COMMERCE CLAUSE RESTRICTIONS

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COMMERCE CLAUSE RESTRICTIONS

• You probably have encountered many of these
  principles in the course on Constitutional Law.
• Note that the Supreme Court has decided over 300
  cases on this topic. If you try to reconcile
  them you are doomed.
• Still, today there is not much wiggle room for
  taxpayers to argue the commerce clause in
  disputes with the states, since the ground rules
  are mostly fixed in stone.

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THE HISTORY OF STATES ABILITY TO LEVY A TAX ON
INTERSTATE COMMERCE

• Pages 189 through 200 pp.192-204, 8th ed
  outlines the off and on again nature of the
  Supreme Courts rulings in this area. You do not
  need to know this casuistry, defined as
  subtle but evasive reasoning. One wonders
  whether the Supremes should be allowed to decide
  tax cases. Some have said that Moe, Larry and
  Curly could have done a better job.
• The modern approach to apportionment was not
  blessed until 1959 in the Portland Cement Case.

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THE RAILWAY EXPRESS CASES p. 202-3

• In the first case Railway Express challenged
  Virginias annual license tax for the privilege
  of doing business in the state the tax was a
  percentage of gross receipts. The Supreme Court
  struck down the tax as a prohibited franchise
  tax.
• So, the Virginia legislature renamed the tax,
  calling it a franchise tax on intangible property
  and the Supreme Court upheld the tax. Do Supreme
  Court justices actually get paid for their work?
  Should they?

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HOW TO PASS THE COMMERCE CLAUSE TEST

• The Supreme Court says that there are 4 criteria
  needed to satisfy the commerce clause
  requirements. (Complete Auto)
• There must be a nexus to the state.
• The tax must be fairly apportioned.
• The tax must not discriminate against interstate
  commerce.
• The tax must be fairly related to services
  provided by the state.

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WHAT IS NEXUS

• This requirement simply means that there must be
  a connection between the interstate business
  and the state.
• For example, we represented a Japanese trading
  corporation that did a worldwide business. Its
  only connection to North Dakota was a minor
  interest in a limited partnership that owned
  minerals in Williams county. It sold nothing in
  the state, had no office, nor employees here.
  Nexus was lacking, though the N.D. Tax Department
  struggled mightily to establish one.

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WHAT IS FAIRLY APPORTIONED.

• This means that the tax must bear some
  relationship to the amount of the taxpayers
  business in the state.
• Today, most all apportionment is accomplished
  through the three factor formula, that is, sales,
  property and payroll.
• This formula is mandated by the Uniform
  apportionment of Income Tax Act, Chapter 57-38.1,
  NDCC. The act has been adopted by over 20 states
  but the three factor formula or variations
  thereof is used in the other states as well. We
  study the three factor formula in more detail
  later in the course.

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THE OTHER TWO CRITERIA

• Whether a tax is a burden on interstate commerce
  seems to be decided on a case by case basis, but
  the key is that the non-resident should not be
  taxed more heavily than the similarly situated
  resident.
• The only services the state need supply to
  satisfy the test are the standard ones, , i.e,
  police and fire protection, roads, courts and the
  like. This should not be a part of this 4
  criteria test since it will always be satisfied.

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COMMONWEALTH EDISON V. MONTANA

• This case is discussed in the footnote on page
  207 p.211 8th ed 435 U.S. 609 (1988). It
  tests the limit on the issue, What kind of tax
  affects Interstate Commerce? We will go over
  the full case next week
• Montana levied a severance tax on coal, virtually
  all of which was shipped outside the state. The
  state argued that the commerce clause was not
  implicated, since the mining of the coal occurred
  before it entered interstate commerce. The
  Supreme Court held otherwise, noting that all
  that is necessary is that there be a substantial
  effect on interstate commerce. However, the
  court sustained the tax on other grounds

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Camps Newfound etc v. Town of Harrison

• The camp was in Maine, and it was for the benefit
  of children of Christian Scientists parents.
  Charitable organizations were exempt from this
  property tax, so long as conducted for Maine
  residents with a cap on weekly charges of 30.
  Since 95 of the children were non-residents and
  the weekly charge was 400 the exemption was
  useless to the Camp.
• The town first argued that the children were not
  articles of commerce. Dumb. The camp was
  engaged in interstate commerce, through its
  purchases and its solicitation for campers.

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CAMP NEWFOUND, CONCLUDED

• Next, the Town argued that the tax was a property
  tax, inherently a local matter, and not affect
  interstate commerce.
• Again the Supreme Court had no problem dismissing
  the contention, as the label property tax did
  nothing to salvage its nature as a burden on
  interstate commerce. If such a burden could be
  disguised as a property tax it would be simple
  for the states to avoid the commerce clause
  limits.
• Would the tax be upheld if all charities were
  treated the same? It should be.

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NORTHWESTERN STATES PORTLAND V MINNESOTA

• This is a landmark case, decided in 1959.
  Northwestern manufactured cement in Mason City,
  Iowa. 48 of its sales were to Minnesota buyers.
  It had an office in Minneapolis staffed with
  employees. It never filed a Minnesota income tax
  return.
• A companion case Stockholm Valves and Fittings
  from Georgia involved the same facts.

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NORTHWESTERN, CONTINUED

• Minnesota claimed a deficiency of 102,000 for
  the years 1933 through 1948. Minnesota applied
  the three factor formula, i.e., sales, property
  and payroll in computing the amount of tax.
• The case is the first Supreme Court decision
  upholding the three factor test, which is now
  universally recognized.
• Footnote B., page 223 p.227, 8th ed, points out
  that soon after Northwestern was decided Congress
  exempted income taxes on a out of state business
  if its only activity in the state was the
  solicitation of business for orders which are
  fulfilled out of state. 15 U.S.C. 381 et seq.

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HOW THE 3 FACTOR FORMULA WORKS

• Assume a taxpayers ratio of sales in ND is 40
  of sales everywhere. Assume that the taxpayers
  ratio of property in ND is 10 of its property
  everywhere, and its ratio of ND payroll is also
  10 of its payroll everywhere. It earned,
  everywhere, 100,000 last year. Its income
  allocated to ND is 40 10 10 60 divided
  by 320 times 100,000 or 20,000.

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QUESTIONS RAISED BY THE NORTHWESTERN DECISION

• How did Minnesota learn of Portlands activities
  in Minnesota?
• The normal statute of limitations to assess
  additional income taxes is 3 years. How can
  Minnesota assess additional 1933 taxes in 1948,
  or later?
• Northwestern might be taxable on 100 of its
  worldwide income in Iowa, its state of domicile.
  What if the apportionment formula results in more
  than 100 of its income being taxed by multiple
  states? This is a question waiting to be
  answered.

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THE CREDIT FOR TAXES PAID TO ANOTHER STATE

• All states that have individual income taxes
  provide an escape to prevent taxation of more
  than 100 of a taxpayers income. It is known as
  the credit for taxes paid to another state. See
  text, p. 957, p. 1007, 8th ed,
  57-38-042a., NDCC.
• It operates this way. Assume Iowas income tax
  rate is 6 and Minnesotas is 10. Assume that
  Smith, an individual, has total business income
  this year of 1,000,000, and that the
  apportionment formula assigns 48 of his income
  to Minnesota. Assume as well that Iowa taxes
  100 of Smiths worldwide income.

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CREDIT FOR STATE TAXES, CONCLUDED

• Minnesota will levy a tax of 48,000 10 of
  480,000 and Iowa a tax of 60,000 6 of
  1,000,000. Iowa will allow a credit against its
  tax, but only at the lower Iowa tax rate, 6, or
  28,800 6 of 480,000. The net Iowa tax is
  31,200.
• Hence the taxpayer pays the higher rates imposed
  by the foreign state, or if the foreign states
  rates are lower than the domiciliary state, it
  only gets credit for that lower rate.

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PROBLEMS WITH RESIDENCE

• Do not confuse the commerce clause issues with
  the matter of the taxation of non-resident
  individuals, which is covered elsewhere and will
  be the subject of a lecture later in the
  semester.
• For example, you are licensed to practice law in
  Minnesota and North Dakota. You live in Bismarck,
  but win a case tried in Morehead, earning a fee
  of 100,000. Can Minnesota tax you on that
  income? How much of that fee is allocable to
  your presence in Minnesota, for you did your
  preparation in Bismarck. How does Minnesota
  learn of your income?
• How many state income tax returns do you suppose
  Kobe Bryant files?