6. Con Law: State Regulation of Taxation of Commerce/Power of States to Tax Interstate Commerce

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6. Con Law: State Regulation of Taxation of Commerce/Power of States to Tax Interstate Commerce
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2012-04-23 16:59:19
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taxation of commerce
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  1. REGULATION OF FOREIGN COMMERCE
    The power to regulate foreign commerce lies exclusively with congress.

    Minor exceptions, such as states are free to regulate local aspects of port pilotage and navigation of ships in foreign commerce.
  2. INTERSTATE COMMERCE:
    REGULATION BY CONGRESS
    If a state law regulating commerce conflicts with a federal law, the state law will be void by the supremacy clause. Moreover, congress may preempt an entire area of regulation, thus preventing states from making any laws concerning the preempted area.

    States generally may not discriminate against interstate commerce, but congress may allow the states to adopt legislation that would otherwise violate the commerce clause.
  3. STATE REGULATION OF COMMERCE IN THE ABSENCE OF CONGRESSIONAL ACTION:
    GENERAL
    • If congress has not enacted laws regarding the subject, a state or local gov't may regulate local aspects of interstate commerce if the regulation:
    • -- does not discriminate against out-of-state competition to benefit local economic interests; and

    -- is not unduly burdensome (the burden on interstate commerce doesn't outweigh the legitimate local benefits)
  4. STATE REGULATION OF COMMERCE IN THE ABSENCE OF CONGRESSIONAL ACTION:
    DISCRIMINATORY REGULATIONS
    State or local regulations that discriminate against interstate commerce to protect local economic interests are almost always invalid.

    Exceptions:

    -- necessary to important state interest -- may be valid if it furthers an important non-economic state interest and there are no reasonable alternatives available

    -- when the state is a market participant -- the state may prefer it's own citizens when buying or selling products, hiring labor, giving subsidies

    -- favoring gov't performing traditional gov't functions -- discrimination against interstate commerce in such a case is permissible because it is likely motivated by legitimate obectives rather than by economic protectionism
  5. STATE REGULATION OF COMMERCE IN THE ABSENCE OF CONGRESSIONAL ACTION:
    NONDISCRIMINATORY REGULATIONS
    A nondiscriminatory law will be invalidated only if the burden on interstate commerce outweighs the promotion of legitimate local interests.

    In determining whether a nondiscriminatory state reg violates the comerce clause, a court will sometimes consider whether less restrictive alternatives are available.

    State and local laws regulating commerce are more likely to be upheld when there is little chance that states would have conflicting regs of the same subject matter.

    Because of the states' long history of regulating the internal governance of corporations that they create, and because of their strong interest in doing so, even a statute that heavily impacts interstate commerce may be upheld.
  6. 21st AMENDMENT -- STATE CONTROL OVER INTOXICATING LIQUOR
    Gives states wide latitude over the importation of liquor and the conditions under which liquor is sold or used within the state. However, state liquor regs that constitute only an economic preference for local liquor manufacturers may violate the commerce clause.

    Transitory liquor is subject to the commerce clause. Thus, a state prohibition on transporting liquor through the state would probably be held unconstitutional.
  7. EXAM APPROACH re STATE REGULATION OF INTERSTATE COMMERCE
    Whenever an exam Q involves a state reg that affects the free flow of interstate commerce, you should proceed as follows:

    FIRST, see if the Q refers to any federal legislation that might be held to either (1) supersede the state reg or preempt the field, or (2) authorize state regulation otherwise impermissible.

    SECOND, if neither of these is dispositive of the Q, ask if the state legislation either discriminates against interstate or out-of-state commerce or places an undue burden on the free flow of interstate commerce.

    If the reg is discriminatory, it will be invalid unless (1) it furthers an important state interest and there are no reasonable alternatives, or (2) the state is a market participant.

    If the reg does not discriminate but does burden interstate commerce, it will be invalid if the burden on commerce outweighs the state's interest. Consider whether there are less restrictive alternatives.
  8. POWER OF STATES TO TAX INTERSTATE COMMERCE: GENERAL
    The same general considerations applicable to state regulation of commerce apply to taxation.

    Pursuant to the commerce clause, congress has complete power to authorize or forbid state taxation affecting interstate commerce. If congress has not acted, look to see whether the tax discriminates against interstate commerce. If it does, it is invalid. If it doesn't, then assess whether the burden on interstate commerce outweighs the benefit to the state.

    • Three tests must be met:
    • 1.) there must be a substantial nexus between the taxpayer and the state;
    • 2.) the tax must be fairly apportioned; and
    • 3.) there must be a fair relationship between the tax and the services or benefits provided by the state.
  9. DISCRIMINATORY TAXES
    Unless authorized by congress, state taxes that discriminate against interstate commerce violate the commerce clause. Such taxes may also violate the interstate privileges and immunities clause if they also discriminate against nonresidents of the state, as well as the EP clause if the discrimination is not rationally related to a legitimate state purpose.

    A seemingly uniform tax may be ruled to be disccriminatory if the proceeds from the tax are earmarked for subsidies to in-state businesses.
  10. DISCRIMINATORY TAXES:
    CHOOSING THE PROPER CLAUSE
    While a state tax that discriminates against interstate commerce generally violates the commerce clause, the clause is not always the strongest argument against the tax.

    If a state tax discriminates against a natural person who is a nonresident, the article IV interstate privileges and immunities clause is the strongest argument against the tax's validity.

    Where congress has given permission to do something that would otherwise violate the commerce clause, it may still violate the EP clause if it does not relate to a legitimate interest of gov't.

    States do not have a legitimate interest in discriminating against out-of-state businesses simply to protect local economic interests from competition.

    The court may use EP analysis to strike state taxes that are imposed on the basis of a suspect classification or that burden a fundamental right. A state tax system giving tax exemptions only to long-time residents of the state and denying a similar tax to newer residents will be held to violate the EP clause.
  11. NONDISCRIMINATORY TAXES
    The court reviews nondiscriminatory state taxes affecting interstate commerce and balances the state need to obtain the revenue against the burden the tax imposes on the free flow of commerce.

    The court generally considers three factors:

    1.) substantial nexus -- a state tax will be valid under the commerce clause only if there is a substantial nexus between the activity or property taxed and the taxing state. Substantial nexus requires significant or substantial activity within the taxing state.

    2.) fair apportionment -- a tax affecting interstate commerce will be valid under the commerce clause only if it is fairly apportioned according to a rational formula, ie, the tax should be based on the extent of the taxable activity or property in the state (protects agains having to pay same tax in multiple states). The taxpayer has the burden of proving an unfair apportionment.

    3.) fair relationship -- a state tax affecting interstate commerce will be valid under the commerce clause only if the tax is fairly related to the services or benefits provided by the state.
  12. USE TAX
    A use tax is imposed on the users of goods purchased out of state.

    Use taxes are not considered to discriminate against interstate commerce as long as the use tax is not higher than the sales tax rate.

    Often, states force the user to come forward and pay the state the use tax owed. However, a state may also force a non-resident seller to collect the use tax from the local buyer and remit it to the state if the seller has a substantial nexus required by the commerce clause -- met if the seller has significant activity in the state, eg, maintains offices there.
  13. AD VELOREM PROPERTY TAXES
    Taxes based on a percentage of the assessed value of the property in question. Generally valid. However, a commerce clause issue arises when the property taxed moves in interstate commerce. Goods in transit are totally exempt from taxation. Once the goods come to a halt in a state (obtaining a taxable situs), they may be taxed. Then the issue usually revolves around whether the tax imposes an undue cumulative burden.

    Goods are in transit, and thus exempt, when (1) delivered to an interstate carrier, or (2) the cargo actually starts its interstate journey. Goods merely being prepared for transit are not in the course of interstate commerce.

    Breaks in the continuity of transit will not destroy the interstate character of the shipment, uness the break was intended to end or suspend the shipment.

    The interstate shipment usually ends when it reaches its destination, and thereafter the goods are subject to local tax.

    The validity of ad valorem property taxes on instrumentalities of commerce depends on (1) whether the instrumentality has acquired a taxable situs in the taxing state, and (2) since the physical situs of the instrumentalities may change from state to state during the year, whether the value of the instrumentality has been properly apportioned according to the amount of contacts with each taxing state. The taxable situs is required by the DP clause to establish the state's power to tax at all, and apportionment is required by the commerce clause to prevent an intolerable burden on interstate commerce.

    An instrumentality has a taxable situs in a state if it receives benefits or protection from the state.
  14. PRIVILEGE, LICENSE, FRANCHISE, OR OCCUPATION TAXES
    Cumulatively known as "doing business" taxes. The tax must meet the basic requirements -- the activity taxed must have a substantial nexus to the taxing state; and the tax must be fairly apportioned, must not discriminate against interstate commerce, and must fairly relate to services provided by the state.

    The taxpayer has the burden of showing that the state's apportionment formula is unfair. However, a state tax that discriminates against interstate commerce will be held invalid regardless of whether the taxpayer can show that an actual, unfair multiple burden is imposed on his business.
  15. POWER OF STATES TO TAX FOREIGN COMMERCE:
    IMPORT-EXPORT CLAUSE
    No 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.

    The import-export clause prohibits states from imposing any tax on imported goods as such or on commercial activity connected with imported good as such, except with congressional consent.

    The import-export clause prohibits states from imposing any tax on goods after they have entered the export stream.
  16. POWER OF STATES TO TAX FOREIGN COMMERCE:
    COMMERCE CLAUSE
    A state tax applied to foreign commerce must meet all of the commerce clause tests that apply to state taxation of interstate commerce. And even if a state tax meets those tests, the tax is invalid if it would (1) create a substantial risk of international multiple taxation or (2) prevent the federal gov't from speaking with one voice regarding international trade or foreign affairs issues.

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