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State Taxation and Regulation: the Modern Law

State Taxation and Regulation: The Modern Law

General Considerations.—Transition from the old law to the modern standard occurred relatively smoothly in the field of regulation,999 but in the area of taxation the passage was choppy and often witnessed retreats and advances.1000 In any event, both taxation and regulation now are evaluated under a judicial balancing formula comparing the burden on interstate commerce with the importance of the state interest, save for discriminatory state action that cannot be justified at all.

Taxation.—During the 1940s and 1950s, there was engaged within the Court a contest between the view that interstate commerce could not be taxed at all, at least “directly,” and the view that the negative commerce clause protected against the risk of double taxation.1001 In Northwestern States Portland Cement Co. v. Minnesota,1002 the Court reasserted the principle expressed earlier in Western Live Stock, that the Framers did not intend to immunize interstate commerce from its just share of the state tax burden even though it increased the cost of doing business.1003 Northwestern States held that a State could constitutionally impose a nondiscriminatory, fairly apportioned net income tax on an out-of-state corporation engaged exclusively in interstate commerce in the taxing State. “For the first time outside the context of property taxation, the Court explicitly recognized that an exclusively interstate business could be subjected to the states’ taxing powers.”1004 Thus, in Northwestern States, foreign corporations, which 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.

999 Formulation of a balancing test was achieved in Southern Pacific Co. v. Arizona, 325 U.S. 761 (1945),and was thereafter maintained more or less consistently. The Court’s current phrasing of the test was in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970).

1000 Indeed, scholars dispute just when the modern standard was firmly adopted. The conventional view is that it was articulated in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), but there also seems little doubt that the foundation of the present law was laid in Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959).

1001 Compare Freeman v. Hewit, 329 U.S. 249, 252–256 (1946), with Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 258, 260 (1938).

1002 358 U.S. 450 (1959).

1003 358 U.S. at 461–62. See Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254 (1938). For recent reiterations of the principle, see Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 310 n.5 (1992) (citing cases).

1004 Hellerstein, State Taxation of Interstate Business: Perspectives on Two Centuries of Constitutional Adjudication, 41 TAX LAW. 37, 54 (1987).

Yet, the following years saw inconsistent rulings that turned almost completely upon the use of or failure to use “magic words” by legislative drafters. That is, it was constitutional for the States to tax a corporation’s net income, properly apportioned to the taxing State, as in Northwestern States, but no State could levy a tax on a foreign corporation for the privilege of doing business in the State, both taxes alike in all respects.1005 In Complete Auto Transit, Inc. v. Brady,1006 the Court overruled the cases embodying the distinction and articulated a standard that has governed the cases since. The tax in Brady was imposed on the privilege of doing business as applied to a corporation engaged in interstate transportation services in the taxing State; it was measured by the corporation’s gross receipts from the service. The appropriate concern, the Court wrote, was to pay attention to “economic realities” and to “address the problems with which the commerce clause is concerned.”1007 The standard, a set of four factors that was distilled from precedent but newly applied, was firmly set out. A tax on interstate commerce will be sustained “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.”1008 All subsequent cases have been decided in this framework.

1005 Spector Motor Service, Inc. v. O’Connor, 340 U.S. 602 (1951). The attenuated nature of the purported distinction was evidenced in Colonial Pipeline Co. v. Traigle, 421 U.S. 100 (1975), in which the Court sustained a nondiscriminatory, fairly apportioned franchise tax that was measured by the taxpayer’s capital stock, imposed on a pipeline company doing an exclusively interstate business in the taxing State, on the basis that it was a tax imposed on the privilege of conducting business in the corporate form.

1006 430 U.S. 274 (1977).

1007 430 U.S. at 279, 288. “In reviewing Commerce Clause challenges to state taxes, our goal has instead been to ‘establish a consistent and rational method of inquiry’ focusing on ‘the practical effect of a challenged tax.’” Commonwealth Edison Co. v. Montana, 453 U.S. 609, 615 (1981) (quoting Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 443 (1980)).

1008 430 U.S. at 279. The rationale of these four parts of the test is set out in Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 312-13 (1992). A recent application of the four-part Complete Auto Transit test is Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995).

Nexus.—Nexus is a requirement that flows from both the commerce clause and the due process clause of the Fourteenth Amendment.1009 What is required is “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.”1010 In its commerce-clause setting, the nexus requirement serves to effectuate the “structural concerns about the effects of state regulation on the national economy.”1011 That is, “the ‘substantial-nexus’ requirement . . . limit[s] the reach of State taxing authority so as to ensure that State taxation does not unduly burden interstate commerce.”1012 The broad inquiry subsumed in both constitutional requirements is whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state — that is, whether the state has given anything for which it can ask return.”25

Often surfacing in cases having to do with the imposition of an obligation by a State on an out-of-state vendor to collect use taxes on goods sold to purchasers in the taxing State, the test is a “physical presence” standard. The Court has sustained the imposition on mail order sellers with retail outlets, solicitors, or property within the taxing State,1013 but it has denied the power to a State when the only connection is that the company communicates with customers in the State by mail or common carrier as part of a general interstate business.1014 The validity of general business taxes on interstate enterprises may also be determined by the nexus standard. However, again, only a minimal contact is necessary.1015 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.1016 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.1017 Also, the Court 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.1018

1009 It had been thought that the tests of nexus under the commerce clause and the due process clause were identical, but, controversially, in Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 306-08 (1992), but compare id. at 319 (Justice White concurring in part and dissenting in part), the Court, stating that the two “are closely related,” (citing National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753, 756 (1967)), held that the two constitutional requirements “differ fundamentally” and it found a state tax met the due process test while violating the commerce clause.

1010 National Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 386 U.S. 753, 756 (1967). The phraseology is quoted from a due process case, Miller Bros. v. Maryland, 347 U.S. 340, 344–345 (1954), but as a statement it probably survives the bifurcation of the tests in Quill.

1011 Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 312 (1992).

1012 504 U.S. at 313.

25 Meadwestvaco Corp. v. Illinois Dept. of Revenue, 128 S. Ct. 1498, 1505 (2008) (citations and internal quotation marks omitted).

1013 Scripto v. Carson, 362 U.S. 207 (1960); National Geographic Society v. California Bd. of Equalization,, 430 U.S. 551 (1977). The agents in the State in Scripto were independent contractors, rather than employees, but this distinction was irrelevant. See also Tyler Pipe Indus. v. Washington State Dept. of Revenue, 483 U.S. 232, 249–250 (1987) (reaffirming Scripto on this point). See also D. H. Holmes Co. v. McNamara, 486 U.S. 24 (1988) (imposition of use tax on catalogs, printed outside State at direction of an in-state corporation and shipped to prospective customers within the State, upheld).

1014 National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), reaffirmed with respect to the commerce clause in Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298 (1992).

1015 Some in-state contact is necessary in many instances by statutory compulson, Reacting to Northwestern States, Congress enacted P.L. 86–272, 15 U.S.C. § 381, providing that mere solicitation by a company acting outside the State did not support imposition of a state income tax on a company’s proceeds. See Heublein, Inc. v. South Carolina Tax Comm’n, 409 U.S. 275 (1972).

1016 Standard Pressed Steel Co. v. Department of Revenue, 419 U.S. 560 (1975). See also General Motors Corp. v. Washington, 377 U.S. 436 (1964).

1017 Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232, 249–251 (1987). The Court noted its agreement with the state court holding that “‘the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.’” Id. at 250.

1018 United Air Lines v. Mahin, 410 U.S. 623 (1973).

Given the complexity of modern corporations and their frequent diversification and control of subsidiaries, state treatment of businesses operating within and without their borders requires an appropriate definition of the scope of business operations. Thus, States may impose a tax in accordance with a “unitary business” apportionment formula on concerns carrying on part of their business within the taxing State based upon the company’s entire proceeds. But there must be a nexus, or minimal connection, 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.1019

Apportionment.—This requirement is of long standing,1020 but its importance has broadened as the scope of the States’ taxing powers has enlarged. It is concerned with what formulas the States must use to claim a share of a multistate business’ tax base for the taxing State, when the business carries on a single integrated enterprise both within and without the State. A State may not exact from interstate commerce more than the State’s fair share. Avoidance of multiple taxation, or the risk of multiple taxation, is the test of an apportionment formula. Generally speaking, this factor is both a commerce clause and a due process requisite, and it necessitates a rational relationship between the income attributed to the State and the intrastate values of the enterprise.1021 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.1022

1019 Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 165–169 (1983); ASARCO Inc. v. Idaho State Tax Comm’n, 458 U.S. 307, 316–17 (1982). Hunt-Wesson, Inc. v. Franchise Tax Bd. of Cal., 528 U.S. 58 (2000) (interest deduction not properly apportioned between unitary and non-unitary business). See also Meadwestvaco Corp. v. Illinois Dept. of Revenue, 128 S. Ct. 1498, 1508 (2008) (the concept of “operational function,” which the Court had introduced in prior cases, was “not intended to modify the unitary business principle by adding a new ground for apportionment”).

1020 E.g., Pullman’s Palace Car Co. v. Pennsylvania, 141 U.S. 18, 26 (1891); Maine v. Grand Trunk Ry., 142 U.S. 217, 278 (1891).

1021 The recent cases are, Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978); Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980); Exxon Corp. v. Wisconsin Dep’t of Revenue, 447 U.S. 207 (1980); ASARCO Inc. v. Idaho State Tax Comm’n, 458 U.S. 307 (1982); F. W. Woolworth Co. v. New Mexico Taxation & Revenue Dep’t, 458 U.S. 354 (1982); Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983); Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232, 251 (1987) Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768 (1992). Cf. American Trucking Ass’ns Inc. v. Scheiner, 483 U.S. 266 (1987).

1022 Moorman Mfg. Co. v. Bair, 437 U.S. 267, 278–280 (1978).

Rather, “we determine whether a tax is fairly apportioned by examining whether it is internally and externally consistent.”1023 “To be internally consistent, a tax must be structured so that if every State were to impose an identical tax, no multiple taxation would result. Thus, the internal consistency test focuses on the text of the challenged statute and hypothesizes a situation where other States have passed an identical statute... .”

“The external consistency test asks whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed. We thus examine the in-state business activity which triggers the taxable event and the practical or economic effect of the tax on that interstate activity.”1024 In the latter case, the Court upheld as properly apportioned a state tax on the gross charge of any telephone call originated or terminated in the State and charged to an in-state service address, regardless of where the telephone call was billed or paid.1025 A complex state tax imposed on trucks displays the operation of the test. Thus, a state registration tax met the internal consistency test because every State honored every other States’, and a motor fuel tax similarly was sustained because it was apportioned to mileage traveled in the State, whereas lump-sum annual taxes, an axle tax and an identification marker fee, being unapportioned flat taxes imposed for the use of the State’s roads, were voided, under the internal consistency test, because if every State imposed them the burden on interstate commerce would be great.1026

1023 Goldberg v. Sweet, 488 U.S. 252, 261 (1989).

1024 488 U.S. at 261, 262 (internal citations omitted).

1025 Id. The tax law provided a credit for any taxpayer who was taxed by another State on the same call. Actual multiple taxation could thus be avoided, the risks of other multiple taxation was small, and it was impracticable to keep track of the taxable transactions.

1026 American Trucking Ass’ns v. Scheiner, 483 U.S. 266 (1987).

A deference to state taxing authority was evident in a case in which the Court sustained a state sales tax on the price of a bus ticket for travel that originated in the State but terminated in another State. The tax was unapportioned to reflect the intrastate travel and the interstate travel.1027 The tax in this case was different from the tax upheld in Central Greyhound, the Court held. The previous tax constituted a levy on gross receipts, payable by the seller, whereas the present tax was a sales tax, also assessed on gross receipts, but payable by the buyer. The Oklahoma tax, the Court continued, was internally consistent, since if every State imposed a tax on ticket sales within the State for travel originating there, no sale would be subject to more than one tax. The tax was also externally consistent, the Court held, because it was a tax on the sale of a service that took place in the State, not a tax on the travel.1028

However, the Court found discriminatory and thus invalid a state intangibles tax on a fraction of the value of corporate stock owned by state residents inversely proportional to the State’s exposure to the state income tax.1029

Discrimination.—The “fundamental principle” governing this factor is simple. “‘No State may, consistent with the Commerce Clause, impose a tax which discriminates against interstate commerce . . . by providing a direct commercial advantage to local business.’”1030 That is, a tax which 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.1031 In Armco Inc. v. Hardesty,1032 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 the imposition discriminated against the interstate wholesaler.1033 A state excise tax on wholesale liquor sales, which exempted sales of specified local products, was held to violate the commerce clause.1034 A state statute that granted a tax credit for ethanol fuel if the ethanol was produced in the State, or if produced in another State that granted a similar credit to the State’s ethanol fuel, was found discriminatory in violation of the clause.1035 Expanding, although neither unexpectedly nor exceptionally, its dormant commerce jurisprudence, the Court in Camps Newfound/Owatonna, Inc. v. Town of Harrison1036 applied its non-discrimination 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 non-state residents. The claimant here operated a church camp for children, most of whom resided out-of-state. The discriminatory tax would easily have fallen had it been applied to profit-making firms, and the Court saw no reason to make an exception for nonprofits. The tax scheme was designed to encourage entities to care for local populations and to discourage attention to out-of-state individuals and groups. “For purposes of Commerce Clause analysis, any categorical distinction between the activities of profit-making enterprises and not-for-profit entities is therefore wholly illusory. Entities in both categories are major participants in interstate markets. And, although the summer camp involved in this case may have a relatively insignificant impact on the commerce of the entire Nation, the interstate commercial activities of nonprofit entities as a class are unquestionably significant.”1037

1027 Indeed, there seemed to be a precedent squarely on point, Central Greyhound Lines v. Mealey, 334 U.S. 653 (1948). Struck down in that case was a state statute that failed to apportion its taxation of interstate bus ticket sales to reflect the distance traveled within the State.

1028 Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995). Indeed, the Court analogized the tax to that in Goldberg v. Sweet, 488 U.S. 252 (1989), a tax on interstate telephone services that originated in or terminated in the State and that were bill to an in-state address.

1029 Fulton Corp. v. Faulkner, 516 U.S. 325 (1996). The State had defended on the basis that the tax was a “compensatory” one designed to make interstate commerce bear a burden already borne by intrastate commerce. The Court recognized the legitimacy of the defense, but it found the tax to meet none of the three criteria for classification as a valid compensatory tax. Id. at 333–44. See also South Central Bell Tel. Co. v. Alabama, 526 U.S. 160 (1999) (tax not justified as compensatory).

1030 Boston Stock Exchange v. State Tax Comm’n, 429 U.S. 318, 329 (1977) (quoting, Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 457 (1959)). The principle, as we have observed above, is a long-standing one under the commerce clause. E.g., Welton v. Missouri, 91 U.S. 275 (1876).

1031 Maryland v. Louisiana, 451 U.S. 725, 753–760 (1981). But see Commonwealth Edison Co. v. Montana, 453 U.S. 609, 617–619 (1981). And see Oregon Waste Systems, Inc. v. Department of Environmental Quality, 511 U.S. 93 (1994) (surcharge on in-state disposal of solid wastes that discriminates against companies disposing of waste generated in other States invalid).

1032 467 U.S. 638 (1984).

1033 The Court applied the “internal consistency” test here too, in order to determine the existence of discrimination. 467 U.S. at 644–45. Thus, the wholesaler did not have to demonstrate it had paid a like tax to another State, only that if other States imposed like taxes it would be subject to discriminatory taxation. See also Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232 (1987); American Trucking Ass’ns, Inc. v. Scheiner, 483 U.S. 266 (1987); Amerada Hess Corp. v. Director, New Jersey Taxation Div., 490 U.S. 66 (1989); Kraft General Foods v. Iowa Dep’t of Revenue, 505 U.S. 71 (1992)

1034 Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984).

1035 New Energy Co. of Indiana v. Limbach, 486 U.S. 269 (1988). Compare Fulton Corp. v. Faulkner, 516 U.S. 325 (1996) (state intangibles tax on a fraction of the value of corporate stock owned by in-state residents inversely proportional to the corporation’s exposure to the state income tax violated dormant commerce clause), with General Motors Corp. v. Tracy, 519 U.S. 278 (1997) (state imposition of sales and use tax on all sales of natural gas except sales by regulated public utilities, all of which were in-state companies, but covering all other sellers that were out-of-state companies did not violate dormant commerce clause because regulated and unregulated companies were not similarly situated).

1036 520 U.S. 564 (1997). The decision was a 5–to–4 one with a strong dissent by Justice Scalia, id. at 595, and a philosophical departure by Justice Thomas. Id. at 609.

1037 520 U.S. at 586.

Benefit Relationship.—Although, in all the modern cases, the Court has stated that a necessary factor to sustain state taxes having an interstate impact is that the levy be fairly related to benefits provided by the taxing State, it has declined to be drawn into any consideration of the amount of the tax or the value of the benefits bestowed. The test rather is whether, as a matter of the first factor, the business has the requisite nexus with the State; if it does, the tax meets the fourth factor simply because the business has enjoyed the opportunities and protections which the State has afforded it.1038

Regulation.—Adoption of the modern standard of commerce-clause review of state regulation of or having an impact on interstate commerce was achieved in Southern Pacific Co. v. Arizona,1039 although it was presaged in a series of opinions, mostly dissents, by Chief Justice Stone.1040 The Southern Pacific case tested the validity of a state train-length law, justified as a safety measure. Revising a hundred years of doctrine, the Chief Justice wrote that whether a state or local regulation was valid depended upon a “reconciliation of the conflicting claims of state and national power [that] is to be attained only by some appraisal and accommodation of the competing demands of the state and national interests involved.”1041 Save in those few cases in which Congress has acted, “this Court, and not the state legislature, is under the commerce clause the final arbiter of the competing demands of state and national interests.”1042

1038 Commonwealth Edison Co. v. Montana, 453 U.S. 609, 620–29 (1981). Two state taxes imposing flat rates on truckers, because they did not vary directly with miles traveled or with some other proxy for value obtained from the State, were found to violate this standard in American Trucking Ass’ns, Inc. v. Scheiner, 483 U.S. 266, 291 (1987), but this oblique holding was tagged onto an elaborate opinion holding the taxes invalid under two other Brady tests, and, thus, the precedential value is questionable. But see American Trucking Ass’ns v. Michigan Pub. Serv. Comm’n, 545 U.S. 429 (2005), upholding imposition of a flat annual fee on all trucks engaged in intrastate hauling (including trucks engaged in interstate hauling that “top off” loads with intrastate pickups and deliveries) and concluding that levying the fee on a per-truck rather than per-mile basis was permissible in view of the objectives of defraying costs of administering various size, weight, safety, and insurance requirements.

1039 325 U.S. 761 (1945).

1040 E.g., DiSanto v. Pennsylvania, 273 U.S. 34, 43 (1927) (dissenting); California v. Thompson, 313 U.S. 109 (1941); Duckworth v. Arkansas, 314 U.S. 390 (1941); Parker v. Brown, 317 U.S. 341, 362–368 (1943) (alternative holding).

1041 Southern Pacific Co. v. Arizona, 325 U.S. 761, 768–769 (1941).

1042 325 U.S. at 769.

That the test to be applied was a balancing one, the Chief Justice made clear at length, stating that in order to determine whether the challenged regulation was permissible, “matters for ultimate determination are the nature and extent of the burden which the state regulation of interstate trains, adopted as a safety measure, imposes on interstate commerce, and whether the relative weights of the state and national interests involved are such as to make inapplicable the rule, generally observed, that the free flow of interstate commerce and its freedom from local restraints in matters requiring uniformity of regulation are interests safeguarded by the commerce clause from state interference.”1043

The test today continues to be the Stone articulation, although the more frequently quoted encapsulation of it is from Pike v. Bruce Church, Inc.1044 “Where the statute regulates even-handedly 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.”

Obviously, the test requires “even-handedness.” Discrimination in regulation is another matter altogether. When on its face or in its effect a regulation betrays “economic protectionism,” an intent to benefit in-state economic interests at the expense of out-of-state interests, no balancing is required. “When a state statute clearly discriminates against interstate commerce, it will be struck down . . . unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism, ... Indeed, when the state statute amounts to simple economic protectionism, a ‘virtually per se rule of invalidity’ has applied.”1045 Thus, an Oklahoma law that required coal-fired electric utilities in the State, producing power for sale in the State, to burn a mixture of coal containing at least 10% Oklahoma-mined coal was invalidated at the behest of a State that had previously provided virtually 100% of the coal used by the Oklahoma utilities.1046 Similarly, the Court invalidated a state law that permitted interdiction of export of hydroelectric power from the State to neighboring States, when in the opinion of regulatory authorities the energy was required for use in the State; a State may not prefer its own citizens over out-of-state residents in access to resources within the State.1047

1043 325 U.S. at 770–71.

1044 397 U.S. 137, 142 (1970).

1045 Wyoming v. Oklahoma, 502 U.S. 437, 454 (1992) (quoting City of Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978)). See also Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 579 (1986). In Maine v. Taylor, 477 U.S. 131 (1986), the Court did uphold a protectionist law, finding a valid justification aside from economic protectionism. The State barred the importation of out-of-state baitfish, and the Court credited lower-court findings that legitimate ecological concerns existed about the possible presence of parasites and nonnative species in baitfish shipments.

1046 Wyoming v. Oklahoma, 502 U.S. 437 (1992). See also Maryland v. Louisiana, 451 U.S. 725 (1981) (a tax case, invalidating a state first-use tax, which, because of exceptions and credits, imposed a tax only on natural gas moving out-of-state, because of impermissible discrimination).

1047 New England Power Co. v. New Hampshire, 455 U.S. 331 (1982). See also Hughes v. Oklahoma, 441 U.S. 322 (1979) (voiding a ban on transporting minnows caught in the State for sale outside the State); Sporhase v. Nebraska, 458 U.S. 941 (1982) (invalidating a ban on the withdrawal of ground water from any well in the State intended for use in another State). These cases largely eviscerated a line of older cases recognizing a strong state interest in protection of animals and resources. See Geer v. Connecticut, 161 U.S. 519 (1896). New England Power had rather old antecedents. E.g., West v. Kansas Gas Co., 221 U.S. 229 (1911); Pennsylvania v. West Virginia, 262 U.S. 553 (1923).

States may certainly promote local economic interests and favor local consumers, but they may not do so by adversely regulating out-of-state producers or consumers. In Hunt v. Washington State Apple Advertising Comm’n,1048 the Court confronted a state requirement that closed containers of apples offered for sale or shipped into North Carolina carry no grade other than the applicable U. S. grade. Washington State mandated that all apples produced in and shipped in interstate commerce pass a much more rigorous inspection than that mandated by the United States. The inability to display the recognized state grade in North Carolina impeded marketing of Washington apples. The Court obviously suspected the impact was intended, but, rather than strike the state requirement down as purposeful, it held that the regulation had the practical effect of discriminating, and, inasmuch as no defense based on possible consumer protection could be presented, the state law was invalidated.1049 State actions to promote local products and producers, of everything from milk1050 to alcohol,1051 may not be achieved through protectionism.

1048 432 U.S. 333 (1977). Other cases in which the State was attempting to promote and enhance local products and businesses include Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) (State required producer of high-quality cantaloupes to pack them in the State, rather than in an adjacent State at considerably less expense, in order that the produce be identified with the producing State); Foster-Fountain Packing Co. v. Haydel, 278 U.S. 1 (1928) (State banned export of shrimp from State until hulls and heads were removed and processed, in order to favor canning and manufacture within the State).

1049 That discriminatory effects will result in invalidation, as well as purposeful discrimination, is also drawn from Dean Milk Co. v. City of Madison, 340 U.S. 349 (1951)

1050 E.g., H. P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525 (1949). See also Great Atlantic & Pacific Tea Co. v. Cottrell, 424 U.S. 366 (1976) (state effort to combat discrimination by other States against its milk through reciprocity provisions). In West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994), the Court held invalidly discriminatory against interstate commerce a state milk pricing order, which imposed an assessment on all milk sold by dealers to in-state retailers, the entire assessment being distributed to in-state dairy farmers despite the fact that about two-thirds of the assessed milk was produced out of State. The avowed purpose and un-disputed effect of the provision was to enable higher-cost in-state dairy farmers to compete with lower-cost dairy farmers in other States.

1051 Healy v. Beer Institute, Inc., 491 U.S. 324 (1989); Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573 (1986). And see Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984) (a tax case). But cf. Pharmaceutical Research and Mfrs. of America v. Walsh, 538 U.S. 644 (2003) (state prescription drug program providing rebates to participating companies does not regulate prices of out-of-state transactions and does not favor in-state over out-of-state companies). But cf. Pharmaceutical Research and Mfrs. of America v. Walsh, 538 U.S. 644 (2003) (state prescription drug program providing rebates to participating companies does not regulate prices of out-of-state transactions and does not favor in-state over out-of-state companies).

Even garbage transportation and disposition is covered by the negative commerce clause. A state law that banned the importation of most solid or liquid wastes that originated outside the State was struck down, because the State could not justify it as a health or safety measure, in the form of a quarantine, inasmuch as it did not limit in-state disposal at its landfills; the State was simply attempting to conserve landfill space and lower costs to its residents by keeping out trash from other States.1052 Further extending the limitation of the clause on waste disposal,1053 the Court invalidated as a discrimination against interstate commerce a local “flow control” law, which required all solid waste within the town to be processed at a designated transfer station before leaving the municipality.1054 The town’s reason for the restriction was its decision to have built a solid waste transfer station by a private contractor, rather than with public funds by the town. To make the arrangement appetizing to the contractor, the town guaranteed it a minimum waste flow, for which it could charge a fee significantly higher than market rates. The guarantee was policed by the requirement that all solid waste generated within the town be processed at the contractor’s station and that any person disposing of solid waste in any other location would be penalized.

The Court analogized the constraint as a form of economic protectionism, which bars out-of-state processors from the business of treating the localities solid waste, by hoarding a local resource for the benefit of local businesses that perform the service. The town’s goal of revenue generation was not a local interest that could justify the discrimination. Moreover, the town had other means to accomplish this goal, such as subsidization of the local facility through general taxes or municipal bonds. The Court did not deal with, indeed, did not notice, the fact that the local law conferred a governmentally-granted monopoly, an exclusive franchise, indistinguishable from a host of local monopolies at the state and local level.1055

1052 City of Philadelphia v. New Jersey, 437 U.S. 617 (1978), reaffirmed and applied in Chemical Waste Management, Inc. v. Hunt, 504 U.S. 334 (1992), and Fort Gratiot Sanitary Landfill v. Michigan Natural Resources Dept., 504 U.S. 353 (1992).

1053 See also Oregon Waste Systems, Inc. v. Department of Envtl. Quality, 511 U.S. 93 (1994) (discriminatory tax).

1054 C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383 (1994).

1055 See The Supreme Court, Leading Cases, 1993 Term, 108 HARV. L. REV. 139, 149–59 (1994). Weight was given to this consideration by Justice O’Connor, 511 U.S. at 401 (concurring) (local law an excessive burden on interstate commerce), and by Justice Souter, id. at 410 (dissenting).

In United Haulers Ass’n, Inc. v. Oneida-Herkimer Solid Waste Management Authority,26 the Court declined to apply Carbone where haulers were required to bring waste to facilities owned and operated by a state-created public benefit corporation instead of to a private processing facility, as was the case in Carbone. The Court found this difference constitutionally significant because “[d]isposing of trash has been a traditional government activity for years, and laws that favor the government in such areas — but treat every private business, whether in-state or out-of-state, exactly the same — do not discriminate against interstate commerce for purposes of the Commerce Clause. Applying the Commerce Clause test reserved for regulations that do not discriminate against interstate commerce, we uphold these ordinances because any incidental burden they may have on interstate commerce does not outweigh the benefits they confer …”27

In Department of Revenue of Kentucky v. Davis,28 the Court considered a challenge to the long-standing state practice of issuing bonds for public purposes while exempting interest on the bonds from state taxation.29 In Davis, a challenge was brought against Kentucky for such a tax exemption because it applied only to government bonds that Kentucky issued, and not to government bonds issued by other states. The Court, however, recognizing the long pedigree of such taxation schemes, applied the logic of United Haulers Ass'n, Inc., noting that the issuance of debt securities to pay for public projects is a "quintessentially public function," and that Kentucky's differential tax scheme should not be treated like one that discriminated between privately issued bonds. In what may portend a significant change in dormant commerce clause doctrine, however, the Court declined to evaluate the governmental benefits of Kentucky's tax scheme versus the economic burdens it imposed, holding that, at least in this instance, the "Judicial Branch is not institutionally suited to draw reliable conclusions."

Drawing the line between discriminatory regulations that are almost per se invalid and regulations that necessitate balancing is not an easy task. Not every claim of protectionism is sustained. Thus, in Minnesota v. Clover Leaf Creamery Co.,1057 there was attacked a state law banning the retail sale of milk products in plastic, nonreturnable containers but permitting sales in other non-returnable, nonrefillable containers, such as paperboard cartons. The Court found no discrimination against interstate commerce, because both in-state and out-of-state interests could not use plastic containers, and it refused to credit a lower, state-court finding that the measure was intended to benefit the local pulpwood industry. In Exxon Corp. v. Governor of Maryland,1058 the Court upheld a statute that prohibited producers or refiners of petroleum products from operating retail service stations in Maryland. No discrimination was found, first, because there were no local producers or refiners within Maryland and therefore since the State’s entire gasoline supply flowed in interstate commerce there was no favoritism, and, second, although the bar on operating fell entirely on out-of-state concerns, there were out-of-state concerns that did not produce or refine gasoline and they were able to continue operating in the State, so that there was some distinction between all in-state operators and some out-of-state operators as against some other out-of-state operators.

26 550 U.S. 330 (2007).

27 550 U.S. at 334. The Commerce Clause test referred to is the test set forth in Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). “Under the Pike test, we will uphold a nondiscriminatory statute . . . ‘unless the burden imposed on [interstate] commerce is clearly excessive in relation to the putative local benefits.’” Id. at 1797 (quoting Pike, 397 U.S. at 142). The fact that a state is seeking to protect itself from economic or other difficulties, is not, by itself, sufficient to justify barriers to interstate commerce. Edwards v. California, 314 U.S. 160 (1941) (striking down California effort to bar “Okies” — persons fleeing the Great Plains dust bowl during the Depression). Cf. Crandall v. Nevada, 73 U.S. (6 Wall.) 35 (1867) (without tying it to any particular provision of Constitution, Court finds a protected right of interstate movement). The right of travel is now an aspect of equal protection jurisprudence.

28 128 S. Ct. 1801 (2008).

29 This exemption from state taxes is also generally made available to bonds issued by local governmental entities within a state.

1057 449 U.S. 456, 470–474 (1981).

1058 437 U.S. 117 (1978).

Still a model example of balancing is Chief Justice Stone’s opinion in Southern Pacific Co. v. Arizona.1059 At issue was the validity of Arizona’s law barring the operation within the State of trains of more than 14 passenger cars, no other State had a figure this low, or 70 freight cars, only one other State had a cap this low. First, the Court observed that the law substantially burdened interstate commerce. Enforcement of the law in Arizona, while train lengths went unregulated or were regulated by varying standards in other States, meant that interstate trains of a length lawful in other States had to be broken up before entering the State; inasmuch as it was not practicable to break up trains at the border, that act had to be accomplished at yards quite removed, with the result that the Arizona limitation controlled train lengths as far east as El Paso, Texas, and as far west as Los Angeles. Nearly 95% of the rail traffic in Arizona was interstate. The other alternative was to operate in other States with the lowest cap, Arizona’s, with the result that that State’s law controlled the railroads’ operations over a wide area.1060 If other States began regulating at different lengths, as they would be permitted to do, the burden on the railroads would burgeon. Moreover, the additional number of trains needed to comply with the cap just within Arizona was costly, and delays were occasioned by the need to break up and remake lengthy trains.1061

Conversely, the Court found that as a safety measure the state cap had “at most slight and dubious advantage, if any, over unregulated train lengths.” That is, while there were safety problems with longer trains, the shorter trains mandated by state law required increases in the numbers of trains and train operations and a consequent increase in accidents generally more severe than those attributable to longer trains. In short, the evidence did not show that the cap lessened rather than increased the danger of accidents.1062

1059 325 U.S. 761 (1945). Interestingly, Justice Stone had written the opinion for the Court in South Carolina State Highway Dept. v. Barnwell Bros., 303 U.S. 177 (1938), in which, in a similar case involving regulation of interstate transportation and proffered safety reasons, he had eschewed balancing and deferred overwhelmingly to the state legislature. Barnwell Bros. involved a state law that prohibited use on state highways of trucks that were over 90 inches wide or that had a gross weight over 20,000 pounds, with from 85% to 90% of the Nation’s trucks exceeding these limits. This deference and refusal to evaluate evidence resurfaced in a case involving an attack on railroad “full-crew” laws. Brotherhood of Locomotive Firemen & Enginemen v. Chicago, R.I. & P. Railroad Co., 393 U.S. 129 (1968).

1060 The concern about the impact of one State’s regulation upon the laws of other States is in part a reflection of the Cooley national uniformity interest and partly a hesitation about the autonomy of other States, E.g., CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 88–89 (1987); Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 583–584 (1986).

1061 Southern Pacific Co. v. Arizona, 325 U.S. 761, 771–75 (1945).

Conflicting state regulations appeared in Bibb v. Navajo Freight Lines.1063 There, Illinois required the use of contour mud-guards on trucks and trailers operating on the State’s highways, while adjacent Arkansas required the use of straight mudguards and banned contoured ones. At least 45 States authorized straight mudguards. The Court sifted the evidence and found it conflicting on the comparative safety advantages of contoured and straight mudguards. But, admitting that if that were all that was involved the Court would have to sustain the costs and burdens of outfitting with the required mudguards, the Court invalidated the Illinois law, because of the massive burden on interstate commerce occasioned by the necessity of truckers to shift cargoes to differently designed vehicles at the State’s borders.

Arguably, the Court in more recent years has continued to stiffen the scrutiny with which it reviews state regulation of interstate carriers purportedly for safety reasons.1064 Difficulty attends any evaluation of the possible developing approach, inasmuch as the Court has spoken with several voices. A close reading, however, indicates that while the Court is most reluctant to invalidate regulations that touch upon safety and that if safety justifications are not illusory it will not second-guess legislative judgment, nonetheless, the Court will not accept, without more, state assertions of safety motivations. “Regulations designed for that salutary purpose nevertheless may further the purpose so marginally, and interfere with commerce so substantially, as to be invalid under the Commerce Clause.” Rather, the asserted safety purpose must be weighed against the degree of interference with interstate commerce. “This ‘weighing’ . . . requires . . . a sensitive consideration of the weight and nature of the state regulatory concern in light of the extent of the burden imposed on the course of interstate commerce.”1065

Balancing has been used in other than transportation-industry cases. Indeed, the modern restatement of the standard was in such a case.1066 There, the State required cantaloupes grown in the State to be packed there, rather than in an adjacent State, so that in-state packers’ names would be associated with a superior product. Promotion of a local industry was legitimate, the Court, said, but it did not justify the substantial expense the company would have to incur to comply. State efforts to protect local markets, concerns, or consumers against outside companies have largely been unsuccessful. Thus, a state law that prohibited ownership of local investment-advisory businesses by out-of-state banks, bank-holding companies, and trust companies was invalidated.1067 The Court plainly thought the statute was protectionist, but instead of voiding it for that reason it held that the legitimate interests the State might have did not justify the burdens placed on out-of-state companies and that the State could pursue the accomplishment of legitimate ends through some intermediate form of regulation. In Edgar v. Mite Corp.,1068 an Illinois regulation of take-over attempts of companies that had specified business contacts with the State, as applied to an attempted take-over of a Delware corporation with its principal place of business in Connecticut, was found to constitute an undue burden, with special emphasis upon the extraterritorial effect of the law and the dangers of disuniformity. These problems were found lacking in the next case, in which the state statute regulated the manner in which purchasers of corporations chartered within the State and with a specified percentage of in-state shareholders could proceed with their take-over efforts. The Court emphasized that the State was regulating only its own corporations, which it was empowered to do, and no matter how many other States adopted such laws there would be no conflict. The burdens on interstate commerce, and the Court was not that clear that the effects of the law were burdensome in the appropriate context, were justified by the State’s interests in regulating its corporations and resident shareholders.1069

1062 325 U.S. at 775–79, 781–84.

1063 359 U.S. 520 (1959).

1064 Raymond Motor Transp., Inc. v. Rice, 434 U.S. 429 (1978); Kassel v. Consolidated Freightways Corp., 450 U.S. 662 (1981).

1065 Kassel v. Consolidated Freightways Corp., 450 U.S. 662, 670–671 (1981), (quoting Raymond Motor Transp. v. Rice, 434 U.S. 429, 441, 443 (1978)). Both cases invalidated state prohibitions of the use of 65–foot single-trailer trucks on state highways.

1066 Pike v. Bruce Church, Inc., 397 U.S. 137 (1970).

1067 Lewis v. BT Investment Managers, Inc., 447 U.S. 27 (1980).

1068 457 U.S. 624 (1982) (plurality opinion).

1069 CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69 (1987).

In other areas, while the Court repeats balancing language, it has not applied it with any appreciable bite,1070 but in most respects the state regulations involved are at most problematic in the context of the concerns of the commerce clause.

1070 E.g., Northwest Central Pipeline Corp. v. Kansas Corp. Comm’n, 489 U.S. 493, 525–526 (1989); Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 472– 474 (1981); Exxon Corp. v. Governor of Maryland, 437 U.S. 117, 127–128 (1978). But see Bendix Autolite Corp. v. Midwesco Enterprises, Inc., 486 U.S. 888 (1988).

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