Academic journal article Journal of Business and Behavior Sciences

The Commerce Clause, State Taxation, and the Internal Consistency Test

Academic journal article Journal of Business and Behavior Sciences

The Commerce Clause, State Taxation, and the Internal Consistency Test

Article excerpt

INTRODUCTION

In today's economy, state and local governments are more and more strapped for funds to provide services to their citizenry. Many are incurring large deficits requiring the need to raise additional revenues and/or cut expenses by eliminating or reducing the services they provide. The power to tax is an important element in their ability to raise revenues. While our governing system of federalism provides a level of sovereignty to the states, their taxing power is not without limit. The Framers of the Constitution recognized the importance of interstate commerce to the growth of the nation and were concerned with economic balkanization due to each state's taxing and regulatory powers.

The Commerce Clause of Article I, Section 8 of the U.S. Constitution provides Congress with the power to "regulate commerce ...among the several States." This positive grant of power was given to Congress to address economic discrimination by states through their tax or regulatory powers whereby intrastate commerce is favored over interstate commerce. Courts have inferred from this grant of power to Congress a negative aspect prohibiting states from discriminating against or unduly burdening interstate commerce by subjecting it to multiple taxation or unfairly apportioned taxation, even in the absence of Congressional legislation. Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 179 (1995) (Jefferson Lines). This implicit aspect of the Commerce Clause is referred to as the "negative" or "dormant" Commerce Clause (DCC). While the DCC has many areas of application, the state taxation of interstate commerce is the focus herein.

Another primary limitation the Constitution places on states' powers to tax is the Due Process Clause (DPC) of the 14th Amendment which provides "[N]or shall any State deprive any person of life, liberty, or property without due process of law. ..." The Supreme Court in Miller Brothers Co. v. Maryland, 347 U.S. 340, 344-345 (1954) ruled that the DPC requires "some definite link, some minimum connection between a state and the person, property, or transaction it seeks to tax." Also in Moorman Mfg. Co. v. Bair, 437 U.S. 267, 273 (1978) (Moorman) (citation omitted), the Court ruled that the "income attributed to the State for tax purposes ... be rationally related to the 'values connected with the taxing State'."

Under the DPC, the Supreme Court has held that a state may tax its residents' income whether earned in or out of the state. It also may tax a non-resident's income if it was earned within the state. Oklahoma Tax Comm'n v. Chickasaw Nation, 515 U.S. 450, 462-63 (1995) (Chickasaw Nation) and Lawrence v. State Tax Comm'n, 286 U.S. 276, 279-80 (1932). This may lead to the double taxation of income earned as a result of interstate commerce because the state of residency or domicile may tax the income as well as the state where the income is sourced. Accordingly, interstate commerce may be adversely affected. In Quill Corp. v. North Dakota, 504 U.S. 298, 305 (1992) (Quill), the Supreme Court ruled that "while a State may, consistent with the Due Process Clause, have the authority to tax a particular taxpayer, imposition of the tax may nonetheless violate the Commerce Clause." The Court reasoned that the DPC and DCC "reflect different Constitutional concerns." The primary concern of the DPC is that there is sufficient nexus to provide the state with the power to tax. Clearly, in the case of residence, nexus exists, as the inhabitants of a state subject themselves to the rights and privileges of the state; for example, access to public services and the protection afforded by state law. Conversely, the primary aim of the Commerce Clause is to ensure that a state does not negatively impact interstate commerce; thus, it serves to prevent a state from impermissibly engaging in the federal realm. The DCC serves to prevent a state's power to tax from significantly burdening interstate commerce. …

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