jobs by keeping industry within the State,” “to preserve the State’s financial resources from depletion by fencing out indigent immigrants,” and to “accord [a state’s] own inhabitants a preferred right of access over consumers in other States to natural resources located within its borders” would all be invalidated.²¹

ArtI.S8.C3.7.9 Local Laws and Traditional Government Functions

At times, the Supreme Court has taken a more lenient approach under the Dormant Commerce Clause toward local laws that relate to government actions it identifies as traditional government functions, and which “may be directed toward any number of legitimate goals unrelated to protectionism.”¹ In such cases, the Court has held that “a government function is not susceptible to standard Dormant Commerce Clause scrutiny owing to its likely motivation by legitimate objectives distinct from the simple economic protectionism the Clause abhors.”²

The Court has not identified an exhaustive list of traditional government functions or a test for identifying them, but one paradigmatic example is the govenrment’s role in waste collection. In United Haulers Association, Inc. v. Oneida-Herkimer Solid Waste Management Authority, the Court upheld a law requiring trash haulers to bring waste to a processing plant owned by a state-created public benefit corporation. The Court explained that it would be “particularly hesitant to interfere . . . under the guise of the Commerce Clause” where a local government engaged in a traditional government function.³ United Haulers contrasted with earlier rulings that addressed garbarge transport and disposal laws without discussing whether those laws related to a traditional government function.⁴ For example, in C & A Carbone, Inc. v. Clarkstown,⁵ the Court invalidated a local “flow control” ordinance requiring that all solid waste within the town be processed at a designated transfer station before leaving the town. Underlying the restriction was the town’s desire to guarantee a minimum waste flow to the private contractor that constructed a solid waste transfer station. The Court declined to apply Carbone in United Haulers because the ordinance at issue in the latter case required haulers to bring waste to facilities owned and operated by a state-created public benefit corporation, as opposed to a private processing facility.⁶ 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.”⁷

The Court has applied a traditional governmental function lens in other contexts. In Department of Revenue of Kentucky v. Davis, the Court upheld Kentucky’s exemption of interest on its municipal bonds from state income taxes while imposing income taxes on bond interest from other states, after concluding that the issuance of debt securities to pay for public projects is a “quintessentially public function.”⁸ Curiously, the Court declined to apply the Pike v. Bruce Church, Inc. balancing analysis, holding that “the current record and scholarly material convince us that the Judicial Branch is not institutionally suited to draw reliable conclusions of the kind that would be necessary . . . to satisfy a Pike burden in this particular case.”⁹

ArtI.S8.C3.7.10 Foreign Commerce and State Powers

State taxation and regulation of commerce from abroad are also subject to negative commerce clause constraints. In the seminal case of Brown v. Maryland,¹ in the course of striking down a state statute requiring “all importers of foreign articles or commodities,” preparatory to selling the goods, to take out a license, Chief Justice John Marshall developed a lengthy exegesis explaining why the law was void under both the Import-Export Clause² and the Commerce Clause. According to the Chief Justice, an inseparable part of the right to import was the right to sell, and a tax on the sale of an article is a tax on the article itself. Thus, the taxing power of the states did not extend in any form to imports from abroad so long as they remain “the property of the importer, in his warehouse, in the original form or package” in which they were imported. This is the famous “original package” doctrine. Only when the importer parts with his importations, mixes them into his general property by breaking up the packages, may the state treat them as taxable property.

Obviously, to the extent that the Import-Export Clause was construed to impose a complete ban on taxation of imports so long as they were in their original packages, there was little occasion to develop a Commerce Clause analysis that would have reached only discriminatory taxes or taxes upon goods in transit.³ In other respects, however, the Court has applied the foreign commerce aspect of the clause more stringently against state taxation.

Thus, in Japan Line, Ltd. v. County of Los Angeles,⁴ the Court held that, in addition to satisfying the four requirements that govern the permissibility of state taxation of interstate commerce,⁵ “When a State seeks to tax the instrumentalities of foreign commerce, two additional considerations . . . come into play. The first is the enhanced risk of multiple taxation. . . . Second, a state tax on the instrumentalities of foreign commerce may impair federal uniformity in an area where federal uniformity is essential.”⁶ Multiple taxation is to be avoided with respect to interstate commerce by apportionment so that no jurisdiction may tax all the property of a multistate business, and the rule of apportionment is enforced by the Supreme Court with jurisdiction over all the states. However, the Court is unable to enforce such a rule against another country, and the country of the domicile of the business may impose a tax on full value. Uniformity could be frustrated by disputes over multiple taxation, and trade disputes could result.

Applying both these concerns, the Court invalidated a state tax, a nondiscriminatory, ad valorem property tax, on foreign-owned instrumentalities, i.e., cargo containers, of international commerce. The containers were used exclusively in international commerce and were based in Japan, which did in fact tax them on full value. Thus, there was the actuality, not only the risk, of multiple taxation. National uniformity was endangered, because, although California taxed the Japanese containers, Japan did not tax American containers, and disputes resulted.⁷

On the other hand, the Court has upheld a state tax on all aviation fuel sold within the state as applied to a foreign airline operating charters to and from the United States. The Court found the Complete Auto standards met, and it similarly decided that the two standards specifically raised in foreign commerce cases were not violated. First, there was no danger of double taxation because the tax was imposed upon a discrete transaction—the sale of fuel—that occurred within only one jurisdiction. Second, the one-voice standard was satisfied, because the United States had never entered into any compact with a foreign nation precluding such state taxation, having only signed agreements with others, which had no force of law, aspiring to eliminate taxation that constituted impediments to air travel.⁸ Also, a state unitary-tax scheme that used a worldwide-combined reporting formula was upheld as applied to the taxing of the income of a domestic-based corporate group with extensive foreign operations.⁹

Extending Container Corp., the Court in Barclays Bank v. Franchise Tax Bd. of California¹⁰ upheld the state’s worldwide-combined reporting method of determining the corporate franchise tax owed by unitary multinational corporations, as applied to a foreign corporation. The Court determined that the tax easily satisfied three of the four-part Complete Auto test—nexus, apportionment, and relation to state’s services—and concluded that the nondiscrimination principle—perhaps violated by the letter of the law—could be met by the discretion accorded state officials. As for the two additional factors, as outlined in Japan Lines, the Court pronounced itself satisfied. Multiple taxation was not the inevitable result of the tax, and that risk would not be avoided by the use of any reasonable alternative. The tax, it was found, did not impair federal uniformity or prevent the Federal Government from speaking with one voice in international trade, in view of the fact that Congress had rejected proposals that would have preempted California’s practice.¹¹ The result of the case, perhaps intended, is that foreign corporations have less protection under the negative Commerce Clause.¹²

The power to regulate foreign commerce was always broader than the states’ power to tax it, an exercise of the “police power” recognized by Chief Justice John Marshall in Brown v. Maryland.¹³ That this power was constrained by notions of the national interest and preemption principles was evidenced in the cases striking down state efforts to curb and regulate the actions of shippers bringing persons into their ports.¹⁴ On the other hand, quarantine legislation to protect the states’ residents from disease and other hazards was commonly upheld though it regulated international commerce.¹⁵ A state game-season law applied to criminalize the possession of a dead grouse imported from Russia was upheld because of the practical necessities of enforcement of domestic law.¹⁶

Nowadays, state regulation of foreign commerce is likely to be judged by the extra factors set out in Japan Line.¹⁷ Thus, the application of a state civil rights law to a corporation transporting passengers outside the state to an island in a foreign province was sustained in an opinion emphasizing that, because of the particularistic geographic situation the foreign commerce involved was more conceptual than actual, there was only a remote hazard of conflict between state law and the law of the other country and little if any prospect of burdening foreign commerce.

ArtI.S8.C3.7.11.1 Overview of State Taxation and Dormant Commerce Clause

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 to drain that quagmire, though at different times for taxation and for regulation.

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 by persons and corporations that are ordinarily engaged also in local business, often through activities that 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 fact-bound and difficult to reconcile, and this is particularly the case with respect to the infringement of interstate commerce by the state taxing power.³

ArtI.S8.C3.7.11.2 Early Dormant Commerce Clause Jurisprudence and State Taxation

The Supreme Court’s Dormant Commerce Clause jurisprudence dealing with how state taxing power relates to interstate commerce developed gradually with the Court first striking down a state tax as violating the Commerce Clause in 1873 in the State Freight Tax Case.¹ In the State Freight Tax Case, the Court considered 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.² A tax upon freight transported from one state to another effects a regulation of interstate commerce.³ 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.⁴

Relying on the doctrine established in Cooley v. Board of Wardens,⁵ the Supreme Court stated:

[W]henever the subjects over which a power to regulate commerce is asserted are in

their nature national or admit of one uniform system or plan of regulation, they may

justly be said to be of such a nature as to require exclusive legislation by Congress.

Surely transportation of passengers or merchandise through a State, or from one state

to another, is of this nature. It is of national importance that over that subject there

should be but one regulating power, for if one State can directly tax persons or property

passing through it, or tax them indirectly by levying a tax upon their transportation,

every other may, and thus commercial intercourse between States remote from each

other may be destroyed. . . . It was to guard against the possibility of such commercial

embarrassments, no doubt, that the power of regulating commerce among the States

was conferred upon the Federal government.⁶

The principle thus established in the State Freight Tax Case—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.” 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, decided the same day as the State Freight Tax Case, the Supreme Court considered the constitutionality of a state tax upon gross receipts of all railroads chartered by the state, when part of the receipts had been derived from interstate transportation of the same freight that had been held immune from tax pursuant to the State Freight Tax Case.⁷ If the latter tax—the state tax upon gross receipts of all railroads chartered by the state—was regarded as a tax on interstate commerce, it too would violate the Constitution. But to the Court, the tax on gross receipts of an interstate transportation company was not a tax on commerce. The Court stated: “[I]t is not everything that affects commerce that amounts to a regulation of it, within the meaning of the Constitution.”⁸ The Court reasoned that a gross receipts tax upon a railroad company, which concededly affected commerce, did not directly regulate commerce. The Court explained: “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. . . .”⁹

The Court differentiated these two cases in part on the basis of Cooley, reasoning 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.¹⁰ Those 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.¹¹ In the Minnesota Rate Cases, the Court stated: “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.”¹² However, the Court sustained taxes that imposed only an “indirect” burden on interstate commerce. For instance, the Court sustained property taxes and taxes in lieu of property taxes applied to all businesses, including instrumentalities of interstate commerce.¹³ Generally, courts sustained taxes that were imposed on some local, rather than 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 commerce—perhaps in pursuit of parochial interests. Many 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 for invalidation.¹⁴

Following the Great Depression and under the leadership of Justice, and later Chief Justice, Harlan Stone, the Court attempted to move away from the principle that interstate commerce may not be taxed and the use of the direct-indirect distinction. Instead, a state or local tax 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.¹⁵ 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.¹⁶ But in some cases, the Court continued to suggest that interstate commerce may not be taxed at all, even by a properly apportioned levy, and reasserted the direct-indirect tax distinction.¹⁷ Following a series of cases that suggested difficulty in applying the Court’s precedents,¹⁸ the Court adopted the modern standard which is discussed in the essay Modern Dormant Commerce Clause Jurisprudence on State Taxation Generally.¹⁹

ArtI.S8.C3.7.11.3 Modern Dormant Commerce Clause Jurisprudence and State Taxation

In the area of taxation, the transition from the earliest formulations to the modern standard was gradual.¹ Both taxation and regulation now, however, are evaluated under a judicial balancing formula comparing the burden on interstate commerce with the importance of the state interest, save for discriminatory state action that cannot be justified at all.

During the 1940s and 1950s, there was conflict within the Court between the view that interstate commerce could not be taxed at all, at least “directly,” and the view that the Dormant Commerce Clause protected against the risk of double taxation.² In Northwestern States Portland Cement Co. v. Minnesota,³ the Court reasserted the principle expressed in Western Live Stock—that the Framers did not intend to immunize interstate commerce from its just share of the state tax burden even though it increased the cost of doing business.⁴ In Northwestern States, the Court held that a state could constitutionally impose a nondiscriminatory, fairly apportioned net income tax on an out-of-state corporation engaged exclusively in interstate commerce in the taxing state. The Court stated: “For the first time outside the context of property taxation, the Court explicitly recognized that an exclusively interstate business could be subjected to the states’ taxing powers.”⁵ Thus, in Northwestern States, foreign corporations that maintained a sales office and employed sales staff in the taxing state for solicitation of orders for their merchandise that, upon acceptance of the orders at their home office in another jurisdiction, were shipped to customers in the taxing state, were held liable to pay the latter’s income tax on that portion of the net income of their interstate business as was attributable to such solicitation.

Subsequent years, however, saw inconsistent rulings that turned almost completely upon the use of or failure to use “magic words” by legislative drafters. That is, it was constitutional for states to tax a corporation’s net income, properly apportioned to the taxing state, as in Northwestern States, but no state could levy a tax on a foreign corporation for the privilege of doing business in the state, notwithstanding the similarity of the taxes.⁶

In Complete Auto Transit, Inc. v. Brady,⁷ the Court overruled the cases embodying the distinction and articulated a standard that has governed subsequent cases. A tax on interstate commerce will be sustained “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.”⁸

ArtI.S8.C3.7.11.4 Nexus Prong of Complete Auto Test for Taxes on Interstate Commerce

In Complete Auto Transit, Inc. v. Brady,¹ the Court held that a state tax on interstate commerce will be sustained “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.”² The first prong of the Complete Auto test, which this essay concerns,³ 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.”⁴ 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.⁵ 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.”⁶ The “broad inquiry” under “both constitutional requirements”⁷ 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.”⁸

Until the Court’s 2018 decision in South Dakota v. Wayfair,⁹ the Court imposed a relatively narrow interpretation of the minimum contacts test in two cases, which involved 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 held that unless a retailer maintained a physical presence with the state, the state lacked the power to require that retailer to collect a local use tax.¹⁰ A quarter of a century later, the Court reaffirmed Bellas Hess’s physical presence rule under the Commerce Clause in Quill v. North Dakota.¹¹

In South Dakota v. Wayfair, however, the Court overruled both cases, 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.¹² 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.¹³ Second, Justice Anthony Kennedy viewed the Quill rule as unmoored from the underlying purpose of the Commerce Clause: to prevent states from engaging in economic discrimination.¹⁴ 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.¹⁵ Third, the Wayfair Court viewed the physical presence rule, in contrast with modern Commerce Clause jurisprudence, as overly formalistic.¹⁶ 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.¹⁷

As the Court in Wayfair noted, the substantial nexus inquiry has tended to reject formal rules in favor of a more flexible inquiry.¹⁸ 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.¹⁹ 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.²⁰ 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.²¹

Providing guidance on what states may tax, the Court’s unitary business principle looks at whether the taxpayer’s intrastate and extra-state activities form a “single unitary business” or if the extra-state activities are unrelated to the instrastate activities and instead form a discrete business.²² In MeadWestvaco Corp. v. Illinois Department of Revenue, the Supreme Court stated:

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.²³

However, notwithstanding the existence of a unitary business, a “minimal connection” or “nexus” must still exist between the state and the taxpayer’s interstate activities to meet constitutional standards as well as a “rational relationship” between the amount taxed and the taxpayer’s intrastate activities.²⁴ As the Court explained in Container Corp. v. Franchise Tax Board:

The 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.’²⁵

ArtI.S8.C3.7.11.5 Apportionment Prong of Complete Auto Test for Taxes on Interstate Commerce

In Complete Auto Transit, Inc. v. Brady,¹ the Court held that a state tax on interstate commerce will be sustained “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.”² The second prong of the Complete Auto test, which this essay concerns, is the apportionment of the tax.³ This requirement is of long standing,⁴ but its importance has broadened as the scope of the states’ taxing powers has enlarged. When a business carries on a single integrated enterprise both within and without the state, the state may not exact from interstate commerce more than the state’s fair share. Avoidance of multiple taxation, or the risk of multiple taxation, is the test of an apportionment formula. Generally speaking, this factor has been seen as both a Commerce Clause and a due process requisite,⁵ although, as one recent Court decision notes, some tax measures that are permissible under the Due Process Clause nonetheless could run afoul of the Commerce Clause.⁶ The Court has declined to impose any particular formula on the states, reasoning that to do so would be to require the Court to engage in“extensive judicial lawmaking,” for which it was ill-suited and for which Congress had ample power and ability to legislate.⁷

In Goldberg v. Sweet, the Court articulated an “internally consistent test” and an “externally consistent test” when it upheld as properly apportioned a state tax on the gross charge of any telephone call originated or terminated in the state and charged to an in-state service address, regardless of where the telephone call was billed or paid.⁸ Explaining its “internally consistent test” and its “externally consistent test” for determining whether a tax has been fairly apportioned, the Goldberg Court wrote:

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.⁹

In American Trucking Ass’ns v. Scheiner, the Supreme Court held that a state registration tax met the internal consistency test because every state honored every other states’, and a motor fuel tax similarly was sustained because it was apportioned to mileage traveled in the state, whereas lump-sum annual taxes, an axle tax and an identification marker fee, being unapportioned flat taxes imposed for the use of the state’s roads, were voided under the internal consistency test, because if every state imposed them, then the burden on interstate commerce would be great.¹⁰ Similarly, in Comptroller of the Treasury of Maryland v. Wynne, the Court held that Maryland’s personal income tax scheme—which taxed Maryland residents on their worldwide income and nonresidents on income earned in the state and did not offer Maryland residents a full credit for income taxes they paid to other states—“fails the internal consistency test.”¹¹ The Court did so because if every state adopted the same approach, taxpayers who “earn[ ] income interstate” would be taxed twice on a portion of that income, while those who earned income solely within their state of residence would be taxed only once.¹²

Deference to state taxing authority was evident in Oklahoma Tax Commission v. Jefferson Lines, Inc., in which the Court sustained a state sales tax on the price of a bus ticket for travel that originated in the state but terminated in another state.¹³ The tax was unapportioned to reflect the intrastate travel and the interstate travel.¹⁴ The tax in Oklahoma was different from the tax upheld in Central Greyhound, the Court held, because the tax in Central Greyhound constituted a levy on gross receipts, payable by the seller, whereas the tax in Oklahoma was a sales tax, also assessed on gross receipts, but payable by the buyer.¹⁵ The Oklahoma tax, the Court continued, was internally consistent, because if every state imposed a tax on ticket sales within the state for travel originating there, no sale would be subject to more than one tax.¹⁶ The tax was also externally consistent, the Court held, because it was a tax on the sale of a service that took place in the state, not a tax on the travel.¹⁷

In Fulton Corp. v. Faulkner, the Court, however, found discriminatory and thus invalid a state intangibles tax on a fraction of the value of corporate stock owned by state residents inversely proportional to the state’s exposure to the state income tax.¹⁸

ArtI.S8.C3.7.11.6 Discrimination Prong of Complete Auto Test for Taxes on Interstate Commerce

In Complete Auto Transit, Inc. v. Brady,¹ the Court held that a state tax on interstate commerce will be sustained “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.”² The third prong of the Complete Auto test, which this essay concerns, goes to whether the tax discriminates against interstate commerce.³

The “fundamental principle” governing the discrimination factor is simple and fully consonant with the broader application of the Dormant Commerce Clause. As the Supreme Court recognized in Boston Stock Exchange v. State Tax Commission: “‘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.’”⁴ 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.⁵ In Armco, Inc. v. Hardesty,⁶ 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.⁷ Similarly, in Bacchus Imports, Ltd. v. Dias, the Court held a state excise tax on wholesale liquor sales, which exempted sales of specified local products, to violate the Commerce Clause.⁸ The Court also held that 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, to be discriminatory and in violation of the Commerce Clause in New Energy Co. of Indiana v. Limbach.⁹ The Court reached the same conclusion as to Maryland’s personal income tax scheme in Comptroller of the Treasury of Maryland v. Wynne, 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.”¹⁰

Expanding, although neither unexpectedly nor exceptionally, its dormant commerce jurisprudence, the Court in Camps Newfound/Owatonna, Inc. v. Town of Harrison¹¹ 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. As such, the tax scheme was designed to encourage entities to care for local populations and to discourage attention to out-of-state individuals and groups. Camps Newfound/Owatonna Inc., however, operated a church camp for children, most of whom resided out-of-state. In holding the tax to violate the Commerce Clause, the Court underscored that there was no reason to distinguish nonprofits from for-profit companies for Commerce Clause purposes.

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.¹²

ArtI.S8.C3.7.11.7 Benefit Prong of Complete Auto Test for Taxes on Interstate Commerce

In Complete Auto Transit, Inc. v. Brady,¹ the Court held that a state tax on interstate commerce will be sustained “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.”² The fourth prong of the Complete Auto test, which this essay concerns, goes to whether the tax is fairly related to the services that the State provides.³

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 tax be fairly related to benefits provided by the taxing state, the Court has not addressed how to weigh the amount of the tax or the value of the benefits bestowed. The test rather is whether, as a matter of the nexus 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.⁴