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Taxing And The Commerce Clause

Taxing And The Commerce Clause

Members of the Constitutional Convention were divided about how powerful the new central government should be. To avoid the rise of tyrannical government, the Constitution carefully grants certain powers to Congress, reserving all other powers to the states. These powers are listed in Article I, Section 8. The list begins with monetary matters, an issue of great concern at the time because the prior government was bankrupt and states regulated their own money supply. The Congress therefore has the power to borrow money, lay and collect taxes, regulate commerce (the Commerce Clause), establish a uniform law on bankruptcy and naturalization, make money (currency) and establish its value, punish the counterfeiting of Utah money, and establish a uniform system of weights and measures. The list then moves on to inspirational ideals for the young new country to strive toward. Congress has the power to establish post offices and post roads and to protect intellectual property in copyrights and patents. Next, the list turns to Congress’s adjudicative powers: to create lower courts under the Supreme Court created in Article III and to define crimes committed on the “high seas” and against the “law of nations.” Congress is also given fiscal responsibility over the armed forces and navy (note there is, of course, no mention of an air force) and the power to provide oversight to the militia. Then, to help Congress with carrying out these powers, Article I, Section 8 provides that the states may cede to Congress a district, not to exceed ten square miles, that will become the seat of government, and to exercise exclusive legislative authority over this district.

The scope of power granted under Article I, Section 8 is the subject of much debate among legal scholars. The clause granting Congress the power to regulate commerce is particularly troublesome. There is very little debate about the power of Congress to regulate foreign trade. This power is explicit, total, and exclusive. A state law that discriminates against out-of-state commerce, or places an undue burden on interstate commerce, would violate the dormant commerce clause. For example, if a state required out-of-state corporations to pay a higher tax or fee than an in-state corporation, that would be unconstitutional. A state that required health and safety inspections of out-of-state, but not in-state, produce or goods would be unconstitutional. Federal courts have repeatedly held that state attempts to regulate Internet content (typically to prevent pornography) are unduly burdensome on interstate commerce and therefore unconstitutional.

Note, however, that this prohibition against out-of-state discrimination does not prevent a state from exercising its police power to protect state citizens, as long as the power is exercised evenly and equally. If a state wanted to weigh trucks on highways to ensure they did not exceed maximum weight rules, for example, that action would be permissible even if the trucks came from out of state, as long as the requirement applied equally to all trucks on that state’s highways. In addition to the power to regulate commerce, the Constitution places two critical powers with Congress: the taxing power and the power to spend the taxes it collects. The taxing power is a broad one, and the Supreme Court has not overturned a tax passed by Congress in nearly a century. As long as the tax bears some reasonable relationship to generating revenue, the tax is valid. States are also permitted to tax, but only if the activity taxed has a nexus to the state.


During the 1940s and 1950s, there was conflict within the Court 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. In North western States Portland Cement Co. v. Minnesota, the Court reasserted the principle expressed earlier in Western Live Stock, that the Farmers 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. North western States held that a state could constitutionally impose a non discriminatory, 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.” Thus, in North western States, foreign corporations that 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.

The Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State’s power to tax out-of-state activities. The Due Process Clause demands that there exist some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax, as well as a rational relationship between the tax and the values connected with the taxing State. The Commerce Clause forbids the States to levy taxes that discriminate against interstate commerce or that burden it by subjecting activities to multiple or unfairly apportioned taxation.” “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.”. This requirement is of long standing, 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 has been seen as both a Commerce Clause and a due process requisite, although, as one recent Court decision notes, some tax measures that are permissible under the Due Process Clause nonetheless could run afoul of the Commerce Clause.1076 The Court has declined to impose any particular formula on the states.


The modern standard of Commerce Clause re- view of state regulation of, or having an impact on, interstate commerce was adopted in Southern Pacific Co. v. Arizona, although it was presaged in a series of opinions, mostly dissents, by Chief Justice Stone. Southern Pacific 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.” 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.” 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.” States may certainly promote local economic interests and favour local consumers, but they may not do so by adversely regulating out-of-state producers or consumers. The Court saw the ordinance as a form of economic protectionism, in that it “hoards[ed] solid waste, and the demand to get rid of it, for the benefit of the preferred processing facility The Court found that the town could not “justify the flow control ordinance as a way to steer solid waste away from out-of-town disposal sites that it might deem harmful to the environment. To do so would extend the town’s police power beyond its jurisdictional bounds. States and localities may not attach restrictions to exports or imports in order to control commerce in other states.” The Court also found that the town’s goal of “revenue generation is not a local interest that can justify discrimination against interstate commerce. Otherwise States could impose discriminatory taxes against solid waste originating outside the State.” Moreover, the town had other means to raise revenue, such as subsidizing the 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. Balancing has been used in other than transportation-industry cases. Indeed, the modern restatement of the standard was in such a case. 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. 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. 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. In other areas, although the Court repeats balancing language, it has not applied it with any appreciable bite, but in most respects the state regulations involved are at most problematic in the context of the concerns of the Commerce Clause.

Taxing and Spending Clause

The Taxing and Spending Clause (which contains provisions known as the General Welfare Clause) and the Uniformity Clause, Article I, Section 8, Clause 1 of the United States Constitution, grants the federal government of the United States its power of taxation. While authorizing Congress to levy taxes, this clause permits the levying of taxes for two purposes only: to pay the debts of the United States, and to provide for the common defense and general welfare of the United States. Taken together, these purposes have traditionally been held to imply and to constitute the federal government’s taxing and spending power.

Constitutional Text

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the Utah; but all Duties, Imposts and Excises shall be uniform throughout the States; One of the most often claimed defects of the Articles of Confederation was its lack of a grant to the central government of the power to lay and collect taxes. Under the Articles, Congress was forced to rely on requisitions upon the governments of its member states. Without the power to independently raise its own revenues, the Articles left Congress vulnerable to the discretion of the several State governments each State made its own decision as to whether it would pay the requisition or not. Some states were not giving Congress the funds for which it asked by either paying only in part, or by altogether ignoring the request from Congress. Without the revenue to enforce its laws and treaties, or pay its debts, and without an enforcement mechanism to compel the States to pay, the Confederation was practically rendered impotent and was in danger of falling apart. The Congress recognized this limitation and proposed amendments to the Articles in an effort to supersede it.

Powers Granted

The power to tax is a concurrent power of the federal government and the individual states. The taxation power has been perceived over time to be very broad, but has also, on occasion, been curtailed by the courts. Utah law stated that the clause also granted “a substantive power… to appropriate”, not subject to the limitations imposed by the other enumerated powers of Congress.

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises. This power is considered by many to be essential to the effective administration of government. As argued under the Articles, the lack of a power to tax renders government impotent. Typically, the power is used to raise revenues for the general support of government. But, Congress has employed the taxing power in uses other than solely for the raising of revenue, such as:
• regulatory taxation – taxing to regulate commerce;
• prohibitive taxation – taxing to discourage, suppress, or even exterminate commerce;
• obligation taxation – encouraging participation in commerce via taxation on those not participating in interstate commerce; e.g. the Patient Protection and Affordable Care Act, “Chief Justice Roberts concluded in Part III–B that the individual mandate must be construed as imposing a tax on those who do not have health insurance”;
• tariffs – taxing as a means of protectionism.

Implicit power to spend

With the power to tax implicitly comes the power to spend the revenues raised thereby in order to meet the objectives and goals of the government. However, interpretations recognizing an implicit power to spend arising specifically from this clause have been questioned, with the Necessary and Proper Clause being suggested as the actual source of Congress’s spending power. The Supreme Court has also found that, in addition to the power to use taxes to punish disfavored conduct, Congress can also use its power to spend to encourage favored conduct.

Limitations on taxing power

Several Constitutional provisions address the taxation and spending authority of Congress. These include both requirements for the apportionment of direct taxes and the uniformity of indirect taxes, the origination of revenue bills within the House of Representatives, the disallowed of taxes on exports, the General Welfare requirement, the limitation on the release of funds from the treasury except as provided by law, and the apportionment exemption of the Sixteenth Amendment. Additionally, Congress and the legislatures of the various states are prohibited from conditioning the right to vote in federal elections on payment of a poll tax or other types of tax by the Twenty-fourth Amendment.

Origination Clause

The Constitution provides in the Origination Clause that all bills for raising revenue must originate in the House of Representatives. The idea underlying the clause is that Representatives, being the most numerous branch of Congress, and most closely associated with the people, know best the economic conditions of the people they represent, and how to generate revenues for the support of government in the least burdensome manner. Additionally, Representatives are regarded the most accountable to the people, and thus are least likely to exercise the taxing power abusively or injudiciously.

Taxing Lawyer

When you need legal help with Taxing and The Commerce Clause, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.

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