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An Analysis of the Historical Development of the Dormant Commerce Clause in State Tax Cases |
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| The article was authored by Craig B. Fields and Michael W. McLoughlin and is 20 pages in length. It was originally published in the State and Local Tax Lawyer 2007 Symposium Edition. |
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In the field of state and local taxation, no other clause of -- or silence within -- the Constitution has as much significance as the Commerce Clause. It yields the fundamental limitations on state taxing power with which professionals in our field grapple daily -- nexus, discrimination, and fair apportionment to name a few. This compilation of articles and essays presents analyses by preeminent authorities of not only the intricacies of these "day-to-day" issues, but also the theoretical underpinnings of Commerce Clause jurisprudence. The day-long program from which these pieces are adapted was held at Georgetown University Law Center on May 16th, 2007.
For information on the State and Local Tax Lawyer 2007 Symposium Edition, click here.
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Considering all of the judicial decisions, discussion, and debate that have erupted from the various interpretations of the Commerce Clause of the U.S. Constitution in the past 150 years, it seems a misnomer that the term "dormant" would have any place in a discussion as to its application. While, by comparison, the Court's Due Process Clause jurisprudence has also evolved over the same period, the basic platform for analyzing that provision has been relatively unchanged since established by the U.S. Supreme Court in 1945. The Court's interpretation of the "negative" or "dormant" Commerce Clause, on the other hand, has undergone several transformations since that time. This is particularly surprising as this is a provision that some on the Court argue does not even exist.
Essentially, the "dormant" aspect of the Commerce Clause prohibits state regulation of interstate or foreign commerce even where the U.S. Congress has not acted to regulate commerce in regard to a particular area. The cases establishing the dormant aspect of the Commerce Clause read the language of that clause stating that Congress "shall have the power" to regulate interstate or foreign commerce to be an exclusive grant of power. Thus, any attempt by a state to regulate such commerce infringes on the power granted to Congress regardless of whether Congress has chosen to regulate in the particular area affected by the state action. However, as the cases discussed below demonstrate, it is not always easy to discern when a state law regarding a seemingly local activity crosses the line into interfering with the national economy.
Adding to the confusion, not only must the Commerce Clause be examined in terms of both its positive and negative reach, but a different test is used by the Court in examining state taxing measures than is generally applied to non-tax regulatory measures enacted by states affecting interstate commerce. Thus, the Commerce Clause, as it is currently interpreted, contains a positive grant of power to the U.S. Congress, a negative prohibition of certain state action related to interstate or foreign commerce, and separate tests for state regulatory action versus state imposition of tax.
It is somewhat paradoxical that, considering the number of dormant Commerce Clause cases that have been decided by the U.S. Supreme Court, the major state tax issues that confront multistate businesses today result from a lack of guidance by the Court. While 30 years ago the Court articulated a four part test for deciding whether a state tax violated the Commerce Clause in Complete Auto Transit, Inc. v. Brady, the Court has never directly addressed how the "nexus" prong of the Complete Auto test should be applied to corporate income taxpayers. Indeed, the Court recently declined an opportunity to review two cases which directly involved this issue.
In addition to the nexus issues still confronting multistate taxpayers, there is also still much uncertainty as to when state taxes that favor in state business will be considered to discriminate against interstate commerce. This issue can also arise in regard to state tax incentives that are provided to companies to encourage them to either remain in the state or relocate there. As states continue to seek more expansive ways to tax companies engaged in interstate commerce, and such companies develop more creative tax solutions, the need for guidance in these areas, from either the Court or the U.S. Congress, will only become more urgent.
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