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State Taxation and Regulation: The Old Law

State Taxation and Regulation: The Old Law

Although in previous editions of this volume considerable attention was paid to the development and circuitous paths of the law of the negative commerce clause, the value of this exegesis was doubtlessly quite limited. The Court itself has admitted that its “some three hundred full-dress opinions” as of 1959 have not resulted in “consistent or reconcilable” doctrine but rather in something more resembling a “quagmire.”956 Although many of the principles still applicable in constitutional law may be found in the older cases, in fact the Court has worked a revolution in this area, though at different times for taxation and for regulation. Thus, in this section we summarize the “old” law and then deal more fully with the “modern” law of the negative commerce clause.

956 Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 457– 458 (1959) (in part quoting Miller Bros. v. Maryland, 347 U.S. 340, 344 (1954)). Justice Frankfurter was similarly skeptical of definitive statements. “To attempt to harmonize all that has been said in the past would neither clarify what has gone before nor guide the future. Suffice it to say that especially in this field opinions must be read in the setting of the particular cases and as the product of preoccupation with their special facts.” Freeman v. Hewit, 329 U.S. 249, 251–252 (1946). The comments in all three cases dealt with taxation, but they could just as well have included regulation.

General Considerations.—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.957 With “commerce among the States” affairs are very different. Interstate commerce is conducted in the interior of the country, by persons and corporations that are ordinarily engaged also in local business; its usual incidents are acts that, if unconnected with commerce among the States, would fall within the State’s powers of police and taxation, while the things it deals in and the instruments by which it is carried on comprise the most ordinary subject matter of state power. In this field, the Court consequently has been unable to rely upon sweeping solutions. To the contrary, its judgments have often been fluctuating and tentative, even contradictory, and this is particularly the case with respect to the infringement of interstate commerce by the state taxing power.958

Taxation.—The leading case dealing with the relation of the States’ taxing power to interstate commerce, the case in which the Court first struck down a state tax as violative of the commerce clause, was the State Freight Tax Case.959 Before the Court was the validity of a Pennsylvania statute that required every company transporting freight within the State, with certain exceptions, to pay a tax at specified rates on each ton of freight carried by it. The Court’s reasoning was forthright. Transportation of freight constitutes commerce.960 A tax upon freight transported from one State to another effects a regulation of interstate commerce.961 Under the Cooley doctrine, whenever the subject of a regulation of commerce is in its nature of national interest or admits of one uniform system or plan of regulation, that subject is within the exclusive regulating control of Congress.962 Transportation of passengers or merchandise through a State, or from one State to another, is of this nature.963 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.964

957 Infra pp. 240–42. See also Hillside Dairy, Inc. v. Lyons, 539 U.S. 59 (2003) (authorization of state laws regulating milk solids does not authorize milk pricing and pooling laws).

958 In addition to the sources previously cited, see J. HELLERSTEIN & W. HELLERSTEIN, STATE AND LOCAL TAXATION—CASES AND MATERIALS ch. 6, 241 (5th ed. 1988) passim. For a succinct description of the history, see Hellerstein, State Taxation of Interstate Business: Perspectives on Two Centuries of Constitutional Adjudication, 41 TAX LAW. 37 (1987).

959 Reading R.R. v. Pennsylvania, 82 U.S. (15 Wall.) 232 (1873).

960 82 U.S. at 275.

961 82 U.S. at 275–76, 279.

The principle thus asserted, that a State may not tax interstate commerce, confronted the principle that a State may tax all purely domestic business within its borders and all property “within its jurisdiction.” Inasmuch as most large concerns prosecute both an interstate and a domestic business, while the instrumentalities of interstate commerce and the pecuniary returns from such commerce are ordinarily property within the jurisdiction of some State or other, the task before the Court was to determine where to draw the line between the immunity claimed by interstate business, on the one hand, and the prerogatives claimed by local power on the other. In the State Tax on Railway Gross Receipts Case,965 decided the same day as the State Freight Tax Case, the issue was a tax upon gross receipts of all railroads chartered by the State, part of the receipts having been derived from interstate transportation of the same freight that had been held immune from tax in the first case. If the latter tax were regarded as a tax on interstate commerce, it too would fall. But to the Court, the tax on gross receipts of an interstate transportation company was not a tax on commerce. “[I]t is not everything that affects commerce that amounts to a regulation of it, within the meaning of the Constitution.”966 A gross receipts tax upon a railroad company, which concededly affected commerce, was not a regulation “directly. Very manifestly it is a tax upon the railroad company.... That its ultimate effect may be to increase the cost of transportation must be admitted.... Still it is not a tax upon transportation, or upon commerce....”967

Insofar as there is a distinction between these two cases, the Court drew it in part on the basis of Cooley, that some subjects embraced within the meaning of commerce demand uniform, national regulation, while 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.968 Confusingly, the two concepts were sometimes conflated, 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.969 “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.”970 However, some taxes imposed only an “indirect” burden and were sustained; property taxes and taxes in lieu of property taxes applied to all businesses, including instrumentalies of interstate commerce, were sustained.971 A good rule of thumb in these cases is that taxation was sustained if the tax was imposed on some local, rather than an interstate, activity or if the tax was exacted before interstate movement had begun or after it had ended.

962 82 U.S. at 279–80.

963 82 U.S. at 280.

964 82 U.S. at 281–82.

965 Reading R.R. v. Pennsylvania, 82 U.S. (15 Wall.) 284 (1872).

966 82 U.S. at 293.

967 82 U.S. at 294. This case was overruled 14 years later, when the Court voided substantially the same tax in Philadelphia Steamship Co. v. Pennsylvania, 122 U.S. 326 (1887).

968 See The Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 398–412 (1913) (reviewing and summarizing at length both taxation and regulation cases). See also Missouri ex rel. Barrett v. Kansas Natural Gas Co., 265 U.S. 298, 307 (1924).

969 Robbins v. Shelby County Taxing Dist., 120 U.S. 489, 497 (1887); Leloup v. Port of Mobile, 127 U.S. 640, 648 (1888).

970 The Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 400–401 (1913).

971 The Delaware R.R. Tax, 85 U.S. (18 Wall.) 206, 232 (1873). See Cleveland, Cincinnati, Chicago & St. Louis Ry. Co. v. Backus, 154 U.S. 439 (1894); Postal Telegraph Cable Co. v. Adams, 155 U.S. 688 (1895). See cases cited in J. HELLERSTEIN & W. HELLERSTEIN, supra n. 891, at 215–219.

An independent basis for invalidation was that the tax was discriminatory, that its impact was intentionally or unintentionally felt by interstate commerce and not by local, perhaps in pursuit of parochial interests. Many of the early cases actually involving discriminatory taxation were decided on the basis of the impermissibility of taxing interstate commerce at all, but the category was soon clearly delineated as a separate ground (and one of the most important today).972

Following the Great Depression and under the leadership of Justice, and later Chief Justice, Stone, the Court attempted to move away from the principle that interstate commerce may not be taxed and reliance on the direct-indirect distinction. Instead, a state or local levy would be voided only if in the opinion of the Court it created a risk of multiple taxation for interstate commerce not felt by local commerce.973 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.974 But, just as the Court had achieved constancy in the area of regulation, it reverted to the older doctrines in the taxation area and reiterated that interstate commerce may not be taxed at all, even by a properly apportioned levy, and re-asserted the direct-indirect distinction.975 The stage was set, following a series of cases in which through formalistic reasoning the States were permitted to evade the Court’s precedents,976 for the formulation of a more realistic doctrine.

972 E.g., Welton v. Missouri, 91 U.S. 275 (1875); Robbins v. Shelby County Taxing District, 120 U.S. 489 (1887); Darnell & Son Co. v. City of Memphis, 208 U.S. 113 (1908); Bethlehem Motors Corp. v. Flynt, 256 U.S. 421 (1921).

973 Western Live Stock v. Bureau of Revenue, 303 U.S. 250 (1938); McGoldrick v. Berwind-White Coal Mining Co., 309 U.S. 33 (1940); International Harvester Co. v. Department of Treasury, 322 U.S. 340 (1944); International Harvester Co. v. Evatt, 329 U.S. 416 (1947).

974 E.g., Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434 (1939); Joseph v. Carter & Weekes Stevedoring Co., 330 U.S. 422 (1947); Central Greyhound Lines v. Mealey, 334 U.S. 653 (1948). Notice the Court’s distinguishing of Central Greyhound in Oklahoma Tax Comm’n v. Jefferson Lines, 514 U.S. 175, 188–91 (1995).

975 Freeman v. Hewit, 329 U.S. 249 (1946); Spector Motor Service v. O’Connor, 340 U.S. 602 (1951).

976 Thus, the States carefully phrased tax laws so as to impose on interstate companies not a license tax for doing business in the State, which was not permitted, Railway Express Agency v. Virginia, 347 U.S. 359 (1954), but as a franchise tax on intangible property or the privilege of doing business in a corporate form, which was permissible. Railway Express Agency v. Virginia, 358 U.S. 434 (1959); Colonial Pipeline Co. v. Traigle, 421 U.S. 100 (1975). Also, the Court increasingly found the tax to be imposed on a local activity in instances it would previously have seen to be an interstate activity. E.g., Memphis Natural Gas Co. v. Stone, 335 U.S. 80 (1948); General Motors Corp. v. Washington, 377 U.S. 436 (1964); Standard Pressed Steel Co. v. Department of Revenue, 419 U.S. 560 (1975).

Regulation.—Much more diverse were the cases dealing with regulation by the state and local governments. Taxation was one thing, the myriad approaches and purposes of regulations another. Generally speaking, if the state action was perceived by the Court to be a regulation of interstate commerce itself, it was deemed to impose a “direct” burden on interstate commerce and impermissible. If the Court saw it as something other than a regulation of interstate commerce, it was considered only to “affect” interstate commerce or to impose only an “indirect” burden on it in the proper exercise of the police powers of the States.977 But the distinction between “direct” and “indirect” burdens was often perceptible only to the Court.978

977 Sedler, The Negative Commerce Clause as a Restriction on State Regulation and Taxation: An Analysis in Terms of Constitutional Structure, 31 WAYNE L. REV. 885, 924–925 (1985). In addition to the sources already cited, see the Court’s summaries in The Minnesota Rate Cases (Simpson v. Shepard), 230 U.S. 352, 398– 412 (1913), and Southern Pacific Co. v. Arizona, 325 U.S. 761, 766–770 (1945). In the latter case, Chief Justice Stone was reconceptualizing the standards under the clause, but the summary represents a faithful recitation of the law.

978 See DiSanto v. Pennsylvania, 273 U.S. 34, 44 (1927) (Justice Stone dissenting). The dissent was the precurser to Chief Jusdtice Stone’s reformulation of the standard in 1945. DiSanto was overruled in California v. Thompson, 313 U.S. 109 (1941).

A corporation’s status as a foreign entity did not immunize it from state requirements, conditioning its admission to do a local business, to obtain a local license, and to furnish relevant information as well as to pay a reasonable fee.979 But no registration was permitted of an out-of-state corporation, the business of which in the host State was purely interstate in character.980 Neither did the Court permit a State to exclude from the its courts a corporation engaging solely in interstate commerce because of a failure to register and to qualify to do business in that State.981

Interstate transportation brought forth hundreds of cases. State regulation of trains operating across state lines resulted in divergent rulings. It was early held improper for States to prescribe charges for transportation of persons and freight on the basis that the regulation must be uniform and thus could not be left to the States.982 The Court deemed “reasonable” and therefore constitutional many state regulations requiring a fair and adequate service for its inhabitants by railway companies conducting interstate service within its borders, as long as there was no unnecessary burden on commerce.983 A marked tolerance for a class of regulations that arguably furthered public safety was long exhibited by the Court,984 even in instances in which the safety connection was tenuous.985 Of particular controversy were “full-crew” laws, represented as safety measures, that were attacked by the companies as “feather-bedding” rules.986

979 Bank of Augusta v. Earle, 38 U.S. (13 Pet.) 519 (1839); Hanover Fire Ins. Co. v. Harding, 272 U.S. 494 (1926); Union Brokerage Co. v. Jensen, 322 U.S. 202 (1944).

980 Crutcher v. Kentucky, 141 U.S. 47 (1891); International Textbook Co. v. Pigg, 217 U.S. 91 (1910).

981 Dahnke-Walker Co. v. Bondurant, 257 U.S. 282 (1921); Allenberg Cotton Co. v. Pittman, 419 U.S. 20 (1974). But see Eli Lilly & Co. v. Sav-on Drugs, 366 U.S. 276 (1961).

982 Wabash, S. L. & P. Ry. v. Illinois, 118 U.S. 557 (1886). The power of the States generally to set rates had been approved in Chicago, B. & Q. R.R. v. Iowa, 94 U.S. 155 (1877), and Peik v. Chicago & N. W. Ry., 94 U.S. 164 (1877). After the Wabash decision, States retained power to set rates for passengers and freight taken up and put down within their borders. Wisconsin R.R. Comm’n v. Chicago, B. & Q. R.R., 257 U.S. 563 (1922).

983 Generally, the Court drew the line at regulations that provided for adequate service, not any and all service. Thus, one class of cases dealt with requirements that trains stop at designated cities and towns. The regulations were upheld in such cases as Gladson v. Minnesota, 166 U.S. 142 (1897), and Lake Shore & Mich. South. Ry. v. Ohio, 173 U.S. 285 (1899), and invalidated in Illinois Central R. R. v. Illinois, 142 (1896). See Chicago, B. & Q. R.R. v. Wisconsin R.R. Comm’n, 237 U.S. 220, 226 (1915); St. Louis & S. F. Ry. v. Public Service Comm’n, 254 U.S. 535, 536–537 (1921). The cases were extremely fact particularistic.

Similarly, motor vehicle regulations have met mixed fates. Basically, it has always been recognized that States, in the interest of public safety and conservation of public highways, may enact and enforce comprehensive licensing and regulation of motor vehicles using its facilities.987 Indeed, States were permitted to regulate many of the local activities of interstate firms and thus the interstate operations, in pursuit of these interests.988 Here, too, safety concerns became overriding objects of deference, even in doubtful cases.989 In regard to navigation, which had given rise to Gibbons v. Ogden and Cooley, the Court generally upheld much state regulation on the basis that the activities were local and did not demand uniform rules.990

984 E.g., Smith v. Alabama, 124 U.S. 465 (1888) (required locomotive engineers to be examined and licensed by the State, until Congress should deem otherwise); New York, N. H. & H. R.R. v. New York, 165 U.S. 628 (1897) (fobidding heating of passenger cars by stoves); Chicago, R. I. & Pac. Ry. v. Arkansas, 219 U.S. 453 (1911) (requiring three brakemen on freight trains of more than 25 cars).

985 E.g., Terminal Ass’n v. Trainmen, 318 U.S. 1 (1943) (requiring railroad to provide caboose cars for its employees); Hennington v. Georgia, 163 U.S. 299 (1896) (forbidding freight trains to run on Sundays). But see Seaboard Air Line Ry. v. Blackwell, 244 U.S. 310 (1917) (voiding as too onerous on interstate transportation law requiring trains to come to almost a complete stop at all grade crossings, when there were 124 highway crossings at grade in 123 miles, doubling the running time).

986 Four cases over a lengthy period sustained the laws. Chicago, R. I. & Pac. Ry. Co. v. Arkansas, 219 U.S. 453 (1911); St. Louis, Iron Mt. & S. Ry. v. Arkansas, 240 U.S. 518 (1916); Missouri Pacific Co. v. Norwood, 283 U.S. 249 (1931); Brotherhood of Locomotive Firemen & Enginemen v. Chicago, R. I. & P. R.R., 382 U.S. 423 (1966). In the latter case, the Court noted the extensive and conflicting record with regard to safety, but it then ruled that with the issue in so much doubt it was peculiarly a legislative choice.

987 Hendrick v. Maryland, 235 U.S. 610 (1915); Kane v. New Jersey, 242 U.S. 160 (1916).

988 E.g., Bradley v. Public Utility Comm’n, 289 U.S. 92 (1933) (State could deny an interstate firm a necessary certificate of convenience to operate as a common carrier on the basis that the route was overcrowded); Welch Co. v. New Hampshire, 306 U.S. 79 (1939) (maximum hours for drivers of motor vehicles); Eichholz v. Public Service Comm’n, 306 U.S. 268 (1939) (reasonable regulations of traffic). But compare Michigan Comm’n v. Duke, 266 U.S. 570 (1925) (State may not impose common-carrier responsibilities on business operating between States that did not assume them); Buck v. Kuykendall, 267 U.S. 307 (1925) (denial of certificate of convenience under circumstances was a ban on competition).

989 E.g., Mauer v. Hamilton, 309 U.S. 598 (1940) (ban on oiperation of any motor vehicle carrying any other vehicle above the head of the operator). By far, the example of the greatest deference is South Carolina Highway Dep’t v. Barnwell Bros., 303 U.S. 177 (1938), in which the Court upheld, in a surprising Stone opinion, truck weight and width restrictions prescribed by practically no other State (in terms of the width, no other).

990 E.g., Transportation Co. v. City of Chicago, 99 U.S. 635 (1879); Willamette Iron Bridge Co. v. Hatch, 125 U.S. 1 (1888). See Kelly v. Washington, 302 U.S. 1 (1937) (upholding state inspection and regulation of tugs operating in navigable waters, in absence of federal law).

As a general rule, during this time, although the Court did not permit States to regulate a purely interstate activity or prescribe prices for purely interstate transactions,991 it did sustain a great deal of price and other regulation imposed prior to or subsequent to the travel in interstate commerce of goods produced for such commerce or received from such commerce. For example, decisions late in the period upheld state price-fixing schemes applied to goods intended for interstate commerce.992

However, the States always had an obligation to act nondiscriminatorily. Just as in the taxing area, regulation that was parochially oriented, to protect local producers or industries, for instance, was not evaluated under ordinary standards but subjected to practically per se invalidation. The mirror image of Welton v. Missouri,993 the tax case, was Minnesota v. Barber,994 in which the Court invalidated a facially neutral law that in its practical effect discriminated against interstate commerce and in favor of local commerce. The law required fresh meat sold in the State to have been inspected by its own inspectors with 24 hours of slaughter. Thus, meat slaughtered in other States was excluded from the Minnesota market. The principle of the case has a long pedigree of application.995 State protectionist regulation on behalf of local milk producers has occasioned judicial censure. Thus, in Baldwin v. G.A.F. Seelig, Inc.,996 the Court had before it a complex state price-fixing scheme for milk, in which the State, in order to keep the price of milk artificially high within the State, required milk dealers buying out-of-state to pay producers, wherever they were, what the dealers had to pay within the State, and, thus, in-state producers were protected. And in H. P. Hood & Sons, Inc. v. Du Mond,997 the Court struck down a state refusal to grant an out-of-state milk distributor a license to operate a milk receiving station within the State on the basis that the additional diversion of local milk to the other State would impair the supply for the in-state market. A State may not bar an interstate market to protect local interests.998

991 E.g., Western Union Tel Co. v. Foster, 247 U.S. 105 (1918); Lemke v. Framers Grain Co., 258 U.S. 50 (1922); State Corp. Comm’n v. Wichita Gas Co., 290 U.S. 561 (1934).

992 Milk Control Board v. Eisenberg Co., 306 U.S. 346 (1939) (milk); Parker v. Brown, 317 U.S. 341 (1943) (raisins).

993 91 U.S. 275 (1875).

994 136 U.S. 313 (1890).

995 E.g., Brimmer v. Rebman, 138 U.S. 78 (1891) (law requiring postslaughter inspection in each county of meat transported over 100 miles from the place of slaughter); Dean Milk Co. v. City of Madison, 340 U.S. 349 (1951) (city ordinance preventing selling of milk as pasteurized unless it had been processed and bottled at an approved plant within a radius of five miles from the central square of Madison). As the latter case demonstrates, it is constitutionally irrelevant that other Wisconsin producers were also disadvantaged by the law. For a modern application of the principle of these cases, see Fort Gratiot Sanitary Landfill v. Michigan Natural Resources Dept., 504 U.S. 353 (1992) (forbidding landfills from accepting outof-county wastes). And see C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 391 (1994) (discrimination against interstate commerce not preserved because local businesses also suffer).

996 294 U.S. 511 (1935). See also Polar Ice Cream & Creamery Co. v. Andrews, 375 U.S. 361 (1964). With regard to products originating within the State, the Court had no difficulty with price fixing. Nebbia v. New York, 291 U.S. 502 (1934).

997 336 U.S. 525 (1949). For the most recent case in this saga, see West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994).

998 And the Court does not permit a State to combat discrimination against its own products by admitting only products (here, again, milk) from States that have reciprocity agreements with it to protect its own dealers. Great Atlantic & Pacific Tea Co. v. Cottrell, 424 U.S. 366 (1976).

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Last modified: June 9, 2014