The Silence of Congress: State Taxation of Interstate Commerce

The Silence of Congress

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The Silence of Congress State Taxation of Interstate Commerce

Joseph F. Zimmerman

 State University of New York Press

Published by State University of New York Press, Albany © 2007 State University of New York All rights reserved Printed in the United States of America No part of this book may be used or reproduced in any manner whatsoever without written permission. No part of this book may be stored in a retrieval system or transmitted in any form or by any means including electronic, electrostatic, magnetic tape, mechanical, photocopying, recording, or otherwise without the prior permission in writing of the publisher. For information, contact State University of New York Press, Albany, NY www.sunypress.edu Production by Kelli W. LeRoux Marketing by Anne M. Valentine Library of Congress Cataloging-in-Publication Data Zimmerman, Joseph Francis, 1928–– The silence of Congress : state taxation of interstate commerce / Joseph F. Zimmerman.. p. cm. Includes bibliographical references and index. ISBN 978–0–7914–7205–7 (alk. paper) 1. Intergovernmental tax relations—United States. 2. Interstate commerce— Taxation—United States—States. I. Title. II. Title: State taxation of interstate commerce. HJ275.Z56 2007 336.2⬘01373—dc22 20066100301

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This book is dedicated with love to Kieran Thomas Taylor

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Contents

Preface

viii

Acknowledgments

xi

Chapter 1. State Competition for Tax Revenue

1

Chapter 2. Excise and Documentary Taxes

23

Chapter 3. Severance Taxes

47

Chapter 4. The Nonresident Income Tax

61

Chapter 5. Corporate Income Taxation

79

Chapter 6. Escheats and Tax Revenue Competition

105

Chapter 7. Competition for Other Tax Resources

131

Chapter 8. The Silence of Congress

153

Chapter 9. Fairness in Taxation of Interstate Income

175

Notes

193

Bibliography

233

Index

277

vii

Preface

T

he United States Constitution established the world’s first federal system encompassing an economic union and a political union whose central characteristic is dual sovereignty with Congress possessing delegated powers and states possessing reserved or residual powers. A federal system automatically raises questions pertaining to the nature of appropriate relations between the national government and state governments at the boundary lines of their respective authority and between sister states each possessing equal powers. Relations between states in such unions may be cooperative, competitive, and/or conflictive in general and with respect to taxation of interstate commerce in particular. The constitution reserves substantial powers, including taxation, to state legislatures and the result has been the enactment of nonuniform state taxation laws that may or may not cause interstate relations problems and result in a state filing a motion in the U.S. Supreme Court for permission to file a complaint in equity against another state seeking to invoke the court’s original jurisdiction. The passage of time witnessed state legislatures enacting an increasing number of tax credits and exemptions for a wide variety of purposes including economic development and research. Collectively, these statutes resulted in nonharmonious state laws levying taxes on interstate commerce that often produce taxpayer inequities, costly taxpayer compliance costs, and law suits by individuals and multijurisdictional corporations seeking equity in taxation. The constitution delegates to Congress two most important powers to solve problems prevalent under the Articles of Confederation and Perpetual Union. The constitutional authority to levy taxes to raise revenues relieved Congress of its former dependence on voluntary contributions of funds by states that often were not made or were made in part. The plenary power to regulate commerce among the several states was granted in the expectation Congress would enact statutes, reinforced

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by the supremacy of the laws clause, to invalidate barriers, tax and others, to interstate commerce erected by state legislatures disrupting the economic union. Congress in its first session in 1789 exercised its taxation powers by imposing imposts on imports. However, the national legislature did not enact a statute regulating interstate commerce until 1887. Failure to exercise this delegated power led to the use of the term “the Silence of Congress” and the U.S. Supreme Court in 1824 developing its dormant commerce clause doctrine in order to allow state and U.S. courts to adjudicate controversies involving state-erected barriers to interstate commerce. Although Congress subsequently on a gradual basis enacted laws regulating such commerce, no statute regulating state taxation of interstate commerce was enacted until 1959 and this statute and eighteen of the nineteen subsequent statutes regulating such taxation are minor ones. The exception is the prohibition of taxation of Internet sales that deprives state and local governments levying a sales tax of revenues in excess of $16 billion annually. State and U.S. courts adjudicate interstate taxation controversies and private citizen and corporate challenges of state taxes levied on interstate commerce. The U.S. Supreme Court and individual justices on several occasions issued opinions calling on Congress to harmonize such state taxation as Congress, the political branch representing the people, possesses plenary authority to address problems created by nonuniform state taxation of interstate commerce and is better equipped, in terms of staff and hearings, to fashion comprehensive remedies than the court. The latter acts spasmodically after invoking its original jurisdiction or agreeing to review the decision of a lower court and in both types of cases its jurisdiction is limited to the narrow issue in controversy. Furthermore, academics specializing in taxation of interstate commerce, other tax experts, and multijurisdictional corporations urged Congress to initiate action to make state taxation of interstate commerce more uniform. The congressional response has been very limited and designed principally to protect specified taxpayers. The purposes of this book are to examine (1) the desirability of Congress’s decision to leave prime responsibility for resolving taxation controversies involving interstate commerce to state and U.S. courts, (2) tax regulatory actions that could be initiated by Congress and the prospect for their enactment, (3) alternative methods of achieving uniform state laws levying taxes on interstate commerce, and (4) actions Congress should initiate to encourage enactment of uniform state laws and interstate regulatory compacts.

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Preface

The volume concludes by adding three maxims involving state taxation of interstate commerce to the four developed by Adam Smith in 1776 and presenting the outline of a broad theory of interstate relations encompassing the subject of state taxation of interstate commerce.

Acknowledgments

T

he literature on state taxation in the United States is large, and searching such literature is time-consuming. I have been most fortunate in having highly competent research associates who identified and obtained copies of pertinent books, government reports, journal articles, Ph.D. dissertations, conference papers, and other unpublished documents. I am most pleased to acknowledge a special debt of gratitude to Paul Alexander, Winston R. Brownlow, and Katherine M. Zuber, who performed their assignments in a most conscientious, professional, and timely manner. Without their assistance, completion of a scholarly manuscript on the subject of state taxation of interstate commerce would have been delayed significantly. As usual, I compliment Addie Napolitano for excellence in preparing the manuscript for publication and for solving word processing problems. Any errors of act or misinterpretation are solely my responsibility.

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Chapter 1

State Competition for Tax Revenue

A

dam Smith in 1776 established four famous tax maxims for all nations. A tax, a compulsory extraction of funds, should (1) fall equally on each taxpayer, (2) be certain and not arbitrary, (3) be convenient in terms of payment, and (4) be economical to collect.1 These maxims remain valid, but were developed prior to the establishment in 1789 of the first federation—the United States of America—and its complex system of national, state, and local taxation including the national graduated personal income tax that suggests the first maxim should be modified to read “fall equally on each taxpayer according to his or her ability to pay.” The federal system has revealed the need for additional maxims (see chapter 9). A confederate or a federal system may encourage states to increase their respective revenues by enacting taxes whose incidence, directly or indirectly, falls primarily on business firms and residents in sister states and one or more foreign nations. New York during the confederacy established by the Articles of Confederation and Perpetual Union, for example, levied import duties on goods entering the state’s ports from overseas, including goods destined for sister states, a form of tax exportation.

1

The extent of tax exportation is determined in part by the constitution establishing a federation. The U.S. Constitution delegates to Congress broad regulatory and taxation powers and reserves to the states powers to provide services, regulate, and tax. States, in turn, have delegated specific taxation powers to general-purpose local governments that may levy a tax with an extraterritorial effect. Our principal focus is state taxation of interstate commerce. The two prominent theories of federalism—dual and cooperative—are devoted exclusively to nationalstate relations and provide no guidance on the subject of state taxation of interstate commerce. The reasons why a state exports taxes are apparent. A governor and a state legislature seek to keep the tax burden placed on the state’s business firms and citizens relatively low by imposing taxes payable in part by firms and citizens of other states. Such a policy is popular with elected officers and will help their reelection campaigns. The taxes exported vary greatly as some are conventional taxes with an extraterritorial incidence such as the commuter income tax imposed on nonresidents who earn all or part of their income in the state, the city, or both. States also seek to tax the income of corporations and residents of foreign nations with respect to income earned within each state. Such taxes may be subject to provisions of bilateral or multilateral treaties entered into by the United States with foreign nations. It also should be noted that states engage in competition to attract major business firms, gamblers, filmmakers, sports franchises, and tourists as sources of tax revenues.2 Tax credits play an important role in the interstate competition to attract business firms and increase the complexity of state taxation of interstate commerce. State legislatures not uncommonly levy higher taxes on foreign business corporations (chartered in another state) and alien corporations (chartered in another nation) than on domestic corporations by limiting tax credits to domestic firms. Taxes discriminating against foreign firms often beget retaliatory state taxes that may become the subject of an original jurisdiction trial in the United States Supreme Court when one state challenges the constitutionality of a tax levied by a sister state (see chapter 5).3 In addition, business firms can challenge the constitutionality of a tax in a state court or the U.S. District Court. States often face major court challenges in their attempts to tax fairly the income of multistate and multinational corporations, and income taxes levied on the latter corporations have generated international controversies as explained in chapter 5. An equitable state corporate income tax requires that the income of multistate and multinational corporations be apportioned fairly among the states. Forty-five states and the District

State Competition for Tax Revenue

3

of Columbia levy a corporate income, business profits, or franchise tax and corporations today face a major compliance burden because of the nonuniformity of provisions of these taxation statutes and may be overtaxed or undertaxed. Congress possesses plenary power to regulate state taxation of interstate commerce. Its relative silence on the subject has resulted in a major burden placed on state courts and the U.S. District Court to determine the balance between the tax policies of a state designed to raise adequate revenue and the national policy of ensuring the free flow of commerce between sister states. Many states today tax visiting nonresident professional athletes for each playing day, training day, or both in the state (see chapter 4). Nonresidents visiting a sister state who make purchases pay sales taxes unless their purchases are shipped to their homes and also may pay highway tolls. Similarly, sojourners pay excise taxes when they purchase alcoholic beverages and tobacco products. A taxpayer does not necessarily have to visit another state in order to pay one of its taxes. A severance tax is levied on natural resources, such as coal and natural gas, and the bulk of these resources are exported to other states where the incidence of the tax falls (see chapter 3) and a nonresident may be required to pay an estate tax (see chapter 6). In 1993, the City of Virginia Beach, Virginia, developed an ingenious scheme to raise additional revenue by means of tax exportation. The city levied a personal property tax on three satellite transponders owned by International Family Entertainment Incorporated. The devices are located on communications satellites circling the globe. The company challenged the constitutionality of the tax and the Virginia Beach Circuit Court ruled the city possessed no authority to tax the transponders.4 Acting on an appeal, the Virginia Supreme Court in 2002 upheld the lower court decision because the state statute relied on by the city as authority to levy the tax “does not contain any rules for the determination of a situs for transponders or the satellites to which the transponders are affixed.”5 New Hampshire, a major tourist state, does not levy an earned income tax or a sales tax, but does levy a 5 percent tax on dividend and interest income. The state and many of its cities and towns have employed innovative methods to export taxes. The state relies in part for revenue on hotel and motel occupancy, motor vehicle rental, and restaurant meals taxes, and also raises substantial revenues through the sale of alcohol beverages at relatively low prices in its state-operated liquor stores, which attract customers from many states and Canadian provinces. The state’s policy of keeping its excise tax on cigarettes low also has attracted nonresidents who make their purchases in the state.

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The Silence of Congress

Furthermore, the lack of a sales tax attracts shoppers from neighboring states and thereby allows the state to export part of its 8.5 percent business profits tax. The board of selectpersons in the neighboring town of St. Johnsbury, located in Caledonia County, Vermont, employed a professional firm which estimated county merchants lost approximately $36 million in retail sales in 2005 to New Hampshire merchants.6 The 1991 New Hampshire General Court (state legislature) raised $35 million by levying an unique statewide ad valorem 0.64 percent property tax on a nuclear power plant owned jointly by twelve utilities with eleven located in sister states. This tax induced Connecticut, Massachusetts, and Rhode Island to file an original jurisdiction bill of complaint in equity against New Hampshire in the U.S. Supreme Court (see chapter 5). In 1987, a study of 63 cities and towns revealed that nonresident owners of vacation and recreation property paid more than 8.1 percent of local government property taxes.7 An example of tax exportation by a New Hampshire local government is the Town of Newbury, with frontage on Lake Sunapee and a population of 900, which received 70 percent of its property tax revenue from nonresidents in 1987. Massachusetts decided to help its merchants compete with New Hampshire merchants by exempting from its 5 percent sales tax on purchases under $2,500 on August 13–14, 2004. New Hampshire responded with advertisements in the Boston Globe containing the slogan “365 vs. 002 . . . Tax-Free Shopping Days (for those of you keeping score).”8 The state’s division of travel and tourism development reported the state welcomes twenty-seven million visitors annually. Vermont in 2005 held its first auction of hunting permits that raised $21,517 for the state fish and wildlife department’s conservation education programs.9 The top bid for one of five moose hunting permits was $7,777 and bids for the other permits were lower. Each successful bidder also has to purchase a hunting license ($16 for residents and $90 for nonresidents) or hunting permit fee ($100 for residents, $350 for nonresidents). States also initiate action to prevent tax evasion. Each state with a sales tax also has a compensating use tax at the same rate applicable to items purchased by their residents in other states and nations. Enforcement of the use tax is difficult with the exception of the purchase of motor vehicles in another state or nation. The home state requires payment of a use tax on a vehicle purchased outside the state as a condition for registering the vehicle. A number of motorists, in order to avoid taxes and high insurance premiums also purchase and register their vehicles in a state with no sales tax and lower insurance premiums. The problem is severe near the Massachusetts–New Hampshire boundary and

State Competition for Tax Revenue

5

Massachusetts encourages its residents to use a toll-free hotline—1-800l-Pay-Tax—to report residents who have out-of-state license plates on their vehicles. An increasing number of owners of motor homes recreational vehicles (RV) commenced in the early years of the twenty-first century to drive to Montana, which lacks a sales tax and has a maximum RV registration fee of $305.50, to create a limited liability corporation (LLC) to avoid paying taxes and to trade in their RV to purchase a new one at a Montana dealer.10 The cost of establishing a LLC ranges from $750 to $1,000 and attorneys representing RV owners examine the statutes of their respective home state to ensure a use tax will not be levied. Under California law, for example, the purchaser of a RV in a sister state may not bring the vehicle to California for one year without paying the use tax. An understanding of the constitutional foundations of the federal system, including interstate provisions, is essential if one is to comprehend fully the complexities of interstate tax revenue competition, resultant problems, and proposed solutions.

THE ARTICLES OF CONFEDERATION AND PERPETUAL UNION The Second Continental Congress superintended the prosecution of the Revolutionary War following the signing of the 1776 Declaration of Independence by representatives of the thirteen states. This Congress was not a national government, recognized the need for a formal national governance document, and drafted the Articles of Confederation and Perpetual Union containing Art. 3 establishing “a firm league of friendship” of the states. Art. 2 proclaimed: “Each State retains its sovereignty which is not by this confederal expressly delegated to the united States in Congress Assembled.” The lower case “u” purposely was utilized to emphasize a government with powers derived from the people was not established. A unicameral Congress, with two to seven delegates from each state, was the governing body, but no executive branch or judicial branch was created. The articles were submitted to the states in 1777 for ratification, but boundary disputes delayed ratification by the thirteenth state until 1781. The authors of the articles were convinced it was essential to include articles governing relations between sister states. Art. 4 required each state to (1) extend privileges and immunities to sojourners, (2) render

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The Silence of Congress

fugitives from justice on a request from the governor of a sister state, and (3) give full faith and credit “to the records, acts, and judicial proceedings of the courts and magistrates of every other state.” Art. 4 authorized states to enter into agreements with each other with “the consent of the United States in Congress assembled, specifying accurately the purposes for which the same is to be entered into, and how long it shall continued.” Only a short period of time was required to demonstrate the major defects of the confederation established by the articles. Alexander Hamilton, John Jay, and James Madison, in a series of letters to editors of New York City newspapers, examined the defects in detail and explained the provisions of the proposed U.S. Constitution between October 27, 1787, and August 16, 1788.11

Defects The first defect was the reliance placed upon each state voluntarily to send its full quota of funds to Congress and their failure to do so deprived Congress of revenues essential for the implementation of its limited delegated powers as Hamilton explained in “The Federalist No. 21.” The second defect was the absence of a provision authorizing Congress to regulate commerce among the several states. Disputes developed as individual states, acting in a mercantilist fashion, erected trade barriers against goods from other states and by 1786 trade between the states had come to a near standstill. Hamilton in “The Federalist Number 22” highlighted the serious nature of this defect: The interfering and unneighborly regulations of some States, contrary to the true spirit of the Union have, in different instances, given just cause of umbrage and complaint to others, and it is feared that examples of this nature, if not restrained by a national control, would be multiplied and extended till they became not less serious sources of animosity and discord than injurious impediments to the intercourse between the different parts of the Confederacy. Madison in “The Federalist No. 21” focused on tax exportation by states with gateway seaports and stressed the need for congressional superintendence of foreign commerce as interior states import and export products through states with seaports which would “load the articles of import and export, during the passage through their jurisdiction, with duties which would fall on the makers of the latter and the consumers of the former.”12 As a consequence, animosities would be cre-

State Competition for Tax Revenue

7

ated between states and the interior states would resort to less convenient routes for importing and exporting products in order to avoid the duties levied by states with seaports.The third defect was Congress’s lack of authority to enforce its statutes and treaties with foreign nations. Under the Articles, no state was required to respect the statutes enacted by the Congress as described by Hamilton in “The Federalist No. 21” or the treaties entered into with foreign nations including the Peace Treaty with the United Kingdom of 1783. Nonobservance of the terms of treaties by various states generated poor relations with foreign nations. Fourth, the lack of an army and a navy was a serious defect caused by the inability of Congress to acquire the necessary funds. This defect was a particularly important one in view of the facts, outlined by John Jay in “The Federalist No. 4,” that Canada was controlled by the United Kingdom and excluded U.S. citizens from the St. Lawrence River, the southwest was under the jurisdiction of Spain which closed the Mississippi River, and the friendly French monarchy appeared to be close to a collapse. Furthermore, as Hamilton noted in “The Federalist Papers Nos. 6, 25, 28, and 74,” former Continental Army Captain Daniel Shays led a rebellion by farmers in Massachusetts in 1786–87 and captured control of all of the Commonwealth west of Worcester which is located forty miles from Boston. The confederation was powerless to help the Commonwealth put down the insurrection that was suppressed when wealthy Boston residents raised funds and sent General Benjamin Lincoln with an army to restore Commonwealth control of rebellious areas. The fifth defect was the absence of a mechanism to resolve interstate disputes. Hamilton in “The Federalist No. 6” referred to the dangers “which will in all probability flow from dissensions between the States themselves . . . ” and in “The Federalist No. 7” cited the battle between Connecticut and Pennsylvania military forces over the Wyoming territory in present-day Pennsylvania.13 The sixth defect was the danger the confederation would dissolve. In 1787, James Madison wrote “a breach of any of the Articles of Confederation by any of the parties to it absolves the other parties from their obligations, and gives them a right if they choose to exert it of dissolving the Union altogether.”14 John Jay in “The Federalist No. 5” expounded on the turmoil which would result from a breakup of the confederation. Representatives of Maryland and Virginia in 1785 signed an interstate compact governing fishing and navigation on the Potomac River and the Chesapeake Bay. The Maryland General Assembly enacted the compact and invited Delaware and Pennsylvania to become involved in

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The Silence of Congress

commercial regulations in the future. The Virginia General Assembly enacted the compact and invited all states to attend a convention in Annapolis, Maryland, in 1786 for the purpose of developing a uniform commerce and trade system. Commissioners were appointed by nine states to attend the convention. However, only commissioners from five states participated and approved a resolution, drafted by Alexander Hamilton, memorializing Congress to call a convention to meet in May 1787 in Philadelphia for the expressed purpose of amending the Articles of Confederation and Perpetual Union. Congress on February 21, 1787, issued the convention call without specifying the method to choose delegates. The governor or the state legislature appointed the delegates with several instructed to take no action other than revising the articles.

THE UNITED STATES CONSTITUTION All states, except Rhode Island and Providence Plantations, sent delegates to the 1787 convention, which met from May 25 to September 17. Rhode Island maintained changes to the articles could only be made in conformance with the art. 8 requirement providing they could be altered only if approved by Congress and “confirmed by the legislatures of every state.” Although seven-four delegates were appointed by the states, only fifty-five accepted their appointments and attended the convention. Fourteen delegates left Philadelphia prior to the official closure of the convention. George Washington was elected president of the convention. Ideological and sectional factions developed in the convention. The former factions were divided on the question of whether a strong national government would be a threat to the liberties of individuals. The latter factions reflected sectional differences over issues such as slavery and whether Congress should be authorized to levy import and export duties. Another issue involved the potential in a federal system for a conflict between a congressional statute and a state statute. Madison favored a proposal granting Congress the power to disallow state statutes contravening the delegated powers of Congress, but the proposal was rejected as the convention added the supremacy of national laws and treaties clause to the draft constitution to resolve conflicts between congressional statutes and state statutes.15 In addition, there was a major division between states with large populations and states with small populations over the issue of the system of representation in the proposed unicameral Congress. The controversy was removed through

State Competition for Tax Revenue

9

the Connecticut Compromise providing for equal state representation in the Senate and representation in accordance with population in the House of Representatives with the guarantee each state would have at least one member. A similar division occurred between the free states and the slave states over the issue of whether slaves should be counted as part of a state’s population. The issue was resolved by incorporating in art. 1, sec. 2 a provision stipulating apportionment of seats would include “three fifth of all other persons” (slaves). Whether states should be allowed to import slaves was another divisive issue producing the compromise in art.1, sec. 9 providing slaves may continued to be imported until 1808 and Congress may imposed a tax of ten dollars on each slave imported. Alexander Hamilton in “The Federalist Number 82” focused on national-state relations under the proposed constitution and admitted problems with such relations were to be expected: The erection of a new government, whatever care or wisdom may distinguish the work, cannot fail to originate questions of intricacy and nicety; and there may, in a particular manner, be expected to flow from the establishment of a constitution founded upon the total or partial incorporation of a number of distinct sovereignties. “This time only that can mature and perfect so compound a system, can liquidate the meaning of all the parts, and can adjust them to each other in a harmonious and consistent whole.”16

Ratification The convention, on approving the draft constitution, sent copies to each state with a directive that the state legislature should convene a convention of elected delegates to consider the question of ratification of the proposed fundamental law. The constitution’s framers were aware it would be impossible to secure the immediate ratification of the document by all thirteen states, and included in art. 7 a provision that ratification by conventions in “nine states shall be sufficient for the establishment of this constitution between the states so ratifying the same.” The divisions among convention delegates were replicated in the states when debate began on ratification of the proposed constitution. The assumption was made that ratification by nine state conventions would persuade the other states to ratify. Many objections were raised against the proposed constitution including the charges (1) only the unanimous approval of the thirteen state legislatures could replace the Articles of Confederation and

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The Silence of Congress

Perpetual Union with the proposed constitution, (2) the proposed government either would be too strong or too weak, (3) the lack of a Bill of Rights, similar to ones in state constitutions, was a fatal weakness, (4) the president as commander-in-chief of the army and navy was too powerful and might become another Oliver Cromwell, (5) the absence of a reference to God was sacrilegious, (6) the document should require national government officers to be Christians, and (7) states should not be deprived of the power to coin money. The proposed constitution did contain civil liberty guarantees including the prohibition of congressional enactment of a bill of attainder and an ex post facto law or suspension of the writ of habeas corpus except “when in cases of rebellion or invasion the public safety may require it.” For details, consult The Antifederalist Papers.17 Proponents argued there was no need for a bill of rights because Congress could exercise only delegated powers that did not include the power to abridge freedoms of assembly, the press, religion, and right to petition the government for a redress of grievances. The strongest opposition to the proposed fundamental law was in states with a small population and located in the interior of the country. Farmers, who traditionally were in debt, and other debtors were supporters of cheap paper money issued by states and were opposed to the constitution because of the provision in section 10 of Article I forbidding states to “make any thing but gold and silver coin a tender in payment of debts.” Conventions in Delaware, New Jersey, and Pennsylvania within a short period of time ratified the proposed constitution and their actions were followed by ratification by the Connecticut convention and the Georgia convention. Opposition remained strong in Massachusetts, New York, and Virginia, the most populous state. Absent their ratification, the proposal was doomed to defeat. The Federalist Papers were designed to convince New York, one of the largest states, to ratify the proposed constitution and the papers undoubtedly promoted support for the constitution in other states. The proposed U.S. Constitution was ratified by the required ninth state, New Hampshire, in 1788, and became effective in 1789. Two unions were produced by the Constitution—an economic union and a political union. Each union is exceptionally complex in nature, intertwined with the other union, and designed to eliminate serious problems plaguing the United States under the Articles of Confederation and Perpetual Union.

Power Distribution It should be noted that a federal system exists between Congress and the states, and a unitary system exists between Congress and the District of Columbia and territories, including the Commonwealth of Puerto Rico.

State Competition for Tax Revenue

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The unamended constitution delegates important powers to Congress, but is silent with respect to the powers of the states other than listing in section 10 of Article I completely prohibited powers—entrance into a treaty, alliance, or confederation, granting of letters of marque and reprisal or titles of nobility, coinage, emitting bills of credit, making “any thing but gold and silver coin a tender in payment of debts,” and enactment of a “bill of attainder, or law impairing the obligation of contracts.” The section also authorizes states, with congressional consent, to levy import and export duties to raise revenue to finance their inspection laws, “lay any duty of tonnage, keep troops, or ships of war in time of peace, enter into any agreement or compact with another state, or with a foreign power, or engage in war, unless actually invaded, or in such imminent danger as will not admit of delay.” Powers of Congress. In theory, the powers of Congress are limited to the following ones delegated byThe U.S. Constitution, art. 1 sec. 8: To lay and collect taxes, duties, imposts and excises, to pay the debts and to provide for the common defense and general welfare of the United States, but all duties, imposts and excises shall be uniform throughout the United States; To borrow money on the credit of the United States; To regulate commerce with foreign nations, and among the several States, and with the Indian Tribes; To establish an uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States; To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures; To provide for the punishment of counterfeiting the securities and current coin of the United States; To establish post offices and post roads; To promote the progress of sciences and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries; To constitute tribunals inferior to the supreme court; To define and punish piracies and felonies committed on the high seas, and offenses against the law of nations; To declare war, grant letters of marque and reprisal, and make rules concerning captures on land and water; To raise and support armies, but no appropriation of money to that use shall be for a longer term than two years; To provide and maintain a navy;

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The Silence of Congress To make rules for the government and regulation of the land and naval forces; To provide for calling forth the militia to execute the laws of the Union, suppress insurrections, and repel invasions; To provide for organizing, arming, and disciplining the militia, and for governing such part of them as may be employed in the service of the United States, reserving to the States respectively the appointment of the officers, and the authority of training the militia according to the discipline prescribed by Congress; To exercise exclusive legislation in all cases whatsoever, over such district (not exceeding ten miles square) as may, by cession of particular States; and the acceptance of Congress, become the seat of the government of the United States; and to exercise like authority over all places purchased by the consent of the legislature in which the same shall be, for the erection of forts, magazines, arsenals, dock-yards, and other needful buildings; and To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the Government of the United States, or in any department or officer thereof.

Implied and Resultant Powers. Implied powers are essential if specifically enumerated powers are to be fully implemented. The “necessary and proper” clause, also known as the elastic clause, is the basis for the judicial doctrine of implied powers that increased the powers of the national government. In 1819, the U.S. Supreme Court in McCulloch v. Maryland opined: “Let the end be legitimate, let it be within the scope of the Constitution, and all means which are appropriate which are plainly adapted to the end, which are not prohibited, but consistent with the letter and spirit of the Constitution, are constitutional.”18 The term “appropriate means” is a broad one and has included enactment of statutes chartering national banks and other institutions, creation of executive departments and agencies, and authorization of numerous activities based on the delegated powers to levy taxes to provide for the general welfare and national defense. Congressional acts based on implied powers are subject to a court challenge to determine whether the scope of a specific delegated power is broad enough to authorize the exercise of a power implied from it. A resultant power is based on two or more specific powers delegated to Congress. The constitution authorizes Congress “to establish a

State Competition for Tax Revenue

13

uniform rule of naturalization,” but does not delegate a specific power to Congress to regulate immigration. This power, in conjunction with the delegated power to regulate foreign commerce and the power of the Senate to confirm treaties negotiated by the president, serves as the constitutional authority for congressional regulation of immigration. A second example of a resultant power is congressional authorization of the printing of paper money as legal tender. The power is derived from the grant of power to borrow funds and to coin money and determine the value thereof. Concurrent Powers. As noted, states are forbidden to exercise specified powers and may exercise other specified powers only with the consent of Congress. Congress is granted only one power—coinage—that is an exclusive one as states are forbidden to exercise this power. Other powers, including regulation of interstate commerce, delegated to Congress are concurrent ones exercisable by state legislatures. Congress, however, can exercise its power of preemption to remove specific regulatory powers completely or partially from states. Enactment of a complete preemption statute, for example, converts a concurrent power into an exclusive congressional one.19 Indian Tribes. Federally recognized Indian tribes are semisovereign with respect to their respective reservation and possess powers varying with provisions of treaties, dating from the Articles of Confederation and Perpetual Union to the present, between individual tribes and the United States. States with recognized Indian tribes lose tax revenues as purchases by nonresidents on reservations are exempt from state taxes unless a tribe has entered into a compact with the governor authorizing the tribe to operate casinos under provisions of the congressionally enacted Indian Gaming Regulatory Act of 1988 and requiring the tribe to collect state excise taxes on alcoholic beverages, cigarettes, and motor fuels sold on the reservation to nonresidents.20 Interstate Constitutional Principles. Seven provisions were incorporated in the U.S. Constitution to govern relations between sister states. The framers utilized general terms and courts are called on in individual cases to determine the applicability of the provisions. The reader should be aware the U.S. Supreme Court acts on a case-by-case basis and does not define constitutional terms. Legal Equality of States. The U.S. Constitution, art. 4, sec. 3 grants Congress the absolute power to admit new states to the Union, but does

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The Silence of Congress

not indicate whether a newly admitted state is legally equal to each of the original thirteen states. This section also stipulates “no new State shall be formed or erected within the jurisdiction of any other State; nor any State be formed by the junctions of two or more States, or parts of States, without the consent of the legislatures of the States concerned as well as of the Congress.” Congress admitted Vermont to the Union on March 4, 1791, with no conditions by stipulating the state is “a new and entire member of the United States of America.”21 Alaska and Hawaii, the most recently admitted states have the identical reserved powers as those possessed by the original thirteen states. On the one hand, conditions on occasion may be imposed as part of the process of admitting a new state to the Union. When called on, courts may enforce conditions pertaining to United States property in the state or national grants of land or money for stated purposes.22 On the other hand, conditions restricting a newly admitted state from changing its governmental institutions or internal organization can be ignored as the results of a 1911 U.S. Supreme Court decision. The controversy involved the Oklahoma territory and its agreement in the form of an irrevocable ordinance, as a condition of admission to the Union, to establish its capital in Guthrie. The state legislature’s decision to remove the capital to Oklahoma City was challenged and the Oklahoma Supreme Court in 1911 upheld the constitutionality of the removal.23 An appeal was made to the U.S. Supreme Court and it held: “This Union” was and is a union of states, equal in power, dignity, and authority, each competent to exert that residuum of sovereignty not delegated to the United States by the Constitution itself. To maintain otherwise would be to say that the Union, through the power of Congress to admit new states, might come to be a union of states unequal in power, as including states whose powers were restricted only by the Constitution, with others whose powers had been further restricted by an act of Congress accepted as a condition of admission.24

Full Faith and Credit A federation can be successful as an economic and a political union only if there is a constitutional requirement that each state extend full faith and credit to the laws, judicial proceedings, and records of sister states.

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Although there was no written constitution during the Revolutionary War, the Second Continental Congress approved in 1777 a resolution that stipulated: “Full faith and credit shall be given in each of these states to the records, acts, and judicial proceedings of the courts and magistrates of every other state.” This resolution was incorporated into art. 4, the interstate article, of the Articles of Confederation and Perpetual Union, effective in 1781, and subsequently incorporated into the U.S. Constitution, art. 4, sec. 1 with slightly different wording: “Full faith and credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State; and the Congress may by general laws prescribe the manner in which such Acts, Records, and Proceedings shall be proved, and the effect thereof.” Madison in “The Federalist No. 42” described the grant of prescription power as “an evident and valuable improvement on the clause” in the articles.25 Congress prescribed in 1790 and 1804 the authentication method for records and judicial proceedings, and in 1804 extended this guarantee to acts, thereby determining the extraterritorial effects of acts, records, and judicial proceedings of each state.26 Congress in 1980, 1994, 1996, and 1999 enacted clarification statutes. The most famous full faith and credit prescription is the Defense of Marriage Act of 1996 that (1) defines a marriage as “a legal union between one man and one woman as husband and wife,” (2) declares the term “spouse” designates “a person of the opposite sex who is a husband or a wife,” and (3) grants authority to a state to deny full faith and credit to a marriage certificate of two persons of the same sex.27 Each state legislature is free to enact a statute containing less stringent full faith and credits standards than the national ones with respect to authenticating judicial proceedings of other states, yet may not deny to its courts jurisdiction over cases involving duties and rights created by statutes of sister states. A state court must enforce a full faith and credit duty or right even if the court is convinced the sister state court’s reasoning is invalid. This complex and important principle, designed to promote interstate intercourse and national unity, must be read in conjunction with the Constitution, art. 3, sec. 2 granting diversity of citizenship jurisdiction to U.S. courts. A literal reading of the clause suggests a state or a federal court adjudicating a conflict between acts of two sister states would displace the act of the first state with the act of the second state. The U.S. Supreme Court has clarified the guarantee and in early decisions mandated that full faith and credit be accorded to judicial decisions of sister states.28 Commencing in 1866, the court struck down

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The Silence of Congress

choice of law decisions as unconstitutional as illustrated by the decision invalidating New York’s application of its law in determining the effect to be given to the judgment of the court of a sister state.29 The court in 1877 opined explicitly the full faith and credit clause limits choice of law.30 In 1935, the court changed direction by announcing it would evaluate “the governmental interests of each jurisdiction” and base the court’s decision “according to their weight”; the court found California’s interests to be superior to Alaska’s interests.31 This decision was reversed in 1939 when the court held “the very nature of the federal union . . . precludes resort to the full faith and credit clause as the means for compelling a state to substitute the statutes of other states for its own statutes dealing with a subject matter concerning which it is competent to legislate.”32 Interstate Compacts. Interstate compacts, with the consent of Congress, date to 1785 when Maryland and Virginia entered into a compact, under provisions of art. 4 of the Articles of Confederation and Perpetual Union, regulating fishing and navigation on the Chesapeake Bay and the Potomac River.33 Although U.S. Constitution, art. 1, sec. 10 stipulates states may enter into compacts with each other with the consent of Congress, the U.S. Supreme Court in 1893 opined that only political compacts encroaching upon national powers were subject to such consent.34 Compacts cover a wide variety of subject matters, including taxation, and are administered by a commission or departments and agencies of compacting states. The Multistate Tax Compact, which established an advisory commission, has been enacted by twenty-one states and the District of Columbia. An additional twenty-three states are associate members of the compact and three other states participate in certain commission projects. The United States Steel Corporation challenged the constitutionality of the compact because Congress had not granted its consent. The U.S. Supreme Court in 1978 upheld the constitutionality of the compact on the ground the compact does not “authorize the member states to exercise any powers they could not exercise in its absence.”35 The reader should be aware the U.S. Constitution does not contain barriers to states conducting relations with sister states on the basis of reciprocity or the officers of the various states entering into formal and informal cooperative administrative agreements such as the exchange of income tax computer tapes and other tax information.36 Interstate Free Trade. Experience with the mercantilistic actions of states under the Articles of Confederation and Perpetual Union led the

State Competition for Tax Revenue

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drafters of the U.S. Constitution, art. 1, sec. 8 to grant Congress plenary power over interstate and foreign commerce. As noted, art. 1, sec. 10 forbids states to levy tonnage duties, or import or export duties except to finance their inspection activities with any resulting surplus automatically dedicated to the U.S. Treasury. To promote free trade, art. 1, sec. 9 stipulates: “No preference shall be given by any Regulation of Commerce or revenue to the ports of one state over those of another; nor shall vessels bound to, or from, one State, be obligated to enter, clear, or pay duties in another.” The commerce powers of Congress on occasions clash with the exceptionally broad reserved police power of the states that allows them to regulate persons and property in order to promote public health, safety, welfare, morals, and convenience. Suits challenging the constitutionality of state regulatory statutes and/or administrative regulations as violating the interstate commerce clause typically are successful as courts, particularly the U.S. Supreme Court, tend to give an expansive reading to the scope of the clause. In addition, tax exportation by individual states often leads to court challenges. Privileges and Immunities. The U.S. Constitution, art. 4, sec. 2 seeks to establish interstate citizenship by the guarantee that “the citizens of each state shall be entitled to all privileges and immunities of citizens of the several states,” but does not define the term privileges and immunities. The U.S. Supreme Court has excluded beneficial services and political privileges from the guarantee and since 1870 often has struck down a number of taxes imposed on nonresidents. In 1870, the court invalidated a Maryland act requiring the payment of $300 per year license fee by nonresidents for the privileges of trading in products manufactured in sister states.37 The court in 1920 disallowed a New York State nonresident income tax on the ground that each resident taxpayer was granted a personal exemption for himself or herself and each dependent, but a nonresident taxpayer was denied the exemptions.38 In 1948, the court voided a state law levying a $2,500 license fee on each shrimp boat owned by a nonresident and a license fee of $25 on each boat owned by a resident and emphasized the clause guarantees a citizen of one state has the right to conduct business in a sister state “on terms of substantial equality with the citizens of that state.”39 Austin v. New Hampshire involved a privilege and immunities challenge and a Fourteenth Amendment equal protection of the laws challenge of a commuter income tax, a form of tax exportation. The New Hampshire General Court imposed a tax of 4 percent on a nonresident’s

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The Silence of Congress

New Hampshire derived income “less an exemption of two thousand dollars; provided, however, that if the tax hereby imposed exceeds the tax which would be imposed upon such income by the state of residence, if such income were earned in such state, the tax hereby imposed shall be reduced to equal the tax which would be imposed by such other state.”40 Employers were required to withhold the tax on the income of a nonresident even if his or her home state levied a lower tax rate. Should a nonresident pay an excess tax, it would be refunded on the filing of a New Hampshire tax return after the end of the tax year. A similar 4 percent tax was levied on residents by the commuter income tax, but they were exempt “provided . . . such income shall be subject to a tax in the state in which its is derived . . . ” or “such income is exempt from taxation because of statutory or constitutional provisions in the state in which it is derived, or . . . the state in which it is derived does not impose an income tax on such income. . . . ”41 The effect of the exemptions was no New Hampshire tax on a resident’s earned domestic and foreign income. New Hampshire defended the constitutionality of the tax by maintaining no onerous burden was placed on Maine residents employed in New Hampshire, since their home state grants a tax credit to its residents who paid income taxes in a sister state. Under this tax scheme, tax revenue that otherwise would have been received by the Maine treasury was diverted to the New Hampshire treasury. The U.S. Supreme Court invalidated the tax by opining “we do not think the possibility that Maine could shield its residents from New Hampshire’s tax cures the constitutional defect of the discrimination in that tax. In fact, it compounds it. For New Hampshire in effect invites appellants to induce their representatives, if they can, to retaliate against it.”42 In view of this decision, the court did not address the equal protection of the laws challenge. Justice Harry A. Blackmun dissented: “The reason these appellants . . . pay a New Hampshire tax is because the Maine Legislature...has given New Hampshire the option to divert this increment of tax (on a Maine resident’s income earned in New Hampshire) from Maine to New Hampshire, and New Hampshire willingly has picked up that option. All that New Hampshire has done is what Maine specifically permits and, indeed, invites it to do.”43 Interstate Rendition. The U.S. Constitution, art. 4, sec. 2 incorporates a provision for the rendition by the governor of the asylum state of a fugitive from justice on the request of the governor of the state from which the fugitive fled. This provision, similar to an extradition treaty between

State Competition for Tax Revenue

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nation states, is nearly identical to the one contained in the Articles of Confederation, art. 4, and Perpetual Union and is designed to promote interstate harmony. Although the constitution does not authorize Congress to prescribe the rendition procedure, Congress enacted the Rendition Act of 1793 clarifying the procedure.44 Failure of a governor to honor the request of a sister state governor to return a fugitive from justice in the period 1861 to 1987 caused friction between states. The U.S. Supreme Court in Kentucky v. Dennison in 1861 held the governor of an asylum state had only a moral obligation to return a fugitive.45 This decision was not reversed until 1987 when the court in Puerto Rico v. Branstad opined that the duty of the governor of the asylum state was mandatory.46 Interstate Suits. Whether there was a need for national courts was the subject of debate at the Philadelphia Constitutional Convention. Opponents of such courts argued state courts could adjudicate national controversies as well as state controversies. Proponents of national court countered the reliance on state courts probably would lead to different court interpretations of a constitutional provision or a statute enacted by Congress. A compromise was reached. The fundamental law created the Supreme Court, Congress was authorized to create inferior courts as needed (art. I, sec. 8), and the judicial power of the United States was defined in art. 3, sec. 2. This power was amended by the Eleventh Amendment prohibiting a citizen of one state to sue a sister state without the permission of the legislature of the latter state. The court renders major tax decisions on an appellate basis and on occasion conducts an original jurisdiction trial involving an interstate tax controversy, such as escheats (unclaimed properties). The heavy appellate workload of the court resulted in its decision to exercise its original jurisdiction sparingly on a discretionary basis when a state files a motion seeking permission to file a suit in equity against a sister state.47 Lower U.S. courts and state courts also conduct trials or hear appeals involving tax controversies (see chapters 4 and 5).

AN OVERVIEW The principal focus of chapter 2 is excise taxes levied on cigarettes and alcoholic beverages and paid by the producer or importer who shifts the tax incidence forward to the ultimate consumer. Differentials in excise taxes on items such as alcoholic beverages and cigarettes lead to tax exportation and organized crime involvement in avoiding payment of

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The Silence of Congress

the taxes. Such taxes also can be avoided by consumers making purchases on a federally recognized Indian reservation unless the concerned tribe has entered into a gaming compact with the governor of the state providing for the collection of state excise taxes on the reservations. The chapter also examines the International Fuel Agreement which allocates tax revenues derived from multistate transportation companies to states based upon the number of miles driven by a company’s vehicles in each state, the International Registration Plan, and documentary taxes. Chapter 3 describes and analyzes severance taxes levied by states on extracted minerals. Much of the incidence of these taxes is shifted forward to consumers in sister states. Chapter 4 reviews experience with state nonresidential personal income taxes. In crafting such a tax, a state legislature often includes provisions for tax credits and deductions favoring in-state taxpayers. The disparities in provisions relating to residents and nonresidents have lead to court challenges on the ground they violate the privileges and immunities clause and the interstate commerce clause of the U.S. Constitution. The chapter also explores state taxation of the income of nonresident professional athletes. Chapter 5 is devoted to taxation of multistate and multinational corporations by analyzing the complex income apportionment formulas used to determine the portion of a corporation’s income subject to tax. Major court challenges to the formulas are described and court criteria for fair taxation are presented. Escheats and estate taxation are the subjects of chapter 6. Escheats have been sources of revenue for several states and the U.S. Supreme Court has been called on to resolve interstate disputes over escheats. The effect of the current phaseout of the national estate tax on the revenue of the states is described. Tourists, gamblers, and competition for business firms are the subject matters of chapter 7. States at one time prohibited gambling, but in recent decades have relied increasingly on gambling as a source of revenue. Lotteries, video gaming machines at casinos and race tracts, and Indian tribe operated casinos have become relatively common. A major purpose of this volume is to determine whether congressional regulation of interstate tax revenue competition would be more desirable than judicial adjudication. Chapter 8 examines the relatively small number of congressional statutes regulating state taxation of interstate commerce and the reasons for the general “silence of Congress” on the subject. Recommendations for congressional action to improve the equity of state taxation of interstate commerce in general and tax exportation in particular are presented.

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Cooperation, conflict, and competition have marked interstate relations over the decades. The concluding chapter, on fairness in taxation, (1) reviews interstate cooperation in the form of interstate compacts, uniform state laws, and interstate administrative agreements; (2) adds three tax maxims to Adam Smith’s four maxims; and (3) recommends that Congress should enact statutes encouraging states to harmonize their tax statutes to improve the equity of state taxation of interstate commerce in general and tax exportation in particular.

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Chapter 2

Excise and Documentary Taxes

A

distinction is made between a direct tax and an indirect tax with the former levied by a legislative body on the ultimate payer. In contrast, the incidence of an indirect tax initially is on taxpayers who shift the incidence forward to consumers. Examples of indirect taxes include the excise tax, estate and gift taxes (see chapter 6), and documentary taxes on specified transactions; that is, recording of deeds or a mortgage and stamp duties. Severance taxes on mineral resources and timber harvest taxes are excise taxes explored in chapter 3. A custom duty, levied by Congress, is also an excise tax on a particular imported product. In addition, taxes are classified as assessed taxes and expenditure taxes with the former levied on an assessment or valuation and the latter levied on expenditures. The primary focus of this chapter is the state excise tax levied on cigarettes and alcoholic beverages that has a long history dating to the Commonwealth in England in 1643 under Oliver Cromwell. These taxes historically were referred to as sumptuary taxes because they were based on moral and religious grounds, and designed to discourage consumption of the two products. Sharp increases in the New York State and New York City excise taxes in 2001 discouraged smoking in the city 23

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The Silence of Congress

where 21.6 percent of adults smoked in 2003, 19.2 percent smoked in 2004, and 18.4 percent smoked in 2005.1 To prevent the loss of tax revenue through illegal sales, some states require that alcoholic beverage firms and tobacco companies must ship their products to bonded warehouses. This chapter also reviews the excise tax on motor fuels, the International Fuel Plan, the International Registration Plan, and documentary taxes.

EXCISE TAXES Legislative bodies initially levied excise taxes on specific products, and later services, to raise revenues to support the operations of the government and these taxes generally comported with the four tax maxims— certainty, convenience, economy, and equality—established by Adam Smith in 1776 (see chapter 1).2 In other words, taxes are a quid pro quo or the price paid for the receipt of public services, although it generally is impossible to levy taxes on individuals in strict accordance with the benefits received by taxpayers from their respective governments. Double and even triple taxation of the consumption of a given commodity is a possibility in a federal system as Congress, state legislatures, and certain local governing councils levy excise taxes in the United States. Alexander Hamilton in “The Federalist No. 32” noted there was no restriction on state taxation powers in the proposed constitution, other than the prohibition of levying export and import duties, and explained: It is, indeed, possible that a tax might be laid on a particular article by a State which might render it inexpedient that a further tax should be laid on the same article by the Union; but it would not imply a constitutional inability to impose a further tax. The quantity of the imposition, the expedience or inexpediency of an increase on either side, would be mutually questions of prudence; but there would be no direct contradiction of power. The particular policy of the national and of the State systems of finance might now and then not exactly coincide, and might require reciprocal forbearances.3 A second rationale, a moral one, more recently has been employed to justify steep increases in state and in certain cases local government (New York City’s is an example) excise taxes on alcoholic beverages and tobacco products. The adverse health effects of heavy consumption of these beverages and cigarettes, referred to as negative externalities, has

Excise and Documentary Taxes

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convinced lawmakers to increase the excise taxes on these commodities to discourage consumption and to raise revenue to help governments cover the costs of treatments for persons whose health has been affected adversely by excessive consumption of these products. Governments, in particular, have sought to prevent future health problems by discouraging under legal age persons from consuming alcoholic beverages and smoking cigarettes by making their prices reach levels many minors can not afford. A duty levied on an imported product is the equivalent of an excise tax levied on a domestic product. James Madison in “The Federalist 42” referred to the lack of authority of the Congress, established by the Articles of Confederation and Perpetual Union, to regulate foreign and interstate commerce and noted “the improper contributions levied” on states “which import and export through other States.”4 He added: . . . the desire of commercial States to collect, in any form, an indirect revenue from their uncommerical neighbors must appear not less impolitic than it is unfair; since it would stimulate the injured party by resentment as well as interest to resort to less convenient channels for their foreign trade. But the mild voice of reason, pleading the cause of an enlarged and permanent interest, is but too often drowned before public bodies as well as individuals, by the clamors of an impatient avidity for immediate and immoderate gain.5 Madison had in mind the port of New York, the major gateway for imported goods destined for sister states, and the New York State Legislature levy of duties on such goods.6 Experience under the confederacy, according to Madison, argued for granting Congress authority to regulate such trade. Excise taxes imposed on cigarettes and alcoholic beverages vary considerably between states. Prices of these products are increased further in states levying a sales tax and particularly in states allowing certain local governments to impose such taxes. The wide difference in prices of these products in various states encourages smuggling, organized crime activities, loss of a significant amount of tax revenue for high excise tax states, and revenue gains for low excise tax states.

Cigarette Taxation and Smuggling Congress enacted the Jenkins Act of 1949 to assist states to collect their excise taxes by reducing interstate cigarette smuggling through prohibition of the use of the U.S. Postal Service to evade state excise taxes and

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The Silence of Congress

authorizing the federal officers to investigate and prosecute smugglers.7 The act was designed to prevent residents of a state from evading the state cigarette excise tax by out-of-state purchases and to protect in-state sellers of cigarettes from competition. The act does not include other transportation modes and a conviction is only a misdemeanor.8 U.S. district attorneys prefer to prosecute smugglers under the Mail Fraud Act of 1909 since a violation of the act is a felony.9 The 1949 act was amended six years later to require firms shipping cigarettes to a state to file a report with the appropriate state tax officer listing each shipment and the name address of the recipient.10 A court challenge to this amendment was brought on the ground the requirement violated the U.S. Constitution’s Fifth Amendment’s guarantee of the privilege against self-incrimination. The U.S. District Court for the Southern District of New York in 1971 rejected the challenge.11 The act also was challenged as unconstitutional on the ground it discriminates against cigarettes as an article of commerce since other tobacco products are not subject to the act. The defendants were convicted of conspiracy and mail fraud for sending cigarettes from North Carolina to Florida through the mail after soliciting sales by mail and for failure to submit required reports to the Florida Department of Beverages. The U.S. Court of Appeals for the Fifth Circuit ruled the act is constitutional and the U.S. Supreme Court in 1977 rejected the defendants’ petition for the issuance of a writ of certiorari.12 Historically, smuggling of cigarettes or buttlegging was not a major problem until the sixth decade of the twentieth century when several states increased the excise tax rate and expanded organized crime smuggling reduced anticipated cigarette tax revenues. New York Governor Nelson A. Rockefeller reported the New York State Legislature raised the cigarette excise tax from five to ten cents in 1965 and reasonably expected cigarette tax revenues would double, but they did not.13 He reacted to the problem by convening in 1967 a conference on cigarette excise tax enforcement attended by representatives of thirteen states, members of Congress, and the Federal Bureau of Investigations. The source of most smuggled cigarettes was North Carolina, a state lacking a cigarette excise tax. The Retail Tobacco Dealers of America reported New York City retailers were losing approximately one-quarter of their cigarette sales and millions of dollars in related sales.14 Governor Rockefeller appointed a task force in 1973 to investigate the problem and propose solutions, and emphasized the problem “is making the ordinary citizen an unthinking partner of organized crime” and “is unwittingly financing other enterprises of organized crime, including narcotics, the corruption of public officials, and loan-sharking.”15

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According to the New York State Commission of Investigations, in excess of 100,000 illegal cigarette cartons in 1975 were sold daily in the state.16 New York State Senator Roy M. Goodman convened a news conference in 1976, estimated buttleggers were responsible for more than one-half of all cigarettes sold in New York City and made $1 million in weekly profits.17 Attending the news conference were five blackhooded tobacco company executives who reported their warehouses and safes containing tax indicia (decals or meter impressions) had been targets of hijackers. The U.S. Advisory Commission on Intergovernmental Relations (ACIR) in 1977 issued a report estimating smuggling was resulting in subnational governments losing approximately $400 million 1975.18 A follow-up report was issued by the commission in 1985 and revealed a decline in smuggling with subnational governments losing approximately $255 million in cigarette tax revenue in fiscal year 1983.19 States continued to pressure Congress to enact additional statutes designed to curtail cigarette smuggling and the response was the Contraband Cigarette Trafficking Act of 1978 making it a federal crime to distribute, possess, purchase, receive, ship, or transport in excess of 60,000 cigarettes lacking the tax indicia of the state where they were found.20 States are primarily responsible for collection of the excise tax and the federal government focuses on tax evasion beyond the territorial jurisdiction of each state. Congress included in the act the suggestion that states should coordinate their tax enforcement efforts by means of an interstate compact, but states have made no effort to draft and enter into such a compact. The effectiveness of the act is questionable in view of the fact ACIR reported in 1985 “a relatively small percentage of those persons arrested for cigarette smuggling were convicted and very few were sent to jail.”21 Jerry G. Thursby and Marie C. Thursby in 2000 reached a similar conclusion and attributed the decline in cigarette smuggling during the decades of the 1970s and 1980s primarily to reduced state excise tax differentials.22 The decision of a number of states in the 1990s to enact large increases in their respective cigarette excise tax in order to raise additional revenues and to discourage smoking promoted cigarette sales in low excise tax states. Massachusetts voters, for example, approved an increase from twenty-six to fifty-one cents in the per pack excise tax, thereby producing a ninety cents per pack lower price in the neighboring state of New Hampshire.23 The 1993 New York State Legislature increased the state excise tax from thirty-nine to fifty-six cents per pack and neighboring Vermont tax officers projected a major increase in their excise tax revenues.24 These sharp increases in a state’s cigarette excise tax

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encouraged its residents who are smokers to engage in casual smuggling by purchasing cigarettes in a neighboring state with a significantly lower state excise tax and increased smuggling by organized crime. Price-Waterhouse released in 1992 a report, prepared for the American Legislative Exchange Council, revealing nonsales tax New Hampshire and Vermont levied a cigarette excise tax of twenty-five cents per pack and twenty-three cents per pack, respectively, in 1991 compared to fifty-four cents per pack in nearby Connecticut.25 The report concluded: “New Hampshire has gained significant business volume, tax revenues, and jobs from neighboring states.”26 The following year, PriceWaterhouse released a similar report on cross-border cigarette activities in the southeastern states and noted: “Florida . . . has suffered the greatest losses in cigarette sales of all of the seven states represented in our study.”27 The Commissioner of the New Hampshire Department of Revenue Administration estimated in 2005 that 30 to 35 percent of the cigarettes sold in the state were sold to nonresidents.28 States faced increased financial problems in 2001 subsequent to the decline in the national economy and turned again to the cigarette excise tax to raise additional revenues. The Connecticut excise tax was increased in 2002 from $0.65 to $1.11 per pack and was estimated to produce $170 million over a two-year period. In the same year, the New York State Legislature raised the state excise tax from $1.11 to $1.50 per pack, authorized New York City to increase its excise tax from $0.08 to $1.50, and projected a 50 percent decline in sales and an additional $249 million in excise tax revenues annually.29 Virginia with a $0.03 cents excise tax per pack and Kentucky with a $0.03 cents tax are the major sources of smuggled cigarettes. Tax Exempt Sales. Cigarettes, alcoholic beverages, and motor fuel sales to residents of Indian reservations and military posts are exempt from state excise taxes unless an Indian tribe has entered into an agreement with a state to collect state excise taxes in exchange for stipulated state privileges such as the operation of a gambling casino. Furthermore, Congress allows tourists returning from foreign nations to bring one quart of alcoholic beverages and a stated number of cigarettes free of tax and has exempted all sales over the Internet from taxation.30 Various treaties entered into by the Untied States with individual Indian tribes recognize them as sovereign nations. The Indian Trade and Intercourse Act of 1790 and the Indian Trader Act of 1876 regulate commerce on reservations.31 As a consequence, states lose millions of dollars in excise tax revenues on products sold on reservations or via the Internet to nonresidents. To date, no federal or state court has issued an

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opinion relative to whether the Jenkins Act applies to sales by an Indian tribe or member. Not surprisingly, courts are called on to settle state-tribal tax controversies. In 1976, the U.S. Supreme Court ruled a state may not levy an excise tax on cigarette purchases by an Indian resident of a reservation, but the tax could be collected on sales to nonresidents.32 The court in 1980 opined the state could levy an excise tax on cigarettes purchased on reservations by nonmembers of the concerned Indian tribe and tribal merchants could be required to purchase and affix state excise tax stamps on cigarettes sold to nonmembers.33 This decision permitted the state to seize unstamped cigarettes shipped to the reservation from sister states in the event the tribes failed to collect the state excise tax, but did not address the question whether the state possesses the power to seize cigarettes on reservations intended for sales to non-members. The Oklahoma Tax Commission in 1987 levied a $2.7 million excise and sales tax assessment on the Citizen Band Potawatomi Indian Tribe of Oklahoma which challenged the assessment in the U.S. District Court for the Western District of Oklahoma. Concluding a significant percentage of the assessment included cigarettes sales to tribe members, the court ruled against Oklahoma but found it would be legal for the state to collect such taxes prospectively and require the keeping of records of sales on reservations to nontribal members. The U.S. Court of Appeals for the 10th Circuit in 1989 reversed the lower court ruling by holding the tribe has sovereignty over the reservation and Oklahoma therefore lacks authority to collect cigarette taxes on the reservation without the consent of Congress.34 The court remanded the case to the district court for a reinstatement of the injunction forbidding Oklahoma to implement the cigarette tax collection regulations. Oklahoma appealed the Court of Appeals decision to the U.S. Supreme Court, which unanimously reaffirmed its earlier decisions that a tribe can be required to collect state cigarette taxes on sales to nonresidents of the reservation.35 The justices, however, rejected Oklahoma’s appeal requesting the court to narrow the tribe’s sovereign immunity that prevented the state from enforcing its tax regulations.36 Commenting on this decision, Jonathan I. Sirois wrote in 2003: “Paradoxically, the Court’s holding permits a state to impose cigarette tax collection regulations on Indian cigarette retailers, but does not allow them the most efficient means of ensuring the collection-that is-through civil suit.”37 The New York State Department of Taxation and Finance in 1989 initiated another administrative approach to the problem of excise tax free sales on Indian reservations by promulgating regulations establishing

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a limit on the maximum number of tax-free cigarettes wholesalers may sell to Indian reservation merchants. The limit is determined by multiplying the number of tribe members by the average per capita cigarette consumption in the state. A wholesaler selling more than the limit is required to pay in advance to the department a fifty-six cents excise tax per pack. The regulations were challenged in the Appellate Division of the New York Supreme Court which invalidated them in 1990 and the New York Court of Appeals in 1993 upheld the lower-court decision.38 The U.S. Supreme Court in 1994, however, reversed the decisions of the lower courts and opined the Indian Trader Act of 1876 does not preempt a state’s authority to promulgate reasonable regulations to assess and collect a tax, and the New York tax regulations do not impose an excessive burden on Indian cigarette sellers.39 In 2005, the U.S. Supreme Court, by an 8 to 1 vote, overturned the decision of the U.S. District Court and the U.S. Court of Appeals for the Second Circuit by rejecting the claim of the Oneida Indian Nation of New York that ancestral lands ceded in 1805 to New York and purchased by the tribe in the 1990s were part of the tribe’s reservation and exempt from local taxes without authorization from Congress.40 Writing for the court, Justice Ruth Bader Ginsburg held the tribe had relinquished its control of the disputed lands and could not reincorporate it into the reservation by purchase as such action “would yield a checkerboard of tribal and state jurisdiction,” confounding local governance and affect adversely “landowners neighboring the tribal patches.”41 The decision suggests all 17,000 acres of Oneida owned land outside the 32-acre reservation may be taxed. Justice John Paul Stevens in dissent wrote the City of Sherrill is located on part of the 300,000-acre reservation established in 1788 for the Oneida Indians and “has no jurisdiction to tax them (the tribe) without express congressional consent.”42

Internet Sales The Internet sale of cigarettes has increased exponentially with the sharp increase in state excise taxes in major consuming states although there are no accurate data on the precise amount of such sales. Internet vendors’ Web sites often promise to keep the names and addresses of purchasers confidential and suggest the Internet Tax Freedom Act of 2004 exempts cigarette sales from taxation.43 The act, however, does not exempt the sale of cigarettes over the Internet. Currently, ten state legislatures have enacted statutes prohibiting the online sale of cigarettes and several state attorneys general have sued online cigarette companies and obtained the names and addresses of purchasers of cigarettes which were

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provided to state revenue officers who billed the purchasers for the state excise taxes. The New York State Legislature in 2000 enacted the first statute, effective October 1, 2001, forbidding sellers of cigarettes and common and contract carriers to ship or transport cigarettes directly to consumers in the state.44 Brown & Williamson Tobacco Corporation challenged the statute, and Judge Loretta A. Preska of the U.S. District Court for the Southern District of New York in 2001 declared the act unconstitutional as violative of the dormant interstate commerce clause.45 In 2003, the U.S. Court of Appeals for the Second Circuit reversed the trial court’s decision by ruling “the statute does not discriminate against interstate commerce.”46 The New York statute encourages interstate sellers of cigarettes to ship their products by the U.S. Postal Service which, as an agency of a sovereign government, is not subject to the statute. In 2005, U.S. Representative John M. McHugh of New York introduced a bill adding cigarettes to the list of items excluded from the mail. He commented: “The data show that of the some 400 sites that are engaged in tobacco sales over the Internet, there are virtually no meaningful age enforcements” and added the illegal online sale of tax-free cigarettes is causing states to lose an estimated $1.4 billion in tax revenues annually.47 Internet venders also violate state age verification statutes, the Mail Fraud Act of 1909, and the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).48 The latter act targets organized crime, the Mafia in particular, but also contains a section authorizing any person whose business or property has been injured by a violation of the act to file a civil claim against the perpetrator.49 U.S. Representative John Conyers requested the U.S. General Accounting Office (GAO) to investigate the extent to which Internet cigarette vendors comply with the Jenkins Act. GAO issued its report in 2002 revealing there have been only three federal investigations of potential violations of the act and no Internet cigarette vendor “had been penalized for violating the act.”50 The Federal Bureau of Investigations (FBI) has jurisdiction over alleged violations of the Jenkins Act, but has redirected its resources in response to the terrorists’ attacks on September 11, 2001. The Alcohol and Tobacco Tax and Trade Bureau of the U.S. Department of the Treasury, formerly the Bureau of Alcohol, Tobacco, and Firearms (ATF), is responsible for enforcing the Contraband Cigarette Trafficking Act (CCTA). ATF responded to a Connecticut Department of Revenue request for assistance by reporting it (1) “will solicit the cooperation of tobacco manufacturers and determine who is selling cigarettes to Internet and mail order companies,” (2) “contact shippers/couriers to determine if they

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have any prohibitions against the shipment of cigarettes,” and (3) provide technical assistance to Connecticut.51 The bureau also reported it does not have primary jurisdiction over alleged violations of the Jenkins Act and hence has not committed resources to investigations of alleged violations of the act. The GAO report also revealed that none of the 147 cigarette Web sites reviewed complied with the Jenkins Act, a number of sites maintained they protect customer information under privacy laws, and Native American vendors indicated they do not report such sales because of their status as a sovereign nation.52 GAO reached the following conclusion: States are hampered in attempting to promote Jenkins Act compliance because they lack authority to enforce the act. In addition, violation of the act is a misdemeanor, and U.S. Attorneys’ reluctance to pursue misdemeanor violations could be contributing to limited enforcement. Transferring primary investigative jurisdiction from the FBI to ATF would give ATF comprehensive authority at the federal level to enforce the Jenkins Act and should result in more enforcement. ATF’s ability to couple Jenkins Act and CCTA enforcement may increase the likelihood it will detect and investigate violators and that U.S. Attorneys will prosecute them. This could lead to improved reporting of interstate cigarette sales, thereby helping to prevent the loss of state cigarette tax revenues.53 No action has been initiated by Congress to implement this recommendation. A effective approach to solving the problem would be an amendment to the Jenkins Act authorizing the attorney general of each state to seek an injunction in the U.S. District Court prohibiting vendors to sell cigarettes to residents of the state. State attorneys general are authorized by a recent amendment to the Webb-Kenyon Act of 1913 to seek an injunction in the U.S. District Court forbidding business firms to violate the act by shipping alcoholic beverages to the state’s residents.54 The U.S. Department of Justice and the Bureau of Alcohol, Tobacco, and Firearms were provided with a draft of the GAO report and requested to comment on it. Both responded if Congress made a violation of the Jenkins Act a felony, “U.S. Attorneys’ Offices might be less reluctant to prosecute violations. ATF further noted that individuals might be deterred from committing Jenkins Act violations if they were felonies.”55 A 2005 agreement between nine state attorneys general and the U.S. Alcohol and Tobacco Tax and Trade Bureau with major credit card companies to stop the use of credit cards to make interstate purchases of

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cigarettes over the Internet holds potential for reducing significantly the estimated more than $1 billion in lost state cigarette excise tax revenue.56 The companies specifically will deprive the use of credit cards by Internet sellers in the United States and other nations who have been identified as violators of federal and state statutes regulating the sale of cigarettes. In addition, New York State Attorney General Eliot Spitzer in the same year reached an agreement with the United Parcel Service, Incorporated, the world’s largest shipping carrier, to stop delivering cigarettes to individuals.57

Alcoholic Beverages Taxation and Bootlegging State excise taxation of alcohol beverages encounters the same problems, including sales of beverages by retailers on Indian reservations and via the Internet, as state excise taxation of cigarettes. Initially, tax evasion by individuals and smuggling by organized crime were not major enforcement problems. The levying of higher excise taxes combined with sales taxes levied by state and local governments produced significant differentials in the retail prices of beverages in various states and cities. These differentials encouraged consumers in high tax states to make all or many their alcoholic beverages purchases in a neighboring low tax state. Price-Waterhouse prepared a report for the American Legislative Exchange Council revealing New Hampshire derived a higher percentage of its alcoholic beverages revenues from sales of beer, distilled spirits, and wines sold in its state-operated stores to nonresidents than from sales to residents.58 The report specifically noted the state gained revenue from Massachusetts’s residents. State Regulation. The temperance movement in the nineteenth century gathered strength and resulted in many states prohibiting the sale and consumption of alcoholic beverages. To assist dry states to enforce their prohibition statutes, Congress enacted the Wilson Act of 1890, exempting these statutes from the interstate commerce clause, thereby allowing states to utilize their police power to control and regulate the importation and consumption of alcoholic beverages.59 Immediately upon entering a dry state, alcoholic beverages became subject to its police power. Prohibition enforcement, however, was weakened by court interpretations of the act holding a mail order firm could ship alcoholic beverages to an individual in a dry state for personal consumption. Pressure built on Congress to overturn the court decisions, and it responded by enacting the Webb-Kenyon Act of 1913, declaring illegal the receipt and resale of alcoholic beverages contravening a state law.60

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The provisions of these two acts in general were incorporated in the Twenty-first Amendment to the U.S. Constitution, repealing national prohibition effective in 1933, which stipulates in sec. 2 that “the transportation or importation in any State, Territory or Possession of the United States, for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” As part of the temperance movement, Iowa until the early 1950s issued liquor cards to individuals desiring to purchase, the cards were punched by clerks in state operated stores for each purchase and “parents would demand to see the cards of their children’s suitors.”61 In 1986, Iowa sold its 220 state-operated stores to private business firms and individuals, and Vermont recently phased out its operation of state liquor stores. In 2005, 393 counties, principally in the southern states, under local option laws are dry as are five towns in New Hampshire.62 There are 278 dry cities within wet counties in Michigan, 52 wet cities within dry counties in Tennessee, and 66 wet counties and 39 dry counties in Kansas. In 1996, the U.S. Supreme Court addressed the question of the constitutionality of a Rhode Island statute banning the advertising of the retail prices of alcoholic beverages in order to promote temperance in consumption of alcoholic beverages.63 The justices explained a state can employ its historic police power to reduce the problem of citizen overindulgence of intoxicating liquors and held the advertising ban regulates commercial speech protected by the First Amendment to the U.S. Constitution without evidence supporting the effectiveness of the ban in reducing the consumption of alcohol.64 Holding the Twenty-first Amendment must be considered in the light of other constitutional provisions, the court unanimously concluded the Rhode Island statute abridges “speech in violation of the First Amendment as made applicable to the States by the Due Process of Law Clause of the Fourteenth Amendment.”65 States currently use two alcoholic beverages control systems.66 Thirty-one states, the District of Columbia, and Puerto Rico operate a three-tiered licensing system to control sales. Manufacturers and importers are in the top tier, wholesalers are in the second tier, and retailers constitute the third tier.67 Wholesalers and retailers in these jurisdictions are private firms. Under the second system, agencies of eighteen states and Montgomery County, Maryland, directly control the retail sales, wholesale sales or both of distilled spirits and some also control wine at the wholesale level. Twelve of these jurisdictions also control retail sales of alcoholic beverages for consumption off-premises either through stateoperated package stores or state-supervised designated outlets. Only

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New Hampshire, Pennsylvania, and Utah control the wholesale and retail sales of beverages. New Hampshire does not levy an excise tax on alcoholic beverages but does impose an 8 percent rooms and meals tax on beer, spirits, and wine consumed in restaurants. The state best illustrates the control system as a revenue producer. The state liquor commission raises revenue for the state by marking up the cost of distilled spirits by 46 percent and wine by 30 to 66 percent.68 Many of its 75 state-operated liquor stores are located conveniently near the boundaries of three neighboring states and the Province of Quebec. The New Hampshire General Court (state legislature) enacted a statute requiring the state liquor commission, to spend 80 percent of its advertising appropriations in other states in order to not increase alcohol consumption by its residents. The law was repealed in 1997 and the commission currently spends one-half of its advertising appropriations in the state and the other one-half in sister states. In addition, the commission by direct mail notifies customers of the availability of its monthly e-mail alerts informing them of sales events and new products, and customers who sign up at its Web site are entered in a drawing to win a $100 gift card. The commission has been increasing its product line by carrying more expensive products and a larger selection. The number of malt beverages, for example, within a period of one year was increased from twenty-five to ninety-eight. Furthermore, the commission enters into partnerships with the alcoholic beverage industry and provides firms special display areas within the state-operated stores. The commission also cooperates closely with the department of resources and economic development whose tourism division maintains highway rest areas and stocks them with lists of the commission’s products and prices. In return, the commission’s retail stores distribute tourism materials. The absence of a state excise tax, a refundable bottle deposit fee, and a sales tax gives the commission’s retail stores a significant competitive advantage over retailers in sister states and the Province of Quebec.69 New Hampshire’s sales increased dramatically when the Massachusetts General Court imposed a refundable bottle deposit fee that increased the differential between a case of beer in New Hampshire and Massachusetts by nearly three dollars. Until recently, Massachusetts’s blue laws barring all but essential stores from operating on Sundays diverted Massachusetts’s customers to New Hampshire. Other merchants in the latter state also benefit from nonresidents who make purchases in addition to alcoholic beverages.70 The state liquor commission survey of the zip codes of purchases of its products reveal 52 percent of the sales were to nonresidents. Sales, increasing at an annual 7 percent rate, totaled

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$377,217,630 for the fiscal year that ended on June 30, 2004, and net profits were $92,076,335.71 Direct Shipment Laws. State legislatures enacted direct shipment statutes regulating to a degree the interstate shipment of alcoholic beverages in order to discourage underage drinking, prevent evasion of state excise taxes, and protect in-state purveyors of these beverages. Congress in 2002 enacted a statute containing a provision authorizing adult sojourners to ship wine to their homes provided their home state allows such shipments.72 This provision was added to federal law as the result of the terrorists’ attacks of September 11, 2001, and the federal aviation administration’s restriction on the number, size, and type of carry-on bags allowed on passenger airplanes. Twenty-five states in 2005, for example, did not allow the direct shipment of wine from sister states to in-state consumers.73 Twelve states permitted out-of-state shipment to their residents twenty-one years of age and older for personal consumption provided reciprocity is accorded by the purchaser’s home state. Other states limited the amount of beverages that may be shipped to their residents.74 Arizona, Pennsylvania, and Montgomery County, Maryland, allowed their residents to “special order” wine from out-of-state suppliers provided it is shipped through the state’s three-tier distribution system. A violation of a direct shipment law is a felony in seven states. These trade barriers differ from other barriers to the free flow of commerce among sister states—based on the police power, proprietary powers, and taxation powers—because allegedly the U.S. Constitution sanctions such barriers. Small wineries have been affected more adversely than large wineries by statutes prohibiting direct shipments as distributors carry the products of only large wineries. Direct shipment laws raise major questions relative to the relationship between the dormant (unexercised) interstate commerce clause and the Twenty-first Amendment and often have been featured in court challenges of state alcoholic beverages regulation. Does the amendment override only the dormant interstate commerce clause or does the amendment override all U.S. constitutional and statutory constraints on state liquor control?75 The U.S. Supreme Court in 1936 upheld the decision of the U.S. District Court by rejecting interstate commerce clause and equal protection of the laws challenges of the constitutionality of California’s imposition of a $500 license fee for the privilege of importing beer into the state.76 Nevertheless, the 1937 California State Legislature repealed the law. Until 2005, no opinion of the U.S. Supreme Court addressed the question of the constitutionality of direct shipment laws.

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The U.S. District Court for the Southern District of New York in 1970, without conducting a dormant interstate commerce clause review, upheld the constitutionality of the New York statute on Twenty-first Amendment grounds.77 In 1984, the U.S. Supreme Court in Bacchus Imports Limited v. Dias struck down a Hawaiian 20 percent excise tax on the sale at the wholesale level of liquor as violative of the dormant interstate commerce clause because the tax law exempted several in-state produced alcoholic beverages.78 In 2000, the U.S. Court of Appeals for the Seventh Circuit overturned the decision of the U.S. District Court for the Northern District of Indiana invalidating an Indiana law prohibiting direct shipment of alcohol from out-of state firms to consumers in Indiana.79 The appellate court based its reversal on the Twenty-first Amendment, sec. 2, and opined “ . . . the main effect of Indiana’s system is to subject their purchases to taxation, by requiring the beverages to pass through the hands of permit holders whose business is closely monitored to ensure tax collection. Sellers that quit shipping to plaintiffs after §7.1-5-11-1.5 took effect admitted in affidavits that they never paid a dollar of Indiana excise taxes.”80 The U.S. Supreme Court in 2001 rejected a petition for the issuance of a writ of certiorari.81 The U.S. District Court for the Southern District of Texas in 2000 granted summary judgment in favor of the plaintiffs by holding the Texas statute violated the dormant interstate commerce clause by erecting competitive barriers against shipments to consumers by out-of-state firms.82 The Seventh Circuit Court’s subsequent 2000 decision led the lower court to reconsider its opinion. In 2002, the court reaffirmed its earlier decision striking down the statute prohibiting the direct shipment of wine to Texas consumers by opining: “Because out-of-state producers must go through Texas-licensed wholesalers and retailers to sell wine in Texas, they suffer higher costs which translate into higher prices, which in turn affect their ability to compete with local Texas wineries.”83 In 2001, the U.S. District Court for the Middle District of Florida reached the opposite conclusion with respect to the constitutionality of the state’s prohibition of direct shipment of wine by out-of-state suppliers to Florida recipients not holding a manufacturer’s or wholesaler’s license. The court explained “the discriminatory nature of Florida’s statutory scheme…violates the dormant commerce clause. However, because the Florida statutory scheme implicates the ‘core concerns’ of the Twentyfirst Amendment, it is a valid exercise of Florida’s power even as applied to out-of-state wineries. . . . In this regard, the numerous interests promoted by the Florida statutory scheme, including temperance, revenue

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protection, and the reduction of diversion and bootlegging, outweigh the minimal burden placed on interstate commerce.”84 This state victory was short lived as the U.S. Court of Appeals for the Eleventh Circuit in 2002 dismissed two of the state-cited core concerns (orderly market conditions and preventing sales to minors) and vacated the lower court’s decision by opining: “We do not think it is sufficient . . . for Florida to simply show that (a) taxation is a “core concern” and (b) the three-tier distribution scheme, although discriminatory, promotes its revenue raising goals. . . . In short, the State has not shown as a matter of law that its regulatory scheme is so closely related to the concern of raising revenue as to escape Commerce Clause scrutiny.”85 The case was remanded with a directive to consider additional evidence. In 2002, the U.S. District Court for the Eastern District of Virginia found the Commonwealth’s regulatory scheme requiring all imported alcoholic beverages be shipped to a state-licensed wholesaler to be facially discriminatory because a different burden was placed on instate and out-of-state producers and noted the scheme was not the only one the Commonwealth could employ to regulate the consumption of alcoholic beverages.86 The U.S. District Court for the Western District of North Carolina in the same year reached a similar conclusion, struck down the state regulatory scheme, and opined: “It is the task of the North Carolina legislature, and not this Court, to design a non-discriminatory regulatory structure for the sale of alcoholic beverages in the state.”87 Thomas Green Jr. in 1939 concluded interstate alcoholic beverages barriers “appear to be designed to step beyond . . . revenue collection measures and to give protection to . . . (1) Domestic manufacturers and wholesalers of alcoholic beverages, and (2) domestic farmers producing crops used in the manufacture of alcoholic beverages.”88 The protection can include lower alcoholic beverage excise taxes on domestic products particularly wines, higher wholesalers license fees if they handle imported beverages, special fees levied on nonresident manufacturers desiring to ship products into the state, and price advantages extended to domestic products in state-operated liquor stores. States also have taken actions to benefit farmers by a lower excise tax on wines made from domestic materials, authorization for domestic producers of beverages to sell directly to retailers whereas imported beverages must be sold through wholesalers, and a requirement that a minimum percentage of a beverage, such as wines, must contain products grown in-state. Vijay Shanker similarly argued in 1999, “direct shipment laws are a clear example of protectionist legislation that detrimentally impacts

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interstate commerce. As such, they are per se violations of the Commerce Clause.”89 In his judgment, the Twenty-first Amendment is trumped by the constitution’s dormant interstate commerce clause. In 2004, the U.S. Supreme Court agreed to address the constitutionality of direct shipment laws as an exercise of state regulatory power authorized by the Twenty-first Amendment because of a conflict between the decision of the U.S. Court of Appeals for the Second Circuit upholding New York’s wine regulatory system and the decision of the U.S. Court of Appeals for the Sixth Circuit invalidating the Michigan wine regulatory program.90 The U.S. Supreme Court in Granholm v. Heald in 2005, by a 5 to 4 vote, invalidated state statutes prohibiting the direct shipment of out-of-state wines by opining the Twenty-first Amendment to the U.S. Constitution does not excuse economic protectionism in violation of the constitution’s interstate commerce clause.91 The New York State Legislature reacted almost immediately to the decision by allowing all wineries in the state and other states to ship wines directly to customers in the state.92 Although the Pennsylvania General Assembly did not respond to the court’s decision, the Pennsylvania Liquor Control Board (LCB) complied by promulgating an interim rule forbidding the commonwealth’s 100 wineries from shipping their products directly to consumers effective November 1, 2005.93 Wineries, however, are allowed to ship their products to a LCB licensed store for pickup by a customer who may not sell the wine and is limited to receiving nine liters of wine per month from any one winery. As one would anticipate, a state’s beverage system discriminating against imported products invites retaliation in the form of discriminatory excise taxes and license fees levied by sister states on specified or all beverages imported from a discriminatory state. Retaliation, not surprisingly, begets counter retaliation and interstate alcoholic beverages statutes increase in number and scope. Many of these statutes have been challenged in court over the years. Bootlegging. Cross-border smuggling of alcoholic beverages by a state’s residents is difficult to curtail. Massachusetts Tax Commissioner Henry F. Long in the 1950s stationed officers in the vicinity of each New Hampshire state liquor store to record Massachusetts’s motor vehicle license numbers. Subsequently, the commissioner posted a use tax bill to vehicle owners for one case of spirits. In the 1960s, New York tax agents established roadblocks to reduce smuggling of alcoholic beverages between Vermont and Plattsburgh, New York, and between Staten Island, New York, and New Jersey.94 In 1976, New York stationed its

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enforcement officers near the parking lot of a Bennington, Vermont, state liquor store and later sent a use tax bill for $3.25 plus a 50 percent penalty for every gallon of alcoholic beverages purchased.95 Pennsylvania tax officers in 1965 also were recording Pennsylvania’s license plate numbers of vehicles parked near Phillipsburg, New Jersey, liquor stores and the Warren County, New Jersey, prosecutor in 1965 signed expulsion orders against them.96 Maryland and Pennsylvania engaged in the same tactic with the former objecting to Pennsylvania stationing its tax officers outside Maryland liquor stores even though Maryland stations its tax officers near liquor stores in the District of Columbia.97 Vermont tax agents similarly record the license plate numbers of Vermont vehicles in the parking lots of New Hampshire state liquor stores. In 1993, a Vermont State Police officer made a routine traffic stop of a New York registered truck, owned by a Indian tribe, and discovered it was transporting vodka legally purchased from the Jenkins company, a rectifier, in New Hampshire.98 The vodka, however, was contraband in Vermont because the state excise tax had not been paid, and was seized and subsequently sold in Vermont state liquor stores. New York in 1993 commenced to employ a more effective method to reduce alcoholic beverage smuggling from New Jersey by New York City bars and restaurants. An amendment to the tax law requires each shipper of such beverages to obtain a license from the New York State Department of Taxation and Finance, and to have available for inspection a manifest for each shipment.99 The amendment also authorizes the forfeiture of any seized liquors. New York tax agents discovered that large quantities of alcoholic beverages had been shipped from Florida, Kentucky, and Virginia to warehouses in upstate New York and subsequently were smuggled into Canada through the Mohawk Indian Reservation that is partly located in Canada and New York where there are no U.S. customs and other officers.100 How effective is border surveillance? The director of the New York State Miscellaneous Tax Bureau is convinced that “border patrols can’t really make a dent in ‘liquor runs.’ The patrols are sporadic, expensive, and enforcement is almost impossible even after the letters are sent.”101 The cross-border battles over the sale of alcoholic beverages to nonresidents of states do not prevent interstate cooperation. The first national conference on interstate trade barriers, held in Chicago in 1939, placed emphasis on barriers to the free movement of alcoholic products and their removal. On the one hand, Massachusetts and New Hampshire, which had been involved in a border price war over the purchase of alcoholic beverages, agreed in 1969 to study the problem, but no agreement was reached.102 On the other hand, the New York State police

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in 1994 arrested two Canadian citizens for transporting cases of distilled spirits whose truck and automobile were kept under surveillance by police officers from a discount liquor store in Maryland through Pennsylvania and into New York.103 Most of the liquor came from distilleries in southern states and were destined for Ontario. A Wisconsin judge in the same year rejected a challenge to a Minnesota-Wisconsin joint surveillance operation designed to prevent Minnesota residents bringing to their homes alcoholic beverages from the latter state.104

International Fuel Agreement All states levy an excise tax on motor fuels including fuels sold to motor carriers engaged in interstate commerce which are permitted by reciprocity agreements to travel beyond the borders of their respective home state. Arizona, Iowa, and Washington signed in 1983 an experimental administrative agreement establishing an interstate fuel agreement providing a motor carrier must have a base state responsible for collecting motor fuel taxes and distributing the revenues on a pro rata basis to the member jurisdictions. By 1991, membership totaled sixteen states when Congress enacted the Motor Carrier Safety Act of 1991 pressuring the remaining states to become members of the agreement and the International Registration Plan described below.105 Under the act, a nonparticipating state legislature may not enact a law and a state motor vehicle administrator may not promulgate a regulation requiring a motor carrier to pay a state fuel tax “unless such law or regulation is in conformity with the International Fuel Agreement with respect to the collection of such a tax by a single base state and proportional sharing of such taxes charged among the states where a commercial vehicle is registered.”106 Currently, forty-eight states and the ten Canadian provinces are members of the agreement that is administered by the International Fuel Tax Association which was incorporated in 1991 by its members. Nonmembers are Alaska, Hawaii, District of Columbia, and the Northwest Territory, the Nunavut Territory, and the Yukon Territory in Canada. The agreement covers every commercial motor vehicle transporting persons, property, or both that has (1) two axles and a gross weight exceeding 26,000 pounds or (2) three or more axles regardless of weight, or (3) is used in a combination exceeding 26,000 pounds. Recreational vehicles are excluded. In a 1999 report, the National Conference of State Legislatures noted the International Fuel Agreement is similar to an interstate compact, a reciprocity statute, and a reciprocity administrative agreement.107

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Although, the agreement is similar to an interstate compact, the agreement has not been granted direct formal consent by Congress. The base jurisdiction state or province assesses and collects taxes owed by a motor carrier company for all of its fuel use in the jurisdiction of member states and distributes to the other members revenues in proportion with the number of miles of travel by the company’s trucks in each jurisdiction. The company pays a net amount to the base jurisdiction. In other words, credits owed to the company by certain member jurisdictions are deducted from the liability owed to the other member jurisdictions. This plan has several benefits for each motor carrier in terms of one license, one set of credentials, one quarterly fuel tax report listing the tax or refund due, and one audit that collectively results in cost and time savings. Should a qualified carrier decide not to participate in the plan, the carrier must obtain a fuel permit from each plan jurisdiction through which the carrier’s vehicles will travel. In 2001, Robert C. Pitcher termed the International Fuel Agreement “a remarkable success” because it allows states to retain their motor fuel taxation authority and relieves the motor carriers of compliance costs estimated to have been $750 million annually prior to the inauguration of the agreement.108

International Registration Plan Established in 1973, the plan administers on a cooperative basis a commercial motor carrier registration reciprocity program for vehicles traveling in two or more jurisdictions and distributes licensing fees to each member jurisdiction in accordance with the number of miles a carrier vehicles traveled in the jurisdiction. The plan utilizes the same definition of a commercial motor vehicle as the one used by the International Fuel Agreement. Currently, the plan is administered by the International Registration Plan, Incorporated which was established on September 7, 1994, as a subsidiary of the American Association of Motor Vehicle Commissioners. All fifty states, the District of Columbia, and ten Canadian provinces are members. The Northwest Territory and Inuit Territory in Canada, and Mexican states are not members of the plan. The plan requires an interstate commercial motor carrier to file an application(s) with its home base jurisdiction. The latter issues commercial motor vehicle registration credentials including license plate(s) with the word “apportioned,” stickers, and a cab card indicating the jurisdictions in which the vehicle is registered and its registration weight limit. State and provincial roadside enforcement officers use the latter information to verify and validate the registration. Each member jurisdiction is

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required to recognize the documents as authorization for the vehicle to operate in each jurisdiction listed on the cab card. A plan jurisdiction sets its own registration schedules and fees. The base jurisdiction is responsible for collecting all applicable fees for apportionment to each jurisdiction in accordance with the (1) percentage of miles traveled in each jurisdiction; (2) vehicle identification information and maximum weight; and (3) value, age, unladen weight, and other factors in certain jurisdictions. Members are using with increasing frequency the plan’s electronic clearinghouse to transfer the commercial carrier fees to other member jurisdictions. A carrier based in New York, for example, files information with the Department of Motor Vehicles on the states, provinces, or both in which the carrier plans to operate and estimated mileage in each jurisdiction, and transmits to the department certified mileage at the end of the year. Each jurisdiction must conduct an audit of 3 percent of its registered carriers annually over a five-year period. The plan has an electronic audit exchange program. Member cooperation in general has been good, but the District of Columbia in 2001 failed to transfer funds to the other jurisdictions and was faced with retaliatory action. Oklahoma at one time was charged with permitting a number of motor carrier firms to register with phantom addresses including those of forwarding companies.109 The plan also administers a Uniform Reciprocity Agreement for Non-IRP vehicles—signed by Indiana, Maine, Maryland, Michigan, Pennsylvania, and Wisconsin—granting complete reciprocity to passenger and noncommercial vehicles.

DOCUMENTARY TAXES Congress, seventeen states, and the District of Columbia levy three classes of these taxes on issuance of bonds and capital stock, or transfer or conveyance of real property, or insurance policies issued by companies headquartered in foreign nations.110 These taxes are not major revenue producers as the rates generally are low. Only four states levy taxes on transfers of stocks with New York collecting the bulk of the revenue, since approximately 80 percent of stock transfers take place in New York City, which enables New York State to export its stock transfer tax to residents of other states and nations. The suggestion has been advanced that states should repeal their stock transfer taxes since the tax is paid on transactions throughout the United States and hence the revenue should belong to the federal

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government. According recognition that an amendment to the U.S. Constitution would be required to deprive states of authority to levy such a tax, the U.S. Advisory Commission on Intergovernmental Relations in 1964 concluded that “no action is indicated with respect to the overlapping of State and Federal documentary taxes on stock transfers. The duplication is largely limited to one State (New York). The compliance burden for taxpayers is minimized by the collection of both taxes through security exchanges and clearing houses.”111 The commission explained documentary taxes on real estate transfers present a different situation as individual transactions occur at the county level and in many cases involve federal, state, and local government transfer taxes. Realtors in particular object to being required to purchase stamps at two different locations and to use two methods to compute the taxes. A legal method of evading the Maryland state (0.5%) and county (up to 1.0%) real estate transfer taxes has been discovered. A Florida company, Talisman Cos., placed a shopping center in a limited partnership and Kimco Realty of New York purchased the partnership rather than the center with the result that no sale occurred and no property was transferred.112 The Maryland House of Delegates in 2004 approved a bill mandating companies transferring real property from one entity to a second entity by means of the sale of a firm’s controlling interest in a partnership to pay transfer and recording taxes if the sale is $1 million or more. The Maryland Chamber of Commerce and commercial real estate firms persuaded the Maryland Senate in 2004 not to act on the bill on the ground enactment of the bill would encourage large and small firms to depart the state with the consequent loss of jobs.

SUMMARY AND CONCLUSIONS Alcohol and cigarette excise taxes are important sources of state revenue, yet are subject to avoidance by means of casual smuggling by individual citizens and organized smuggling by criminal organizations. The decision by state legislatures to increase sharply the excise tax on cigarettes to discourage consumption by minors and to raise revenues to finance the health costs associated with smoking resulted in a sharp decrease in sales in high tax states, but also encourages smuggling. State cigarette excise tax revenues also are reduced by tax-free Internet sales and purchases on Indian reservations and military bases. To date, state efforts to stop smuggling of illegal alcoholic beverages and cigarettes have been relatively ineffective.

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Congress possesses ample constitutional authority to provide greater assistance to states to impede the flow of illegal alcohol and cigarettes, but has been relatively nonresponsive to state requests for additional assistance in enforcing state excise tax statutes. The September 11, 2001, terrorists’ attacks prompted the FBI to redirect additional resources to antiterrorism activities, thereby reducing its enforcement assistance to states. Casual and organized crime smuggling of cigarettes in particular will continue as long as there are significant excise tax differential between states encouraging smuggling and also permitting low excise tax states to export taxes to residents of neighboring states. The smuggling problem could be reduced in scope if states adopt the congressional suggestion to enact an interstate cigarette tax enforcement compact. The International Fuel Agreement and the International Registration Plan demonstrate states and Canadian provinces are capable of developing cooperatively effective administrative agreements bridging jurisdictional lines that facilitate the collection of revenue, and reduce the compliance burden and costs of commercial motor carrier firms. The cigarette smuggling problem would be completely eliminated by a federal-state agreement providing for each state legislature to repeal its cigarette excise tax, and Congress increasing the federal excise tax to replace lost state revenues and distributing the increased revenues to the states. Such an agreement would remove the existing tax incentive encouraging smuggling and illegal sales of cigarettes, result in increased revenues for states, and lower state administrative costs. An identical agreement could provide for repeal of state alcoholic beverages excises taxes and an increased in the federal alcoholic beverages excise taxes. One state, New Hampshire, would not receive a share of the increased federal excise taxes revenue under such an agreement as the state does not levy an excise tax. State excise taxes on tobacco products and alcoholic beverages do not measure up well against Adam Smith’s maxims, as the taxes are not economical to collect and placed a significantly higher burden on lowincome consumers of the products. Documentary taxes are minor ones in terms of revenue raised for states and comport with Smith’s maxims. The U.S. Advisory Commission on Intergovernmental Relations examined documentary taxes, particularly on stock transfers, and concluded that no changes were needed in such taxes. Chapter 3 examines another type of excise tax—state severance taxes on natural resources—the constitutionality of such taxes, and the extent to which they are exported to taxpayers in other states.

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Chapter 3

Severance Taxes

D

oes the U.S. Constitution place any limits on state taxation other than the prohibition of discriminatory taxes burdening interstate commerce? On the one hand, Alexander Hamilton in The Federalist No. 32 answered this question in the negative by writing that he was willing . . . to allow, in its full extent, the justness of the reasoning which requires that the individual States should possess an independent and uncontrollable authority to raise their own revenues for the supply of their own wants. . . . I affirm that (with the sole exception of duties on imports and exports) they would, under the plan of the convention, retain that authority in the most absolute and unqualified sense; and that an attempt on the part of the national government to abridge them in the exercise of it would be a violent assumption of power, unwarranted by any article or clause of its Constitution.

On the other hand, James Madison identified as a major defect of the Articles of Confederation and Perpetual Union the lack of authority for Congress to regulate interstate commerce and referred to the burden placed on states “which import or export through other States” that

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would “load the articles of import and export, during the passage through their jurisdiction, with duties which would fall on the makers of the latter and the consumers of the formers.”1 The solution to this problem, in Madison’s view, was granting Congress “a superintending authority” over foreign and interstate commerce. A federal system permits state legislators to consider levying innovative taxes whose incidence exclusively or more heavily will be on taxpayers in sister states and nations who have no elected representatives in the legislature imposing the tax. By exporting taxes, the lawmakers reduce the tax burden placed on their constituents and increase their prospects for reelection. Tax exportation is a particular problem in a federal system with several natural resource rich states levying a severance tax for the privilege of extracting minerals or harvesting timber. This tax has a major extraterritorial incidence as it is shifted to a large extent to consumers in other states. Congressional authorization for corporate taxpayers to deduct most taxes, including severance taxes, from their gross incomes reduces their national tax liability, thereby offsetting in part the incidence of exported taxes. The extractive taxes are defended on the ground that irreplaceable state natural resources are being depleted and the extraction imposes environmental costs on the state. These taxes in effect are excise taxes and hence are not subject to the state constitutional requirements of equality and uniformity applicable to the ad valorem property tax.2 They also can be viewed as taxes for the privilege of extracting natural resources and harvesting timber. It is important to note that a severance tax is levied in addition to other taxes such as a corporate income tax and an ad valorem property tax.

NATURAL RESOURCE TAXATION Timber taxation differs from mineral taxation because timber is a renewal resource and its harvesting does not cause the environmental damage that may be associated with mining. Timber taxes date to 1861 in Nebraska and included an annual partial general property tax exemption for landowners who replanted trees and practiced forest conservation. Other state legislatures enacted similar statutes. A change in the type of timber taxation commenced to occur as the result of President Theodore Roosevelt appointment of the National Conservation Commission, whose 1909 report recommended that the ad valorem property tax on forest lands be replaced by a timber harvest tax.3 The report also contains papers prepared by experts including Fred R. Fairchild of Yale

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University who focused on taxation of timber lands and reported twelve states sought to encourage the planting and cultivation of trees by tax concessions including most commonly complete exemption from taxes on land and trees for a stated period of time.4 His paper documented the haphazard valuation of forest lands for property tax purposes, a heavy tax burden, and a trend toward levying higher taxes on timber lands. He concluded a superior system is a tax based on yield.5 The Michigan State Legislature in 1911 was the first legislative body to enact a timber harvest tax as a replacement for the ad valorem general property tax.6 Nevertheless, the tax continued to be levied in many states. Congress enacted the Clark-McNary Act of 1924, which, among other things, directed the secretary of agriculture to study state taxation of timberlands and to draft tax laws to encourage the conservation and growing of timber.7 The result was a 1935 report on Forest Taxation in the United States identifying the problems with the current forest lands system of ad valorem property taxation system and recommending three alternative systems including a harvest tax.8 The Mississippi State Legislature in 1940 was the first one to enact a statute levying a statewide timber yield tax.9 Taxes of this nature apply only when the timber is harvested. The land, excluding timber, also may be subject to the annual ad valorem property tax. Walter Hellerstein noted “the desirability of treating natural resources like other property for taxes purposes was generally taken for granted” during the early taxation period.10 The levying of state taxes, at rates of 1 or 2 percent of the value of a given natural resource, has a long history dating to a 1846 Michigan ad valorem property tax and generated little controversy. He also reported the state’s “initial experience with the ad valorem taxation of its mineral resources was not a happy one. Left to the hands of elected local assessors, the ad valorem method of taxation in its application to mining properties gave rise to familiar complaints about its flaws.”11 Subsequently, the ad valorem property tax generally was abandoned for the taxation of mineral land because of the impossibility of determining the quantity of minerals, which were subject to exhaustion, located below a parcel of land.

Tax Exportation By 1981, thirty-three states were levying severance taxes when several western states increased their tax rates sharply, touching off eastern and midwestern state complaints that the resource-rich states were exploiting their semimonopolies.12 Currently, thirty-nine states levy mineral severance taxes: twenty-seven states tax extracted oil and gas, sixteen tax coal,

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The Silence of Congress

eleven states tax harvested timber, and numerous states levy a severance tax on minerals including gravel, iron ore, and phosphates. Nine energy-rich states levy special severance taxes on coal, natural gas, and oil that are consumed largely in other states. These taxes are a major source of state government revenue with Texas receiving approximately one-quarter of its revenue from oil and natural gas severance taxes and making unnecessary the levying of a state personal income tax. Tax rates vary greatly from 4.6 percent on oil in Oklahoma to 12.5 percent in Alaska. Montana levies the highest tax rate: 30.5 percent on coal. Congress possesses plenary power to regulate interstate, foreign, and Indian commerce, yet surprisingly did not enact a statute to regulate state taxation of interstate commerce until 1959 when a narrow statute was enacted in response to a decision of the U.S. Supreme Court in the same year holding that a state could tax the apportioned net income of a firm engaged only in interstate business within the state (see chapter 5).13 The statute stipulates that a seller may not be subject to a state income tax if the firm merely solicits orders for the sale of tangible goods, but excludes service industries. Subsequently, Congress enacted a small number of statutes restricting the ability of states to tax transportation industries, national banks, federal savings and loan associations, generation of transmission of electricity, and stock transfers in order to prevent discrimination against out-of-state firms (see chapter 8).14 Congress enacted one statute, based on the interstate commerce clause, prohibiting a state tax that has a discriminatory effect extraterritorially. The Tax Reform Act of 1976 specifically forbids a state to tax electricity generation in a manner discriminating against consumers in sister states (see chapter 5).15 In the absence of congressional statutes prohibiting or restricting the ability of state legislatures to levy discriminatory taxes on interstate commerce, individuals and business firms subject to taxation discrimination turn to the courts for relief. The Arizona Public Service Company and four other electric power companies, relying on the 1976 act, filed suit against New Mexico maintaining its tax on the generation of electricity was discriminatory even though the tax rate was uniform because the state permitted the tax paid to be a credit against the state’s gross receipts tax provided the electricity was consumed in the state. Summary judgment was rendered by the Santa Fe District Court for the respondents and its decision was appealed to the New Mexico Supreme Court. In 1979, this court affirmed the lower-court ruling and an appeal was made to the U.S. Supreme Court.16 In 1979, the court rejected New Mexico’s contention that its severance tax on electricity did not fall under the interstate commerce clause by opining that “Congress had a

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rational basis for finding that New Mexico’s tax interfered with interstate commerce and selected a reasonable method to eliminate that interference.”17 The court explained: The generation of electricity . . . undoubtedly also generates environmental and other problems for New Mexico. There is no indication that Congress intended to prevent the State from taxing the generation of electricity to pay for solutions to these problems. But the generation of electricity to be sent to Phoenix causes no more problems than the generation of electricity to be sent to Albuquerque. Congress required only that New Mexico if it chooses to tax the generation of electricity for consumption in either city to tax it equally.18

SUPREME COURT TAXATION GROUND RULES The U.S. Supreme Court did not invalidate a state tax as violating the interstate commerce clause until 1872, when the court struck down a Pennsylvania tax of two cents per ton levied on the transportation of goods.19 The court in 1922 first addressed the question of taxation of the severance of natural resources and rendered other decisions in 1923 and 1927. These decisions collectively are termed the “Heisler Trilogy” and held taxation of severances of such resources was similar to the manufacturing process as the severances occurred prior to the flow of interstate commerce and consequently were “local” activities exempt from constitutional challenges based on the dormant interstate commerce clause.20 In other words, firms engaged in interstate commerce could be required to contribute revenue to support the state government. The court in Heisler was concerned that the nationalization of all industries might be a consequence of a decision holding the clause includes articles to be exported from a state.21 In 1932, the court developed a corollary to its “local” activities doctrine by ruling a state legislature constitutionally could levy a tax on “local incidents” of an interstate business activity such as the generation of electric power.22 This corollary made an exception to a broader U.S. Supreme Court ruling that a state could not tax the privilege of conducting interstate business. Kaveh Shahrokhshahi commented: “In application, the privilege doctrine was handicapped by its mechanical approach which made the validity of a tax dependent on its label.”23 The court in Pike v. Bruce Church, Incorporated in 1970 elaborated on its “local” activities exception doctrine and explained:

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The Silence of Congress Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to putative local benefits. . . . If a legitimate local purpose is found, then the question becomes one of degree. And the extent of the burden that will be tolerated will of course depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities.24

In 1977, the court in Complete Auto Transit Incorporated v. Brady commenced to change its interpretation of the dormant interstate commerce clause by replacing the privilege doctrine with “a standard of permissibility of state taxation based upon its effect rather than its legal terminology.”25 The question at issue was the constitutionality of a Mississippi privilege tax levied on an interstate company. The unanimous opinion specifically adopted a flexibility test and held that such a state tax is constitutional provided it “is applied to an activity with a substantial nexus with the taxing state, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the state.”26 The first three criteria relate to the power of a state to tax and the last criterion relates to the amount of the tax levied.

Commonwealth Edison Company v. Montana Montana and Wyoming are the repositories of approximately 40 percent of U.S. coal reserves including 68 percent of low-sulfur coal. Ninety percent of Montana’s coal is exported to sister states. The Montana Legislative Assembly first levied a small coal severance tax in 1921, but in 1975 increased the tax to 30.5 percent on each pound of coal with a heating value of 7,000 British Thermal Units (BTU).27 The Wyoming State Legislature in the same year also increased its severance tax from 2.0 percent to 17.5 percent. The sharp increases in the rates of several taxes raised the issues of whether an undue burden had been placed on interstate commerce and taxation without representation occurred since consumers in sister states are not represented in the state legislatures raising the severance tax rates. In 1978, four Montana coal companies and eleven electric utility companies in other states challenged the constitutionality of the Montana tax increase on the grounds an undue burden had been placed on interstate commerce and the tax statute was preempted by several congressional statutes, and sought the issuance of a writ of injunction.28

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The companies buttressed their contention by citing the report of a Montana Legislature’s conference committee contending the tax would have an extraterritorial incidence. The Montana Supreme Court in 1980 ruled the tax increase was constitutional.29 An appeal was made to the U.S. Supreme Court. U.S. Senator Max Baucus of Montana submitted an amicus curiae brief to the court supporting the constitutionality of the Montana coal severance tax. He argued: “The standards for determination of what taxes should be imposed on local activities are political questions for the state legislature and are beyond the institutional competence of the federal judiciary,” and added: Other types of taxes are equally complicated and could be subject to challenge. States with high levels of tourism and with relatively high hotel, restaurant, entertainment, or gambling taxes arguably force non-residents to contribute more to state revenues than the benefits they receive. Examination of inheritance taxes on local real estate or nonresidents might indicate that a state is asking more of these taxpayers than it asks of others. Income, gross receipts, and the sales taxes might be subject to challenges based on the Commerce Clause. Who is to say when a tax that goes to support the general revenues of the state is out of all proportion to the benefits provided? What standard measures the benefits a taxpayer receives from a state? Opening state tax rates and benefits received by taxpayers to judicial examination would also open the mix of state taxes to examination. If a state should decide to levy high property taxes and to forego a state income tax or vice versa, one group of taxpayers may be subjected to higher taxes than if both taxes were levied at lower rates.30 The U.S. Supreme Court, by a 6 to 3 vote, affirmed in 1981 the decision of the Montana Supreme Court.31 The high court abandoned its Heisler “local activities” exceptions and specifically ruled the Federal Mineral Lands Leasing Act of 1920 and the Federal Coal Leasing Amendments of 1975 did not preempt the Montana Legislative Assembly from imposing the tax.32 The majority opinion held the taxpayers had nexus to Montana, there was no tax apportionment question and hence no multiple taxation, the tax was uniform regardless of where the coal was mined in the state, no congressional act preempted the tax, a firm with a nexus to the state can be forced to support general governmental services and not simply services benefiting the firm’s activities, and determination of the

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taxation rate is the responsibility of the legislature and not that of the courts.33 Justice Byron White in a concurring opinion explained his concerns with the decision: . . . I join the Court’s opinion with considerable doubt and with the realization that Montana’s levy on consumers in other States may in the long run prove to be an intolerable and unacceptable burden on commerce. Indeed, there is particular force in the argument that the tax is here and now unconstitutional. Montana collects most of its tax from coal lands owned by the Federal Government and hence by all of the people of this country, while at the same time sharing equally and directly with the Federal Government all of the royalties reserved under the leases the United States has negotiated on its land in the State of Montana. This share is intended to compensate the State for the burdens that coal mining may place upon it . . . The constitutional authority and the machinery to thwart efforts such as those of Montana, if thought unacceptable, are available to Congress, and surely Montana and other similarly situated States do not have the political power to impose their will on the rest of the country. As I presently see it, therefore, the better part of both wisdom and valor is to respect the judgment of the other branches of Government.34 Supporting the court’s decision, Stephen F. Williams in 1982 explained the complexities that would be involved in determining the proportion of the severance tax exported to business firms and individuals in sister states: Thus, Montana’s export of ninety percent of its coal by no means shows that would export ninety percent of the tax. Apart from the long-term contracts, a court could discover what portion of the tax was exported only after complex economic inquiries. The rules as to the incidence of taxes are easy to state, but hard to apply. The difficulties are suggested by the variance in results when economists seek to estimate price elasticities. For example, estimates of the long-term price elasticity of demand for motor gasoline, a much studied matter, range from –.22 (very inelastic) to –1.3 (quite elastic).35

Maryland v. Louisiana The U.S. Supreme Court in 1981 also was petitioned by Maryland and seven other states to issue a declaratory judgment that a Louisiana first-

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use tax of seven cents per thousand cubic feet of natural gas levied on certain uses of natural gas derived from federal outer continental shelf (OSC) land was unconstitutional. In 1950, the court in United States v. Louisiana opined the state had no legal claim to the rights in the lands, minerals, and other things underlying the Gulf of Mexico along the Louisiana coast twenty-four miles seaward of the three-mile limit.36 The state first-use tax statute exempted gas used to drill oil or gas within the state, but did not provide a similar exemption for gas used to drill for oil or gas in sister states. Louisiana defended the tax on two grounds: (1) it reimbursed residents for damages to barrier islands and coastal areas and the cost of protecting the areas and (2) equalized competition between gas produced in the state that was subject to the seven cents per thousand cubic feet state severance tax and the cost of gas produced elsewhere not subject to a severance tax. Louisiana sought dismissal of the suit because the tax was imposed on pipeline companies and not on consumers and thereby did not raise state sovereignty concerns justifying the court to invoke its original jurisdiction. The court dismissed the motion and explained its exercise of original jurisdiction was supported by the impact of the tax on the interests of the United States in the administration of the outer continental shelf. The suit, in the court’s judgment, was indistinguishable from its 1923 decision that a West Virginia statute requiring natural gas producers in the state to supply local customers prior to shipping gas in interstate commerce.37 The justices rejected the contention that the tax was similar to a use tax complementing a state sales tax, stressed the state had no right to be compensated for resources severed from the federally owned land, and added: “A state tax must be assessed in light of its actual effect considered in conjunction with other provisions of the state’s tax scheme . . . the Louisiana first-use tax unquestionably discriminates against interstate commerce in favor of local interests as the necessary result of various tax credits and exclusions.”38 The lone dissenter was Justice William Rehnquist who maintained that the “plaintiff states have not . . . established the ‘strictest necessity’ required for invoking this Court’s original jurisdiction,” and justice would be served better by a lower court trial than by what might be termed a trial by the special master.39

Wyoming v. Oklahoma A quite different interstate challenge of a state law is illustrated by the contention of Wyoming that an Oklahoma statute requiring coal-fired electric generating plants generating electrical power for sale in the state must burn a mixture of coal with a minimum 10 percent content of coal

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mined in the state is unconstitutional because the dormant interstate commerce clause prohibits economic protectionism.40 Wyoming specifically argued the statute is a per se violation of the clause and sought the issuance of a permanent writ of injunction enjoining enforcement of the act. In accordance with its customary practice, the court appointed a special master who ordered the states to complete discovery and to file a stipulation of facts that were uncontested and a statement of disputed issues. Each state complied with the order and moved for summary judgment. The special master presented a report containing findings of fact and conclusions of law that in general supported Wyoming’s motion and rejected Oklahoma’s motion. The evidence uncovered revealed that the Oklahoma requirement resulted in Wyoming losing severance tax revenue totaling $535,886 in 1987, $542,352 in 1988, and $87,130 during January–April 1989. The master reported there was no analogous case as no state had suffered an injury in the form of the loss of revenues from a specific tax. The court in 1992 placed the burden upon Oklahoma to justify its facially unconstitutional statute, utilized the strictest scrutiny of the arguments presented by Oklahoma, and opined: “We need say no more to conclude that Oklahoma has not met its burden of demonstrating a clear and unambiguous intent on behalf of Congress to permit the discrimination against interstate commerce occurring here.”41 Justice Antonin Scalia, joined by Chief Justice Rehnquist and Justice Clarence Thomas, dissented by writing, “when the coal companies with sales alleged affected by the Oklahoma law have, for whatever reason, chosen not to litigate, the Court sees fit, for the first time to recognize a State’s standing to bring a negative Commerce Clause action on the basis of its consequential loss of tax revenue.”42 Scalia continued by explaining he would grant Oklahoma’s motion for summary judgment and deny Wyoming’s motion for summary judgment. Justice Thomas, joined by the Chief Justice and Justice Scalia, issued a second dissent opining the dispute was between private Wyoming mining companies and not between the two states, and the court’s theory that the exercise of original jurisdiction is justified by loss of tax revenue is “both sweeping and troubling.”43 Thomas particularly was disturbed by the fact that a state showing even a de minimis tax revenue loss caused by a sister state can invoke the court’s original jurisdiction. Walter Hellerstein, a leading expert on state taxation, concluded in 1987 that the U.S. Supreme Court is an institutionally incapable and politically inappropriate body for determining the appropriate level of a tax.”44 Are there limits on the rate of a state severance tax? Such a tax must be imposed to raise revenue for the general support of the state govern-

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ment and cannot be confiscatory. Courts recognize that the political branch of government is best suited to determine what constitutes an equitable tax.

Indian Reservations The policy of the U.S. Government toward Indian tribes has evolved over the decades.45 The early policy typically involved moving tribes from the eastern sections of the nation and relocating them in unsettled western areas, some of which later were discovered to be mineral rich. Subsequently, national policy was modified by segregating tribes on reservations with specific boundaries and later increasing national controls over tribes. Congress in the 1870s decided Native Americans should be assimilated into the non-Indian culture and promoted such a policy by allotting 90,000,000 acres of communal tribal lands to individual Indian ownership.46 Lands remaining after these allotments were available for homesteading or purchase by non-Indians. The result was a checkerboard pattern of Indian- and non-Indian-owned land. The Indian Reorganization Act of 1934 terminated the allotment program and promoted cultural plurality, economic development, revival of tribalism, and self-determination.47 The act authorized tribes to adopt constitutions. A number of these tribes included in their respective constitution a self-limiting provision stipulating a tribe-levied tax will become effective only with the approval of the U.S. secretary of the interior. In addition, the Indian Mineral Leasing Act of 1938 as amended authorizes tribes to sign mineral leases with the approval of the secretary, thereby suggesting tribes will not impose an unfair severance tax for fear the secretary will not approve a lease.48 Congress in 1968 enacted the Indian Civil Rights Act of 1968, applying U.S. constitutional guarantees to Indian tribes.49 However, the only forum available to a non-Indian challenging a tribal imposed tax is a tribal court as U.S. courts lack jurisdiction over such challenges. The authority of an Indian tribe to levy taxes is not subject to all the constitutional restraints on the taxation powers of states. NonIndians with a nexus to a tribe by means of a business generally can challenge a tribe’s taxes only in the courts of the tribe in view of the fact the U.S. Constitution is silent relative to any limits on the taxation powers of a tribe. The U.S. Supreme Court in 1982, stressing the inherent power of an Indian tribe as sovereign, held that it constitutionally could levy mineral severance taxes.”50 The court specifically rejected the argument the

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contract between mineral leasees and the tribe restricted the latter’s power to tax and distinguished the proprietary role of the tribe from its role as a sovereign. Also rejected was the appellants’ argument tribes had been deprived by Congress of the power to levy severance taxes. The justices specifically explained the Indian commerce clause was designed to be protective of tribes and was not a restraint on their power to levy taxes. The opinion, however, failed to indicate whether the taxes could be levied on minerals extracted from fee lands in a reservation owned by non-Indians or whether the taxes could be imposed outside a reservation in a territory termed “Indian country.” Kerr-McGee Corporation leased land on the Navajo Reservation and challenged the validity of tribe-imposed taxes on the firm’s leasehold interest in tribal lands and the tribal severance tax on extracted property. The U.S. District Court for the District of Arizona ruled the taxes invalid. On appeal, U.S. Court of Appeals for the Ninth Circuit reversed the lower-court decision in 1984.51 The U.S. Supreme Court in 1985 affirmed the Court of Appeals decision and explained sections 396a to 396q of title 25 of the U.S. Code did not preempt the power of the tribe to tax non-Indians and did not forbid the tribe to levy either tax.52 Writing for the court, Chief Justice Warren Burger also opined that it was not necessary that the U.S. secretary of the interior approve Indian tribe levied taxes on the value of leasehold interests in tribal land and on the sale of property extracted on such lands unless a tribe’s constitution requires such approval.53 Montana levied a severance tax on all coal mined and sold in the state. The Crow Tribe of Indians filed suit in the U.S. District Court for the District of Montana seeking declaratory and injunctive relief against the tax. The court in 1979 dismissed the suit and an appeal was made to the U.S. Court of Appeals for the Ninth Circuit.54 The latter court reversed and remanded the case to the lower court, which in 1985 held the application of the state taxes as valid in certain areas and abstained from making a decision as to whether the state taxes constitutionally could be levied on coal mined on reservation land.55 The Court of Appeals in 1987 opined that federal law preempted the Montana tax law and the state taxes infringed on tribal sovereignty.56 In 1988, the U.S. Supreme Court affirmed the lower court’s decision.57 Cotton Petroleum Corporation filed suit against New Mexico in the U.S. District Court seeking relief from New Mexico’s oil and gas severance taxes levied on the corporation whose operations were located on an Indian reservation and were taxed by the tribe. The corporation leased the land from the Jicarilla Apache Tribe under the Mineral Leasing Act of 1938, and the tribe levied a 6 percent tax. The New

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Mexico State Legislature levied an 8 percent tax. The District Court, Santa Fe denied relief and its decision was affirmed by the New Mexico Court of Appeals.58 The New Mexico Supreme Court first granted and later quashed a writ of certiorari.59 The U.S. Supreme Court affirmed the decision of the lower court and ruled: Federal law, even when given the most generous construction, does not preempt New Mexico’s oil and gas severance taxes. Cotton’s taxes are higher than the taxes paid by producers offreservation. . . . But neither the state nor the Tribe imposes a discriminatory tax. The burdensome consequences is entirely attributable to the fact that the leases are located in an area where two government entities share jurisdiction. . . . It is also well established that the Interstate Commerce Clause and Indian Commerce Clause have very different applications. In particular, while the Interstate Commerce Clause is concerned with maintaining free trade among States even in the absence of federal legislation, the central function of the Indian Commerce Clause is to provide Congress with plenary power to legislate in the field of Indian Affairs.60

SUMMARY AND CONCLUSIONS Tax barriers to interstate commerce date to the period of the Articles of Confederation and Perpetual Union when they generally did not impose a major burden on such commerce. If a tax imposed such a burden, the tax would be challenged and a court usually invalidated the levy. The court decisions examined in this chapter illustrate the ingenuity and complexity of state tax schemes and the use of certain schemes, such as a severance excise tax, to increase the revenue of a state at the expense of business firms and residents in sister states. Little controversy was generated by state severance taxes on mineral and time resources until the late 1970s when several states, Montana and Wyoming in particular, increased the rate of these taxes significantly, thereby generating friction with states that are major importers of minerals and timber and charges that the taxes were profiteering. Nevertheless, the U.S. Supreme Court upheld the constitutionality of such taxes. The court declined to assume the responsibility for determining the precise rate of severance taxes and opined that Congress possesses plenary authority to regulate state taxation of interstate commerce. In fact, the court seldom has held that a congressional statute preempts a state tax.

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The Silence of Congress It is difficult to quarrel with Walter Hellerstein’s 1986 conclusion: The resource rich states do export their tax burdens through production taxes, but so do other states through other taxes. The issue is complex, although perhaps less complex than meets the eye when one considers such institutional arrangements as long-term contracts with pass-through clauses and federal regulatory schemes that place the burden of production taxes squarely on the energy consumers’ shoulders. The real issue…is not tax exportation, but…whether natural resources tax exportation should be viewed as a discrete “problem” demanding a national solution or an endemic feature of our federal system whose fabric would be destroyed by serious efforts to curb it.61

Should Congress regulate state severance and timber harvest excise taxes? To date, there is no evidence that such taxes are placing an undue burden on interstate commerce. These taxes generally comport with Adam Smith’s maxims that were designed for a unitary government where taxpayers elected legislators empowered to levy taxes. In consequence, there could be no cry of taxation without representation in 1776 other than in British colonies. Although the U.S. Supreme Court on a number of occasions referred to the Congress’s power to regulate state taxation of interstate commerce, Congress in its wisdom has decided to exercise the power on only limited occasions. Should Congress decide to exercise its regulatory power, the question becomes one of what should be the extent of such regulation. Potentially, the taxation powers of the states could be restricted by Congress to deprive them of needed revenue and make them more heavily dependent on federal financial assistance with attached conditions restricting the discretionary authority of the semisovereign states. Any attempt by Congress to regulate broadly the taxation powers of states would be challenged by them in court, and their position would be supported by Alexander Hamilton’s statement in the Federalist No. 32 as reflecting the original intent of the framers of the U.S. Constitution. The challenge probably would be successful and the U.S. Supreme Court would place another limit on the reach of the interstate commerce clause when it encroaches on the sovereignty of states. Evidence reveals that states will continue to design and levy taxes that can be exported in part to business firms and customers in other states. The invalidation by a court of tax exportation scheme of a state simply encourages this state to seek to develop and levy a new tax that can survive judicial scrutiny. Chapter 4 examines the constitutional objections raised against state taxation of personal income of nonresidents.

Chapter 4

The Nonresident Income Tax

N

o taxation without representation, embodied in the Declaration of Independence, was a rallying cry of citizens in the thirteen colonies protesting taxes levied by the British Parliament. The cry continues to be heard with respect to the income tax levied by a state, a city, or both, on nonresident workers. The latter, with respect to a city income tax, include residents of the state as well as residents of sister states. The nonresident income tax statute continues to be subject to court challenges by persons who object to paying the tax without representation and contend such taxation violate the due process of law, equal protection of the laws, interstate commerce, and privileges and immunities clauses of the U.S. Constitution. State income tax statutes often treat residents and nonresidents in a disparate manner and thereby provide a ground(s) for constitutional challenges of the laws. For example, the New York State Tax Law in defining the New York source income of a nonresident stipulates: “The deduction allowed by section two hundred fifteen of the internal revenue code, relating to alimony, shall not constitute a deduction derived from New York sources.”1 The concerned section remains on the New York statutes books even though the U.S.

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Supreme Court in 1998 invalidated the section as violative of the privileges and immunities clause of the U.S. Constitution (see Lunding v. New York Tax Appeals Tribunal). In addition, deductions available to residents in many states but not available to nonresidents include interest on a nonbusiness obligation, taxes not arising out of business activities, nonbusiness bad debts, medical expenses, and others. The Appellate Division of the New York Supreme Court in 1956 upheld the constitutionality of the disparate treatment of nonresidents by opining that “each of the deductions embodies a governmental policy designed to serve a legitimate social end. The governmental policies are peculiarly related to the factor of residence within the state. The state may therefore constitutionally limit the availability of the deductions to residents of the state. In the exercise of its general governmental power to advance the welfare of its residents, the state may give aid or encouragement of the character embodied in the tax deductions to its own residents, without being constitutionally required to extend similar aid or encouragement to the residents of other states.”2 Currently, forty-one states and the U.S. government levy extraterritorial personal income taxes on nonresidents. The U.S. Constitution, art. 1, sec. 8 grants broad power to Congress to regulate foreign commerce, interstate commerce, and commerce with the Indian tribes. Congress nevertheless did not enact a statute limiting the taxing powers of the states until 1959 and subsequently enacted a small number of statutes preempting the authority of state legislatures to levy taxes on certain individuals and specific industries (see chapter 8).3 The legal complexities of personal income taxes levied on nonresidents, including taxation of telecommuters, are explored below.

LEGAL CHALLENGES The power to tax is a concurrent power in the U.S. federal system and the U.S. Constitution art. 1, sec. 8 grants Congress plenary power over the regulation of “commerce with foreign nations, and among the several States, and with the Indian Tribes.” The Sixteenth Amendment to the U.S. Constitution, ratified in 1913, authorizes Congress “to lay and collect taxes on incomes, from whatever sourced derived, without apportionment among the Several States, and without regard to any census or enumeration.” Congress almost immediately employed its new power to enact the Income Tax Act of 1913.4 The act encouraged several states to levy a similar income tax. To protect their residents against double

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income taxation, state legislatures enacted statutes authorizing a tax credit for income taxes paid by their residents to sister states.5 Courts, in the absence of a pertinent congressional statute, frequently are called on to determine the constitutionality of a state or city income tax with an extraterritorial reach. In other words, is a state or a city required to apply its income tax in an even-handed manner to residents and nonresidents employed within its jurisdiction? A number of state and local commuter income taxes have been upheld as constitutional, and others have been invalided on the ground of discrimination against nonresident taxpayers in the form of violation of the equal protection of the laws clause of the Fourteenth Amendment or the privileges and immunities clause of the U.S. Constitution, art. 4. On the one hand, Alexander Hamilton in the Federalist No. 80 argued for the establishment of a system of national courts responsible for interpreting impartially and enforcing the guarantee of privileges and immunities for sojourners contained in art. 4, sec. 2. of the proposed U.S. Constitution.6 On the other hand, Brutus in the Anti-Federalist Papers maintained the guarantee should not be included in the constitution because “a citizen of one state . . . will be a citizen of every state.”7 The U.S. Supreme Court in Paul v. Virginia in 1868 explained clearly the purposes of the privileges and immunities guarantee: It was undoubtedly the object of the clause . . . is to place citizens of each State upon the same footing with citizens of other States, so far as the advantages resulting from citizenship in these States are concerned. It relieves them from the disabilities of alienage in other States; it inhibits discriminating legislation against them by other States; it give them the right of free ingress into other States; it insures to them in other States the same freedom possessed by citizens of those States in the acquisition and enjoyment of property and in the pursuit of happiness; and it secures to them the equal protection of the laws.8 Plaintiffs challenging a nonresident income tax commonly cite the clause that first received judicial interpretation in 1823 when Justice Bushrod Washington of the U.S. Supreme Court presided in a case in the Circuit Court for the Eastern District of Pennsylvania and identified a number of fundamental privileges and immunities.9 In 1839, the U.S. Supreme Court in Bank of Augusta v. Earle opined that the guarantee of privileges and immunities contained in art. 4 applies only to persons and not to corporations.10

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The court in 1870 employed the clause for the first time to invalidate a state tax statute discriminating against nonresidents. The decision involved a Maryland statute stipulating nonresidents must pay a $300 annual license fee for the privilege of trading in goods not manufactured in the state in contrast to a $15 to $150 fee levied on Maryland traders depending on their respective inventory. Writing for the court in Ward v. Maryland, Justice Nathan Clifford opined that: . . . the clause plainly and unmistakably secures and protects the rights of a citizen of one state to pass into any other state of the union for the purpose of engaging in lawful commerce, trade, or business, without molestation; to acquire personal property; to take and hold real estate; to maintain actions in the courts of the state, and to be exempt from any higher taxes or excises than are imposed by the state upon its own citizens. . . . Inasmuch as the constitution provides that the citizens of each state shall be entitled to all privileges and immunities of citizens in the several states, it follows that the defendant might lawfully sell, or offer, or expose for sale within the district described in the indictment, any goods which the permanent residents of the state might sell, or offer, or expose for sale in that district without being subjected to any higher tax or excise than that exacted by the law of such permanent residents.11

State Nonresident Income Tax The U.S. Supreme Court in 1920 issued its first two decisions on the constitutionality of a state income tax with an extraterritorial reach by validating the Oklahoma state income tax on nonresidents and striking down the nonresident provisions of the New York State income tax statute. The plaintiff in the Oklahoma case was a resident of Illinois engaged in developing and operating several oil and gas mining leases in Oklahoma. He challenged the constitutionality of the state income tax act on the grounds it constituted a taking of his property without due process of the laws and denied to him the equal protection of the laws guaranteed by the Fourteenth Amendment to the U.S. Constitution, contravened the guarantee of privileges and immunities in art. 4 of the constitution by discriminating against nonresidents, and burdened interstate commerce. The court in Shaffer v. Carter, by a 8 to 1 vote, affirmed the decision of the U.S. District Court for the Eastern District of Oklahoma by determining the Oklahoma state income tax statute as applied to a non-

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resident producer of oil and natural gas did not place an undue burden on interstate commerce, did not violate the privileges and immunities clause of art. 4 of the U.S. Constitution or the equal protection of the laws clause of the Fourteenth Amendment, or deprive him of due process of law in tax enforcement proceedings.12 The court in Shaffer emphasized: “The rights of the several states to exercise the widest liberty with respect to the imposition of internal taxes always has been recognized in the decisions of this court,” and the privileges and immunities clause of art. 4 of the U.S. Constitution does not confer on residents of sister states complete tax immunity or preferential treatment in taxation.13 Acknowledging that the Oklahoma tax constitutes double taxation since the plaintiff also paid the state’s gross oil and natural gas production tax, the justices explained neither the original U.S. Constitution nor the Fourteenth Amendment forbids double or any other type of unequal taxation provided it is not arbitrary. The court opined: “The practical burden of a tax imposed upon the net income derived by a nonresident from a business carried on within the state certainly is no greater than that of a tax upon the conduct of a business, and this the State has the lawful power to impose.”14 In Travis v. Yale and Towne Manufacturing Company, the court in the same year addressed the constitutionality of the New York State income tax law as applied to nonresidents.15 The company was required by the law to withhold New York State income taxes from the salaries and wages of its employees in New York who were legal residents of Connecticut and New Jersey which did not levy an income tax. Some of the nonresident employees of the company worked full-time and others worked part-time in New York. Still other employees were traveling salesmen who spent their time in New York and in other states. The New York State statute in question was patterned on the U.S. Income Tax Act of 1913 and levied an income tax on residents of the state and nonresidents employed in the state. The latter, however, were not entitled to the personal exemption—$1,000 for an unmarried person and $2,000 for married persons and $200 for each dependent—accorded residents of the state. The company filed a suit in equity in the U.S. District Court for the Southern District of New York seeking the issuance of a writ of injunction against enforcement of the tax statute. The judge reviewed pertinent privileges and immunities decisions of the U.S. Supreme Court, held provisions of the income tax statute denying to nonresidents exemptions granted to residents to be unconstitutional, and added: “Nothing herein, however, is meant to be decided as to the validity of the statute so far as it relates to residents of the State of New York.”16

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The court issued a final decree in favor of the plaintiff and an appeal was taken to the U.S. Supreme Court that reported no previous case dealt with the issue raised in the present case.17 The complainant alleged the firm would incur substantial expenses in complying with the statute’s requirement that the company withhold from its employees in New York State the state’s income tax, the statute violates the interstate commerce clause and privileges and immunities guaranteed by art. 4 and the Fourteenth Amendment to the U.S. Constitution, deprives the company of its property without due process of law in violation of the amendment, impairs the obligation of contracts between the complainant and its employees, and violates the amendment’s equal protection of the laws clause. The complainant’s contention that the New York State nonresident income tax burdened interstate commerce was abandoned. The justices ruled unanimously in the affirmative on the constitutional question of whether New York could levy an income tax on residents without violating the due process of law clause of the Fourteenth Amendment by citing its decision in Shaffer v. Carter. They also (1) held it was constitutional for the state to require only the employers of nonresidents to withhold the income tax, (2) noted the Connecticut company was exercising the privilege of conducting business in New York, (3) admitted the tax act impairs the obligation of contracts between the firm and its employees but added “there is no averment that any such contract made before the passage of the act required the wages or salaries to be paid in the state of Connecticut, or contained other provisions in any wise conflicting with the requirement of withholding,” and (4) “[t]he nature and effect of the crucial discrimination in the present case are manifest.”18 The New Hampshire General Court (state legislature) in 1970 enacted a commuter income tax containing the following provision: A tax is hereby imposed upon every taxable nonresident, which shall be levied, collected, and paid annually at the rate of four percent of their New Hampshire derived income . . . less an exemption of two thousand dollars; provided, however, that if the tax hereby imposed exceeds the tax which would be impose upon such income by the state of residence, if such income were earned in such state, the tax hereby imposed shall be reduced to equal the tax which would be imposed by such other state.19 Each employer was required to withhold the tax on the income of nonresidents even if their respective home state levied a lower tax. A nonres-

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ident who paid an excess income tax receives a refund subsequent to the filing of a New Hampshire tax return after the close of the tax year. In an effort to disguise possible tax discrimination between residents and nonresidents, the General Court levied a four percent income tax on residents who were granted an exemption from the tax “provided . . . such income shall be subject to a tax in the state in which it is derived . . . ” or “such income is exempt from taxation because of statutory or constitutional provisions in the state in which it is derived, or . . . the state in which it is derived does not impose an income tax on such income. . . . ”20 No income tax was levied on the earned domestic and foreign income of New Hampshire residents as the result of the above exemptions. The nonresident income tax was challenged by Maine residents who in a class action petitioned the New Hampshire Superior Court for the issuance of a declaratory judgment that the tax violated the privileges and immunities clause in art. 4 of the U.S. Constitution and the equal protection of the laws clause of the Fourteenth Amendment, and similar clauses in the Constitution of New Hampshire. The suit was transferred to the New Hampshire Supreme Court, which declared in 1974 the tax was constitutional.21 New Hampshire based its defense of the tax on the argument the nonresident income tax did not place an onerous burden on Maine residents employed in New Hampshire since Maine automatically grants a tax credit to residents for income taxes paid to other states in order to avoid double taxation. Writing for the majority, Justice Thurgood Marshall of the U.S. Supreme Court struck down the tax and opined: “Our prior cases . . . reflect an appropriately heightened concern for the integrity of the Privileges and Immunities Clause by erecting a standard of review substantially more rigorous than that applied to state tax distinction among, say forms of business organizations or different trades and professions.”22 Justice Harry Blackman, the only dissenter, concluded the suit was “a noncase,” cited the demands on the court’s limited time by opining that there were much more urgent cases than the current litigation, and wondered whether the suit was “just a lawyer’s lawsuit.”23 The New Hampshire nonresident income tax effectively diverted revenues to the New Hampshire treasury that otherwise would be received by the Maine treasury. In fairness to New Hampshire, it should be noted that the Maine State Legislature at any time could have repealed the tax credit and New Hampshire was simply taking advantage of Maine’s invitation to divert some of its tax revenue. The U.S. Supreme Court in Pennsylvania v. New Jersey et al. in 1976 consolidated two suits involving Pennsylvania’s suit against New

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Jersey, and Maines, Massachusetts, and Vermont’s suit against New Hampshire.24 The court’s decision readdressed the point made by Justice Blackman in the court’s 1975 decision. Pennsylvania alleged the New Jersey Transportation Benefits Tax Act violated the equal protection of the laws clause and the privileges and immunities clause of the U.S. Constitution. New Jersey did not tax the domestic income of its residents but levied a tax on the income of nonresidents. Pennsylvania extended a tax credit to its residents for income taxes paid to sister states and sought a declaratory judgment and injunctive relief and an accounting for the tax revenues New Jersey unconstitutionally diverted from the Pennsylvania state treasury. Maine, Massachusetts, and Vermont also sought an accounting for the millions of dollars diverted from their state treasuries to the New Hampshire state treasury. In a per curium decision, the court determined neither New Hampshire nor New Jersey had inflicted an injury on the plaintive states by levying the taxes in question and specifically noted: “The injuries to the plaintiffs’ fiscs were self-inflicted, resulting from decisions by their respective state legislatures. Nothing required Maine, Massachusetts, and Vermont to extend a tax credit to their residents for income taxes paid to New Hampshire, and nothing prevents Pennsylvania from withdrawing that credit for taxes paid to New Jersey. No State can be heard to complain about damage inflicted by its own hand.”25 The court also rejected Pennsylvania’s parens patriae claim against New Jersey by opining “that a State has standing to sue only when its sovereign or quasi-sovereign interests are implicated” and concluding the suit was a collection of private suits for taxes against the latter state for taxes withheld from private persons.26 The Supreme Court of Oregon in 1987 invalidated an Oregon income tax provision allowing residents a tax deduction for alimony paid but denying such a deduction to nonresident taxpayers.27 The Oregon Department of Revenue attempted to justify the disparate treatment of nonresidents, but the court dismissed the arguments. “It is no reason for disparity to claim that the income and alimony expenditures are not related to Oregon income, or to claim that the out-of-state character of the obligation and the plaintiffs’ residence justify such a distinction.”28 The court specifically held the statute violated the privileges and immunities clause of art. 4 of the U.S. Constitution and cited the court’s decisions in Travis v. Yale & Towne Manufacturing Company and Austin v. New Hampshire. The Appellate Division of the New York Supreme Court in 1983 and 1996 addressed similar alimony provisions of the New York Tax Law. In common with the Oregon case, the facts in the 1983 suit were

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not disputed. The state tax commission offered a novel justification for the discrimination by arguing “alimony payments are purely personal in nature and, as such, are related solely to a nonresident’s state; ergo, it is not violative of the privileges and immunities clause to permit deduction by a resident but prohibit the same deduction for a nonresident.”29 The court, on statutory and not constitutional grounds, quickly dismissed the argument by holding there neither was a state policy expressing a reason for the disparity nor a showing that residence is connected legitimately with the deduction allowance.30 The 1987 New York State Legislature, in response to the court’s decision added section 631(b)(6) to the state’s Tax Law expressly authorizing the denial of alimony deductions to nonresidents.31 The Appellate Division of the New York Supreme Court in 1996 examined the constitutionality of the addition to the Tax Law. The court found there was “no substantial reason for the disparate treatment” and the statutory authorization for “the denial of alimony deductions to nonresidents does not alter or undermine our previous findings concerning the constitutionality of such practice.”32 The Court of Appeals in 1996, however, reversed the Appellate Division’s decision and an appeal was made to the U.S. Supreme Court.33 The latter court in Lunding v. New York Tax Appeals Tribunal in 1998 reviewed the facts in the case, the lower court decisions, and its own decisions in Shaffer v. Carter, Travis v. Yale & Town Manufacturing Company, and Austin v. New Hampshire. Writing for the majority, Justice Sandra Day O’Connor commented: “In the context of New York’s overall scheme of nonresident taxation, §631(b)(6) is an anomaly. New York tax law currently permits a pro rata deduction for other tax-deductible personal expenses besides alimony. Before 1987, New York law also allowed nonresidents to deduct a pro rata share of alimony payments.”34 The opinion concluded the state had failed to provide a substantial justification for violating the privileges and immunities clause and denying categorically alimony deductions to nonresident taxpayers and hence invalidated the concerned section of the New York Tax Law.35 The New York Tax Law determines the graduated income tax rate levied on a nonresident by combining his or her total in-state and outstate income, thereby placing the taxpayer in a higher tax bracket.36 The plaintiffs in Brady v. State maintained the section violates the due process of law of the Fourteenth Amendment by improperly taxing outof-state income whereas the tax should be levied only on income generated in the state. The New York Court of Appeals in 1992 rejected this argument by referring to U.S. Supreme Court decisions allowing states

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to refer to nontaxable out-of-state income sources in determining the tax rate, also rejected the contentions the tax law violates the equal protection of the laws clause and the privileges and immunities clause of the U.S. Constitution, and opined the plaintiffs’ quarrel is with the graduated income tax system.37 Professor David Schmudde of Fordham University’s School of Law in 1999 examined state taxation of the income of nonresidents and issued the following damming condemnation of New York: The New York system of taxation is a culmination of the most dangerous possibilities for nonresident taxpayers: an overly aggressive Department of Taxation, a legislature which is unlikely to give much consideration to more subtle issues of discriminatory taxation, and a court system which has clearly avowed its position that nonresidents will obtain no protection from the New York courts. The Department of Taxation was granted a free hand to tax nonresidents and can go forward unrestrained. The only available protection for these nonresident taxpayers is the application of constitutional protections by the federal courts.38

Taxation of Nonresident Professional Athletes State taxation of the income of nonresident professional athletes, popularly known as a jock tax, dates to the California State Legislature extending its income tax to such athletes after the Chicago Bulls defeated the Los Angeles Lakers in the 1991 National Basketball Association’s World Championship game.39 The Illinois General Assembly retaliated against California by imposing a similar tax on nonresident professional athletes whose home state levies a similar tax. In consequence, athletes who are residents of Florida, Tennessee, Texas, and Washington are not subject to the tax. Illinois is the only state with professional teams not granting a tax credit to its resident athletes who pay the jock tax in other states.40 Illinois athletes are double taxed when they play games in a state with a jock tax. The very high salary paid to Michael Jordan of the Bulls and other star athletes attracted the attention of several states seeking to increase tax revenues. In 2004, twenty-four states with a professional sports team levied a jock tax on players in the American and National baseball Leagues, National Basketball Association, National Football League, and National Hockey Association (see fig. 1). In addition, the Province of Alberta and the Commonwealth of Puerto Rico, and six cities levy

Figure 1

Source: “Nonresident State and Local Income Taxes in the United States: The Continuing Spread of ‘Jock Taxes.’” Special Report (Washington, DC: Tax Foundation, July 2004), p. 1. Reprinted with permission of the Tax Foundation.

Top Tax Rates on Wages and Salaries in Locations with Professional Sports Franchises. As of July 1, 2004.

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such a tax. New York State, Oregon, and Pennsylvania levy their respective jock tax on the basis of the income of the visiting athlete and the number of games played in the state in contrast to other states that determine the amount of income tax due on the basis of each athlete’s income and the number of preseason training days, practice days, and game days. Gifts to professional athletes also may be considered to be part of their respective gross income subject to the income tax. International athletes, including tennis players, are subject to a jock tax as authorized by treaties between the United States and individual nations.41 The Canada–United States Income Tax Convention of 1980, for example, is designed to determine whether an athlete is a resident of Canada or the United States in order to avoid double income taxation. If there is no treaty with a foreign nation, the United States considers endorsement income to be tax-free income provided the player did not play in a tournament or make a personal appearance in the United States. Determining the amount of personal income subject to the income tax can be difficult as royalty income, from endorsements of products and use of a player’s image, is tax free under the treaties.42 The jock tax is popular because professional athletes receive very high salaries and the ease of enforcement by requiring the team’s to withhold the tax. The Tax Foundation criticized the tax in strong terms and described it as “poor tax policy” because it is “arbitrary because it targets a specific occupation,” includes the staff of teams, requires the filing in a number of states of an income return by each player, and “the incidence of the jock tax is not aligned with the location of economic activity that gives rise to it, a misalignment that creates inefficiencies.”43 The tax commonly is criticized as double taxation, yet there generally is no double taxation as the home state of each professional athlete, except Illinois, with an income tax grants credits to taxpayers for income taxes paid to other states and cities. State income taxes are graduated and as a result a professional athlete pays less in extra income taxes if his or her state has a high tax rate structure. Athletes paying the highest jock taxes are those with a domicile in states without an income tax on earned income—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, and Texas—as the athletes do not receive a tax credit for income taxes paid to sister states. States also have extended their respective income tax to rock stars and their associates whenever they perform in the state. Cincinnati was encouraged by the jock tax to levy its income tax on professional entertainers, particularly rock stars, and New Jersey to tax attorneys from sister states.44

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Telecommuting Improvements in communication systems enable many persons to work full-time or part-time at their homes and they may be subject to a nonresident income tax levied by a state or a local government as illustrated by the following cases. Most governments with such a tax levy it on a pro rata basis determined by the amount of time the telecommuter works in his or her home state and in the employer’s state. New York is an exception in that it taxes 100 percent of the earned income of a telecommuter on the ground the telecommuter is working out-of-state at the convenience of the employee rather than because of employer necessity. The Appellate Division of the New York Supreme Court in 1999 addressed the telecommuting question of whether the state could tax the entire income of a Pennsylvania resident Kenneth Phillips, employed by Lehman Brothers, Incorporated of New York City, who worked primarily from his home office which Lehman Brothers equipped with twenty-five telephone lines, computers, and fax machines. The court determined his total income could be taxed rather than the income earned on the days he worked in New York City and opined the facts that he must monitor world markets when Lehman Brothers office is closed and the company installed equipment in his home office are “insufficient to justify a finding of employer necessity.”45 Thomas L. Huckaby, a Tennessee resident, performed only 25 percent of his work in New York in 1994 and 1995, yet the state sought to tax 100 percent of his income. He argued that New York’s convenience of the employer test violates the due process of law and equal protection of the laws clauses of the Fourteenth Amendment of the U.S. Constitution and he is forced to pay the tax even though any benefits provided by the state flow to his employer. New York defended the tax on the ground the test ensures nonresidents pay their fair share of the cost of the benefits provided to them and their employers by the state. The Appellate Division of the New York Supreme Court in 2004 upheld the tax and an appeal was taken to the Court of Appeals.46 In 2005, it addressed the issue of the convenience of the employer test that stipulates the income of a nonresident employed by a New York employer is taxable unless the work is performed in a sister state for the necessity of the employer. The petitioner maintained the test, developed by the New York State Department of Taxation and Finance, violates the statute it implements and the due process of law clause and equal protection of the laws clause of the Fourteenth Amendment to the United States Constitution. He conceded he worked primarily in

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Tennessee primarily for personal reasons. The court observed the state legislature intended to tax nonresidents based on all their New York source income and noted the petitioner “is the one who chose to accept employment from a New York employer (with the advantages of a New York salary and fringe benefits) while maintaining his residence in Tennessee . . . ”47 The court rejected the due process of law and dormant commerce clause challenges and announced: “We do not view it as our role . . . to upset the Legislature’s and Commissioner’s considered judgments so long as the convenience test has been constitutionally applied in this case.”48 The U.S. Supreme Court in 2005 affirmed the decision.49

Nonresident Pension Source Taxation Several states aggressively sought new sources of tax revenue and California in 1988 found one in nonresident pension source taxation. The income tax was levied on the pension income received by a former employee who worked in a state and whose employer contributed to his or her pension plan in the state, including a person who moved to another state after retiring.50 The U.S. Supreme Court in Shaffer v. Carter in 1920 held states have broad powers to tax the income of nonresidents. Pension income legally is deferred taxable income. Most states granted tax credits, on a reciprocity basis, for income taxes on pension source income paid to a sister state(s), thereby avoiding double taxation of the same income. In effect, the tax credit shifted revenue from the state of residency to the state that was the source of the pension income. Recipients challenged pension source taxation on due process of law, dormant interstate commerce, and privileges and immunities grounds. Many retirees moved to Nevada and Florida, which do not levy an income tax, and consequently they did not benefit from an income tax credit. California, Idaho, and Oregon were levying pension source taxes in 1995 and Kansas, Massachusetts, and New York taxed part of the benefits received by nonresident pensioners. California and New York in particular were aggressive in pension source taxation with the former focusing on retirees who moved to Nevada and New York concentrating on retirees who moved to Florida. Their protests of pension source income taxation led to the subcommittee on economic and commercial law of the committee on the judiciary of the U.S. House of Representatives to hold a hearing on July 2, 1993, on bills introduced to prohibit state taxation of pension source income at which witnesses evoked the cry of “no taxation without representation” and the statement that retirees who relocated to another state currently receives no benefits from the state where the pension was earned.51 These arguments

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and the contention of business firms that they were burdened with keeping records and reporting pension income received by retirees persuaded Congress to enact the State Taxation of Pension Income Act of 1995 allowing only the state of residence to tax the pension income a retired person receives from a qualified retirement plan, thereby preventing the state where the pension was earned to tax the pension income of nonresident retirees.52 Congressional opponents had argued unsuccessfully the bill under consideration would apply to many nonqualified pension plans, benefiting primarily high-income persons, that are not recognized as pension plans under federal law and the bill’s provisions constitute “an unnecessary and unfair unfunded mandate on the states” by limiting their “ability to raise revenues. . . . ”53

THE MUNICIPAL COMMUTER INCOME TAX Charlestown, South Carolina, early in the nineteenth century was the first city to levy such a tax, but later repealed it because of administrative difficulties.54 New York City levied such a tax in 1934, delayed its implementation, and repealed it in 1935. Acute fiscal stress was the reason why the City of Philadelphia in 1938 became the first city in the twentieth century to levy such a permanent tax, effective in 1939, that subsequently has been levied by several thousand other local governments including all cities and villages in Ohio. The tax diversifies their tax base by reducing the reliance on the ad valorem property tax and requires nonresidents working in the city who benefit from services, such as fire and police protection, to financially support the government. The U.S. Advisory Commission on Intergovernmental Relations in 1970 cited another justification for the tax: “To some this practice is further justified as a sort of compensating move, particularly by the large central cities to counter-balance the restrictive zoning practices of neighboring jurisdictions which force the ‘high cost’ citizen to reside in the central city.”55 Nonresidents, it should be noted, benefit from fewer services than residents, thereby suggesting that they should not be taxed to the same extent as residents. Furthermore, nonresidents pay city and state taxes, including bridge and tunnel tolls, while shopping or eating in restaurants in the city and thereby help its economy. A number of cities levy a payroll tax on business firms in lieu of a commuter income tax. The 1966 New York State Legislature authorized New York City to levy a 0.45 percent income tax on the wages of and 0.65 percent on the net earnings from self-employment of residents of New York, Connecticut, and New Jersey employed in the city.56 The tax raised

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approximately $360 million in revenue. The 1999 State Legislature repealed the provision authorizing the city to tax the income of state residents and also included a poison pill provision stipulating the nonresident commuter income tax would be repealed automatically in the event a court declared the tax to be unconstitutional.57 New York City challenged the constitutionality of the repeal provision without a home rule request from the city and four out-of-state plaintiffs mounted a challenge on the grounds the levying of the income tax only on nonresidents of the state violated the privileges and immunities and dormant interstate commerce clauses of the U.S. Constitution. Judge Barry A. Cozier of the Supreme Court of New York for New York County declared the commuter tax as amended in 1999 violated the constitutional clauses cited by the plaintiffs and the equal protection of the laws clause of the New York Constitution.58 The Appellate Division of the New York State Supreme Court in 1999 unanimously affirmed the lower-court decision.59 In 2000, the New York Court of Appeals affirmed the State Legislature’s repeal of the city commuter income tax for state residents effective in 1999 in order to provide tax relief to more than 454,000 state residents, but also ruled the continuation of the tax on nonresidents violated the interstate commerce clause and the privileges and immunity clause of the U.S. Constitution.60 In particular, the court concluded the state had failed to advance “a local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.”61 Approximately 800,000 commuters, including 340,000 Connecticut and New Jersey residents, subsequently received income tax refunds totaling $115 million. New York City argued that the New York State Constitution, art. 9, sec. 2 prohibits the state legislature from enacting a bill affecting the “property, affairs, or government of any local government” except by a general law or by a special law on the request of two-thirds of the members of a local government legislative body or a request of the chief executive officer endorsed by a majority of the legislative body.62 The court opined the repeal statute, although “concededly a special law applying only to New York City, did not require a home rule message” because the statute “is supported by a substantial State interest” and added: “Clearly, a tax paid only by New York residents who live outside New York City is a matter of substantial state concern. Moreover, another stated intention was to make the city more attractive for investment and growth, a goal with obvious implications for the State.”63 An unstated reason for the repeal was an agreement, between Republican Governor George E. Pataki, Republican Senate Majority Leader Joseph Bruno, and Democrat Assembly Speaker Sheldon Silver to repeal the tax as both the Democrat and Republican par-

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ties were hoping to win a Senate seat in Westchester County.64 This decision is in line with a series of decisions dating to the 1929 decision in Adler v. Deegan in which the court upheld the constitutionality of a state statute applicable only to New York City by writing the voters in ratifying a proposed home rule constitutional amendment for cities in 1923 inserted “property, affairs, or government” of a city in the constitution “with a court of Appeals’ definition and not that of Webster’s Dictionary.”65

SUMMARY AND CONCLUSIONS Nonresident income taxation is popular with state legislatures and city councils as a source of additional revenue reducing the upward pressure on the ad valorem real property tax. Courts, including the U.S. Supreme Court, uphold the constitutionality of such state and/or local government taxation provided the tax statutes do not discriminate against nonresidents in terms of tax credits and deductions in violation of the privileges and immunities clause of the U.S. Constitution. New York State has been aggressive in taxing all of the income of nonresidents employed by New York firms and has failed to treat nonresidents in same manner as residents. As a result, the state frequently is sued on the ground its tax statutes violate several provisions of the U.S. Constitution. The nonresident personal income tax in general comports well with Adam Smith’s tax maxims, but the tax in certain states has been challenged on the ground that it is discriminatory because nonresidents are not allowed the same tax deductions and credits granted to residents. Hence, a tax may fail the criterion of falling equally on taxpayers. Chapter 5 is devoted to taxation of the income of multistate and multinational corporations and the use of formulas to apportion a corporation’s income. Numerous state taxes levied on multijurisdictional corporations have been challenged in various courts and the U.S. Supreme Court has established basic rules for taxation of such corporate income consistent with the interstate commerce clause and the due process of law clause of the Fourteenth Amendment to the U.S. Constitution.

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Chapter 5

Corporate Income Taxation

I

ncome taxes were levied by states during the nineteenth century, but generally were unsatisfactory in terms of administration. The modern state income tax dates to a 1911 Wisconsin statute levying such a tax at a graduated rate on corporate and personal income.1 The U.S. Supreme Court during the latter decades of the nineteenth century struck down state taxes on interstate commerce as violative of the dormant interstate commerce clause, thereby insulating a foreign corporation (chartered in another state) engaged only in interstate commerce from taxation by a state.2 The court, however, in Western Live Stock v. Bureau of Revenue in 1938 abandoned the position corporations engaged exclusively in interstate commerce were exempt from state taxation: “It was not the purpose of the commerce clause to relieve those engaged in interstate commerce from their just share of state tax burden even though it increases the cost of doing business.”3 The increase in the number of multistate corporations in the nineteenth and twentieth centuries and the appearance of numerous multinational corporations during the latter half of the twentieth century generated the need for employment of a nondiscriminatory corporate income tax system.4 Currently, forty-five states and the District of

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Columbia levy a corporate income, business profits, or franchise tax. The differences between these taxes are technical. A corporate income tax is a direct tax on the net income of a corporation as is the business profits tax. A franchise tax, considered to be an indirect tax, is levied on the franchise of a domestic corporation (chartered in the state) granting the privilege of a corporate existence and on the franchise granted to a foreign corporation (chartered in a sister state) or alien corporation (chartered in a foreign nation) for the privilege of conducting business in the state. Both types of franchise taxes are measured by the net income of the corporation. Several states levy a direct tax on corporate income as well as a franchise tax. New Hampshire, for example, levies an 8.5 percent business profits tax on income generated within the state with the income apportioned for multistate and multinational corporations.5 In addition, the state levies a 0.75 percent business enterprise tax assessed on the enterprise value tax base constituting all compensation paid or accrued, interest paid or accrued, and dividends paid by the enterprise after special adjustments and apportionment. The corporation income or franchise tax generally is not a major source of state revenues. The New York corporation franchise tax, for example, generated $1,904 million in fiscal year 2005 or 4.50 percent of total tax revenues compared to $42,254 million raised by the personal income tax or 58.33 percent of total tax revenue.6 A motor trucking firm challenged the constitutionality of the Connecticut Corporation Business Tax Act of 1935 by filing a declaratory judgment action seeking issuance of a writ of injunction by the U.S. District Court, which ruled in 1942 that the act did not apply to the firm and granted the requested injunction.7 This decision was reversed by U.S. Court of Appeals in 1943, but the U.S. Supreme Court in Spector Motor Service v. O’Connor in 1951, by a 6 to 3 vote, held the interstate commerce clause forbids a state to impose a franchise tax on a corporation engaged exclusively in interstate commerce even though the tax is a nondiscriminatory one calculated on the corporation’s net income attributable to its business activities in the state.8 The supreme court’s decision allows a state to tax a business firm engaged in both intrastate commerce and interstate commerce for the privilege of conducting intrastate business provided the tax is applied to a fair proportion of the firm’s business conducted within the state. The multinational corporation raises questions of transnational law as Anglo-American countries base the nationality of such a corporation on the nation incorporating it in contrast to the European continental practice of determining the nationality by the nation where the corpora-

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tion has its headquarters. The legal obstacles created by the two systems of determining a corporation’s nationality have been side stepped by a corporation establishing a subsidiary company in each nation or state in which it operates. The U.S. Supreme Court’s interstate and foreign commerce clause adjudication has evolved from the time when early decisions protected the common market by invalidating nearly all state taxes levied on foreign and interstate commerce to the current period where there is general agreement that multijurisdictional corporations can be taxed to raise revenues to help meet their fair share of the costs of governmental operations and the tax should not be based on the internal accounting system of the individual business taxed.9 Raymond Vernon in 1977 noted the difficulties in determining the income of a corporation subject to taxation: “The question about the allocation of costs in a multinational system are matched by even more obscure questions about the allocation of benefits. The operations of any individual subsidiary in a multinational system commonly enhance the profits or reduce the risks of others in the system, yet often no way exists of reflecting that fact fairly in the income accounts of the individual units.”10 Currently, states use separate accounting (also referred to as the arm’s-length method), specific allocation, or formula apportionment (also referred to as the Massachusetts formula) to identify the net income of a multijurisdictional corporation subject to state taxation. The arm’slength method is the international standard incorporated into each tax treaty entered into by the United States with a foreign nation, but is not an effective one for states because of the difficulty of separating the income earned in the state from the total income of a corporation.11 The second method suffers from the provision that a specific type of income, such as interest, is allocated entirely to a single state. Following the specific allocation of items, the remainder typically is apportioned by a formula that is the third method. States generally use a three-factor apportionment formula—payroll, property, and sales—to determine the ratio between the income of a corporation earned in the state relative to its multistate or multinational income. The use of a three-factor formula reduced the number of diverse formulas, but has not produced uniformity in taxation. A survey discovered states employ five major apportionment methods: “(1) Three equally weighted factors: property, payroll, and sales; (2) three factors (property, payroll, and sales) with double weight on sales; (3) specific, unequally weighted factors: property, payroll, and sales; (4) only one factor—sales; and (5) two equally weighted factors: property and payroll or property and sales.”12 Financial institutions are taxed by a number of

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states in a manner differing from taxation of other corporations such as levying a capital based tax instead of an income tax and a higher franchise tax. The trend has been to abandon the equally weighted three-factor formula as weighing sales more heavily raises additional revenue. Currently, twenty-five states weigh sales as 50 percent or higher and twelve states use only the sales factor. The 2005 New York State Legislature authorized a phase-out of the three factor formula and the state will use only sales in 2008.13 The lack of a uniform state apportionment formula results in the determination of the taxable income of a multijurisdictional corporation varying from state to state and the use of nonuniform formulas and conditional tax credits makes state tax systems exceptionally complicated, imposes major compliance costs on foreign corporations and alien corporations, and encourages the filing of lawsuits challenging the constitutionality of state corporate franchise and income taxes. Increased use of state tax incentives in recent decades to encourage business firms to expand or locate facilities in a state has made more serious the problem of nonharmonious state tax statutes (see chapter 7). Although many tax experts call on Congress to regulate state use of tax incentives, James R. Rogers in 1996 argued against congressional action: “State Tax policies aimed at business location decisions are not tax policies attempting to regulate ‘commerce’ between the states as earlier American jurists understood the phrase” and noted “Hamilton provides a lengthy argument in defense of the idea that state and national governments share a non-preemptable, concurrent power over tax policies. . . . ”14 To date, only one subcommittee of the U.S. House of Representatives has conducted an in-depth comprehensive study of state taxation of interstate commerce. The subcommittee on state taxation of interstate commerce of the committee on the judiciary released its report in 1964 containing the following conclusion relative to alternative formulas for division of income for tax purposes: “No formula which has been seriously proposed as a basis for uniformity constitutes a serious threat to the treasury of any of the income tax States, and no national policy with respect to the desirable distribution of tax revenues indicates that one formula should be chosen as opposed to another. If a choice among uniform formulas is to be made, it can be made primarily on the basis of other considerations.”15 The National Conference of Commissioners on Uniform State Laws in 1957 drafted the Uniform Division of Income for Tax Purposes Act (UDITPA), adopted by thirty-six states as of 2005, in order to encourage greater uniformity in state corporate income taxation. The act uti-

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lizes property, sales, and payroll in apportioning business income among states. Walter Hellerstein in 1982 identified the multistate tax commission (see below) as “the driving force behind expansive interpretations of UDITPA’s business income definition” which has led to a number of U.S. Supreme Court decisions.16

THE UNITARY TAXATION SYSTEM This taxation system involves a state’s tax officers examining the United States or worldwide operations of a corporation to determine its total net income and the amount subject to taxation by the state. The value of a corporation with facilities in many states, for example, is greater than the total combined value of each of its components because some of its income is the result of economies of scale, centralized management, and functional integration, a fact recognized by the U.S. Supreme Court in several of its decisions involving challenges to unitary taxation. The U.S. Supreme Court in 1897 rendered its first decision relative to unitary taxation by upholding an Ohio ad valorem state tax based on the apportionment of the value of the property of interstate telegraph, telephone, and rail express companies. The court in Adams Express Company v. Ohio State Auditor specifically ruled: “The states through which the companies operate ought not to be compelled to content themselves with a valuation of separate pieces of property, disconnected from the plant as an entirety, to the proportionate part of which they extend protection, and to the dividends of whose owners their citizens contribute.”17 The Underwood Typewriter Company, a Delaware Corporation, initiated an action in the Connecticut Superior Court for Hartford County seeking recovery of the state tax assessed and paid under protest. Judgment was entered for the defendant by the court and confirmed by the Supreme Court of Errors.18 An appeal was made to the U.S. Supreme Court, which in 1920 reviewed the Connecticut statute’s four classes of corporations taxed by methods that differed somewhat, explained profits were generated by transactions commencing with manufacturing in the state “and ending with sale in other states,” and concluded the tax did not violate the dormant interstate commerce clause by placing an undue burden on such commerce or “that the method of apportionment . . . was inherently arbitrary.”19 Writing for a unanimous court, Justice Louis D. Brandeis explained: “The legislature, in attempting to put on this business its fair share of the burden of taxation, was faced with the impossibility of allocating specifically the profits earned by the processes

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conducted within its borders. It, therefore, adopted a method of apportionment which, for all that appears in this record, reached, and was meant to reach, only the profits earned within the state.”20 In 1924, the court in Bass, Ratliff & Gretton, Limited v. State Tax Commission endorsed the unitary taxation system with respect to an alien corporation by addressing the adequacy of the tax return filed by the company reporting a loss for the tax year commencing November 1, 1918, compared to the New York state tax commission’s determination the company’s apportioned taxable income totaled $27,538.21 The court upheld the commission’s determination by ruling “the company carried on the unitary business of manufacturing and selling ale, in which profits were earned by a series of transactions beginning with the manufacture in England and ending in sales in New York and other places. . . . ”22 California does not follow the international norm of taxing a corporation’s net income based on transactional allocation of income. Instead, the state determines the multistate or worldwide earnings of a corporation and employs the unweighted average of three ratios— California payroll to multistate or worldwide payrolls, California property value to multistate or worldwide property value, and California sales to multistate or worldwide sales—to calculate an allocation fraction. Multiplication of the fraction by the total income of the unitary firm determines the income of the corporation subject to taxation by the state. The California unitary taxation system, also termed formula apportionment, is based upon worldwide combined reporting and has produced diplomatic protests filed with the U.S. Department of State by the governments of Denmark, Germany, Italy, Japan, United Kingdom, and several other nations maintaining the system is not a fair one. Criticisms of formula apportionment “include (1) the difficulty in defining those controlled corporations which should be included in the unitary business operations of the multinational corporations, (2) the lack of comparability of the factors used in the formula from one country to another, (3) the administrative burden associated with obtaining the data needed to use formula apportionment, and (4) the fact that the arm’s-length standing has worldwide acceptance.”23 The U.S. Supreme Court in 1959 in Northwestern States Portland Cement Company v. Minnesota opined that the state could levy a tax on the net income of a foreign corporation subject to the requirements the tax must be nondiscriminatory and apportioned fairly on the corporation’s activities which have a nexus to the state.24 Congress in the same year responded to the court’s decision by enacting Public Law 86-272 prohibiting states and their local governments to levy a net income tax

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on the income of a person or business firm derived in the state or local government from interstate commerce if the only business activities conducted in the state or local government involve the solicitation of orders for sales of tangible personal property with the orders sent outside the state for approval or rejection and shipment of approved orders from outside the state, and addressing the criticisms of state taxation of interstate commerce by authorizing congressional committees to study the subject.25 This law is the first one enacted by Congress limiting the power of states to tax interstate commerce. Subsequently, Congress enacted a small number of other statutes limiting the taxation power of states and they are reviewed in chapter 8. The U.S. House of Representatives established a Subcommittee on State Taxation of the Committee on the Judiciary to conduct a comprehensive detailed study of state taxation of interstate commerce. The subcommittee released in 1964 a comprehensive report, commonly referred to as the Willis report after subcommittee Chairman Edwin E. Willis, revealing the need for greater uniformity in state income taxation and evaluating various proposed jurisdictional rules limiting state taxation of interstate income (see chapter 8).26

Multistate Tax Compact The court’s 1959 decision and the Willis report prompted eight states to enact in 1967 the Multistate Tax Compact creating a commission composed of representatives of member states to facilitate uniform state taxation of the net income of multistate and multinational corporations. The compact currently has twenty-one states and the District of Columbia as members and twenty-three states as associate members (see chapter 9). Three additional states—Iowa, Nebraska, and Rhode Island—participate in certain commission projects. The U.S. Supreme Court in 1978 upheld the constitutionality of the compact by ruling it does not “authorize the member states to exercise any powers they could not exercise in its absence.”27 The Uniform Division of Income for Tax Purposes Act, drafted by the National Conference of Commissioners on Uniform State Laws, is incorporated in art. 4 of the compact and provides a broad taxation framework. Commission regulations, which are advisory, effectuate the article and facilitate determination of the state and local government tax liability of multistate taxpayers by helping to ensure the equitable apportionment of tax bases. Furthermore, the commission operates a Joint Audit Program for groups of states by conducting income tax audits of multijurisdictional corporations. The commission, for example, conducted an audit of

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ASARCO Incorporated at the request of Idaho and five other states and the auditor’s findings were included in the U.S. Supreme Court’s decision in ASARCO Incorporated v. Idaho Tax Commission in 1982.28 The court agreed with the auditor’s findings that five subsidiary corporations were not units of a unitary corporation. In addition, the Multistate Tax Commission drafted the Uniform Protest Statute and Uniform Principles Governing State Transactional Taxation of Telecommunications, and Recommendation Formula for the Apportionment and Allocation of the Net Income of Finance Institutions.29 Other commission model regulations relate to corporate income tax allocation and apportionment; special industry rules for airlines, construction contractors, publishing, radio and television broadcasting, railroads, and trucking companies; and recording keeping regulations for sales and use tax purposes. The purpose of the various model regulations is to eliminate or reduce duplicative taxation. The commission operates a voluntary National Nexus Program permitting taxpayers simultaneously to resolve their potential tax liabilities with two or more states. A corporation anonymously may contact any or all of the member states of the program and propose the settlement of potential state sales/use tax, and/or income franchise tax liabilities that are products of their activities within the concerned states in the past. Most commission services are provided without charge to the taxpayer(s) who additionally benefits from the resolution of tax disputes before the concerned states impose prior year assessment of taxes, interest, and penalties. A taxpayer also may request the commission to conduct a joint audit on behalf of the participating states. The Committee on State Taxation and the commission jointly developed an alternative dispute resolution program to resolve tax controversies among states and thereby reduce the cost and risks of litigation. The U.S. General Accounting Office in 1982 reported states had made progress in developing uniform rules for apportioning the income of multijurisdictional corporations, but added “progress has been slow primarily because individual States have sought to have laws and regulations which embody their particular political and economic views on the best means of determining the taxable income of” such corporations.30 This statement remains an accurate one today.

Key Court Decisions The California Supreme Court in Matson Navigation Company v. State Board of Equalization in 1935 for the first time upheld the constitutionality of formula apportionment and the U.S. Supreme Court in 1936

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affirmed this decision.31 In 1941, the California Supreme Court opined that the state’s Bank and Corporation Franchise Tax Act of 1929 as amended was constitutional and noted the only limitation on formula assessment is that it can not be intrinsically arbitrary or result in an unreasonable tax.32 The U.S. Supreme Court in 1942 affirmed this decision: “We cannot say that property, pay roll, and sales are inappropriate ingredients of an apportionment formula. We agree with the Supreme Court of California that these factors may properly be deemed to reflect ‘the relative contribution of the activities in the various states to the production of the total unitary income,’ so as to allocate to California its just proportion of the profits earned by appellant from this unitary business. And no showing has been made that income unconnected with the unitary business has been used in the formula.”33 The California Supreme Court in Edison California Stores Incorporated v. McColgan in 1947 reversed the decision of the Superior Court, Los Angeles County, which ruled in favor of the plaintiff’s action to recover franchise taxes paid under protest on the ground the corporation transacted only intrastate business and therefore the separate accounting method reflected the corporation’s net income attributable to business conducted in California.34 The parent corporation, a Delaware corporation, incorporated fifteen subsidiary corporations, one for each state in which it operated including California. The court, however, concluded the California-chartered corporation was part of a unitary business that had failed to prove the unreasonableness of the formula allocation method by demonstrating it “produces an arbitrary and unreasonable result.”35 Alcan Aluminum Limited, a Canadian chartered corporation, and Imperial Chemical Industries, a United Kingdom chartered corporation, challenged the constitutionality of the California unitary business formula apportionment method to determine the amount each multistate and the multinational corporation owes the state. Judge Ann C. Williams of the U.S. District Court for the Northern District of Illinois in 1987 dismissed the challenge as the parent companies suffered an injury in their capacities as shareholders and hence lacked standing to file a suit against the state as shareholders must prove there is a direct and independent injury.36 The U.S. Court of Appeals for the Seventh Circuit reversed and remanded the case by holding the foreign corporation’s alleged injuries were sufficient to confer standing to challenge the California tax and added “that comity and federalism, weighty as these concerns are where federal courts pass on the constitutionality of state tax legislation cannot justify withholding federal jurisdiction from a party with

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no cause of action in a state court to redress its own direct and independent injury.37 Justice Byron White, writing for the U.S. Supreme Court in 1990, reviewed the facts in the case and agreed with the decision of the Court of Appeals by opining the foreign firms, the sole owners of domestic corporations, have standing to sue under the U.S. Constitution art. 3 on foreign commerce clause grounds, but ruled Congress in the Tax Injunction Act of 1937 as amended in 1948 forbade the U.S. District Court in a suit seeking a declaratory judgment or an injunction to enjoin, suspend, or restrain a state law relating to the assessment, levy, or collection of a tax “if a plain, speedy, and efficient remedy” is available in the courts of the state levying the tax.38 A group of New Jersey state legislators and taxpayers challenged the constitutionality of the application of New York’s income tax law to nonresidents. Judge John W. Bissell of the U.S. District Court for the District of New Jersey dismissed the action for want of jurisdiction. On appeal, the U.S. Court of Appeals for the Third Circuit in 1989 ruled New York could not waive the bar of the Tax Injunction Act of 1937, New York provides a “plain, speedy, and efficient remedy” in its courts for the claims of nonresident taxpayers, and thereby the suit was barred by the act.39 The court added: “This case demonstrates why the federal courts should be reluctant to accept actions challenging state taxes . . . for by declining to do so they give the state the opportunity to adjust to possible problems in the application of its law.”40 The U.S. Supreme Court in 1978 addressed the constitutionality of Iowa’s single-factor gross receipts tax formula for apportioning the net income of the Moorman Manufacturing Company, domiciled in Illinois, between states. Most states use a three-factor formula and the company maintained use of this formula would allocate 12 percent of its 1972 net income to Iowa in contrast to the single-factor formula that would allocate 18 percent. The Iowa District Court, Polk County, held the formula was invalid because it violated the due process of law clause of the Fourteenth Amendment, but the Iowa Supreme Court reversed this decision.41 The U.S. Supreme Court referred to the fact states have been granted wide discretion in developing formulas for apportionment of the income of multijurisdictional business enterprises, and added if the U.S. Constitution was interpreted to require precision in interstate taxation, “the consequences would extend fare beyond this particular case,” and the Court would have “to prescribe a uniform definition of each category in the three-factor formula.”42 If the court prescribed a uniform definition, duplicate taxation would not be eliminated because states

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have adopted different rules relative to “where a ‘sale’ takes place,” a number of states do not make a distinction between business and nonbusiness income, and still other states utilize particular rules assigning nonbusiness income to a specific location.43 The six member majority opinion continued by noting that Congress could utilize its interstate commerce clause power to enact a statute mandating all states to adhere to uniform rules for the division of income, but until it does so the Iowa formula is constitutional unless the company can demonstrate that a portion of its income allocated to Iowa was generated in other states. Walter Hellerstein considers Iowa’s use of a single-factor sales formula to be economic protectionism when viewed with respect to the use of the three-factor formula by other states because the Iowa formula “imposes a lower total income tax burden on Iowa-based businesses doing business in other states than on similarly situated out-of-state businesses doing business in Iowa.”44 Mobil Oil Corporation objected to Vermont tax officers including dividend income from its subsidiaries doing business abroad in the corporation’s tax base and argued the income should be allocated to New York which incorporated the company and did not tax such dividends. The corporation filed a challenge in the Washington Superior Court which ruled inclusion of this income unconstitutionally subjected the corporation to multiple taxation, but the decision was reversed in 1978 by the Vermont Supreme Court.45 Justice Harry Blackmun of the U.S. Supreme Court, writing for the majority, held in 1980 the inclusion of dividends from the corporation’s subsidiaries did not violate the due process of law clause of the Fourteenth Amendment, interstate commerce clause, or foreign commerce clause of the U.S. Constitution and did not place an undue burden on foreign commerce by subjecting the dividend income to a major risk of multiple taxation.46 Blackmun stressed the court was not suggesting all dividends received by a multistate or multinational corporation are taxable in each state as the business operations of a subsidiary corporation may be totally unrelated to the activities of the recipient in the concerned state and thereby due process of law considerations would preclude apportionment of dividend income by the taxing state as there is no unitary business involved.47 Justice John Paul Stevens dissented and maintained the factual record did not demonstrate the corporation’s income from investments and the sale of products in the state are part of a unitary business.48 Furthermore, he contended Vermont applied its apportionment formula “in an arbitrary and unconstitutional way” by overstating “Mobil’s earnings in the State.”49

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The court in the same year rendered a taxation decision involving a second integrated multinational oil corporation, Exxon, and several similarities exists between the facts in the two cases. However, the Exxon case did not involve the question of the inclusion of dividend income. The issue involved the constitutionality of the state’s application of its apportionment formula to the total operating income of the corporation even though its activities in the state involved only marketing. Exxon argued Wisconsin’s apportionment formula produced a distorted total corporate income. Judge George R. Currie of the Circuit Court for Dane County in 1977 reviewed the decision and order of the state tax appeals commission denying the corporation abatement of additional income and franchise taxes during the period 1965 to 1968, and entered judgment for the state. The Wisconsin Supreme Court affirmed in part the lower court decision and ruled the apportioned total income of the Exxon Corporation, a Delaware corporation, was taxable as the Wisconsin operations were a part of a unitary business.50 The U.S. Supreme Court referred to its earlier decision involving the Mobil Oil Corporation, determined the due process of law clause of the Fourteenth Amendment does not forbid Wisconsin to apply its apportionment formula to the corporation’s total income or prevent the state from subjecting to taxation under its apportionment formula income from extraction of oil and natural gas located outside the state, and the dormant interstate commerce clause does not require the state to allocate all income derived from Exxon’s exploration and production activities to the situs state, thereby excluding the income from the Wisconsin apportionment formula.51 The Mobil and the Exxon decisions widened the state tax net cast under authority of the unitary business principle. The court in Mobil cited a number of cases that it declared demonstrated “the linchpin of apportionability in the field of state taxation is the unitarybusiness principle.”52 In 1982, the court in ASARCO Incorporated v. Idaho Tax Commission drew a line separating the corporation’s subsidiaries from the unitary-business principle by holding they were “discrete businesses.”53 Justice Marion J. Callister of the Idaho District Court of the fourth Judicial District, Ada County, modified the commission’s assessment of taxes and the commission appealed. The Idaho Supreme Court reversed the lower court decision by finding the state’s apportionment formula did not violate the due process of law clause of the Fourteenth Amendment or the interstate commerce clause.54 The U.S. Supreme Court in 1982 reiterated the “linchpin . . . is the unitary-business principle,” there was no unitary relationship between the corporation and its subsidiary corporations, and the state’s attempt to tax the interest and

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capital gain income derived from the subsidiary corporations violated the due process of law clause.55 The court on the same day issued a similar opinion in F. W. Woolworth Company v. Taxation and Revenue Department of New Mexico by repeating its linchpin standard and finding the dividend paying subsidiary corporations were not part of a unitary business.56 These two decisions are a rejection of broad state definitions of a unitary business encompassing capital gains and intangible (dividends and interest) income of unrelated subsidiary corporations. Barclay’s Bank, chartered in the United Kingdom, and the Colgate-Palmolive Company, chartered in Delaware, filed a constitutional suit in the Superior Court, Sacramento County, challenging California’s three-factor formula apportioning the income of a foreignparent multicorporate unitary enterprise for state tax purposes. The court, in an unreported decision, invalidated the formula and the decision was appealed to the Court of Appeals which reversed the lower court decision by finding the three-factor formula did not violate the foreign commerce clause of the U.S. Constitution.57 The California Supreme Court in one case affirmed the decision of the Court of Appeals and in the other case remanded it to the Court of Appeals with directions to vacate.58 An appeal was made to the U.S. Supreme Court where Barclays Bank challenged the California worldwide combined reporting system on the grounds it violates the interstate commerce and due process of law clauses of the U.S. Constitution and also places a distinct burden on a foreign-based multinational company resulting in double international taxation. Justice Ruth B. Ginsburg delivered the opinion of the court and found evidence was lacking that Congress intended to prohibit the unitary system and “the history of Senate action on a United States/United Kingdom tax treaty . . . reinforces our conclusion that Congress implicitly has permitted the states to use the worldwide combined reporting method.”59 Had California lost the case, the state would have had to repay approximately 2,000 multinational corporations in excess of $2.1 billion in tax refunds and abatements of pending assessments. (See related court decisions below).60 In 1992, the U.S. Supreme Court examined the first congressional statute restricting state taxation of interstate commerce, and interpreted the term “solicitation of orders” to include all activities totally ancillary to purchase requests, held whether a particular activity is sufficiently de minimis to be protected by immunity from a state income tax is dependent on whether the activity established a nontrivial additional connection to the concerned state, and the combined nonimmune activities of the company were not de minimis (see chapter 8).61

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The New Jersey Division of Taxation employed the unitary tax system to assess the Bendix Corporation (now Allied-Signal, Incorporated) for taxes on income derived from a gain from the sale of stock in another corporation. Although the U.S. Supreme Court in 1992 upheld use of the unitary tax system, the division was directed to refund the tax on the capital gain because a state may not tax a nondomicilliary corporation’s income derived from an unrelated business activity including the sale of stock.62 Justice Anthony M. Kennedy, writing for the five member majority, opined “the unitary business rule is a recognition of two imperatives: the states’ wide authority to devise formulae for an accurate assessment of a corporation’s intrastate value or income; and the necessary limit on the states’ authority to tax value or income which cannot in fairness be attributed to the taxpayer’s activities within the state.”63 Hak K. Dickenson commented: “Thus, under the new rule announced by Allied-Signal, an intangible property that served an ‘operating’ rather than ‘investment’ function would be fair game to be taxed by the states in the absence of the unitary business.”64 The U.S. Supreme Court in 2000 ruled unanimously in favor of Hunt-Wesson Incorporated, a unitary corporation, which challenged a decision of the California Franchise Board denying the allowance of the total interest expenses claimed. The board limited the interest expenses deduction to the amount exceeding out-of-state income derived from an unrelated business activity of the corporation. The court found the disallowance violated the due process of law clause of the Fourteenth Amendment and the interstate commerce clause because California “measures the amount of additional unitary income that become subject to taxation (through reducing the deduction) by precisely the amount of nonunitary income that the taxpayer has received.”65

OTHER LEGAL CHALLENGES Plaintiffs challenged a variety of taxes levied by state legislatures on transportation companies and manufacturing companies. Courts constantly are faced with the difficult task of determining the line between interstate and intrastate commerce and whether a state tax has a discriminatory effect on interstate commerce. A majority of the states have a throwback rule providing “for throwing back a corporation’s sales to the State in which the sales originated if the corporation is not taxable in the State of destination.”66 The objective of the rule is to ensure the sales of a corporation do not escape taxation totally.

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Transportation Taxes Lawsuits challenging state-imposed taxes on interstate transportation firms have become common with the firms contending the taxes are discriminatory and violate the U.S. Constitution. Railroads in the United States date to the late 1820s, but the U.S. Supreme Court did not render its first decision involving the interstate apportionment of a state tax on a railroad until 1891. The Pullman’s Palace Car Company alleged Pennsylvania’s corporation income tax apportionment formula violated the U.S. Constitution. The case involved a tax on nondomiciliary scheduled railroad rolling stock. The court determined the tax was constitutional because it was apportioned on the basis of Pennsylvania track mileage relative to the total track mileage used by the rolling stock.67 The issue of state taxation of a railroad’s rolling stock reached the court again in 1905 when it invalidated on due process of law grounds a Kentucky tax levied on the entire rolling stock fleet of the Union Refrigerator Transit Company because many of the cars were based in other states where they could be taxed by sister states.68 In 1906, however, the court upheld a New York tax on the entire rolling stock of a domestic railroad corporation, including numerous cars that seldom were in the state, by opining there was no evidence presented at the lower court trial that the cars were subject to a tax by a nondomiciliary state.69 Justice Oliver Wendell Holmes in Wallace et al. v. Hines in 1920 observed: The only reason for allowing a State to look beyond its borders when it taxes the property of foreign corporations is that it may get the true value of the things within it, when they are part of an organic system of wide extent, that gives them a value above what they otherwise would possess. The purpose is not to expose the heel of the system to a mortal dart—not, in other words, to open to taxation what is not within the State. Therefore, no property of such an interstate road situated elsewhere can be taken into account unless it can be seen in some plain and fairly intelligible way that it adds to the value of the road and the rights exercised in the State.70 The case involved an excise tax on foreign corporations that was challenged as unconstitutional interference with interstate commerce and the taking of railroad property without due process of law. Under the law, the state tax commissioner determines the value of all property of each railroad by the value of its stocks and bonds and levies the tax on the

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part of this value that the main track mileage in the state bears to the main track mileage of the so stem. The railroad maintained the apportionment formula was unfair in view of the fact the cost of construction in Nebraska was lower than the cost of construction in mountainous states and all terminals are located in sister states. The court agreed the formula was flawed and also noted “possession of bonds secured by mortgage of lands in other States, or of a land-grant in another State or of other property that adds to the riches of the corporation but does not affect the North Dakota part of the road is no sufficient ground for the increase of the tax. . . . ”71 Justice Harlan F. Stone, writing for a unanimous court in 1926, validated the constitutionality of a facially discriminatory Louisiana tax of twenty-five mills on the rolling stock of foreign railroad corporation not domiciled in the state.72 The state constitution exempted payers of the tax from local government taxes and there was a very slight differential of four mills between the state tax and the average local government tax.73 The justices determined the state tax did not constitute significant discrimination and there was no evidence the tax was intended to discriminate against out-of-state firms.74 The development of domestic airlines in the 1930s raised the prospects of states levying a tax on the entire fleet of an airline. In 1944, the U.S. Supreme Court in Northwest Airlines, Incorporated v. Minnesota extended its 1906 rail car decision to an airline by validating a Minnesota personal property tax levied on the entire fleet of a domestic airline corporation even though the airplanes were flying continuously in interstate commerce except when they were loading or unloading cargo or passengers or were being maintained.75 Justice Felix Frankfurter observed there was a lack of evidence that “a defined part of the domiciliary corpus . . . acquired a permanent location; i.e., a taxing situs elsewhere.”76 The court in 1954 in Braniff Airways, Incorporated v. Nebraska State Board, by a 7 to 2 vote, drew on its railroad rolling stock decisions and upheld the validity of a nondomiciliary apportioned Nebraska state property tax on aircraft owned by an interstate airline which had scheduled stops in the state.77 State taxation of an interstate bus company reached the U.S. Supreme Court when it reviewed in 1948 the New York State formula for apportionment of the state’s gross receipts tax levied on Greyhound Bus Corporation buses traveling in New Jersey, New York, and Pennsylvania. The tax was invalidated on the ground the tax was not apportioned on the basis of the total number of miles the corporation’s buses traveled in each state.78

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The following year, the court broke with its precedent that only a domiciliary state could tax vessels carrying freight by validating ad valorem property taxes, levied by the City of New Orleans and the State of Louisiana, apportioned on the basis of the number of inland water miles traveled by a foreign corporation’s ships.79 Barge companies challenged the taxes as violating the due process of law clause of the Fourteenth Amendment and the interstate commerce clause of the U.S. Constitution. The concerned barges had no regular schedule and were only in Louisiana long enough to load and discharge freight, make repairs, or both. The U.S. District Court for the District of Louisiana in 1948 concluded the taxes violated the due process of law clause.80 The U.S. Court of Appeals for the Fifth Circuit in 1948 affirmed the lower court decision.81 The U.S. Supreme Court explained in 1949 it was limiting its decision to inland waters and was not addressing ocean carriage, and observed its decision was consistent with its previous holdings “that interstate commerce can be made to pay its way by bearing a nondiscriminatory share of the tax burden which each state may impose on the activities or property within its borders.”82 Until 1959, the court had ruled that a state may not levy a direct tax on the income of a business firm engaged exclusively in interstate commerce. Speaking for the six-member majority, Justice Tom C. Clark in Northwestern States Portland Cement Company v. Minnesota established a new precedent in 1959 by opining “ . . . it is axiomatic that the founders did not intend to immunize such commerce from carrying its fair share of the costs of the state government in return for the benefits it derives from within the State.”83 The decision resulted in Congress in the same year enacting the first statute regulating state taxation of interstate commerce (see chapter 8). The court in 1961 examined a four percent Alaskan license fee on freezer ships and floating cold storage units assessed on the basis of the value of the raw fish caught in the state’s waters. The Artic Maid Company argued the tax was a discriminatory one violating the dormant interstate commerce clause by exempting fish caught and frozen in Alaska before canning in the state. Alaska defended the tax by maintaining it was a complementary one since a 6 percent tax was levied on the value of salmon canned in Alaskan canneries. The court upheld the constitutionality of the contested tax by declaring it was a complementary one.84 The U.S. Supreme Court in 1977 in Complete Auto Transit Incorporated v. Brady, involving the constitutionality of a Mississippi privilege tax, developed a four-part test to determine whether a tax

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violated the dormant interstate commerce clause. The justices unanimously announced a state tax would be valid provided it “is applied to an activity with a substantial nexus with the taxing state, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the state.”85 The tax was upheld as constitutional because the plaintiff did not allege the tax violated any part of the test. The constitutionality of a California ad valorem property tax levied on cargo containers, owned by a Japanese firm located temporarily in the state, was the subject of a 1979 decision of the U.S. Supreme Court in Japan Line Limited v. County of Los Angeles. Japan and the United States had signed a convention that neither government would levy a tax on containers temporarily stored in a port of one nation when the home port is in the other nation. The court in its decision applied for the first time the above four-part test to a tax dispute involving foreign commerce and added two additional parts to the test. The tax (1) must not result in international double taxation or (2) prevent the U.S. Government from “speaking with one voice when regulating commercial relations with foreign governments.”86 The court found the property tax violated both of the additional parts of the test as the containers were taxed in Japan and in California, and the tax prevented the U.S. Government from speaking with a single voice. Left open was the question of the application of this decision to “domestically owned instrumentalities engaged in foreign commerce.”87 In 1983, the U.S. Supreme Court in Container Corporation of America v. Franchise Tax Board rendered a decision relative to the constitutionality of the application of the worldwide combined reporting version of the California’s unitary tax to U.S. multinational corporations that have foreign subsidiary corporations. The key question was whether the tax system met the requirements of the two additional parts added by the Japan Line Limited decision to the four-part test imposed in Complete Auto Transit Incorporated. The court concluded there were similarities in the present case to those in Japan Line Limited, but emphasized property taxation and income taxation differ and “the double taxation in this case, although real, is not the ‘inevitable’ result of the California taxing scheme.”88 The property tax in Japan Line Limited made double taxation unavoidable. The seven-member majority opinion held the international double taxation criterion was not an absolute rule and the court would examine whether a reasonable alternative was available to the state. The trial court’s decision was affirmed because use of the alternative arm’s-length approach by California would not avoid double taxa-

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tion and there is no congressional preemption statute invalidating the California taxation scheme or establishing a federal policy inconsistent with the tax scheme.89 Florida had been prorating on a mileage basis the fuel tax levied on common carriers until 1983 when the state legislature repealed the prorating tax on fuel sold to airlines and replaced it with a 5 percent tax on a state determined price of $1.148 per gallon. Airlines were required to pay the tax when purchasing fuel in the state regardless of whether they operated primarily outside the state.90 No double taxation, such as in Japan Line Limited, was involved because the tax is paid on the purchase of the fuel. WardAir Canada, Incorporated contended the new tax was inconsistent with a 1974 nonscheduled air service agreement entered into by Canada and the United States and was preempted by the Federal Aviation Act. The U.S. Supreme Court in 1986 rejected these arguments by explaining more than seventy United States bilateral aviation agreements with other nations do not preclude the type of tax levied by Florida and the “silence of Congress” on the subject in dispute is intentional and permits states to levy taxes on aviation fuel, and therefore it was unnecessary to conduct a dormant interstate commerce clause analysis.91 In 1987, the justices heard a challenge to the constitutionality of Pennsylvania’s axle tax and marker fee levied on trucks. The plaintiff alleged the flat taxes subjected out-of-state trucking firms to a higher charge per mile traveled in the commonwealth compared to domestic trucking firms and did not approximate the cost of the use of its highways. Agreeing with the plaintiff, the court held the concerned flat taxes did not meet the its internal consistency test holding a permissible tax, if levied by every taxing jurisdiction, would not burden impermissibly commerce among the states.92 Flat taxes, for example, discriminate against out-of-state truckers because they on average travel only approximately one-fifth as many miles in the state as in-state truckers travel. In delivering the court’s decision, Justice John Paul Stevens acknowledged “our task is by no means easy; the uneven course of decisions in this field reflects the difficulty of reconciling unrestricted access to the national market with each state’s authority to collect its fair share of revenues from interstate commercial activities.”93 He added that the court’s recent decisions rejected “a somewhat metaphysical approach to the commerce clause,” emphasizing the character of the privilege and not the tax consequences.94 Justice Antonin Scalia dissented and highlighted the difficulties faced by the court in adjudicating claims that a state discriminates against foreign firms: “Legislative action adjusting taxes on interstate and intrastate

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activities spans a spectrum, ranging from the obviously discriminatory to the manipulative to the ambiguous to the wholly innocent. Courts can avoid arbitrariness in their review only by policing the entire spectrum (which is impossible), by policing none of it, or by adopting rules which subject to scrutiny certain well-defined classes of actions thought likely to come at or near the discriminatory end of the spectrum.”95 The U.S. Supreme Court in 1995 addressed the constitutionality of an Oklahoma sales tax levied on the price of interstate bus tickets sold in the state. The court, by a 7 to 2 vote, upheld the tax as nonviolative of the dormant interstate commerce clause.96 The fact the Oklahoma tax was levied when a ticket is sold meant no other state could tax the ticket in contrast to the New York gross receipts tax on transportation, invalidated by the court in 1948, because each state might levy a similar tax, thereby resulting in multiple taxation.

Tax Credits State legislatures commonly authorize tax credits for a variety of purposes. California, for example, allows a corporation income tax credit of 8 to 12 percent for the cost of research, and a 10 percent credit for the cost of a solar energy system installed in the state.97 Illinois grants a tax credit for employment of workers in enterprise zones and Virginia offers a 10 percent tax credit for the cost of equipment used in the state for processing recycled personal property.98 Tax incentives in the form of credits are powerful tools employed by states to encourage firms to locate or expand facilities within their respective states, but possess the potential for discriminating against interstate commerce as revealed by court decisions below. The 1968 New York State Legislature amended its transfer tax on stocks and bonds sales by authorizing a 50 percent lower tax rate for nonresidents if their sales transactions occur in New York and limiting the tax to a maximum of $350 imposed on resident and nonresident taxpayers provided the sale occurs in the state.99 In 1977, the U.S. Supreme Court in Boston Stock Exchange v. State Tax Commission declared these provisions to be unconstitutional because they promoted “local enterprises at the expense of out-of-state business” and added its decision does not prevent a state from competing with sister states for interstate commerce as “such competition lies at the heart of a free trade policy.”100 The New York State Legislature, which is aggressive in taxation, also imposed a franchise tax on corporations, including the income of their subsidiary corporations exporting goods, but granted a partial offsetting credit for income flowing from exports shipped from one of their

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places of business in New York. The U.S. Supreme Court rejected the state’s contention the tax credit simply forgave “a portion of the tax that New York had jurisdiction to levy” under its fairly apportioned tax formula and opined the credit violates the dormant interstate commerce clause by singling out foreign corporations for discrimination if they fail to conduct more of their business in New York.101 The New Mexico State Legislature imposed an electrical energy generation tax at a rate of approximately 2 percent of the retail charge per net kilowatt-hour. In 1979, the U.S. Supreme Court in Arizona Public Service Company v. Snead invalidated the tax because the associated tax credit only could be used to reduce the gross receipts tax on in-state electricity sales and could not be employed by firms exporting electricity to sister states.102 The court’s opinion cited a provision in the congressional Tax Reform Act of 1976 specifically prohibiting discriminatory taxation against consumers in sister states in the generation of electricity.103 The West Virginia State Legislature levied a 0.27 percent gross receipts tax on the business of selling tangible property at wholesale but exempted West Virginia manufacturers who were subject to a 0.88 percent tax on the value of their products.104 This business and occupation tax was challenged by an Ohio corporation. The state argued the tax levied on its manufacturers was a compensating tax for the tax levied on out-of-state manufacturers. Judge Robert K. Smith Jr., of the West Virginia Circuit Court, Kanawa County, held the nexus between the state and the sales of Armco Incorporated was insufficient to support the levy of the tax. The decision was appealed and the West Virginia Court of Appeals reversed the lower court’s decision by upholding the constitutionality of the tax.105 The U.S. Supreme Court in 1984 rejected the compensating tax argument and opined that the tax violated the dormant interstate commerce clause because the tax failed the internal consistency test providing that the tax would not burden interstate commerce if sister states levied a similar tax, and specifically stated that “a state may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the state.”106 Justice William H. Rehnquist disagreed with the majority opinion: “It is perfectly proper to examine a State’s net income tax system for hypothetical burdens on interstate commerce. Nevertheless, that form of analysis is irrelevant to examining the validity of a gross receipts tax system based on manufacturing or wholesaling transactions. Where a State’s taxes are linked exactly to the activities taxed, it should be unnecessary to examine a hypothetical taxing scheme to see if interstate commerce would be unduly burdened.”107

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The Alabama State Legislature enacted a statute levying a substantially lower gross premiums tax rate on Alabama insurance companies compared to the rate levied on foreign insurance companies.108 The statute allowed the latter corporations to reduce but not eliminate the differential in the tax rate by investing in Alabama assets and securities. Judge H. Randall Thomas of the Circuit Court for Montgomery County ruled the statute was constitutional and did not violate the equal protection of the laws clause of the Fourteenth Amendment. The Alabama Court of Civil Appeals and the Alabama Supreme Court affirmed the trial court’s decision.109 In 1985, the U.S. Supreme Court, by a 5 to 4 vote, reversed the lower-court decisions and opined that “Alabama’s aim to promote domestic industry is purely and completely discriminatory, designed only to favor domestic industry within the state.”110 The court took cognizance of the McCarran-Ferguson Act of 1945 exempting the insurance industry from the restrictions of the interstate commerce clause, but added the industry is not exempt from the equal protection of the laws clause.111 Justice Sandra Day O’Connor—joined by Justices Brennan, Marshall, and Rehnquist—described the majority decision as “astonishing” and emphasized “our long-established jurisprudence requires us to defer to a legislature’s judgment if the classification is rationally related to a legitimate state purpose.”112 She emphasized the state’s classification of insurance companies is related rationally to a legitimate state policy and the McCarran-Ferguson Act was enacted to allow states to engage in economic protectionism with respect to regulation and taxation of the business of insurance. The Washington State Legislature employed a different tax scheme to discriminate against interstate commerce by providing that a manufacturer who sold products within the state and paid the wholesale tax was not subject to the manufacturing tax.113 The Superior Court, Thurston County, upheld the tax as constitutional and the Washington Supreme Court in 1986 affirmed the decision.114 The U.S. Supreme Court in 1987 opined the tax violated the interstate commerce clause and rejected the state’s contention that the imposition of the manufacturing tax on goods manufactured in the state and sold in sister states is valid as a compensating tax because the state failed to identify the burden that would be compensated for by the tax.115 A tax credit authorized by the Ohio General Assembly to encourage ethanol (ethyl alcohol) production by firms based in the state reached the U.S. Supreme Court in 1988. Acknowledging that direct subsidization of domestic firms generally does not violate the dormant interstate

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commerce clause, the justices ruled the tax was invalid because the tax credit was not accorded to out-of-state producers.116

Other Notable Decisions The U.S. Supreme Court in 1989 again addressed the tax apportionment question and rendered a significant decision differing from its Scheiner decision. The tax in question was a 5 percent tax levied by the 1985 Illinois State Legislature on interstate telecommunications originating or terminating in the state charged to an Illinois service address regardless of whether the call is an interstate or an intrastate one. A tax credit was authorized if the taxpayer offers proof a tax had been paid in a sister sate on the same call. Writing for the court, Justice Thurgood Marshall acknowledged in Goldberg v. Sweet an interstate telephone call could be subject to double taxation, but this possibility is an insufficient ground for invalidating the tax.117 He specifically explained that the Illinois tax differs from the flat taxes levied on trucks by Pennsylvania because the latter taxes burdened foreign truckers in contrast to the Illinois tax whose burden fell on an Illinois resident “who presumably is able to complain about and change the tax through the Illinois political process.”118 Emphasizing the interstate commerce clause is not designed to protect a state’s residents from taxes levied by their respective state legislature, he noted the number of miles traveled by domestic and foreign trucks on Pennsylvania highways could be determined whereas the precise path of electronic telephone signals can not be determined. The North Carolina General Assembly levied an intangibles tax apportioned on the basis of the fraction of the fair market value of the corporate stock owned by state residents inversely proportional to the corporation’s exposure to the state income tax.119 The Fulton Corporation challenged the tax, the Superior Court, Wake County, granted summary judgment for the defendant, the Court of Appeals reversed the decision, and the North Carolina Supreme Court reversed the appellate court’s decision and remanded the case.120 The corporation, domiciled in North Carolina, owned shares in six corporations and only one did business and earned income subject to the state’s corporate income tax. As a result, the corporation’s stocks in five corporations were subject to the intangible tax based on 100 percent of the value of the stock. The corporation also owned stock in Food Lion, Incorporated which conducted 46 percent of its business in North Carolina and, accordingly, the stock was subject to the intangible tax on 54 percent of its value.

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The decision of the North Carolina Supreme Court was appealed. The state justified the tax as a compensatory tax. The U.S. Supreme Court viewed the tax as facially discriminatory against interstate commerce and found the state had failed to demonstrate the “tax satisfies any of the three requirements for a valid compensatory tax.”121 Congress embarked on a program of economic deregulation of several industries by enacting preemption statutes commencing in the 1970s.122 The Natural Gas Policy Act of 1978 initiated the process of deregulation of this industry and in 1992 the federal energy regulatory commission completed the transition to deregulation.123 An important provision of the act allowed large industrial gas users to purchase gas from suppliers instead of public utilities, thereby reducing taxes on natural gas paid to states. In 1991, the New York State Legislature enacted a tax law designed to recapture the taxes that otherwise would be lost under deregulation.124 A 4.25 percent tax was levied on the price paid for the privilege of importing gas through pipes or mains or causing gas services to be imported for consumption in New York. The New York State Department of Taxation and Finance audited the financial records of the Tennessee Gas Pipeline Company and determined it had imported gas to New York, but paid the state’s privilege tax only for the period of 1991–96 and owed the state $1.6 million in taxes, interest, and penalties. The state attorney general agreed with the company’s argument that the tax discriminates against interstate commerce. The New York Court of Appeals, citing U.S. Supreme Court decisions, explained a tax that is facially discriminatory does not violate the dormant interstate commerce clause of the U.S. Constitution provided the tax “advances a legitimate local purpose that cannot adequately be served by reasonable nondiscriminatory alternatives.”125 The court, however, invalidated the tax on the ground it failed the internal consistency test since a credit was not provided for taxes assessed on the out-of-state purchase of the gas.126

SUMMARY AND CONCLUSIONS Tax barriers to commerce among the sister states were a feature of time period the Articles of Confederation and Perpetual Union were in effect. The court decisions examined in this chapter illustrate the ingenuity and complexity of state corporation taxation schemes and the use of certain schemes to increase the revenue of a state at the expense of sister states. Courts, including the U.S. Supreme Court, have opined interstate business firms with a nexus to a state can be taxed to cover their fair share of

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the expenses of a state. Courts of necessity have to balance a state’s need for revenue against any burden the state’s taxes place on the flow of commerce throughout the nation. Multistate and multinational corporations have a heavy tax burden placed on them by certain states, particularly ones employing the unitary system of taxation. Determining the proper method of taxing a nondomiciliary corporation engaged in interstate commerce in a particular state is a difficult task. Controversy also has swirled around the tax apportionment formulas utilized by states to determine the tax liability of nondomiciliary corporations. The unitary tax system employed by California has generated strong protests from foreign governments, yet the U.S. Supreme Court has upheld the system as constitutional. The court developed in Complete Auto Transit v. Brady a fourprong test to determine the constitutionality of a state unitary tax scheme, added two additional prongs in Japan Line Limited v. County of Los Angeles, and applied in Container Corporation of America v. Franchise Tax Board the two additional prongs to domestically owned subsidiary corporations engaged in foreign commerce. The principal defender of corporate taxpayers against unfair interstate tax revenue competition is the judiciary. The U.S. Supreme Court has noted it acts “as a defense against state taxes, which, whether by design or inadvertence, either give rise to serious concerns of double taxation, or attempt to capture tax revenues that, under the theory of the tax, belong of right to other jurisdictions.”127 The court also declines to assume the responsibility for mandating a specific system of state taxation of interstate commerce and opines that Congress possesses plenary authority to regulate state taxation of such commerce. Barclay’s Bank PLC v. California Franchise Board revealed the reluctance of the court to address political issues by noting the political branch, Congress, is better able to address them. The corporation income tax levied on alien and foreign corporations does not comport well with three of Adam Smith’s maxims as the tax does not always fall equally on these corporations compared to domestic corporations, may be arbitrary to an extent, and can be costly to enforce. In addition, the compliance costs of corporations may be high. Evidence reveals that states will continue to design taxes that can be exported in part to alien and foreign business firms and consumers in sister states. The invalidation by a court of tax exportation schemes of a state simply encourages the concerned state to seek to develop a new tax that can survive judicial scrutiny. Chapter 6 examines interstate competition to escheat property, tax the estates of wealthy decedents, and export taxes.

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Chapter 6

Escheats and Tax Revenue Competition

T

he role of the U.S. Supreme Court in settling disputes between states over escheats (unclaimed property) and tax resources is highlighted in this chapter. Escheats of real property date to the feudal period in England and were a source of revenue for the Crown and feudal lords. The Crown granted title to land to lords who in term made smaller land grants to individual tenants. Should a tenant die without heirs, the estate escheated to the lord who could grant the land to a new tenant. In the event that a lord died without an heir, his estate escheated to the Crown. Today, property is escheated if a person dies intestate and without an heir. The newly established states subsequent to the Declaration of Independence adopted the English common law including its provisions relating to escheats. States later extended escheats to personal property including intangible property (bonds and stocks) that has proven to be a more important source of revenue than escheated real property. The twentieth century witnessed an exponential increase in intangible personal property and interstate disputes involving conflicting claims to the same unclaimed property developed. Responding to these disputes, the National Conference of Commissioners on Uniform State

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Laws, organized in 1892, drafted the Uniform Disposition of Unclaimed Property Act in 1954 and amended it in 1966. Thirty-two state legislatures enacted one form of the act. In 1981, the commissioners drafted the Uniform Unclaimed Property Act to harmonize the uniform law with the decision of the U.S. Supreme Court in Texas v. New Jersey (see section below) and revised the act in 1995.1 To date, twelve state legislatures enacted the revised uniform act including Alaska, Arizona, Indiana, Kansas, Louisiana, Missouri, Montana, and New Mexico that replaced their respective 1981 act with the 1995 act.2 The U.S. Supreme Court resolved three interstate controversies involving escheated property by establishing a primary rule and a secondary rule for escheating such property. In addition, the court issued opinions in three interstate suits involving which state has the authority to tax each estate. The justices also adjudicated five interstate taxation controversies involving tax exportation and one controversy involving a charge that an Oklahoma statute caused Wyoming to lose tax revenue.

INTERSTATE ESCHEATS SUITS Real and intangible property can be escheated only to state governments as the U.S. Constitution does not delegate authority to Congress to escheat unclaimed property. All state legislatures have enacted an escheat or unclaimed property statute stipulating dividends, electronic gift certificates, gift certificates, interest, mineral rights, payroll checks, real property, royalties, security deposits, securities, and wages not claimed by the owners within a specified time period are deemed abandoned and the title to the property reverts to the state.3 Business firms, individuals, and other entities are required by law to file annually with a designated state officer a report on abandoned property, and to notify in writing the owner of the abandoned property at his or her recorded address. Reciprocal agreements with sister states authorize firms and individuals holding abandoned property to include in their annual reports any property falling under the jurisdiction of a reciprocal agreement state.4 Tennessee, for example, has reciprocity agreements with Arkansas, Florida, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Rhode Island, Virginia, and Washington.5

Texas v. New Jersey Texas filed with the U.S. Supreme Court a bill complaint in equity against New Jersey, Pennsylvania, and the Sun Oil Company seeking an

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injunction and declaration of rights with respect to which state has jurisdiction to take title to specified abandoned intangible personal property through escheat. The properties in dispute were numerous small debts totaling $26,461.65 resulting from the failure of creditors to claim or cash checks. The company was incorporated in New Jersey and the disputed properties were evidenced on the books of the company’s two Texas offices or owed to individuals whose last known address was in Texas. Pennsylvania claimed the right to escheat the property on the ground the principal business offices of the Sun Oil Company are located in the state. The court in 1965 adjudicated the interstate controversy by developing two explicit rules governing a state’s right to take title to unclaimed property.6 The primary rule stipulates the abandoned property “is subject to escheat only by the state of the last known address of the creditor as shown by the debtor’s books and records.”7 The secondary rule awards the right to escheat abandoned property where there is no last known address of the creditor to the debtor’s state of corporate domicile subject to a claim by a state with a superior right to escheat under the primary rule.

Pennsylvania v. New York In 1972, the U.S. Supreme Court adjudicated the competing claims of New York and Pennsylvania for certain proceeds of the Western Union Company attributable to its inability to contact the payees of money orders or to refund the money to the senders due to the fact the company did not record addresses of the senders.8 In general, the court’s primary rule is not applicable to the disputed funds because the payees’ addresses are unknown. A number of states maintained application of the secondary rule in this case would result in the Western Union Company’s state of domicile receiving a considerably larger proportion of the unclaimed funds. In consequence, they recommended adoption of a rule authorizing the state or the place of purchase of the money orders to escheat under the primary rule. The majority opinion, however, accepted the special master’s recommendations and did not deviate from the two rules established in its 1965 decision: We think that as a matter of fairness the claimant States, and not Western Union, should bear the cost of finding and recording the available addresses, and we shall remand to the Special Master for a hearing and recommendation as to the appropriate formula for distributing those costs. As for future money order

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Justices Lewis F. Powell, Harry Blackmun, and William Rehnquist dissented, maintained the search for the last-known address of each creditor probably would be fruitless, and opined that“reliance should be placed upon the State where the debtor-creditor relationship was established. In most cases that State is likely also to be the site of the creditor’s domicile.”10 Congress examined the problem and enacted the Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974, specifically excluding third party bank checks and other intangibles.11 The act also stipulates the state of the originator of the money orders, traveler’s checks, or both is entitled to escheat them if there is no known last address of the purchaser and the state of incorporation of the issuer of a money order or traveler’s check is not entitled to escheat.

Delaware v. New York Delaware filed a motion in the U.S. Supreme Court seeking leave to file a bill of complaint against New York that escheated $360 million in unclaimed dividends, interest, and other securities allegedly belonging to Delaware. The court, in conformance with its customary practice, appointed a special master who collected and analyzed relevant facts. He recommended that the court should award to the state in which the principal executive offices of the securities issuers are located the right to escheat funds belonging to beneficial owners who either cannot be identified or located. Delaware and New York each filed exceptions to this recommendation. The majority opinion did not accept this recommendation by holding its 1965 precedent mandated the state in which the intermediary holding the securities is located possesses the right to escheat funds belonging to persons who cannot be located.12 In remanding the case to the special master the court held that “if New York can establish by reference to debtors’ records that the creditors who were owed particular securities distributions had last known addresses in New York,” its right to escheat under the primary rule supersedes Delaware’s right under the secondary rule.13

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Justice Byron White, joined by Justices Harry Blackman and John Paul Stevens, dissented and argued the special master’s report was based on the court’s precedents and contained “a much superior approach and more equitable result than does the Court.”14 In 1995, Suellen M. Wolfe wrote: “The Court’s decision in Delaware v. New York is perplexing, because the decision ignores the fact that the Court has found state compliance with due process requirements in analogous areas of taxation, when states have imposed taxes on intangible property owned by entities not incorporated in the taxing state.”15 To resolve interstate controversies, she proposed: “The $100 million a year generated by securities transactions that become undistributable to owners should be distributed to the states identified in the securities records by dividing the amount pro rata between the states of incorporation and commercial domicile of both the issuer and the holder. This method of distribution reflects the commercial activities giving rise to the distribution. The rule should be implemented as federal common law. States should pass legislation to facilitate and to correspond to the federally imposed escheat process.”16

INTERSTATE TAXATION CONTROVERSIES States have been involved in taxation controversies that may be placed in three general classes: Taxation of estates, other forms of taxation, and loss of tax revenues allegedly attributable to the action of a sister state. The U.S. Supreme Court has adjudicated four estate tax controversies including two involving the same estate. Other controversies involved commuter personal income taxes, a state general property tax, a severance tax levied on off-shore natural gas, and retaliatory highway use taxes. One case involved the loss of tax revenue as the result of an action initiated by another state.

Estate Tax Disputes Congress levied an estate tax on several occasions: 1798–1802, 1861–1870, 1898–1902, and 1926 to date. The Pennsylvania General Assembly in 1825 was the first state legislative body to levy an estate tax and all states except Nevada subsequently enacted such a tax. An estate tax is always accompanied by a gift tax in order to prevent the loss of state revenue through large gifts prior to the death of a wealthy individual. Coordination of the federal and state estate taxes became essential.17

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The U.S. federal system automatically allows multiple state taxation of the income of business firms operating in two or more states, individuals deriving income from two or more states, and intangible property (bonds and stocks) held by estates (see chapters 4–5). The U.S. Supreme Court ruled the due process of law clause of the Fourteenth Amendment to the U.S. Constitution permits only the state of situs to tax real property and tangible personal property held by an estate.18 The fact the laws of the various states do not incorporate a uniform definition of domicile makes determination of the state of situs difficult. In addition, the court opined the intangible property of estates may be taxed by more than one state as such property is siteless.19 Uniformity in state taxation of the estates of decedents was lacking in the mid-1920s when Congress inserted a tax credit in the Revenue Act of 1926 to encourage each state legislature to enact a uniform inheritance and estate tax based upon the federal inheritance and estate tax.20 Taxpayers would be required to pay the national estate tax and the state estate tax if a state legislature failed to enact an estate tax linked to the national estate tax. Enactment of such a tax by a state legislature, however, automatically generated an 80 percent credit against the national inheritance and estate tax for a similar inheritance and estate tax paid to a state. The incentive in the national law promoted more uniformity in state inheritance and estate taxation, but did not eliminate controversies over the legal domicile of a number of decedents who left large estates. Pressure had been building for years to eliminate the national tax. Congress in 2001 reduced the maximum estate tax rate, increased the exemption from the tax from $1,000,000 in 2002 to $3,500,000 in 2009, reduced the credit for state death taxes paid from 75 percent in 2002 to 25 percent in 2004, replaced the credit with a tax deduction effective in 2005, and eliminated the tax in 2010.21 However, the elimination is for 2010 only and the tax is scheduled to return at rate for 55 percent on estates exceeding $675,000 in 2011. Twenty state legislatures, following the congressional action in 2001, reenacted an estate tax.22 In 1937, the Supreme Court held the U.S. District Court possesses no jurisdiction to resolve a controversy over the domicile of a decedent because it is a state and not federal common law concept, a dispute between states over the decedent’s domicile does not involve diversity jurisdiction under the Federal Interpleader Act of 1936, and the Eleventh Amendment prevents the court from entertaining a suit praying for restraint of state action.23 As a result, the only possible remedy for an interstate dispute involving a decedent estate is the filing of a motion in the U.S. Supreme Court by a state seeking permission to file a bill of

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complaint in equity against a sister state. It should be noted the court invokes its original jurisdiction sparingly on a discretionary basis.24 Texas v. Florida et al. An original jurisdiction suit was brought in the form of a bill of interpleader for the determination of the legal domicile of decedent Edward H. R. Green who died in Lake Placid, New York, in 1936. The Supreme Court on March 15, 1937, granted the motion of Texas for leave to file a bill of complaint in equity against Florida, Massachusetts, New York, the decedent’s wife, and her sister. The bill of complaint contended decedent Green left a gross estate of $44,348,500 and a net estate of $42,348,500 in the form of real property and tangible personal property in Florida, New York, Massachusetts, and Texas with a total value of $6,500,000, and intangible personal property—bonds, stocks, and other securities—with most intangibles located in New York. The plaintiff state asserted the decedent was domiciled in Texas at the time of his death, but the other three states each responded the decedent was domiciled in its state. The bill additionally reported each defendant state planned to tax the estate of the decedent within the state on the claim that he was domiciled in the state at the time of his death. Each state claimed a lien for taxes and the authority to collect the tax with total claims exceeding the net value of the estate with the result the decedent’s property in Texas was insufficient to pay its tax. The three defendant states admitted the insufficiency of the decedent’s estate to pay all of the claimed taxes and rejected the claim the decedent was domiciled in Texas. Each defendant state by cross-bill against the other defendant states asserted the decedent was domiciled in it, thereby legally entitling it to collect taxes on all of the decedent’s intangible and tangible property within the state. The court appointed a special master who found the decedent was domiciled in Massachusetts at the time of his death and supported this conclusion with elaborate subsidiary findings. The case returned to the court on exceptions to the special master’s conclusions of fact and subsidiary findings. The justices first explained they had a duty to determine whether the controversy was one within the court’s jurisdiction and that prior to ratification of the U.S. Constitution courts exercised their powers to avoid the risk of loss flowing from the demands of rival claimants to the same debt. The following conclusion was reached: When, by appropriate procedure, a court possessing equity power in such circumstances is asked to prevent the loss which might otherwise result from the independent prosecution of

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The court accepted the special master’s findings of fact and conclusion that Green was domiciled in Massachusetts at the time of his death and added it was not necessary to offer an explanation beyond the following basic facts. Green was born in England and educated in New York and Vermont public schools and Fordham University prior to his mother sending him in 1892 to Texas to foreclose a mortgage on a railroad which he subsequently managed until 1911. He visited Texas twice a year from 1911 to 1921, once a year between 1922 and 1927, and his last visit was in 1935. He resided in a hotel or bachelor apartment or rented a room while in Texas. His best Dallas residential furniture was shipped to New York in 1911. Nevertheless, he described Terrell, Texas, as his domicile in his 1908 will and 1917 marriage license, and he declined in 1922 to consider seeking election to the United States House of Representatives from Massachusetts on the ground he was a resident of Texas and similarly declined to be available for appointment as a Federal Radio Commissioner from New England because he was a former Republican National Committeeman from Texas and resided in New England only during the summer months. The court determined Green never registered to vote in New York, spent a part of each summer since 1917 near Round Hills, Massachusetts, where he constructed a $6,699,000 residential estate and spent more time (averaging nearly six months each year) there than in any other state commencing in 1921 until his death. Special furniture was constructed for the new house and his New York City furnishings were moved to Round Hills. Green’s medical doctor in 1923 advised him to spend the winter in Florida for health reasons and he did so. Florida’s claim to have authority to tax Green’s estate is attributable in part to Green occasionally speaking to friends and referring to Florida as his home even though he had been advised in 1921 and 1933 to change his legal domicile from Texas to Florida. The court opined: “Residence, in fact, coupled with the purpose to make the place of residence one’s home, are the essential elements of domicile.”26 The majority opinion concluded that Green did not have a

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place of residence in Texas after 1911 and evidence was lacking of an intention to make New York City or Florida his permanent home. Justice Felix Frankfurter, joined by Justice Hugo L. Black, dissented: “Texas has no standing here except on the basis that three state courts will despoil her of her rights by leaving no assets in the estate out of which to satisfy her claim” and the fact that four states claim the right to tax the estate “is hardly a substantial reason for assuming that their judiciaries will sanction the claims.”27 Frankfurter also emphasized the various factors severally determining domicile, depending on their mixture, may accord domicile to one state rather than another state. He was particularly critical of the application of the device of interpleader to qualitatively difference circumstances: To settle the interests of different claimants to a single res where these interests turn on narrow and relatively few facts and where conflicting claims cannot have equal validity in experience, is one thing; it is a wholly different thing to bring into court in a single sit all states which even remotely might assert domiciliary claims against a decedent and where one state court might with as much reason as another find domicile within its state. Certainly when the claim of the moving state is so obviously without basis as this Court has now found in the case of Texas, the linchpin of jurisdiction is gone and the other states should be remitted to appropriate remedies outside this court. Such a disposition would be a real safeguard against the construction of a suit to give this Court jurisdiction over matters which as such, this Court has already held, are not within our province.28 Frankfurter concluded his dissent by opining the majority’s decision will lead to similar litigation in the future, including suits extending beyond this case’s unique facts. Massachusetts v. Missouri. The Commonwealth of Massachusetts filed a motion in the U.S. Supreme Court for leave to file a complaint in equity against Missouri and several of its citizens relative to the authority of each state to impose an inheritance tax on the transfers of the same property. Missouri, in its response brief, rejected the Massachusetts claims and added they had no cause to show. The complainant and individual respondents maintained the high court has jurisdiction over the controversy, but Missouri disagreed. Massachusetts contended there are two grounds for the court to exercise jurisdiction: A controversy exists

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between two states and a controversy exists between a state and citizens of a sister state. Each state levied an inheritance tax. Massachusetts levied the tax on intangibles only if owned by residents of the Commonwealth and Missouri exempted from the tax intangibles owned by nonresidents residing in sister states extending reciprocity to Missouri residents. Madge B. Blake, a Massachusetts resident, died in 1935 and left an estate in the Commonwealth totaling $12,646.02. In addition, she had established three trusts composed of securities valued at $1,850,789.77 under the control of trustees residing in Missouri. The court rejected the motion to file a bill of complaint in equity on the ground the bill does not involve a justiciable controversy between the two states. The justices opined: “To constitute such a controversy, it must appear that the complaining State has suffered a wrong through the action of the other State, furnishing ground for judicial redress, or is asserting a right against the other State which is susceptible of judicial enforcement according to the accepted principles of the common law or equity systems of jurisprudence.”29 They also concluded Missouri did not cause injury to Massachusetts by collecting taxes from the respondent trustees and the claims of the two states are not mutually exclusive. Massachusetts also argued a controversy had arisen with respect to the enforcement of the reciprocal statutes of the party states. The court rejected this argument by observing there is no agreement or compact between the two states sanctioned by Congress and “the enactment by Missouri of the so-called reciprocal legislation cannot be regarded as conferring upon Massachusetts any contractual right. Each State has enacted its legislation according to its conception of its own interests. Each State has the unfettered right at any time to repeal its legislation.”30 The court similarly was unsympathetic with Massachusetts’ argument that its residents are entitled to the immunity contained in the Missouri statute “as Massachusetts may not invoke our jurisdiction for the benefit of such individuals.”31 The court concluded its opinion by explaining Massachusetts is not without an adequate remedy as it may bring a suit against the trustees either in a Missouri court or in the United States District Court in Missouri.32 California v. Texas. The most prominent estate tax dispute to reach the U.S. Supreme Court involved the legal domicile of decedent Howard Hughes. In 1978, the court summarily denied the motion of California to file a bill of complaint in equity against Texas by holding the interstate controversy over the domicile of Hughes did not constitute a justiciable interstate controversy and the dispute should be litigated in state

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courts.33 Justice William Brennan, however, in a concurring opinion explained he was uncertain whether the court’s 1939 decision in Texas v. Florida was decided wrongly, but nevertheless would deny California’s motion because of the possibility the Hughes estate may be able to obtain a U.S. District Court judgment under the Federal Interpleader Act of 1936 binding on the two states.34 He acknowledged the possibility he might favor such a motion if a statutory interpleader action cannot or is not brought. Justice Potter Stewart, joined by Justices Lewis F. Powell and John Paul Stevens, wrote a concurring opinion explaining he joined in the order denying California’s motion because he was convinced the 1939 Texas v. Florida decision should be overruled as it was wrongly decided. The gravamen of the complaint was that judgments favoring the levying of Texas and U.S. inheritance taxes would exceed the net value of the estate and should California courts determine Hughes was domiciled in the state it would have a valid tax judgment that would be uncollectible. California sought to invoke the court’s original jurisdiction on the ground that it is the only forum capable of determining the domicile of decedent Hughes, and the court’s 1939 Texas v. Florida decision involved a bill of interpleader that led the court to find the controversy was ripe for decision. The opinion also noted the basic facts alleged in the complaint “are indistinguishable in all material respects from those on which jurisdiction was based in Texas v. Florida.”35 Justice Stewart wrote he understood the court’s willingness to accept the interpleader analogy “in the context of the then state of the law governing multiple taxation of intangibles.”36 He explained the facts provided the basis for two separate law suits with one involving the proper division of a specific sum of money and the second a interpleader to settle the question of the domicile of the decedent for taxation purposes. Fairness for the estate is an important criterion. Both states may impose the tax, but the dispute is the result of the fact that one state may obtain a judgment for a valid but uncollectible tax. Stewart concluded “it is not at all clear . . . that the injury threatened here—essentially that one State will be left with an uncollectible judgment because another State has exhausted a debtor’s funds— would be sufficient to justify the exercise of this Court’s original jurisdiction even if the injury actually occurred.”37 The court in 1982 granted the motion of California to file a bill of complaint against Texas to settle the controversy over Hughes’s domicile in view of the lack of an alternative forum and a finding the controversy was ripe for a decision.38 Hughes’s estate accepted the suggestion of the four concurring justices in the 1978 decision and sought a determination

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of the domicile of Hughes by filing an interpleader action in the U.S. District Court. California’s motion was accompanied by a petition for the issuance of a writ of certiorari in Cory v. White requesting a review of the decision of the U.S. Court of Appeals for the Fifth Circuit holding the Federal Interpleader Act provided a jurisdictional basis for resolving the interstate dispute.39 The U.S. Supreme Court opined that the act does not confer jurisdiction on the U.S. District Court to resolve inconsistent inheritance tax claims because the Eleventh Amendment to the U.S. Constitution bars such a suit. The court explained each state may levy an inheritance tax on intangibles owned by a decedent domiciled in the state and the law of each state stipulates a person may have only one domicile. California referred to the court’s 1939 decision in Texas v. Florida involving the claims of four states to tax the estate of Edward H. R. Green. The court noted the concurring opinion of four justices in its 1978 decision to the effect the federal interpleader statute might make unnecessary invocation of the court’s original jurisdiction. The majority opinion also cited several uncertainties at the time of the decision, including the then pending claim of the Hughes Medical Institute that it had found a lost will leaving the entire estate to it and the contention that the so-called Mormon will was valid. The Nevada Supreme Court and the Texas Probate Court rejected the first claim, and a jury rejected the second will. Hence, the five majority justices opined “our original jurisdiction is properly invoked under Texas v. Florida.”40 Justice Lewis F. Powell issued a strong dissent and was joined by Justices Thurgood Marshall, William Rehnquist, and John Paul Stevens. “The mere possibility of inconsistent state determinations of domicile, resulting in a still more remote possibility of the estate being insufficient to satisfy the competing claims, simply does not give rise to a case or controversy in the constitutional sense.”41 In addition, the dissenters argued the court was not entitled to base its invocation “of original jurisdiction on an ‘analogy’ between the original action and ‘a bill in the nature of interpleader.’”42

INTERSTATE TAXATION DISPUTES Other controversies involved the determination of the precise boundary line between two states for taxation purposes, an electrical energy tax, a commuter income tax, a first-use tax levied on natural gas, and a requirement coal-fired electric power generating stations must burn a mixture of coal including a minimum of 10 percent of coal mined in the

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state. These types of interstate taxation controversies typically involve a tax credit.

Iowa v. Illinois The key issue in this boundary dispute was the question of whether Iowa or Illinois had jurisdiction to tax two bridges owned by the Koekuk & Hamilton Bridge Company, which complained of double taxation. The enabling statutes admitting the Territory of Illinois and the Territory of Wisconsin into the Union as states employed the boundary terms “middle of the Mississippi River” and “the center of the main channel of that river, respectively.” The enabling statutes admitting Missouri and Iowa into the Union as states employed the term “middle of the main channel of the Mississippi River” as the boundary line. Iowa in its bill of complaint contended the boundary line is the middle of the main body of the river and Illinois in its response brief argued the boundary line is the middle of “the steamboat channel” of the river regardless of whether it was on one side or the other side of the river. Iowa maintained that prior to the Treaty of 1763—between Great Britain, France, and Spain—Iowa was under the dominion of France and Illinois was under the dominion of Great Britain, with the middle of the river serving as the boundary line between British and French territories. The Illinois territory, under the Treaty of 1783 between Great Britain and the United States, passed to the United States, and Iowa became part of the United States by the Treaty of 1803 involving the latter’s purchase of the Louisiana territory. Iowa alleged Illinois taxed all bridges and other structures in the river from the shore of Illinois to the middle of the steamboat channel. Iowa commenced to tax bridges and other structures to the middle of the main body of the river after the Supreme Court of Iowa in Dunlieth & Dubuque Bridge Company v. County of Dubuque held Iowa authorities had the power to tax structures only to the middle of the main body of the stream.43 The U.S. Supreme Court cited international law holding the middle of a navigable river is the middle of the channel and the term was so employed in the Treaty of 1763.44 The justices ruled the right of navigation on the river is common to both states and explained that the supreme court of each state considered the issue of the boundary line with the Illinois Supreme Court in a case involving Missouri, opining that “the space within which ships can and usually do pass” is the same as middle of the river.45 The U.S. Supreme Court held the opinions by the two state supreme courts to be able ones and added: “The reason and necessity of the rule of international law as to the mid-channel being the

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true boundary of a navigable river separating independent states may not be as cogent in this country, where neighboring states are under the same general government, as in Europe, yet the same rule will be held to obtain unless changed by statute or usage of so great a length of time as to have acquired the force of law.”46 The justices consequently declared that the boundary line between the two states “is the middle of the main navigable channel of the Mississippi River.”47 Each state desired a precise determination of the boundary line where each of nine bridges cross the river. The court ordered the appointment of a commission to ascertain the boundary line at each bridge and report its findings to the court for its further action.

Arizona v. New Mexico Arizona filed a motion for leave to file a bill of complaint in equity in the U.S. Supreme Court asking for declaratory relief from the allegedly unconstitutional New Mexico electrical energy tax that constitutes a burden on interstate commerce, denies its citizens due process of law and equal protection of the laws in violation of the Fourteenth Amendment to the United States Constitution, and abridges the privileges and immunities guaranteed by art. 4, sec. 1 of the Constitution. The plaintiff state and its citizens are consumers of electrical energy produced in New Mexico by three Arizona chartered public utilities that operate generating facilities in New Mexico. Private investors own two of the utility companies and the third, Salt River Project Agricultural Improvement and Power District, is a political subdivision of Arizona. The New Mexico State Legislature in 1975 enacted a tax on the generation of electricity at the rate of four-tenths of a mill for each kilowatthour generation.48 The tax facially is nondiscriminatory. The three Arizona utilities retail electrical energy via interstate lines to only Arizona consumers and do not incur a tax liability to New Mexico for its gross receipts tax, which is levied at the point of retail sale. A tax credit was at the core of the dispute. A section of the New Mexico Statutes Annotated stipulates: “On electricity generated inside this state and consumed in this state which was subject to the electrical energy tax, the amount of such tax paid may be credited against the gross receipts tax due this state.”49 New Mexico conceded the Arizona chartered public utilities are not eligible for the tax credit since their electrical energy sales are outside New Mexico. In effect, the statute imposes a maximum tax of 4 percent on electricity generated in the state. Arizona brought its suit in its proprietary capacity as a major consumer of New Mexico–generated electrical energy and as parens patriae

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for its citizens who consume the New Mexico–generated electricity. The complaint alleged the electricity generating tax discriminates against Arizona citizens by imposing on them a burden not imposed on New Mexico citizens as the result of the tax credit provision. Arizona also asserted there was no other forum in which it could assert its claims. The three Arizona chartered public utilities decided not to pay the New Mexico tax and sought a declaratory judgment in the District Court for Santa Fe County, New Mexico. The U.S. Supreme Court repeated its earlier statement indicating its original jurisdiction would be invoked sparingly and, in light of the facts in the case, opined: “If on appeal the New Mexico Supreme Court should hold the electrical energy tax unconstitutional, Arizona will have been vindicated. If, on the other hand, the tax is held to be constitutional, the issues raised now may be brought to this court by way of direct appeal under 28 U.S.C. §1257(2).”50 In a concurring opinion, Justice John Paul Stevens wrote that Arizona consumers of the New Mexico–generated electrical energy do not have standing to challenge the tax in the absence of evidence that the tax has an impact on the rates they pay, and emphasized that Arizona did not allege such an impact.51

Pennsylvania v. New Jersey et al The U.S. Supreme Court combined two suits in one 1976 decision: Pennsylvania (original action No. 68) sought to sue New Jersey, and Maine, Massachusetts, and Vermont (original action No. 69) on parens patriae grounds sought to sue New Hampshire by filing motions for leave to file bills of complaint invoking the court’s original jurisdiction.52 Pennsylvania complained the New Jersey Transportation Benefits Tax Act violated the privileges and immunity clause and the equal protection of the laws clause of Fourteenth Amendment to the U.S. Constitution.53 The complaining states relied on the court’s 1975 decision in Austin v. New Hampshire holding the New Hampshire commuters’ income tax law unconstitutional as violative of the privileges and immunities clause of the U.S. Constitution.54 The law levied a 4 percent tax on New Hampshire–derived income of nonresidents, imposed a similar tax on income earned by New Hampshire residents outside the state, and exempted the latter income from the tax if the income either was taxed or not taxed by the state where it was derived. The net effect of the tax law was to tax only the income of nonresidents working in New Hampshire because the state does not tax the domestic earned income of its residents. The plaintiff’s state of residence, Maine, provided a tax credit for income taxes paid to other states. The New Hampshire tax in

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effect did not affect the tax liability of Maine residents working in New Hampshire, but diverted to New Hampshire tax revenues that otherwise would flow to the Maine treasury. Pennsylvania asserted the New Jersey tax violated the privileges and immunities clause, as interpreted by the court in Austin v. New Hampshire, and the equal protection of the laws clause of the Fourteenth Amendment. The two tax situations were similar. New Jersey, in common with New Hampshire, did not tax the domestic income of its residents at the time, but did tax the income of nonresidents. The New Jersey tax exempts income earned by residents outside the state to the extent the state of income origin taxes the income. Pennsylvania, in common with Maine, permitted a tax credit to residents for income taxes paid to other states, and sought “declaratory and injunctive relief and, apparently, an accounting for the taxes that New Jersey’s allegedly unconstitutional tax has diverted from the Pennsylvania treasury.”55 Maine, Massachusetts, and Vermont premised their suit on the court’s decision in Austin v. New Hampshire and sought an accounting for the alleged more than $13.5 million diverted from their respective state treasuries to the New Hampshire state treasury. The court explained again a plaintiff state must demonstrate a wrong was caused directly by the action of another state and concluded: “In neither of the suits at bar has the defendant State inflicted any injury upon the plaintiff States through the imposition of the taxes held, in No. 69, and alleged, in No. 68 to be unconstitutional. The injuries to the plaintiffs’ fiscs were self-inflicted, resulting from decisions by their respective state legislatures. Nothing required Maine, Massachusetts, and Vermont to extend a tax credit to their residents for income taxes paid to New Hampshire, and nothing prevents Pennsylvania from withdrawing that credit for taxes paid to New Jersey. No State can be heard to complain about damage inflicted by its own hand.”56 The justices addressed Pennsylvania’s parens patriae claim against New Jersey by recognizing the legitimacy of such suits, but emphasized: “It has, however, become settled doctrine that a State has standing to sue only when its sovereign or quasi-sovereign interests are implicated and it is not merely litigating as a volunteer the personal claims of its citizens.”57 The court determined Pennsylvania’s sovereign or quasi-sovereign interests were not implicated and the suit was simply a collection of private suits for taxes against New Jersey for taxes it withheld from private persons.58 In a concurring opinion, Justice Harry Blackman quoted his 1975 “lonely dissent” in Austin v. New Hampshire that the reason Maine appellants paid “a New Hampshire tax is because the Maine Legislature,

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the appellants’ own duly elected representatives, has given New Hampshire the option to divert this increment of tax (on a Maine resident’s income earned in New Hampshire) from Maine to New Hampshire, and New Hampshire willingly has picked up that option” and highlighted the fact the court in the present case recognized the injuries were self-inflicted.59

Maryland v. Louisiana Eight states filed a motion for leave to file a bill of complaint in equity under the Supreme Court’s original jurisdiction seeking a declaratory judgment that Louisiana’s first-use tax on certain uses of natural gas brought into the state not previously taxed by a state or the United States was unconstitutional.60 The taxation statute authorized specified exemptions from and credits for the tax of seven cents per thousand cubic feet of natural gas. The tax, according to the Louisiana State Legislature, was designed to (1) reimburse residents of the state for damages to its water-bottoms barrier islands and coastal area, and the costs of protecting the areas, and (2) equalize competition between Louisianaproduced gas, which was subject to the state severance tax of seven cents per thousand cubic feet, and the cost of gas produced in other areas not subject to a severance tax. Louisiana asserted that the case should be dismissed in view of the fact that the tax is imposed directly on pipeline companies and not on consumers, and hence does not involve concerns of state sovereignty justifying exercise of the court’s original jurisdiction. The court wrote a lengthy justification for the invocation of its original jurisdiction and concluded that the present case was indistinguishable from its 1923 decision in Pennsylvania v. West Virginia, holding unconstitutional a West Virginia statute requiring natural gas producers in the state to supply local customers prior to shipping gas in interstate commerce and this decision advised that the court should not dismiss the motion for leave to file a bill of complaint in equity.61 Also rejected was Louisiana’s assertion, citing Illinois v. City of Milwaukee, that the case is an inappropriate one for the court to exercise its original jurisdiction because of pending lawsuits in the state concerning the same constitutional questions.62 The justices explained the proposed Illinois v. City of Milwaukee suit “against four municipalities did not fall within our exclusive grant of original jurisdiction because political subdivisions of the State could not be considered as a State for purposes of 28 U.S.C. §125(a).”63 In addition, Louisiana cited the court’s decision in Arizona v. New Mexico, denying Arizona’s motion for leave to file a bill of complaint

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challenging New Mexico’s electrical energy tax.64 The court’s opinion acknowledged that there was a facial similarity between the present case and the earlier case, but explained there were significant differences including the facts one of three electrical energy companies was a political subdivision of Arizona, the state had not suffered a wrong, and the New Mexico tax did not affect all residents of Arizona. Furthermore, the justices stressed the court’s exercise of original jurisdiction was supported by the Louisiana tax impact on the interests of the United States in its administration of the outer continental shelf, a factor not present in the electrical energy tax dispute. The plaintiffs also argued the Louisiana first-use tax violated the supremacy of the laws clause of the Constitution because the tax intrudes on national regulation of the interstate transportation and sale of natural gas and specifically violates the Natural Gas Act as amended by the Natural Gas Policy Act of 1978.65 The court agreed with the plaintiffs that section 1303 of the Louisiana act interferes with the authority of the federal energy regulatory commission to determine the allocation of costs involved in the sale of natural gas to consumers.66 Furthermore, the plaintiff states contended the Louisiana first-use tax violated the interstate commerce clause of the constitution, but the latter state responded the flow of gas in interstate commerce is broken by the taxable uses within the state that are local events. The majority opinion rejected this argument by holding the tax “unquestionably discriminates against interstate commerce in favor of local interests as the necessary result of various tax credits and exclusions.”67 They also declared the tax can not be supported as a compensatory tax, which provides equality of taxation of local and interstate commerce, in spite of Louisiana’s claim the tax compensates for the effect of its severance tax on local production of gas. In addition, the state has no sovereign entitlement for compensation resulting from the severance of natural gas from the United States owned outer continental shelf.68 The court earlier rejected Louisiana’s claim to rights in the lands, minerals, and other things underlying the Gulf of Mexico along the Louisiana coast twentyfour miles seaward of the three-mile limit.69 The lone dissenter was Justice William Rehnquist who admitted the interstate controversy falls within what he termed the literal terms of the constitutional and statutory grant of original jurisdiction, but argued the “plaintiff states have not . . . established the ‘strictest necessity’ required for invoking this Court’s original jurisdiction.”70 In his opinion, original jurisdiction cases encroach on the paramount appellate role of the court, and the ends of justice would be better achieved by a trial in a lower court than by what amounts to a trial conducted by a

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special master. He also maintained the court should follow the general rule that a state’s claim is insufficient to invoke the court’s original jurisdiction if the “claim is indistinguishable from the claim of any other private consumer,” and warned “there will be the strongest temptation for various interest groups within the State to attempt to bring an action in the name of the State in order to make an end run around the barriers of time and delay which would confront them if they were merely private litigants.”71 In a concurring opinion, Chief Justice Warren Burger held: “There is much validity in Justice Rehnquist’s dissenting opinion, and it should keep us alert to any effort to expand the use of our original jurisdiction. However, I am satisfied that the Court’s resolution of this case is sound, and I therefore join the Court’s opinion.”72

Connecticut, Massachusetts, and Rhode Island v. New Hampshire The New Hampshire General Court (state legislature) in 1991 imposed a 0.64 percent statewide ad valorem real property tax on the Seabrook Nuclear Power Plant jointly owned by one New Hampshire public utility and eleven public utilities in Connecticut, Massachusetts, and Rhode Island.73 Connecticut, Massachusetts, and Rhode Island filed a motion in the U.S. Supreme Court for leave to file a bill of complaint in equity against New Hampshire and contended that the tax and its related tax credit violated (1) the interstate commerce clause by placing an undue burden on interstate commerce; (2) the supremacy of the laws clause of the Constitution by contravening the Tax Reform Act of 1976, which prohibits the taxing of electricity in a discriminatory manner; (3) the Fourteenth Amendment, by depriving the states and their citizens of equal protection of the laws; and (4) the privileges and immunity clause of the Constitution, art. 4, sec. 2.74 No plaintiff state levied an ad valorem statewide property tax on nuclear power plant property located within its respective state or offered a tax credit against their business profits taxes for the property taxes paid on the Seabrook nuclear power station property. In view of the fact the tax was levied on private utilities companies and not on the plaintiff states, the petition immediately raised the question whether the plaintiff states had the right to invoke the court’s original jurisdiction. Superficially, the evidence suggests the taxed public utilities should have sought relief from the New Hampshire tax in the U.S. District Court. The plaintiff states, however, sought to sue in their capacity as parens patriae to protect their respective citizen consumers of

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electricity generated at the nuclear power plant and in their proprietary capacity as consumers of electricity generated at the plant. New Hampshire, in its response brief, argued that (1) the plaintiff states lacked standing to sue, (2) the suit was premature as the tax had not yet been passed on to consumers, (3) an alternate forum could provide relief, (4) any injury caused by the tax would be insubstantial, and (5) the plaintiff states would not prevail on the merits of their suit.75 Nevertheless, the court in 1992 granted the plaintiff states’ motion to file a bill of complaint and appointed Vincent L. McKussick, retired Chief Justice of the Maine Supreme Judicial Court, as special master to establish the facts in the dispute and to prepare recommendations.76 On the recommendation of the special master in his first interim report, the Court granted the motions of the Connecticut Office of Consumer Counsel and the involved out-of-state public utility companies to intervene in the suit.77 Prior to the levying of the statewide property tax, the owners of the Seabrook nuclear power plant were subject to two state taxes—a 1 percent franchise tax levied on receipts from the sale of electricity within New Hampshire (pursuant to a state franchise), and a business profits tax levied on a unitary business’ profits or the share of a firm’s profits allocable to the state on the basis of a three-factor formula.78 On the opening of the plant, the New Hampshire General Court decided to reexamine its business taxes. It subsequently enacted a statute, effective on July 1, 1991, that (1) repealed the franchise tax on electric utilities, (2) levied the nuclear power plan ad valorem property tax, and (3) granted a credit for the property tax against the business profits tax.79 The latter two provisions were nonseverable in the event either was declared unconstitutional. The Seabrook property tax was to be levied on each joint owner of the plant in proportion to the owner’s share of the property. The 1991 General Court assessed the property at $3.5 billion with subsequent valuations to be determined by the commissioner of revenue administration.80 All business firms, except tax-exempt nonprofit corporations, were subject to the state’s 8 percent business profits tax.81 Firms were required to apportion profits “so as to allocate to this state a fair and equitable proportion of such business profits.”82 Utilities paying the nuclear power plant property tax were allowed a 10 percent credit for the tax paid against the firm’s business profits tax liability, but unused credits could not be carried forward beyond the year in which the property tax was paid. In 1990, only the New England Electric System used its tax credit—$1,115,258—to reduce its business profits tax to $127,382.83 The company would not have had to pay a business profits tax in 1991 had

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the nuclear power plant tax been in effect for the entire year. Three other utilities used their respective tax credit to cover their business profits tax liabilities, five utilities paid no business profits tax because they are tax exempt, and three utilities did not pay the business profits tax because they lost money. That New Hampshire, while levying the new tax on the Seabrook plant, did not levy a property tax on nonnuclear power electrical generating stations was the gravamen of the complaint. The plaintiff states on September 9, 1992, filed with the special master stipulations constituting the record in the case. They waived the contentions the New Hampshire nuclear power plant tax violated the equal protection of the laws and the privileges and immunities clauses of the U.S. Constitution and two of the three original grounds for contending the tax violates the interstate commerce clause—the tax was unfairly apportioned and was unrelated to services provided by New Hampshire. New Hampshire responded to the complaint by maintaining the nuclear power station property tax was a nondiscriminatory tax based on each owner’s share in the property and did not violate either the interstate commerce clause or the Tax Reform Act of 1976.84 The state also emphasized that the plaintiffs’ case was based on the allegation the state’s “decision not to tax the ordinary business profits of Seabrook owners benefits one owner—New Hampshire’s principal utility, Public Service Company of New Hampshire (‘PSNH’)—more than out-ofstate owners.”85 New Hampshire added PSNH’s ownership interest in the plant “has been transferred to a subsidiary of an out-of-state holding company,” and hence there was no basis for the complaint an in-state utility benefited from the tax scheme at the expenses of out-of-state owners of the plant.86 The state laid particular stress on the burdens placed on it as the result of the operations of the nuclear power plant, including the great impact an incident at the plant would have on the state’s economy, tourist industry, and population. Furthermore, the plant was said to have had a major adverse financial impact on the state because of the bankruptcies of the New Hampshire utilities involved in the plant’s development. Moreover, for the six years prior to the transfer of its ownership, PSNH incurred operating losses and did not pay the business profits tax. New Hampshire argued its tax structure at the time of the opening of the nuclear power station was ineffective in providing the state with revenue because PSNH and the New Hampshire Co-op were paying approximately $6.5 million in franchise taxes, whereas the other owners of the plant generally paid no franchise tax since sales of electricity outside the state were exempt from the tax.87

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The final report of the special master’s concluded the case was an appropriate one for the U.S. Supreme Court to invoke its original jurisdiction, cited the lack of an alternative forum for resolving the interstate dispute, and reported conclusions of law generally favoring the position of the plaintiff states.88 This adverse report prompted newly elected New Hampshire Governor Stephen E. Merrill to order the attorney general to settle the case out-of-court because the governor did not want the state to become bogged down in an extended dispute at the start of his administration.89 On April 14, 1993, New Hampshire and the concerned public utility companies reached such an agreement stipulating that the General Court would repeal the nuclear power plant property tax credit against the business profits tax, apply the state franchise tax to electric utilities, refund $17.6 million in collected property taxes by providing a credit against the revised nuclear power plant property tax over two years, lower the property tax rate on the plant from .640 to .491 percent of valuation for 1993 and 1994, and from .491 to .250 percent of valuation, effective January 1, 1995, and assess the plant at $3 billion. The General Court enacted the agreement into law on April 16, and the U.S. Supreme Court on the same day dismissed the suit.90 The out-of-court settlement negotiations support the conclusion the plaintiff states acted parens patriae for their respective electric utility firms and not parens patriae for their respective citizen consumers of electrical energy generated by the nuclear power plant. New Hampshire Senior Assistant Attorney General Harold T. Judd conducted all negotiations with attorneys employed by the electric utility companies and reported a representative of the attorney general of one plaintiff state would attend the meetings, but was not an active negotiating participant.91 He asked an important question: “If the other states were not acting parens patriae, why did they let us keep the $35 million we had collected?”92 He noted New Hampshire had given no commitment that the General Court in the future would not reenact the tax credit. Available evidence suggests the U.S. Supreme Court should have refused to invoke its original jurisdiction as an alternative forum, the U.S. District Court, was available to the public utilities.

Tax Loss Suit To date, only one suit has reached the U.S. Supreme Court involving the loss of tax revenue by one state attributable to an action of a sister state despite the dissenters’ prediction the court subsequently would be inundated by such suits.

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Wyoming v. Oklahoma. Wyoming sought the Court’s permission to file a bill of complaint in equity challenging the constitutionality of a Oklahoma statute requiring plants within the state producing electrical power for sale in the state to burn a mixture of coal contain a minimum of 10 percent coal mined in the state and describing the statute as a type of economic protectionism.93 This type of case is described as a negative commerce clause suit since the court ruled Wyoming had standing to sue because of the adverse effect of the Oklahoma law on Wyoming’s tax revenue and the case was an appropriate one for the court to exercise its original jurisdiction. Coal, a major Wyoming natural resource, is exported to nineteen states. The state is not involved with the production or sale of coal, but levies a severance tax on coal.94 The tax is payable by a person or company for the privilege of extracting coal, including eight mining companies that sell coal to four Oklahoma electric utility companies. The Oklahoma State Legislature adopted a concurrent resolution containing a request that Oklahoma electric generating companies with coal-fired plants consider using a blend of 10 percent Oklahoma-mined coal along with Wyoming coal.95 The four companies, including the state owned Grand River Dam Authority, ignored the precatory resolution. The 1986 Oklahoma State Legislature enacted a concurrent resolution mandating the burning of a mixture of coal in the plants containing 10 percent Oklahoma-mined coal.96 In view of the fact there was less than full compliance with the law by the four utilities, the 1988 State Legislature approved resolution 82 directing the Grand River Dam Authority to comply with the act.97 On receiving Wyoming’s request, the court appointed a special master to collect evidence and frame recommendations. The special master’s report revealed Wyoming lost $535,886 in severance tax revenue in 1987, $542,352 in 1988, and $87,130 during the first third of 1989. In consequence, the Court granted Wyoming’s motion for leave to file its motion of complaint despite Oklahoma’s objection that Wyoming lacked standing to sue, and denied Oklahoma’s motion to dismiss the suit for want of standing.98 The court quoted its opinion in Maryland v. Louisiana, relative to constituting a proper controversy under the court’s original jurisdiction, that “it must appear that the complaining State has suffered a wrong through the action of the other State, furnishing ground for judicial redress, or is asserting a right against the other State which is susceptible of judicial enforcement according to the accepted principles of the common law or equity systems of jurisprudence.”99 The court ruled Wyoming had met this test.

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Oklahoma advanced the argument that the plaintiff state neither is engaged in a proprietary capacity in the affected commerce nor affected as a consumer, and consequently has not suffered a wrong susceptible to an interstate commerce clause action. The justices determined the cases relied on by Oklahoma did not support its position as they involve parens patriae standing claims and not allegations of direct injury to the state. The court continued that it had rejected an argument similar to the one advance by Oklahoma in Hunt v. Washington State Apple Advertising Commission.100 This case involved a state commission that was not engaged in growing and selling Washington apples or their shipment to North Carolina, but whose revenues were based on the number of applies grown and packed as Washington apples. Oklahoma in addition argued that the affected Wyoming mining companies could bring an interstate commerce clause challenge. The court was aware of the fact that none of these companies filed a suit of its own in a state or federal court and they also chose not to intervene in the present litigation. Citing New York v. New Jersey, Oklahoma argued that “[b]efore this court can be moved to exercise its extraordinary power under the Constitution to control the conduct of one State at the suit of another, the threatened invasion of rights must be of serious magnitude and it must be established by clear and convincing evidence.”101 The state continued by asserting Wyoming’s interest is de minimis in view of the fact its severance revenue loss is less than 1 percent of its total tax revenue. The court refused to exercise its original jurisdiction solely on the basis of the amount in controversy and opined that the argument is identical to the one addressed by the court in 1923 in Pennsylvania v. West Virginia involving the latter state’s statute keeping natural gas within its boundaries.102 Oklahoma also attempted to buttress its defense of its statute by drawing on a savings clause in the Federal Power Act reserving to states authority to regulate local retail electric rates.103 In response, the court reported it had already examined the savings clause in New England Power Company v. New Hampshire and concluded that Congress did not intend to alter interstate commerce clause limits on the powers of the states.104 The court determined the nature of Wyoming’s allegations and the absence of pending litigation in other courts involving the identical parties or issues made the present case appropriate for an original jurisdiction trial and held the Oklahoma statute violated the interstate commerce clause of the U.S. Constitution.105 Justice Antonin Scalia, joined by Chief Justice William Rehnquist and Justice Clarence Thomas, dissented and noted “when the coal companies with sales allegedly affected by the Oklahoma law have, for what-

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ever reason, chosen not to litigate the Court sees fit, for the first time, to recognize a State’s standing to bring a negative Commerce Clause action on the basis of its consequential loss of tax revenue.”106 The dissent also explained the so-called zone-of-interest test by citing the Court’s holding in Clarke v. Securities Industry Association that the test “denies a right of review if the plaintiff’s interests are . . . marginally related to or inconsistent with the purposes implicit in the [constitutional provision].”107 Scalia concluded: “Wyoming’s interest in this case falls far shorter of meeting the zone-of-interests test than did that of the plaintiff postal union in Air Courier Conference v. Postal Workers.”108 He deplored the abandonment of the test precluding a judicial remedy for every conceivable injury traceable to an allegation of wrongdoing. Justice Thomas, joined by the Chief Justice and Justice Scalia, wrote a separate dissent justifying a denial of the Wyoming motion for leave to file a bill of complaint and maintaining the majority opinion will allow each state showing any tax revenue loss attributable to the action of a sister state direct access to the court.109

SUMMARY AND CONCLUSIONS To date, the U.S. Supreme Court adjudicated only three escheats suits. Texas v. New Jersey, the first suit, established a primary rule and a secondary rule governing the right of a state to take title to unclaimed property. These rules were applied in the third case—Delaware v. New York. Controversies involving interstate tax revenue competition may be classified as estate taxation, other forms of taxation, and state tax revenue loss caused by the action of a sister state. The court settled three interstate suits involving the question of which state had the right to tax the estate of a decedent, five suits involving tax exportation, and one suit involving the loss of state tax revenue loss caused by the action of a sister state. The reader also should note that interstate disputes labeled boundary ones involve the question of the jurisdiction of the disputing states to levy taxes as illustrated by the high court’s 1893 decision in Iowa v. Illinois. The complexity of interstate tax controversies involving tax credits is illustrated by the New Hampshire statewide property tax on a nuclear power plant owned primarily by public utilities in other states. There is strong evidence that the U.S. Supreme Court should not have invoked its original jurisdiction in this case and in Wyoming v. Oklahoma. The court established the availability of an alternative forum as a criterion for determining whether to invoke its original

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jurisdiction. The private utility companies in the first case failed to exercise their option of bringing suit challenging the New Hampshire tax in the U.S. District Court, and the private coal companies in the second case did not avail of this option. A trial in the lower court would have reduced the workload of the U.S. Supreme Court, which subsequently, however, might review a lower-court decision on appeal. The crowded docket of the court makes it imperative the court invokes its original jurisdiction only when a major interstate controversy exists. We agree with Justice William H. Rehnquist who argued in 1981 that justice would be served better by a lower-court trial than by what may be termed a special master trial. In addition, we conclude that Congress should become more engaged in regulating interstate taxation in order to reduce the number of suits filed by states against one or more sister states, a subject examined in chapter 8. Chapter 7 describes and analyses state competition to attract business firms, major league sports franchises, tourists, gamblers, and filmmakers in order to increase state revenues.

Chapter 7

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tate and local governments energetically have been competing for tax bases that will enhance their total revenues since 1946. All states and many local governments currently have economic development programs offering special benefits, tax and others, to encourage business firms to locate new facilities or expand existing facilities in their respective state, thereby increasing its tax base and providing employment for citizens. New York in 2005 granted tax credits, also known as tax expenditures, to corporations totaling $638.7 million as inducements for expansion of existing facilities or location of new facilities.1 Intense state and/or large city competition in recent years to attract a major league sports franchise has become relatively common with the competitors offering to construct a new stadium or renovate an existing one and provide other benefits to the owner(s) of a team. Several teams have been accused of blackmailing a city or a state by threatening to relocate unless the public finances all or most of the costs a new stadium or renovation of an existing one. The advent of the passenger railroad, and more recently the motor vehicle, induced state governments and many local governments to advertise to attract tourists in order to promote economic development

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and provide employment. The governments also discovered tourism was a legal mechanism for exporting certain taxes to nonresident visitors. Lotteries date to the colonial period and continued with the establishment of states, but the last state lottery was ended in 1894. New Hampshire in 1964 launched the first twentieth-century state lottery and currently thirty-seven states operate lotteries. States and local governments have taken advantage of technological developments, such as video lotteries, to raise additional revenue. Las Vegas discovered many gamblers are attracted to casinos and its promotional campaign led to the city becoming the gambling capital of the United States. More recently, riverboat casinos became popular in the Midwest and Internet gambling spread widely. Competition to attract film producers has a relatively long history and has become more intense in recent years.

BUSINESS FIRMS TAX BASE State competition to attract business firms dates to the era of canal building in the early decades of the nineteenth century. The construction of the Erie Canal in upstate New York, connecting the Hudson River and Lake Ontario, demonstrated that a state could gain a competitive advantage by encouraging the construction of canals. State involvement was essential as only the state legislature could authorize private canal companies to employ eminent domain to obtain the needed rights-of-way. Legislatures also provided funding for canal construction. The era of canal building was short as the advent of the railroad generally diverted freight, except bulk products, from the canals. State governments in the nineteenth century took little action to encourage business firms to locate in their respective states other than granting the power of eminent domain to railroad companies eager to attract business firms to locate facilities near railroad tracks. These companies today continue to promote the location of industrial firms near rail facilities and work closely with state and local government economic development departments. A new tool began to be employed by several states in the late 1940s to attract and retain industrial firms. States commenced to raise funds for construction of industrial buildings and associated infrastructure by issuing industrial development bonds at below-market interest rates, because Congress in 1913 exempted from the newly levied national graduated income tax the interest received by holders of municipal bonds issued by state and local governments.2 Northeastern states sought to protect their respective tax base by issuing such bonds to offset the

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efforts of southern states to attract firms, particularly shoe and textile ones, located in the northeast. The Federal Reserve Bank of Boston published a series of articles in its quarterly magazine in 1963–64, with the first entitled “New War Between the States.”3 The northeastern states initially relied on privately financed business development corporations (BDC) and state direct loans and/or insurance to facilitate the financing of the construction of new industrial buildings. The southern states relied primarily on tax exemption of newly constructed industrial facilities for a period of years and issuance of bonds by cities to raise funds to support private industrial development. Their tax bases would increase after the termination of the tax exemption. Currently, state legislatures generally have authorized municipalities to issue revenue bonds to obtain funds for economic development with the securities supported by rents paid by lessees. Issuance of municipal bonds with interest exempt from the federal income tax has been criticized as an indirect federal subsidy paid by taxpayers throughout the nation and as unneeded in instances where a company would locate a facility in a municipality without a subsidy. Congress reacted to the criticism and loss of federal government revenue by enacting the Revenue and Expenditure Control Act of 1968 stipulating that the recipients of interest paid on industrial development bonds is taxable unless the bonds were issued for exempt purposes.4 In 1986, Congress imposed an additional restriction by placing a limit—$50 per capita or $150 million—on the maximum amount of tax-exempt private business bonds that could be issued by a state.5 A 1991 study by the U.S. Advisory Commission on Intergovernmental Relations (ACIR) reported states competed in terms of quality of their educational systems, public works infrastructure, a state right-towork law, and the financing of the workers’ compensation system.6 The U.S. General Accounting Office in 1993 issued a report revealing that three-fifths of the developers interviewed in Indiana, New Jersey, and Ohio, stated they would have constructed an identical development or a reduced version in the absence of receipt of tax-exempt industrial development bond funds.7 Forty-six states offer industrial firms a wide variety of tax incentives involving equipment and machinery, inventories, raw materials, products in transit, and creation of new jobs. Southern states in particular utilize incentives for job creation. Recognizing the number of women with children in the workforce, states increasingly are offering tax credits for day care costs. The eagerness of a state and a municipality to attract a particular manufacturing company is illustrated by South Carolina and the city of

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Spartanburg in 1993, purchasing a total of 240 middle-class homes at a cost of $36.6 million as a site for a BMW factory because the company would not consider any other site in the state.8 The Mississippi State Legislature in 2001 offered the Nissan Motor Company incentives totaling $295.0 million and acquired land for a factory site by condemning the lands of African American farmers who refused to sell their lands.9 Michigan in 2005 offered the Toyota Motor Corporation $38.9 million in tax incentives if the company would construct engineering and testing facilities near Ann Arbor with the per-job creation cost of $97,250.10 And Missouri and St. Louis County in the same year concluded an agreement with Express Scripts, Incorporated providing subsidies in $20.0 million to the firm in exchange for remaining in the county and expanding the number of its employees.11 A court occasionally invalidates tax incentives offered by a state government, local government, or both to attract an industrial firm. Several Toledo residents and business firms challenged in the U.S. District Court for the Northern District of Ohio the 100 percent property tax exemption and the Ohio investment tax credit of 13.5 percent granted to DaimlerChrysler, Incorporated if it would construct a Jeep manufacturing plant in Toledo on the ground that the tax credit violates the interstate commerce clause of the U.S. Constitution and the equal protection of the law clause of the Ohio Constitution.12 The court rejected the challenges, but the U.S. Court of Appeals for the Sixth Circuit in 2004 reversed in part the lower court decision by opining the property tax exemption was constitutional, but the tax credit violated the interstate commerce clause because the tax credit coerces a company to expand its facilities in the state.13 This decision suggests similar Kentucky, Michigan, and Tennessee tax credits are unconstitutional. In 2005, the U.S. Supreme Court agreed to review the decision of the lower court.14 Recognizing the fact that a business firm planning to construct a new factory may encourage competition between states seeking a facility, the Council of State Governments in 1994 provided the following advice to state officers: • seek additional information when offering customized incentive packages and refrain from offering such . . . packages to lure businesses from other states; • require more thorough analyses to evaluate information on the economic impact of a customized incentive package, and examine policy alternatives;

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• establish clear and consistent policies on business incentives, with enforceable contract provisions applicable to recipient firms as a condition of the customized incentive award; • be aware of the potential ethical problems that can be associated with recruiting large business from other states.15 The Alabama State Legislature in 2002 gambled and took an unusual approach to economic development by authorizing the state pension fund to invest $240 million in the financially weak US Airways in order to achieve 37.5 percent ownership of the firm when it emerges from protection of the U.S. Bankruptcy Court in 2003.16 The state was hoping the airline would add more flights to the state’s large cities and transfer part of its back-office operations to Alabama. The financially weak airline emerged from the court’s protection and in 2005 was seeking to merge with another airline. Critics of tax incentives explain the state, city, or both may never recoup new revenues equal to the large tax expenditures associated with the incentives, the recipient companies in many instances fail to create the promised number of new jobs, the system of taxation becomes more regressive, and tax administration costs are increased.17 David Brunori raised an important question: “Given the relatively small amount of revenue generated by the corporate income tax, as well as the high costs of compliance and administration, a relevant question is whether the states should impose the tax at all.”18

Importance of the Business Climate Large multistate and multinational corporations are well aware of the reputation of each of the fifty states with respect to its tax treatment of corporations. The regulatory and taxation policies of a state are important factors influencing the decisions of corporate managers with respect to location of new facilities. New York’s business climate reputation was so poor that the president of the General Electric Corporation publicly announced it would not invest in new facilities in the state and would retrench its operations in the state. A state with a poor reputation may be able to offset its negative effect in part if it has an important geographical location near major markets and/or resources and has an educated and skilled labor force. The levels of state and local taxes may or may not have a major impact on the decision a company to locate a new manufacturing plant or company headquarters. ACIR released a report in 1967 indicating

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that the level of a state’s taxes did not influence the decision of most business firms when deciding on a region of the United States for a new industrial plant location.19 Not surprisingly, firms decide on a region and next examine more closely the tax differential between states in the region and their respective locational advantages and disadvantages. ACIR reported that it is very difficult for a state with a high tax reputation “to erase the image.”20 Many corporations constructed new plants in the Greater Boston area commencing in the 1950s because they were unable to attract to existing plant locations the type of graduates produced by the Massachusetts Institute of Technology and nearby universities. On the other hand, KeyCorp in 1994 transferred its headquarters to Cleveland from Albany, New York, because the state tax law levied a tax on 40 percent of the dividends financial holding companies received from foreign subsidiary corporations (chartered in sister states).21 Business firms also may resent local government property taxes, particularly if they are applied to business inventories. The Burroughs Corporation had been storing computers in California and paying an inventory tax, but avoided the tax by storing computers for shipment to California in Nevada.22 ACIR reported a corporation with manufacturing facilities in North Carolina and South Carolina could reduce local property taxes by keeping all inventories in South Carolina where they are exempt from such taxes.23 CSX Corporation in 2002 complained that local real property taxes in New York were so high the corporation would remove tracks from unused lines and would not invest in improved tracks capable of handling high-speed trains.24 A second ACIR report examining plant location decisions confirmed the conclusions of its earlier report and emphasized that wage differentials were more important than tax differentials in view of the fact that annual manufacturing labor costs are considerably larger than annual state and local taxes.25 A corporation makes plant location decisions in order to increase profits and typically selects a state where total production costs will be the lowest. A firm, however, may locate a plant in a state where total costs are higher because distribution and marketing costs are lower. Similarly, a firm in selecting a location may consider energy costs to be a key factor if the plant requires large quantities of electrical energy. Motor vehicle companies in the 1980s were attracted to southern states in part because unions were weak or nonexistent.26 The regulatory policies of a state also influence plant location decisions. States until 1965 generally did not have strict water quality standards or take aggressive action to reduce industrial water pollution for fear of driving the polluting firms to other states.

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Congressional enactment of the Water Quality Act of 1965 (now Clean Water Act) established minimum water quality standards applicable to all interstate waters, and amendments to the act have raised the standards.27 In consequence, there are no asylum states with low water quality standards to which a polluting firm can flee. Credit card operations provide banks with a substantial amount of revenue and they will transfer their credit card operations to another state if a state legislature decreases the maximum allowable interest rate on such debt or ends interest rate deregulation.28

Neighboring State Competition Corporations moving plants from one state to another usually relocate them within the same region of a nation. As noted above, the northeast states lost shoe and textile factories to southern states. In addition, the Great Lakes and Mideast regions lost plants to the southeast. Of greater importance is competition between neighboring states to hold firms contemplating relocating a plant and to attract new firms. New Jersey and New York have a long history of competition for industrial firms often contributing to poor interstate relations. In 1995, New York Governor George E. Pataki would not agree to a new contract allowing the New York Power Authority to supply low-cost water-generated electricity to New Jersey Transit.29 According recognition to the fact that competition for business firms by neighboring states can injure interstate relations, Connecticut, New Jersey, and New York City in 1991 reached an agreement that they would not compete for business firms in the area through aggressive recruitment and advertisements. This agreement shortly thereafter was violated by New Jersey, utilizing revenues from the World Trade Center owned by the Port Authority of New York and New Jersey, to establish a fund devoted to industrial recruitment.30 Connecticut in 1994 lured Swiss Bank to move from New York City by offering over $130 million in tax incentives during the forthcoming decade.31 The city responded by purchasing advertisements in Connecticut newspapers stressing that competitive interstate bidding to attract business firms is not in the interest of either state and the tax incentives will amount to $60,000 for each Swiss bank employee. Connecticut state government officers noted Swiss Bank initiated the discussions, New York City broke the 1991 agreement, and estimated $300 million in new tax revenues would come to the state.32 The city announced that it would abide by the 1991 agreement with New Jersey, but would no longer honor the agreement with Connecticut.33

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Stock and other exchanges in New York City on occasion indicate they are considering moving to New Jersey. The New York Mercantile Exchange in 1994 revealed it planned to move to New Jersey, but changed its decision on reaching an agreement that New York State and New York City would provides $184 million in grants to assist in the financing of a new exchange building in Battery Park City in lower Manhattan.34 In 1995, the Coffee, Sugar, and Cocoa Exchange and the Cotton Exchange decided to reject New Jersey tax incentives and remain in New York City on receiving $91 million in New York State and New York City in incentives.35 The New York Stock Exchange needed a new facility and entertained the possibility of relocating to New Jersey. New York State and New York City officers in 1998 developed a $1 billion incentive package to assist in the construction of a new exchange close to its present location.36 New York State and New York City tax and other incentives persuaded a security firm in 1997 to move its employees from Jersey City to the World Trade Center. After the center was destroyed on September 11, 2001, the firm returned to New Jersey with the assistance of more than $8 million in state incentives.37 A large firm on a rare occasion rejects incentives to expand in the state, yet relocates its headquarters, operations, or both to another state without the offer of state and city incentives. C&S Wholesale Grocers, Incorporated is the third largest grocery wholesaler in the United States with sales of approximately $9.5 billion in 2001, had its corporate headquarters and a major warehouse in Brattleboro, Vermont, when it rejected Vermont’s offer of $1.9 million in tax credit incentives and decided in 2002 to move its headquarters but not its warehouse to Keene, New Hampshire, located eighteen miles east of Brattleboro.38 Keene was selected for two principal reasons, although no state and city tax or other incentives were offered: The forty-four-acre site would permit construction of a flexible and attractive campus-type headquarters and was close to the Keene airport where the company’s corporate jet was based. Two other facts may have influenced the decision. Most C&S executives reside in Keene, and New Hampshire levies a personal income tax only on intangible income and does not levy a sales tax and use tax. Keene almost simultaneously lost seventeen executives of the National Grange Mutual Insurance Company, founded in the city, as the company transferred them to its new corporate headquarters in Jacksonville, Florida. The transfer was made because the company experienced difficulty in attracting executives to Keene because of limited housing availability and employment opportunities for relocating spouses.39

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INTERSTATE COMPETITION FOR SPORTS FRANCHISES Cities and states compete to attract such franchises and retain existing ones because they contribute tax revenues to public treasuries. Although each major athletic league is a monopoly, only baseball is exempt from the Sherman Antitrust Act.40 Justice Oliver Wendell Holmes of the U.S. Supreme Court, writing for a unanimous court, in 1922 held that baseball is not subject to the interstate commerce clause of the U.S. Constitution, noted players must cross state boundary lines in order to play games, and added: “ . . . the transport is a mere incident, not the essential thing. That to which is incident, the exhibition, although made for money would not be called trade or commerce in the commonly accepted use of those words. That which in its consummation is not commerce does not become commerce among the States because the transportation that we have mentioned takes place.”41 The early owners of major league teams built their own stadiums without public funds. Most owners during recent decades have been successful in obtaining city and state funding for the construction of new facilities or major renovations of existing ones. Data reveal that about 50 percent of the 115 major professional franchises by 1997 had requested or received new or modernized stadiums.42 Owners paid only 13 percent of the cost of constructing major league baseball stadiums in the period from 1990 to 1998, with public funds covering the remaining costs.43 The number of new professional sports stadiums and arenas has increased by more than thirty-six since 1994. Publicly owned stadiums date to the Memorial Coliseum in Los Angeles that was constructed as part of the city’s successful bid to host the Olympic games. Today, most sports stadiums are publicly owned. Until the mid-1950s, the stadiums were in large cities and accessible by subways and trolley cars. Subsequent stadiums generally were constructed in the suburbs and were not readily accessible by public transportation facilities. Oriole Park, however, was constructed in Baltimore at Camden Yards in Baltimore; a major city redevelopment project. City governments with a sports franchise tend to react to reports that the team plans to relocate in the same manner as they react to news that a major business firm plans to move its facilities to another location. The cities initiate action to mobilize team supporters and the state government to develop a plan meeting the wishes of the owner(s) of the franchise that may be a new or renovated stadium. The Minnesota Twins baseball team and the Minnesota Vikings football team expressed growing dissatisfaction with the their playing field, the Metropolitan Stadium in Bloomington, and the Vikings indicated that the team would be

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moved from the area when its lease expired in 1975.44 This announcement led to the development of several proposals and one, enacted by the state legislature, authorized the appointment of a commission to select a site and stadium design. In 1978, the commission selected, among four alternatives, construction of a domed stadium in Minneapolis. The initial plan called for the issuance of bonds, backed by a 2 percent tax on liquor sales in the seven country metropolitan area, to finance the project. The tax was levied, but repealed in 1979. This action evoked a threat from the Vikings to leave the area. In response, the state legislature authorized construction of a domed stadium and the metropolitan sports facilities commission signed thirty-year lease contracts with the Twins and the Vikings with the former lease containing an escape clause for the Twins providing for termination of the lease if ticket sales fell below 1.4 million annually. The Twins in 1984 was sold to Carl Pohlad who, burdened by heavy debts, negotiated a tentative agreement with the sports commission providing for the construction of a domed stadium with a retractable roof. The complicated proposed financial contract stipulated that the owner would transfer 49 percent ownership of the team to the state and contribute $82.5 million to the state to help fund the construction project.45 The proposal, however, contained another clause obligating the state to repay the $82.5 million after a specified time period and to purchase the owner’s share of the facility. The 1997 state legislature refused to enact the proposal into law and in 1998 the owner sold the franchise. In 2005, Hennepin County sought permission from the Minnesota State Legislature to increase its sales tax by 0.15 percent to raise funds to help finance a $360 million, 42,000-seat open-air stadium for the Minnesota Twins with owner Carl Pohlad contributing $125 toward the construction costs.46 Total costs are estimated to be $478 and include bond interest, site preparation, and infrastructure. No state financial assistance was requested. Yankee Stadium in the borough of the Bronx in New York City was constructed with private money and subsequently was renovated in part with the aid of city funds. Nevertheless, the stadium by 1990 was considered to be inadequate. Team owner George Steinbrenner requested that the city either construct a new stadium or renovate Yankee Stadium. In view of the fact that the New York Giants and the New York Jets had moved to the nearby Meadowlands Stadium in New Jersey, Governor Mario M. Cuomo of New York anticipated that New Jersey would entice the Yankees to move across the Hudson River. In 1993, he publicly threatened to seek legislative authorization for casino gambling if

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New Jersey, with casinos in Atlantic City, offered financial incentives to the Yankees to move.47 Steinbrenner pressed for a new stadium and was supported by Mayor Rudolph W. Giuliani (1995–2001) who favored construction of new facilities for the Yankees, New York Mets, and possibly New York Jets. The terrorists’ attack on the World Trade Center on September 11, 2001, complicated financing plans for new stadiums, but the mayor reached a tentative agreement with the two teams on December 28, 2001, providing for the city to issue bonds to raise $800 million of the estimated $1.8 billion cost of the two stadiums.48 Mayor Michael R. Blumberg, who assumed office in January 2002, announced that the city lacked the requisite funds to support the building of the new stadiums.49 Efforts to build a stadium continued by including one in a proposal to host the Olympics in 2012, but the New York State Legislature failed to provide the necessary financial support in 2005. The New York Giants agreed on September 8, 2005, to remain in New Jersey as the result of a decision of the New Jersey Sports and Exposition Authority to construct a new $750 stadium for the team in the Meadowlands.50 The Giants had been seeking a replacement for the authority’s owned stadium and file a lawsuit seeking enforcement of a provision in its lease requiring the state to improve the facility. The agreement provides that New Jersey would assume the $124 million long-term debt on the existing stadium, improve utilities, and transfer ownership of 40 acres of land to the team. The Giants would construct the stadium with its 200 luxury boxes, with each rented at a cost of $200,000 annually, and pay an annual rent of $5.0 million for the land and $1.3 million annually in lieu of taxes payments to East Rutherford. Plans for the New Jersey stadium quickly changed as the Giants and the Jets signed an agreement on September 29, 2005, to share a new stadium with 200 luxury suites and seats for 80,000 to 90,000 fans, the first agreement for two professional football teams to share the same stadium.51 The Indiana Stadium and Convention Center Building Authority in 2005 approved the construction of a $500 million, retractable-roof stadium for the Indianapolis Colts who signed a lease agreement with the city requiring the Colts to play in the stadium until at least 2034.52

INTERSTATE COMPETITION FOR TOURISTS, GAMBLERS, AND FILMMAKERS All states have tourism programs designed to attract residents of other states and nations and an increasing number of states and cities are relying

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on gambling as a source of revenue. Tourism is considered beneficial because it provides employment for a state’s residents and is a source of tax revenue. Travel, whether by tourists or others, has a major impact on the economies of states as revealed by domestic and international travelers making direct spending of $494.9 billion in 1998 constituting 4.3 percent of the national gross domestic product.53 The attitude of states toward gambling has changed over the years. The progenitors of state-operated lotteries were provincial lotteries during the period of British rule. Growing concern with the social costs and undesirable aspects of gambling led to enactment of laws criminalizing gambling in the nineteenth century and the abandonment of stateoperated lotteries.

Competition for Tourists Tourism is the number one industry in several states and somewhat surprisingly is the second largest industry in New York. States and cities discovered that taxes could be exported to nonresidents by means of levies on airline tickets, hotel and motel rooms, motor vehicle rentals, and restaurant meals. It should be noted, however, that a tax on hotel and motel room occupancy, according to a 1985 study in Hawaii, can cause “significant damage to the lodging and some non-lodging sectors of the visitor industry.”54 A 2001 study of the Hawaii hotel tax, however, concluded that it “did not have a significant negative impact on hotel rental receipts.”55 States have become expert at targeting specialized audiences of potential tourists, including those interested in beautiful scenery, historic sites, and wineries. Childless couples and families are two groups targeted by New Hampshire’s tourist advertising featuring cultural attractions, lodging facilities of interest to the first group, and various outdoor activities to attract the second group. In common with many other states, New Hampshire purchases advertisements in foreign nations. Advertisements in England use the tagline: “We kicked you out in 1776. Now we’ve changed our minds.” The state also has increased sharply its tourist advertising expenditures and has included advertisements in the New York Times to reach a national audience and French-language inserts in nearby Quebec newspapers. The state also displays tourism materials in its state-operated liquor stores and its roadside rest areas, and its parks feature New Hampshire–made products. The state’s tourism promotion is supported by local chambers of commerce, such as the Hampton Area Chamber of Commerce, which prints and posts in response to inquiries 50,000 copies of a

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guide to the state’s seacoast and publishes advertisements in the Albany, New York, Times Union, Hartford Courant, New York Times, and Providence Journal. Surveys reveal approximately 57 percent of persons inquiring about vacationing in the state do so and it estimated that every dollar spent on tourism produces a return of approximately nine dollars. New Hampshire, a small state, estimated in 2005 that tourists spend approximately $4 billion in direct spending in the state and an additional $1.76 billion in indirect spending such as spending by 68,000 workers in the tourist sector.56 Such spending accounted for 7.9 percent of the gross state product and the total impact of the spending on the state’s economy was estimated to exceed $10 billion. The state’s 8 percent lodging and restaurant meals taxes generated more revenues of $162 million in fiscal year 2004. The state also levies an 8 percent tax on motor vehicle rentals. The New York State Division of Tourism issued a master plan for 2000–2004, revealing adventure travel, biking vacations, camping, family and intergenerational travel (involving a grandparent, a parent, and a child), family travel, environmental tourism, and golf vacations are increasingly important trends in travel.57 Market research reveals the majority of domestic visitors to New York State reside along the East coast and their reasons for visiting are family and friends (42%), general vacation (18%), special events (17%), getaway weekend (13%), and other (10%). The state ranks third in international visitors after Florida and California. The increase in the number of wineries from 19 in 1976 to 219 in 2005 has resulted in an estimated more than three million tourists visiting wineries in the state.58 The travel and tourism industry is important as it employs in excess of 712,000 persons in the state and generates revenues exceeding $30 billion annually. As one would anticipate, business travelers resent lodging, parking, and restaurant meals taxes levied at a high rate. New York City and New York State each imposed a sales tax on hotel room rentals and a room occupancy city tax. A 1992 study, sponsored by the Hotel Association of New York City, examined the impact of the 5 percent room occupancy tax levied by the state in 1990, bringing the total tax rate to 21.25 percent and making the city “more than twice as tax-expensive as Chicago.59 The result was a significant decline in travel to New York City. San Francisco had been levying a fourteen percent bed tax when the city in 2004 decided to extend the tax to hotel parking and meeting room charges.60 Washington, D.C. levies a 14.9 percent tax on the occupancy of a hotel or motel room. Las Vegas in 2005, following the lead of other cities, levied a tax on rentals of motor vehicles.

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New Hampshire lacks a sales tax and a compensating use tax, but levies an 8 percent hotel-motel rooms and meals tax. Grocery stores in recent years have been competing with restaurants by selling readycooked meals and allowing customers to use salad bars. This competition has led the state department of revenue administration to attempt to level the playing field between restaurants and grocery stores by attempting to apply the meals tax uniformly.61 The task is a difficult one. A live lobster purchased in a grocery store is not taxed, but a cooked one is taxed. Potato salad in a salad bar is taxed, but is not taxed if in a packaged container. Similarly, tuna salad at a salad bar is taxed, but is not taxed when purchased at a deli counter. States employ professional advertising firms to prepare sophistical print, radio, and television advertisements and to develop slogans. These firms utilize U.S. Bureau of the Census data to direct appeals to certain potential tourist groups. The “I Love New York” slogan was introduced in 1977 and has become so popular that other governments and private organizations have used a similar theme such as “Virginia is for Lovers.” These and other slogans appear on bumper stickers, coffee mugs, motor vehicle license plates, T-shirts, and other items. “Live Free or Die” and an outline of the “Old Man of the Mountain” appear on New Hampshire’s motor vehicle license plates, and Maine uses the slogan “Vacationland.” Several state slogans have been abandoned because they proved to be relatively ineffective or were modified by individuals to reflect a poor state image. The “Escape to Wisconsin” theme was abandoned because a number of residents removed “to” from the slogan. A number of local governments purchase newspaper and television advertisements highlighting their respective natural attractions, such as Niagara Falls. These advertisements typically are tied to state promotional campaigns. The New York State Legislature decided the famous Erie Canal, now obsolete as a bulk water route, could be marketed as a tourism attraction. The canal, a segment of the 524-mile-long New York State Barge Canal, connects the Hudson River to the Great Lakes and interior lakes in the state. In 1992, the legislature transferred the canal system to the New York Thruway State Authority, which established the New York State Canal Corporation as a subsidiary authorized to impose tolls on vessels as they travel through lift bridges and locks.62 A five-year “Canal Recreationway Plan” was drafted and implemented, and a $32.3 million dollar renovation program was launched.63 Modernization of harbors, lift bridges, locks, and construction of biking and walking trails, parts, and visitors’ centers resulted in a sharp increase in recreational

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boats utilizing the system along with a significant increase in the number of persons using associated facilities. States also are interested in encouraging private companies to develop tourist attractions. In 1994, the Walt Disney Company agreed to construct a new theme park in Haymarket, Virginia, in exchange for the Virginia State Assembly appropriating in excess of $163 million for employee training, highway improvements, tax credits, and tourist promotion.64

Gambling Many states and certain cities engage in intense competition to attract gamblers who may be a major source of revenue. Gambling brings in 42.6 percent of all state revenues in Nevada and more than 10.0 percent in Louisiana, Rhode Island, and South Dakota.65 Maryland and Pennsylvania residents provide approximately 70 percent of gambling revenues at the three Delaware racetracks that have video slot machines. Gambling is the third most important revenue source in Rhode Island.66 Cities highly dependent for revenue on gambling and related activities include Atlantic City, New Jersey, and Las Vegas, Nevada. The Nevada State Legislature legalized gambling in 1931 to improve the state’s economy. Legal gambling assumes many forms including bingo, electronic slot machines in bars, lotteries, pari-mutuel and offtrack bettering on greyhound and horse races, and various forms of casino gambling, including slot machines and black jack. Corruption in various forms has been associated with legalized gambling and is illustrated by federal criminal charges brought against the New York Racing Association (NYRA), the private operator of thoroughbred race tracks. Acting U.S. Attorney Erie O. Corngold in 2005 stated: “Two years ago NYRA was a broken and corrupt organization that sanctioned the extensive tax evasion scheme for which it was indicated.”67 Congress recognized legal interstate wagering on horse races by enacting the Interstate Horseracing Act of 1978 devolving several powers to states, including authority to overturn federal prohibition of interstate off-track wagering.68 The act allows interstate simulcasts of horse races provided the concerned state regulatory body and a horsemen’s association approve. A challenge to the constitutionality of the act was filed in the U.S. District Court for the Eastern District of Kentucky and it ruled in 1993 that the act violates the First Amendment’s guarantee of freedom of speech and is unconstitutionally vague.69 This decision was reversed in 1994 by the U.S. Court of Appeals for the Sixth Circuit, which held that the act does not regulate commercial speech in view of the fact that offtrack betting can take place without simulcasting, a very narrow subject

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is regulated by the act, a “less strict vagueness test” applies to the act, and legislative powers are not delegated to private parties.70 Pari-mutuel gambling at horse-race tracks has been declining in terms of tax revenue generated for a state as illustrated by the trend in New York and the following declaration by the owner of Laurel Park and Pimlico racetracks in Maryland: “This industry is declining. It’s heading into oblivion.”71 Nevertheless, pari-mutuel betting allows states to export a significant part of their gambling taxes to residents of sister states. Our foci are lotteries and casino gambling. Concern with the adverse social costs associated with organized crime and gambling induced Congress to create a Commission on the Review of the National Policy Toward Gambling, which issued a comprehensive report in 1976 containing chapters on each type of legal gambling and one chapter on illegal gambling.72 The commission “concluded that States should have the primary responsibility for determining what forms of gambling may legally take place within their borders” and “the only role of the Federal Government should be to prevent interference by one State with the gambling policies of another and to protect identifiable national interests with regard to gambling issues.”73 Lotteries. Public and private lotteries were relatively common during the colonial era and were utilized to raise revenues for specific public purposes in common with many current lotteries whose profits are dedicated totally or partially to education. Lotteries continued to operate subsequent to the achievement of independence from the United Kingdom, but succumbed to the growing political power of the Protestant ethic in the latter part of the nineteenth century and disappeared in 1894 when Louisiana abolished its lottery. Abolition proponents were convinced that lotteries created social problems, such as compulsive gambling and poverty, and were interlaced with fraud. The growing opposition to lotteries persuaded Congress in 1890 to prohibit the transport of lottery materials by the U.S. Post Office and in 1895 to extend the prohibition to interstate commerce.74 One state is the leader in employing innovative methods to obtain revenue from nonresidents. In 1964, the New Hampshire General Court (state legislature) launched a state lottery. Subsequently, thirty-eight states and the District of Columbia decided to operate lotteries.75 Regional groups of states lobbied Congress successfully in 1962 to amend the 1890 and 1895 statutes by exempting lottery tickets from the prohibition and authorizing each state legislature to opt out of the ban on the prohibition of transporting gaming devices in interstate commerce.76 Congress also amended national laws to allow states to advertise

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in newspapers, radio, and television listing prizes and providing other information relating to lotteries.77 Supporters of this form of gambling view it as a supplemental source of revenue for socially desirable programs such as education and are convinced that lotteries divert revenues from organized criminal gambling enterprises, another desirable social goal. Competition among lotteries is strong and various lotteries devise special games, scratch-off tickets, and have one or two drawings each day as well as weekly drawings. The New York Lottery is an important revenue producer for the state. In fiscal year 2005, the lottery had revenues of $6.270 billion and provided $2.063 billion (33%) in grants to primary and secondary public schools.78 Revenues increased by 8.1 percent over the previous fiscal year and winners received $3.52 billion (56%). Revenues provided for primary and secondary education totaled more than $27 billion during the lottery’s first thirty-eight years. States quickly discovered the size of the jackpot influences the number of tickets purchased. In 1984, the Maine lottery noted its ticket sales decreased due to the illegal sale of Massachusetts Megabuck’s lottery tickets.79 The executive director of the Texas lottery admitted in 2005 he had authorized the use of inflated jackpots since October 2004 to increase lottery ticket sales.80 Three groups of states utilized interstate administrative agreements to establish multistate lotteries, and the Tri-State Megabucks Lottery was established when the Maine, New Hampshire, and Vermont state legislatures enacted an interstate compact. The purpose of each multistate lottery is to increase ticket sales by offering large jackpots. Twenty-seven states, the District of Columbia, and the U.S. Virgin Islands are members of the Multistate Powerball Lottery, twelve states participate in Mega Millions, and three states are members of Lotto South. The California Lottery Commission, with ticket sales totaling $3 billion in 2004, decided in 2005 to join Mega Millions.81 The largest lottery jackpot to date was the Big Game’s (now Mega Millions) $366 million jackpot on May 10, 2000.82 Mega Millions with California as a member anticipates record-settling jackpots. State lotteries continually introduce new games of chance to entice individuals to purchase tickets. The Nevada State Legislature in 2005 authorized gamblers to utilize hand-held wireless devices in casinos’ public spaces to play blackjack, slot machines, video poker, and other games.83 The Massachusetts State Lottery in the same year announced that it would launch a new game allowing players to place bets on a televised and animated horse race with twelve horses and a voice announcing the progress of the race.84 As one would anticipate, race tracks immediately opposed the new game.

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Lotteries are a regressive means of raising government revenues since lower-income individuals dominate among players, and also have high administrative costs because of the size of the payouts. This source of public revenue does not measure up well under Adam Smith’s maxims described in chapter 1. Casinos. Only Nevada in 1931 and New Jersey in 1978 allowed casinos to operate prior congressional enactment of the Indian Gaming Regulatory Act of 1988 authorizing three classes of gambling on Indian reservations.85 Both states raised significant revenues from nonresident gamblers, but the revenues in New Jersey have been cyclical and state administrative expenditures “to maintain the integrity of the gaming industry” have been high.86 Congress in the 1988 act defined Class I games as social ones that are part of tribal ceremonies and involve minimal value prizes. Class II games include bingo, lotto, and similar games and are regulated by the government of each tribe subject to oversight by the national Indian gaming commission. Class III games are ones authorized by an agreement, similar to an interstate compact, between the governor of the state and an Indian tribe and involve only the types of gambling authorized in the state. A state-tribal compact authorizing a tribe to operate a casino may result in the tribe increasing its revenues significantly. Extensive negotiations between a tribe and a governor often takes place prior to reaching an agreement that provides for the tribe to share revenues with the state and in some instances requires the tribe to collect the state’s excise and sales taxes on products sold on reservation to customers who reside off the reservation. The Indian Gaming Regulatory Act of 1988 authorizes a tribe to operate a casino extraterritorially with the consent of the governor of the state and the U.S. secretary of the interior.87 Arizona Governor Jane Hull in 2002 signed an agreement with seventeen Indian Nations authorizing additional forms of gambling and expansion of existing casinos on their respective reservation for a period of twenty-three years.88 In 2005, 411 Indian tribes were operating casinos.89 A national economic recession in the late 1990s led a number of states to seek additional revenue by expanding legalized gambling. The 2001 New York State Legislature authorized video gambling devices at horse-racing tracks and the governor signed agreements with Indian tribes to operate three new casinos in western New York and three additional ones in the Catskill Mountains, north of New York City.90 In 2005, the Seneca Nation delivered to New York $57.1 million as its share

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of the nation’s gambling profits in 2004. The video gaming devices have failed to produce the anticipated revenues as they totaled $141 million, in contrast to a projected $240 million, in fiscal year 2005.91 The New York State Constitution, which contains more prohibitions and restrictions than any other state constitution, specifically prohibits all forms of gambling except lotteries and pari-mutuel betting on dog and horse races.92 The governor, business firms, interest groups, and the state legislature over the decades discovered methods of avoiding many of the prohibitions and restrictions. Park Place Entertainment, a Las Vegas casino operator, became a consultant to the St. Regis Mohawk Indian Nation in 2000 and subsequently purchased a sixty-six acre Catskill Mountains site with an option to buy an additional 1,416 acres.93 The company in 2001 transferred the deed to the sixty-six acres to the U.S. Bureau of Indian Affairs to hold in trust for the St. Regis Mohawk Indian Nation, and signed a contract with the tribe to manage the proposed casino after it opens. Riverboat casinos date to 1989 when the Iowa General Assembly legalized such gambling and its lead was followed by state legislatures in Illinois, Louisiana, and Mississippi. The Iowa law initially allowed bets up to $5 and placed a maximum loss per player at $200 for a cruise, but quickly dropped the limits when the other three states imposed no limits.94 The Louisiana State Legislature granted permission for riverboat casinos to operate in many parishes, equivalent to counties in other states, and one casino in New Orleans.95 Five casino riverboats had been planned for the city, but only two operated and the Harrah’s casino in the city was open only for a short period of time prior to closing in 1995. A 1997 study concluded that “the [c]riminal justice costs related to Harrah’s, both while it was open and after it closed, totaled $3,278,608.”96 The September 2005 hurricane that devastated the gulf coast destroyed numerous riverboat casinos on the Mississippi River, but owners announced the casinos will be replaced.97 A special session of the Mississippi State Legislature in October 2005 enacted and Governor Haley Barbour signed a bill allowing the casino owners to build new casinos on shore.98 By 2002, there were eighty-six commercial casinos and eight-seven Indian casinos in the midwest and the employment generated replaced many manufacturing jobs in small towns.99 The Missouri Riverboat Gaming Association reported that approximately one-quarter of riverboat employees had been on public welfare and an additional 16 percent had been unemployed. The 2005 decision of the U.S. Supreme Court upholding the constitutionality of the City of New London, Connecticut, use of eminent

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domain to acquire private property by opining that the city’s use of the power to acquire property for economic development purposes satisfied the constitutional public-use requirement.100 This decision generated fears among many citizens throughout the United States about the potential loss of their property through governmental exercise of eminent domain. The fears are the greatest in cities, such as Niagara Falls, where a gubernatorial–Indian nation agreement stipulates that the power of eminent domain can be used to acquire private property for a Seneca Nation casino if the owner refused to sell the property.101 Approximately one-half of the land was purchased from willing owners, including the city, which sold its convention center for use as the casino. A part owner of Fallsville Splash Water Park commented that restaurants have closed and hotel patronage has declined because the casino is designed to keep people inside its facility. The state has benefited from the Seneca Nation’s casino in the city and a second casino in nearby Salamanca in the form of approximately $100 million in shared revenues from slot machines during their first two years of operation. Casinos, in common with lotteries, are a regressive form of raising government revenues and have high social costs. Social Costs. Is there evidence that governors and state legislatures recognize social costs and problems associated with legalized gambling by restricting certain types of gambling or limiting losses per person? The evidence, not surprisingly, is no. Indian nations and commercial gambling firms make large contributions to candidates for governor and the state legislatures. Although many state and local governments increasingly have become dependent on revenues generated by legal gambling, there is strong opposition to gambling on moral grounds because of the adverse social costs and problems flowing from such activities. A 1995 book highlighted the moral corruption associated with legalized gambling, “its corrosive impact on the work ethic, and its potential devastation of family savings. . . . ”102 In addition, legalized gambling can accentuate criminal activities, including illegal gambling. Two executives of the Lakes Regional Greyhound Park in New Hampshire were indicted in January 2005 for their involvement in a $200 million illegal gambling operation with three alleged associations of the Gambino crime family in Florida, Nevada, New Hampshire, New Jersey, and New York.103 New Hampshire Attorney General Kelly Ayotte in March 2005 requested the state parimutuel commission to revoke the license of the lakes regional greyhound park because the its owners “are part-owners of the International

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Players Association which allegedly conducted an illegal gambling business at the track using track employees, track telephones, and perhaps event track money as capital for its start-up.”104 On May 3, 2005, the greyhound park surrendered its racing license to the commission. In Rhode Island, a dog track and two of its former executives were convicted in 2005 of wire fraud and conspiring to bribe the speaker of the Rhode Island House of Representatives to arrange legislative support for increasing the number of slot machines at the track.105 The speaker was not charged as no bribe was paid. Filmmaking. New York City historically was the filmmaking capital of the United States, but soon was eclipsed by Hollywood. Many states and cities in the United States and Canadian provinces for years have attempted to attract film and television producers by offering a variety of incentives, among them free use of public equipment, including police cruisers, facilities, and staff, and tax incentives. Currently, Louisiana offers a tax credit equal to 15 percent of the total cost of production of a film shot totally or partially in the state and an additional tax credit of 20 percent of the payroll of those employed in the production in the state.106 These incentives resulted in a sharp increase in spending on films and television in the state from $20 million in 2002 to $425 in 2005. The number of feature films shot on location in Los Angeles has declined from 13,980 in 1996 to 8,707 in 2004.107 In consequence, leaders of the Hollywood filmmakers in 2005 campaigned in support of a bill authorizing a 12 percent tax credit up to a maximum of three million for a production filmed in the state.

SUMMARY AND CONCLUSIONS Available evidence suggests that state competition to attract business firms, sports franchises, tourists, gamblers, and filmmakers will become more intensive over the coming decades, as states are faced with the problem of obtaining adequate revenues to finance expensive programs such as Medicaid. Interstate competition for business firms can be viewed as an inefficient and unfair method of increasing tax revenues as the tax incentives offered to firms result in a significant revenue loss for a number of years and existing business firms, ineligible for tax incentives unless they expand, are required to pay taxes to finance the tax incentives offered to other firms. Furthermore, a firm can blackmail a state and a

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city by threatening to relocate to another state unless provided with tax incentives. Owners of sports franchises also can engage in a type of blackmail by indicating that their respective team will leave the state unless it finances a new or renovated stadium. There is little evidence that a state benefits from offering major tax incentives to encourage the owner of a sports franchise not to relocate the franchise to another state. State-sponsored or -authorized gambling is criticized strongly by persons convinced that gambling is morally corrupting and creates major social problems, particularly for the spouse and children of a compulsive gambler, and because it is a regressive means of raising public revenues in view of the fact most gamblers are lower-income persons. State competition to attract tourists generally is not criticized. What is criticized are the high taxes levied on lodging facilities. Chapter 8 examines the “silence of Congress” relative to its general failure to employ its interstate commerce powers to regulate state taxation of interstate commerce and offers recommendations for congressional action to engage in such regulation.

Chapter 8

The Silence of Congress

T

he unamended U.S. Constitution contains five clauses potentially limiting the taxation powers of States. Art. 1, sec. 8 grants plenary power to Congress to regulate interstate, foreign, and Indian tribes commerce. This power grant can be employed to prohibit or restrict the levying of specific taxes by state and local governments affecting such commerce. The supremacy of the laws clause of the art. 4 reinforces this grant and other delegated regulatory powers of Congress. Art. 1, sec. 10, on the import and export clause, stipulates: “No State shall, without the consent of Congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing it’s [sic] inspection laws, and the net produce of all duties and imposts, laid by any State on imports or exports, shall be for the use of the Treasury of the United States.” Furthermore, Congress is authorized to revise such laws. The privileges and immunities clause of art. 4 provides a basis for a constitutional challenge of a state tax discriminating against a citizen of another state. And the Fourteenth Amendment contains three clauses— due process of law, equal protection of the laws, and privileges and immunities—that have been utilized in many court challenges of

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allegedly discriminatory state and local government taxes. Sec. 2 grants power to Congress to enforce the amendment. The principal focus of this chapter is Congress’s limited employment of its delegated powers to regulate the taxation powers of state and local governments under the interstate, foreign, and Indian tribes commerce clause to harmonize their taxation statutes and possibly reduce their revenues. In fairness, it should be noted that many state legislatures have been responsible for tax revenue declines by enacting tax credits, also known as tax expenditures, to promote a number of special policies. The more major tax credits are employed as incentives to induce corporations to construct new facilities in a state (see chapter 7). William F. Fox and LeAnn Luna in 2005 reported that “numerous states have reduced the corporate income tax liability of many firms that are intensive exporters out of state (such as many manufacturers) by altering the traditional three-factor apportionment formula to emphasize the sales factor. The traditional…formula, which placed equal weight on property, payroll, and sales, is now the exception rather than the rule, with over two-thirds of the states at least double weighing the sales factor” (see chapter 5).1 The phrase “the silence of Congress” refers to the facts the national legislature did not enact a regulatory statute based on the commerce clause until The Act to Regulate Commerce of 1887 was enacted and subsequently enacted only a small number of relatively limited statutes prohibiting or restricting the levying of taxes by the states and their political subdivisions.2 The “silence of Congress” raises the question whether the silence reflects the incapacity of the national legislature to regulate state taxation of interstate commerce in an equitable manner to eliminate many current problems and the need for disgruntled taxpayers to seek a remedy in state and U.S. courts? A most important question must be raised: Does Congress possess the necessary free time to draft, debate, and enact bills regulating state taxation of interstate commerce in order to ensure that the taxes, particularly complex ones, are levied equitably? A brief review of a number of key U.S. Supreme Court decisions, in addition to the ones examined in earlier chapters, will promote an understanding of the significance of “the silence of Congress.”

KEY U.S. SUPREME COURT TAX DECISIONS In the absence of congressional action to protect free trade among sister states, the U.S. Supreme Court in Gibbons v. Ogden in 1824 developed its famous dormant interstate commerce clause doctrine holding that a

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state statute may offend the unexercised interstate commerce clause and therefore is invalid.3 The doctrine continues to this day to be employed by state and U.S. courts to invalidate certain actions taken by states and their political subdivisions. The court in Brown v. Maryland in 1827, in view of the “silence of Congress,” invalidated for the first time a state tax by developing the “original package” doctrine holding goods in their original packages moving in foreign commerce retain their constitutional protection against state taxation while in an importer’s warehouse.4 Writing for the court, Chief Justice John Marshall rejected the argument that payment of import duties terminated federal jurisdiction, struck down a Maryland fifty-dollar license tax imposed on importers and wholesalers of foreign goods without the required consent of Congress, and added “the principles laid down in this case . . . apply equally to importations from a sister State.”5 In 1868, the court developed the doctrine of complementary extraction to validate as constitutional a facially discriminatory Alabama tax of fifty cents per gallon levied on dealers importing liquors.6 The tax was upheld because another section of the state’s statutes levied an identical fifty-cent tax on brandy and whiskey produced in the state and hence there was no tax discrimination against imported products. States frequently have utilized this doctrine, successfully and unsuccessfully, to justify taxes levied on foreign firms that are higher than taxes levied on domestic firms. The court in 1885 referred to the “silence of Congress,” validated the constitutionality of a nondiscriminatory Louisiana property tax levied on coal imported in barges from Pennsylvania, and added: “When Congress shall see fit to make a regulation on the subject of property transported from one State to another, which may have the effect to give it a temporary exemption from taxation in the State to which it is transported, it will be time enough to consider any conflict that may arise between such regulation and the general taxing laws of the State.”7 In 1887, the court in Robbins v. Shelby County Taxing District rendered a most important dormant commerce clause dictum by opining about the failure of Congress “to make express regulations indicates its will that the subject be left free from any restrictions or impositions, and regulation of the subject by the States, except in matters of local concern only, is repugnant to such freedom.”8 This quotation aptly summarizes the court’s view of the meaning of the “silence of Congress.” The court, however, shifted its position in Michelin Tire Corporation v. Wages in 1976 by holding the import and export clause does not prohibit the levying of a property tax on imported tires in the absence of the consent of Congress.9

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The constitutionality of a Louisiana twenty-five mills tax on foreign railroad corporations’ rolling stock lacking a domicile in the state was addressed by the justices in 1926, Railroad corporations paying this tax were exempt from local taxes and as a result only a four-mill differential existed between the state tax and the average local government tax. The court opined there was no evidence the state tax was intended to discriminate against foreign firms and upheld that the tax because the amount of discrimination was insignificant.10 In 1932, the court ruled constitutional a South Carolina six-cent per gallon license tax imposed on persons importing petroleum products for consumption because the tax was a complementary one as a second state statute imposed an identical license tax on petroleum product dealers selling such products.11 Writing in 1938, Justice Harlan F. Stone emphasized in Western Live Stock v. Bureau of Revenue that the interstate commerce clause was not designed to exempt persons and business firms “from their just share of state tax burden even though it increases the cost” of their operations.12 He noted the following year, in a case involving the license fee levied by the California Caravan Act, “it is not the province of the Court to hear and examine evidence for the purpose of deciding again a question which the legislature already has decided. Its function is only to determine whether it is possible to say the legislative decision is without rational basis.”13 Congress is free to devolve certain of its powers to states and did so with respect to the regulation of the business of insurance by enacting the McCarran-Ferguson Act of 1945.14 The U.S. Supreme Court examined the act in 1946 and upheld a South Carolina gross receipts tax levied on foreign insurance companies by rejecting an interstate commerce clause challenge of the constitutionality of the tax.15 Delivering in 1981 the court’s opinion in Western & Southern Life Insurance Company v. State Board of Equalization, Justice William Brennan explained that an allegedly discriminatory state tax may be challenged as violating the interstate commerce clause, the privileges and immunities clause, and the equal protection of the laws clause of the Fourteenth Amendment.16 The lawsuit involved an Ohio insurance company’s challenge of a retaliatory tax authorized by a California constitutional amendment ratified by voters in 1964. A privileges and immunities challenge was rejected because the court held in 1839 that the clause applies only to persons and the interstate commerce clause challenge and the equal protection of the laws challenges were inapplicable because the California State Legislature defined the retaliatory tax in question as a privilege tax.17 In 1985, however, the court opined the McCarran-Ferguson Act did not immunize from an equal protection of the laws challenge an

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Alabama tax discriminating against a foreign insurance company by levying a substantially higher gross premiums tax rate on foreign insurance companies than the rate levied on domestic insurance companies.18 Consolidating two cases, the court in Northwestern States Portland Cement Company in 1959 rejected an interstate commerce clause and a due process of law clause challenge of a Minnesota statute that levied a net income tax on the fairly apportioned income of a foreign corporation whose activities were restricted to interstate commerce.19 Chartered in Iowa, the company’s activities in Minnesota were limited to the solicitation of orders for its products with each order subject to acceptance by the company’s office in Iowa from which shipments were made. However, the firm leased in Minnesota an office staffed by a district manager, two other salesmen, and a secretary, and two additional salesmen used the office as a clearinghouse. The court determined a nexus had been established between the company and Minnesota and opined: “Since by the practical operation of (the) tax the State has exerted its power in relation to opportunities which has given, to the protection it has afforded, to benefits it has conferred, it is free to pursue its own fiscal policies.20 Justice Felix Frankfurter wrote a strong dissent based on judicial precedents: To subject these corporations to a separate income tax in each of these States means that they will have to keep books, make returns, store records, and engage legal counsel, all to meet the divers and variegated tax laws of forty-nine States, with their different times for filing returns, different tax structures, different modes for determining “net income,” and different, often conflicting, formulas of apportionment. This will involve large increases in bookkeeping, accounting, and legal paraphernalia to meet these new demands. The cost of such a far-flung scheme for complying with the taxing requirements of the different States may well exceed the burden of the taxes themselves, especially in the case of small companies doing a small volume of business in several States. . . . The extensive litigation in this court which has challenged formulas of apportionment . . . will be multiplied many times when such formulas are applied to the indefinitely larger number of other businesses which are engaged in exclusively interstate commerce.21 He specifically called on Congress to develop a state taxation of interstate commerce policy after conducting “a full and thorough canvassing of the multitudinous and intricate factors which compose the problem of

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the taxing freedom of the States and the needed limits on such state taxing power.”22 In 1961, the court upheld, on the ground of complementary taxation, an Alaskan 4 percent license tax on freezer ships and floating cold storage units, based on the value of the raw fish caught in the state’s waters, against an interstate commerce clause challenge alleging the tax statute exempts fish caught and frozen prior to canning in the state by holding no tax discrimination exists because canneries were subject to a 6 percent tax on the value of the salmon canned.23 The court in National Bellas Hess, Incorporated v. Department of Revenue of Illinois in 1976 invalidated an Illinois tax statute requiring a business firm, with no office sales persons in the state, to collect the state use tax on merchandise purchased by state residents as placing an undue burden on interstate commerce and violating the due process of law clause of the Fourteenth Amendment.24 In 1977, the court in Boston Stock Exchange v. State Tax Commission explained its appellate approach relative to a suit involving the taxation power of states: “On various occasions when called upon to make the delicate adjustment between the national interest in free and open trade and the legitimate interest of the individual States in exercising their taxing powers, the Court has counseled that the result turns on the unique characteristics of the statute at issue and the particular circumstances in each case.”25 The court in Quill Corporation v. North Dakota in 1992 ruled that a state cannot tax an alien or foreign corporation lacking a substantial nexus (physical presence) in the state.26 This ruling deprives state and local government of substantial sales and user-tax revenues. The decision also encouraged several national retail corporations to create intangible holding companies (passive investment companies) in states, particularly Delaware, not taxing royalty income. A national corporation assigns its trademarks to retailers who pay a fee to the company. Where allowed, the retailer takes advantage of a deduction of the fee, thereby reducing gross corporate income subject to taxation and state tax revenues. Sixteen state legislatures responded to this tax avoidance scheme by enacting statutes establishing a combined income reporting system utilizing a formula to determine the in-state taxable income of a corporation. Eight additional state legislatures enacted more limited acts forbidding a corporation to deduct payments made to an intangible holding company in a sister state or to include payments to the intangible holding company in the total taxable income of the corporation.

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Supreme Court Recommendations for Congressional Action Dissenting in McCarroll v. Dixie Greyhound Lines Incorporated involving an Arkansas tax, Justices Hugo L. Black, Felix Frankfurter, and William O. Douglas in 1939 outlined the advantages of congressional regulation of interstate commerce over judicial regulation: Judicial control of national commerce—unlike legislative regulations—must from inherent limitations of the judicial process treat the subject by the hit-and-miss method of deciding single local controversies upon evidence and information limited by the narrow rules of litigation. Spasmodic and unrelated instances of litigation cannot afford an adequate basis for the creation of integrated national rules which alone can afford that full protection for interstate commerce intended by the Constitution. . . . Unconfined by “the narrow scope of judicial proceedings” Congress alone can, in the exercise of its plenary constitutional control over interstate commerce, not only consider whether such a tax as now under scrutiny is consistent with the best interests of our national economy, but can also on the basis of full exploration of the many aspects of a complicated problem devise a national policy fair alike to the States and our Union.27 Justice Robert H. Jackson of the U.S. Supreme Court, in a 1944 concurring opinion in Northwest Airlines, Incorporated v. Minnesota, highlighted the broad power possessed by Congress to regulate state taxation and thereby suggested the power should be exercised: Congress has not extended its protection and control to the field of taxation, although I take it no one denies that constitutionally it may do so. It may exact a single uniform federal tax on the property or the business to the exclusion of taxation by the states. It may subject the vehicles or other incidents to any type of state and local taxation, or it may declare them tax-free altogether. Our function is to determine what rule governs in the absence of such legislative enactment.28 The court in rendering opinions involving interstate commerce, including state taxation of such commerce, has expressed the view congressional regulation of state taxation would be superior to cases-by-case adjudication of challenges to such taxation. In 1959, the court made its views very explicit:

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Justice Felix Frankfurter in dissent echoed the need for congressional regulation of interstate taxation: At best, this court can only act negatively; . . . it can determine whether a specific state tax is imposed in violation of the commerce clause. . . . Congress alone can provide for a full and thorough canvassing of the multitudinous and intricate factors which compose the problem of the taxing freedom of the States and the needed limits on such taxing power. Congressional committees can make studies and give the claims of individual states adequate hearing before the ultimate legislative formulation of policy is made by representatives of all the States. . . . Congress alone can formulate policies founded upon economic realities, perhaps to be applied to the myriad situation involved by a properly constituted and duly informed administrative agency.30 The court’s decision in this case prompted Congress in the same year to enact its first statute limiting the taxation powers of the states based on its power to regulate interstate commerce. The above view was reinforced in the court’s 1978 opinion in Moorman Manufacturing Company v. Bair relative to the apportionment of a taxpayer’s income among the states: “It is clear that the legislative power granted to Congress by the Commerce Clause of the Constitution would amply justify the enactment of legislation requiring all States to adhere to uniform rules for the division of income. It is to that body, and not this Court, that the Constitution has committed policy decisions.”31 A more forceful statement is contained in the court’s 1992 decision in Quill Corporation v. North Dakota:

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[T]he underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions. Indeed, in recent years Congress has considered legislation that would “overrule” the Bellas Hess rule. Its decision not to take action in this direction may, of course, have been dictated by respect for our holding in Bellas Hess that the Due Process Clause prohibits States from imposing such taxes, but today we have put that problem to reset. Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-order concerns with a duty to collect user taxes.32

CONGRESSIONAL REGULATION OF STATE TAXATION The first congressional limitation on state taxing powers dates to the Tariff Act of 1930 imposing a tax on imported crude petroleum and granting specified exemptions, and article 942 of the implementing Customs Regulation of 1931 stipulating merchandise in bonded warehouses “are exempt from taxation under the general laws of the several States.”33 The New York City Council enacted Local Law No. 4 of 1934 imposing a sales tax on fuels manufactured in the city as modified by a subsequent 1934 state statute.34 The Appellate Division of the New York State Supreme Court ruled the tax infringed on the foreign commerce power of Congress and the New York Court of Appeals affirmed the lower-court decision.35 In 1940, the U.S. Supreme Court reached the following conclusion: “The customs regulation prescribing the exemption from state taxation, when applied to the facts of the present case, states only what is implicit in the Congressional regulation of commerce presently involved. The state tax in the circumstances must fail as an infringement of the Congressional Regulation of Commerce.”36 Congress enacted the Soldiers and Sailors Relief Act of 1940 and placed the following limitation on state and local government income taxes: “The collection from any person in the military service of any tax on the income of such person, whether falling due prior to or during his period of military service, shall be deferred for a period extending not more than six months after the termination of his period of military service if such person’s ability to pay such tax is materially impaired by reason of such service.”37

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In 1959, Congress enacted the first law establishing minimum tax jurisdictional standards for states with respect to taxation of interstate commerce.38 This hastily enacted statute was the result of successful lobbying by business firms following the 1959 U.S. Supreme Court’s decision in Northwestern States Portland Cement Company v. Minnesota. Commonly referred to as Public Law 86-272, the act specifically forbids states and their political subdivisions to levy a net income tax on the income a person or firm derived in such a state or local government from interstate commerce if the only business activities conducted in the state or local government involve the solicitation of orders for sales of tangible personal property with the orders sent outside the state for approval or rejection and shipment of approved orders from outside the state. The purpose of the act was to restore the taxation jurisdictional status quo existing prior to the court’s 1959 decision. Public Law 86-272 also authorized congressional committees to conduct studies of state taxation of interstate commerce and the Committee on the Judiciary of the House of Representatives established a Special Subcommittee on State Taxation of Interstate Commerce, popularly known as the Willis committee, which issued a very comprehensive report on the subject in 1964.39 The scope of the protection against taxation provided by the statute is difficult to determine, in part because of the unclear definition of the terms “solicitation of orders” and “delivery.” The Willis committee’s report surveyed business firms to determine the impact of the law on their state income tax liabilities and found “it was an exceptional case in which business methods were changed in response to Public Law 86-272 during its first 3 years.”40 More recently, Paul J. Hartman pointed out the ambiguities in the law: Thus, it is not clear whether an out-of-state seller comes within the protection of “solicitation of orders in a State” where he merely rents a display room in connection with the solicitation of orders. The statute does not apply to activities connected with the sale of services, but the services may be performed in connection with the sale of tangible property. To what extent may the seller aid a customer in the installation of newly purchased equipment without forfeiting his otherwise tax-exempt statute? Does “deliver” included installation work—a term broad enough to encompass jobs requiring five minutes, as well as those requiring five weeks?41 Another ten years passed before Congress enacted a statute restricting the taxation powers of the states. An Act to Clarify the Liability of

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National Banks for Certain Taxes stipulates: “For the purpose of any tax law enacted under the authority of the United States or any State, a national bank shall be treated as a bank organized and existing under the laws of the State or other jurisdiction within which its principal office is located.”42 Reacting to the 1973 U.S. Supreme Court decision upholding the constitutionality of a user tax levied on persons traveling in interstate commerce, Congress enacted the Airport Development Acceleration Act of 1973 forbidding states and their political subdivisions to levy a tax, head charge, or other charge on individuals traveling in air commerce, but exempting from the prohibition until December 31, 1973, jurisdictions that had levied such a tax prior to May 21, 1970.43 Congress included in the Omnibus Budget Reconciliation Act of 1990 authorization for the U.S. secretary of transportation to approve a state or local government tax of $1, $2, or $3 on departing paying air passengers.44 And the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century of 2000 authorizes the secretary of transportation to allow the imposition of a passenger facility fee or $4.00 or $4.50 on each paying passenger boarding an aircraft at an airport controlled by an eligible agency.45 A 1973 congressional statute, State Taxation of Depositories Act, forbids states and local governments to levy a “tax measured by income or receipts or by other ‘Doing Business’ tax on any insured depository not having its principal office within such state.”46 The Securities Acts Amendments of 1975 restrict the taxation power of states and their political subdivisions by limiting stock transfer taxes and prohibiting the imposition of a tax “on securities which are deposited in or retained by a registered clearing agency, registered transfer agent, or any nominee thereof or custodian therefor . . . ”47 The amendments, according to a Senate report, were aimed at the New York transfer tax and generally similar bills under consideration by several other state legislatures.48 The Railroad Revitalization and Regulatory Reform Act of 1976 contains two restrictions on the taxation powers of the states and their political subdivisions. The first restriction forbids subnational governments to tax railroad property more heavily than commercial and industrial property and the second restriction allows only the state and local government of residence of a railroad company employee who performs assigned duties in two or more states to levy an income tax on the employee.49 In 1976, Congress enacted the Tax Reform Act prohibiting state and local government discriminatory taxation of the generation of electrical

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energy and defining as discriminatory a tax “if it results, either directly or indirectly, in a greater tax burden on electricity which is generated and transmitted in interstate commerce than on electricity which is generated and transmitted in intrastate commerce.”50 The U.S. Supreme Court in 1979, based on the act, invalidated a New Mexico tax on generation of electricity at a rate of approximately 2 percent of the retail charge per net kilowatt and authorizing a tax credit to reduce the gross receipts tax on local sales of electricity, a credit not available to firms that sold electricity to customers in other states.51 Most members of Congress maintain a home in their respective state and a second home in the Washington, D.C. area. Congress in 1977 enacted a statute prohibiting a state other than the one represented by a member from levying an income tax on his or her congressional salary.52 This statute immediately restricted only the taxation powers of Maryland as the District of Columbia and Virginia did not tax the income of members of Congress. The Motor Carrier Act of 1980 provides that only the state or political subdivision of residence of a motor carrier employee who performs regularly assigned duties in two or more states may tax the compensation of the employee and a second provision “applies to a master, officer, or sailor who is a crew member of a vessel engaged in foreign, coastwise, intercoastal, or noncontinuous trade or in the fisheries of the United States.”53 Congress enacted the Tax Equity and Fiscal Responsibility Act of 1982 preventing state and local governments from imposing unreasonable tax burdens discriminating against the property of an air carrier.54 The Financial Institutions, Reform, Recovery, and Enforcement Act of 1989 exempts the Federal Deposit Insurance Corporation when acting as a receiver from state and local government taxation with the exception of the corporation’s real property that may be taxed by state and local governments “to the same extent according to its value as other real property is taxed . . . ”55 The following year Congress enacted the AMTRAK Reauthorization Act prohibiting state or local government taxation of the income of a railroad employee or a motor carrier employee whose duties involve interstate commerce except the state or local government of residence of the employee.56 Congress enacted the Motor Carrier Safety Act of 1991 containing the stipulation that a state legislature that is not a member of the International Fuel Agreement may not enact a statute and a state motor vehicle administrator may not promulgate a regulation requiring a motor carrier to pay a state fuel tax “unless such law or regulation is in confor-

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mity with . . . the Agreement with respect to the collection of such tax by a single base state and proportional sharing of such taxes charged among the states where a commercial vehicle is registered.”57 Responding to pressure from airline unions, Congress included in the Federal Aviation Administration Authorization Act of 1994 the following provision: Compensation paid by an air carrier to an employee . . . in connection with such employee’s authorized leave or authorized absence from regular duties on the carrier’s aircraft in order to perform services on behalf of the employee’s airline union shall be subject to the income tax laws of only the following: (A) The State or political subdivision of the State that is the residence of the employee. (B) The State or political subdivision . . . in which the employee’s scheduled flight time would have been more than 50 percent of the employee’s total flight time for the calendar year had the employee been engaged full time in the performance of regularly assigned duties on the carrier’s aircraft.58 A second provision in the act mandates that all airport charges, fees, and rates “must be reasonable and may only be used for purposes not prohibited by this Act.59 An Act to Codify Without Substantive Change Recent Laws Related to Transportation and to Improve the United States Code of 1994 exempts from additional taxes the personal property and real property of Amtrak Commuter.60 The Interstate Commerce Commission Termination Act of 1995 specifically forbids a state or a political subdivision to levy or collect a fee, head charge, other charge, or a tax on: “(1) a passenger traveling in interstate commerce by motor carrier; (2) the transportation of a passenger traveling in interstate commerce by motor carrier; (3) the sale of passenger transportation in interstate commerce by motor carriers; or (4) the gross receipts derived from such transportation.”61 The State Taxation of Pension Income Act of 1995, known as the source tax act, allows only the state of residence to tax the retirement income and pension distributions of a retired person.62 New York in particular had been aggressive in taxing the pension income of former residents who moved to other states including Florida which does not levy an income tax. The most major state and local revenue loss, estimated at $16 billion or more annually, is attributable to a congressional statute prohibiting taxation of Internet sales. The Internet Tax Freedom Act of 1998

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imposed a ban on state and local government taxation of Internet sales, but also contained a 2001 sunset clause.63 The Internet Nondiscrimination Act of 2001 extended the ban for two years.64 Congress failed to renew the prohibition in 2003, but enacted the Internet Tax Freedom Act of 2004 extending the prohibition retroactively to November 1, 2003, and with a sunset date of November 1, 2007.65 This act also continues a grandfather clause allowing states that levied a tax on Internet access prior to October 1, 1998, to continue to levy the tax until November 1, 2005.66 As noted, the U.S. Supreme Court’s 1992 decision in Quill Corporation v. North Dakota prevents state and local governments from taxing interstate mail order sales of a business firm lacking a nexus to a state or local government, thereby resulting in a major loss of tax revenues. Congress possesses ample power to reverse the court’s ruling, but has taken no action to do so. The most recent restriction on the taxation powers of the states is the Act to Provide Equitable Treatment with Respect to State and Local Income Taxes for Certain Individuals Who Perform Duties on Vessels of 2000 that applies to a person engaged to perform duties on a vessel as a pilot in two or more states and who performs regularly assigned duties and stipulates: “An individual to whom this subsection applies is not subject to the income tax laws of a State or political subdivision . . . other than the State and political subdivision in which the individual resides, with respect to compensation for the performance of duties. . . . ”67 Our review of congressional statutes restricting the taxation powers of subnational governments reveals that only the Internet Tax Freedom Act results in substantial state and local government revenue losses. The other statutes have limited applicability as illustrated by acts stipulating only the state of residence may tax the income of employees engaged in interstate transportation; prohibiting taxation of passengers on interstate airlines, buses, and railroads; allowing income taxation of members of Congress only by the state represented by a member; and prohibiting taxation of a national bank except by the state where its principal office is located.

WHAT ACTIONS SHOULD CONGRESS INITIATE? The problem of nonharmonious state taxation of corporate income has been studied by numerous organizations—the National Tax Association since 1916, the National Association of Tax Administrators, and the National Conference of Commissioners on Uniform State Laws—and

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individual scholars such as economist Paul Studenski who in 1960 called on Congress “to correct the long standing harm to interstate commerce produced by the use of divergent, overlapping, and, in some cases, wholly irrational and inequitable allocation formulas by enacting a uniform allocation formula which would be sound from a national point of view and reasonably fair to all states.”68 He specifically recommended: “A proper allocation formula should include property and payroll because these represent the two factors of production, capital and labor, which create the income of any enterprise. Neither gross receipts from shipments nor sales-by-destination belong in a properly designed formula.”69 The Willis committee reported in 1964 that “there is no logical necessity to choose between Federal inaction and a Federal requirement that State definitions of the tax base be identical in all respects. Assuming that some degree of Federal action were considered appropriate in this area, it would nevertheless be possible to leave areas in which the States would retain the power to differ.”70 The committee identified three major advantages of state uniformity in the definition of taxable income by adoption of the federal tax base: (1) Reduction of compliance costs, (2) improvement in compliance and enforcement, and (3) elimination of inequities. Business firms experience compliance costs in determining the degree to which a state’s requirements differ from federal requirements because they were not familiar with laws and regulations of the concerned states. Compliance costs are lower in states linking their statutes to the U.S. Internal Revenue Code. Doubts, however, existed in several states whether the state constitution would allow the state legislature to adopt U.S. taxation statutes prospectively. Subcommittee staff interviews with corporate officers and state taxation officers revealed the former were unwilling to incur major expenses in order to comply with state income tax laws and the tax administrators are reluctant to mandate compliance. Few corporations were subject to field audits and the committee concluded the conformity of state taxation statutes to federal statutes would improve state tax administration. A number of state departures from the federal taxation base have a systematic propensity to result in larger tax liabilities for multistate taxpayers than for a business firm paying taxes to only one state. This finding may be a product of deliberate discrimination against multistate taxpayers, but in other instances is the result of a provision in a state’s tax code making deductibility of an item dependent on whether an event occurs in the state. An extra depreciation deduction allowance is permitted only on property located in the state, charitable contributions are deductible only if made to local charities, and an intercorporate dividend deduction is permitted only if the corporation paying the dividend is

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taxed in the state. Inequities also flow from the fact there is a lack of uniformity among states with respect to the year in which income and deductions should be reported with the result certain income may be taxed more than once or not taxed. The U.S. Supreme Court on occasion, academics, and other tax experts suggested several types of actions Congress should initiate to harmonize the tax laws of the fifty States and the District of Columbia. One can argue strongly that congressional harmonization statutes should be limited primarily to multijurisdictional corporate income taxes in order to allow subnational governments discretion to levy and determine the rates of other taxes. The U.S. Supreme Court has established precedents for state taxation of the income of nonresidents that reduce the need for congressional action to mandate criteria states must follow when levying a tax on nonresidents’ income earned in a state.

Recommendations We offer the following seven recommendations to improve the equity of state taxation of interstate commerce and assess the prospects that Congress will enact statutes containing the recommendations: 1. Congress should enact a statute mandating states to employ uniform rules for apportioning the income of a multijurisdictional corporation among the states where the corporation has a nexus. The need for congressional action has increased since 1964 when the Willis report was issued because of the growth in the number and size of multijurisdictional corporations. The U.S. Supreme Court in Moorman Manufacturing Company v. Bair in 1978 cited examples of the complexities involved in apportionment of a multistate corporation by states using different definitions of key terms such as where a “sale” occurs and different state methods of attributing nonbusiness income, and specifically referred to the fact Congress could use its interstate commerce clause power to mandate all states to adhere to uniform rules for the division of income.71 Such rules are particularly important to ensure multistate and multinational corporations are taxed equitably by the states. The U.S. General Accounting Office (GAO) released a report in 1982 recommending that Congress should use its foreign and interstate commerce power to regulate state taxation of multijurisdictional corporate income based on the

The Silence of Congress following conclusion: “The Congress appears to be in the best position to fully evaluate the multiple factors and assess the arguments surrounding the policy issues involved in State taxation of multistate and multinational corporation income, especially foreign source income. Also, because the Congress can fully consider the States’ rights and foreign policy issues, it can best devise a comprehensive solution which adequately and fairly balances the competing interests of the States and corporate taxpayers.”72 Specifically, Congress should mandate the use of a threefactor formula—payroll, profits, and sales—that would be applicable to unitary multijurisdictional corporations and each factor should be weighted equally. Adoption of this recommendation for uniform rules for apportionment of the income of corporations among the states would solve the most major interstate taxation problem. A decision to require states to use the formula necessitates development of criteria for identifying a unitary corporation such as unity of ownership, management, and centralized services. Criteria development will not be an easy task as there are major corporate officers’ and state officers’ differences of opinion on desirable criteria. GAO reported corporations generally favor as the principal criterion “a ‘substantial interdependence’ test—interdependence in basic operating functions” while state tax officers stress that the primary criterion should be stock ownership.73 Reaching an agreement on criteria to be employed to determine when a state possesses jurisdiction to tax a multistate corporation will be less difficult than reaching an agreement on criteria to be applied to multinational corporations. Non-U.S. multinational corporations, in particular, register strong opposition to state application of the unitary rule to their operations, also known as worldwide combined reporting, for a variety of reasons including the charges foreign source income is taxed, the risk of international double taxation is increased, excess allocation of income to a state government occurs, and heavy administrative compliance burdens are imposed. These corporations also maintain U.S. foreign commerce goals are frustrated by the unitary system. No general formula, however, can solve automatically all questions pertaining to the source of income for all industries.

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The Silence of Congress Daniel Shaviro suggested “Congress could direct that industry-specific elaborations of the general rule be developed administratively . . . pursuant to the general directive that in all cases exactly 100 percent of a taxpayer’s U.S. income should be apportioned to all the states together.”74 2. Congress should require state and local governments levying an income tax on nonresidents to use the federal income tax base with limited specified exceptions. 3. A more drastic recommendation is mandated state piggybacking of state business and personal income taxes on the federal corporate and personal income taxes. Enactment of this recommendation would eliminate all nonuniform provisions of state income tax statutes with the possible exceptions of modifications allowed by Congress. A piggybacking program for personal income taxes currently exists in law. The Federal-State Tax Collection Act of 1972 authorizes a voluntary system under which states may entered into an agreement with the U.S. secretary of the treasury to collect state personal income taxes levied on residents and nonresidents provided the concerned states generally harmonized their respective income tax statute with the U.S. internal revenue code.75 A taxpayer would file a single return for both the federal and state individual income taxes, administrative determinations made by the internal revenue service would be binding, and taxes collected would be transferred promptly to the states. 4. Congress should establish upper limits on state severance taxes levied on minerals and timber subject to waiver provided a state can demonstrate special circumstances involving state expenditures to protect the environment that necessitate a higher tax rate. Justice Byron White of the U.S. Supreme Court in 1981 voted with the majority to uphold the constitutionality of the sharp increase in Montana’s severance tax on coal, but expressed the fear that the tax levied “on consumers in other States may in the long run prove to be an intolerable and unacceptable burden on commerce.”76 His opinion emphasized the potential danger a resource rich state will place an undue burden on interstate commerce by means of a very high severance tax. He also noted that Montana collected the bulk of its coal severance tax revenues from coal mined on United States property and that fact raises the question of whether the revenues should

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be shared with the national government. It should be noted that the court in the same year in Maryland v. Louisiana, which involved a state tax on natural gas, emphasized that the state had no right to be compensated for resources severed from federally owned land.77 5. Congress should enact a statute making it unlawful to use any means or instrumentality of interstate commerce to ship cigarettes in order to avoid a state’s cigarette excise tax. 6. Congress should amend the Jenkins Act of 1949 to authorize the attorney general of each state to seek an injunction in the U.S. District Court prohibiting interstate venders to sell tax-free cigarettes to residents of the state.78 7. Congress and the states should negotiate an agreement providing for the abolition of state excise taxes on alcoholic beverages and tobacco products and an increase in the federal excise taxes on these products to produce additional revenue to be shared with the states on a per capita basis. Enactment of this recommendation would stop interstate smuggling of alcoholic beverages and tobacco products, and deal a blow to organized crime.

Implementation Prospects The special subcommittee on state taxation of interstate commerce of the committee on the judiciary of the U.S. House of Representatives in 1964 concluded: “Certainly, the problems presented are not easy problems, but they are important problems. They are important to the States and they are important to the vitality of the American common market. Congress has a responsibility to both, and it is time for it to seek a solution.”79 Prospects, however, that Congress will implement any of the first four recommendations are extremely slim. With minor exceptions, Congress ignored the U.S. Supreme Court’s advice over the years that the national legislature should determine interstate taxation policy. It is possible Congress’s inaction is attributable to its admiration of the decisions of the court as reflected by the fact that Congress seldom reversed a decision of the court. Members of Congress are well aware of the complexities of state taxation schemes and recognize states need adequate revenue to provide quality services to their citizens. The difficult task of developing national tax standards and U.S. Supreme Court adjudication of interstate taxation controversies encourage Congress not to enact statutes harmonizing the

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taxes levied by states and their political subdivisions. Members, in addition, may be adhering to Alexander Hamilton’s promise, relative to the taxation powers of the states, in The Federalist No. 32: “I affirm that (with the sole exception of duties on imports and exports) they would, under the plan of the convention, retain that authority in the most absolute and unqualified sense; and that an attempt on the part of the national government to abridge them in the exercise of it would be a violent assumption of power, unwarranted by any article or clause of its Constitution.”80 Prospects are improved for congressional enactment of recommendations five and six as these recommendations do not encroach on the powers of Congress and would be of benefit to the nation. A number of states no doubt would oppose the seventh recommendation and in consequence Congress will not enact the proposal into law. Congress employed on one occasion its interstate commerce power to encourage states to harmonize a specific regulatory policy by enacting a contingent preemption statute. The Gramm-Leach-Bliley Financial Modernization Act of 1999 contains a contingent section stipulating a federal system of licensing insurance agents will become effective unless twenty-six states adopt a uniform insurance agent licensing system by November 12, 2002.81 A national licensing system was avoided when thirty-five states on September 10, 2002, were certified to have established such a uniform system. This continent preemption statute respects the legal authority of the states by allowing them to develop a uniform system. Contingent preemption statutes could be enacted to encourage states to harmonize their statutes levying income taxes on multijurisdictional corporations.82 Similarly, Congress could enact such a statute to encourage state legislatures to enact uniform state laws on taxation drafted by the National Conference of Commissioners on Uniform State Laws, the Multistate Tax Commission, or associations of state officers. The threat of enactment of additional preemption statutes prompted the National Association of Insurance Commissioners to draft an interstate insurance products compact creating a commission with authority to establish uniform regulatory policies for annuity, disability income, life, and long-term health care insurance products. The compact has been enacted by thirty state legislatures since its development in 2004.

SUMMARY AND CONCLUSIONS The U.S. Supreme Court examines constitutional challenges to state taxation of interstate commerce on a case-by-case basis and is unable to

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address such taxation on a comprehensive basis. Congress possesses adequate constitutional authority and the capacity to draft and enact statutes regulating state taxation of interstate commerce. The crowded agenda of Congress can be used as an excuse for inaction on the subject, but the importance of the subject to a healthy national economy and equitable treatment of taxpayers should be sufficient to convince Congress to place such regulation high on its agenda. Our review of selected decisions of the court reveals its members favor congressional enactment of statutes harmonizing state taxation of interstate commerce. The logic behind each of their recommendations is incontrovertible, particularly the views of Justices Black, Frankfurter, and Douglas cited above. Furthermore, the 1964 report of the Willis committee demonstrated beyond doubt the three advantages that would flow from a requirement that states must use the federal corporate income tax base. Nevertheless, Congress generally has remained silent with respect to limiting the taxation powers of the states. All available evidence suggests Congress only rarely will enact a statute placing restrictions on the power of state legislatures to levy taxes, perhaps out of respect for the quasi-sovereign status of states, and the statutes enacted generally will be limited in scope. Is there another approach to state tax harmonization beyond congressional regulation? The answer is yes and references have been made to interstate cooperation in the form of interstate compacts and uniform state laws. Chapter 9 examines interstate cooperation relative to enactment of harmonized state taxation statutes and promulgation of uniform regulations.

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Chapter 9

Fairness in Taxation of Interstate Income

T

he relative “silence of Congress” with respect to regulation of state taxation of interstate commerce leads to the obvious conclusion that the national legislative body will not enact a major statute mandating uniform state tax apportionment rules, tax base definitions, and tax jurisdiction standards. The silence is attributable in part to Congress’s general satisfaction with the U.S. Supreme Court’s adjudication of controversies involving state taxation of interstate commerce and the crowded congressional docket. In consequence, the only approach to harmonizing state taxation laws and regulations is enhanced interstate cooperation in the form of interstate compacts, uniform state laws, and interstate administrative agreements, and federal collection of state income taxes based on a voluntary agreement between a state and the U.S. Secretary of the Treasury providing the state generally will conform the provisions of its income tax statute with the internal revenue code enacted by Congress. The drafters of the U.S. Constitution were well aware of the need for a mechanism to promote interstate cooperation and included in 175

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section 10 of Article I of the fundamental law authorization for states to enter into interstate compacts with sister states with the consent of Congress. To promote specific compacts, Congress has granted consentin-advance to states since 1910 to enter into such covenants. More recently, Congress in the Contraband Cigarette Trafficking Act of 1978 suggested indirectly that states should enter into a compact for enforcement of their cigarette excise taxes by stipulating the act does not “inhibit . . . any coordinated law enforcement effort by a number of States through interstate compact or otherwise.”1 The New York nonresident tax study committee in 1959 recommended that New York enter into a tax enforcement compact with sister states, but no action has been initiated to enact such a compact.2 The American Bar Association in 1889 highlighted the need for more harmonious state regulatory and taxation statutes and initiated action to encourage state legislatures to enact such statutes and authorize the appointment of commissioners on uniform state laws.3 Commissioners, representing seven states, met in 1892 at the invitation of the New York State Legislature and established the National Conference of Commissioners on Uniform State Laws (NCCUSL), an organization examined in more detail in a subsequent section. A second organization, the National Municipal League (now National Civic League), was founded in 1894 and has published a number of model state laws that have been enacted into law, with or without amendment, by many state legislatures. Subsequently, other organizations developed model laws and promoted their enactment by state legislatures. This chapter reviews the negotiation and enactment of interstate compacts, required consent of Congress for political compacts, types of consent and their effects, selection of members of a compact commission, and amendment or termination of compacts. The only interstate compact on taxation, the advisory Multistate Tax Compact, is assessed briefly in terms of its success in promoting harmonization of the tax laws of the states. The chapter also examines and draws conclusions relative to interstate administrative agreements and uniform state laws. The final two sections contain recommendations that Congress initiate specific actions to encourage states to enact an interstate taxation regulatory compact(s) and uniform state laws, and add three tax maxims to Adam Smith’s four tax maxims (see chapter 1).4

INTERSTATE COMPACTS Agreements similar to current interstate compacts date to intercolony compacts during the colonial period. Maryland and Virginia in 1785

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entered into the first interstate compact, regulating fishing and navigation on the Chesapeake Bay and the Potomac River, under art. VI of the Articles of Confederation and Perpetual Union; the compact in revised form remains in effect. As noted, the drafters of the U.S. Constitution included an interstate compact authorization provision. Currently, there are more than 225 compacts in effect and numerous other compacts have been enacted by only one state legislature.5 A compact may be bilateral, multilateral, and national in terms of state membership and the District of Columbia and Canadian provinces also may be members. The subject matters of compacts range alphabetically from advisory to water with only one compact devoted to state taxation; that is, the advisory Multistate State Tax compact (see below).6 A compact may establish a commission to conduct studies and develop recommendations for action by member states, provide a service(s) and to regulate, or authorize departments and agencies of the participating states to administer the compact. Commission members may be appointed by the governor of each party state or the compact may contain the following section: “The commissioners shall be chosen in the manner provided by law of the State from which they shall be appointed.” Members of a compact may include gubernatorial appointees, ex officio members who serve on the basis of holding a specified state office, and representatives of the U.S. government who seldom are authorized to vote on commission agenda items. Most compacts authorize the commission to elect a chair and a vice chair from among its membership. Commission adopted bylaws supplement provisions of the compact and provide the commission with greater flexibility in changing policies established by bylaws as they can be amended without the need for the party state legislatures to amend the compact and possibly for Congress to grant consent to an amendment(s). An interstate compact, in the eyes of the U.S. Supreme Court, is a legally binding contract.7 The U.S. Constitution, art. 10, sec. 10 forbids a state to impair the obligation of contract, but no similar prohibition is placed on Congress relative to impairment of contracts. Sec. 10 requires changes in a compact to be negotiated by the party states. Provisions of compacts receiving congressional consent and international treaties entered into by the United States supersede conflicting provisions of state constitutions, statutes, and administrative regulations.

Negotiations and Enactment Neither the U.S. Constitution nor Congress established the procedure to be followed by states desiring to enter into an interstate compact. Joint commissions with members appointed by their respective state governor

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negotiated all compacts until 1930. Subsequently, several outside organizations drafted and encouraged state legislatures to enact a specific compact. The Interstate Commission on Crime drafted the Interstate Compact on Parolees and Probationers and southern state governors drafted the Southern Regional Education Compact. In addition, a single state legislature may draft and enact a compact and extend an invitation to sister states to activate the compact by enacting it. States on occasion invite representatives of U.S. departments and agencies to participate in the drafting of a compact. Should states decide to draft a compact to harmonize laws and regulations relating to taxation of multistate and multinational corporations, the drafting process would benefit from participation by officers of the U.S. Internal Revenue Service who would provide policy and technical advice. Approval of the draft compact by these officers could facilitate obtaining the consent of Congress, when required, because the service might be “a friend at court at a high level who understands their situation and can present their case.”8 In 2001, the executive director of the Northeast Dairy Compact Commission informed the author the compact’s drafters made a mistake in not inviting officers of relevant U.S. departments and agencies to participate in the drafting of the compact.9 Not surprisingly, drafting a compact creating a commission with only advisory powers has been a relatively easy process. Similarly, negotiations over the drafting of a higher education compact have not been difficult because the advantages of such a compact were apparent. Drafting, however, becomes a long and tedious process of negotiations if the subject matter is an important and contentious topic, such as taxation or river water allocation. Years may be required to reach an agreement on the language of the compact or negotiations may terminate as each state seeks to protect its interests. A successfully drafted state taxation harmonization compact with a national reach would have to be introduced in each state legislature where many issues debated during the drafting process will be debated again. If compact negotiators for a state failed to keep the governor and leaders of the state legislature informed, the prospects of obtaining their approval may be slim or may require educational efforts that may or not be successful. Should a state legislature amend the draft compact beyond minor details, negotiators will have to meet with their counterparts from other states to reach an agreement on the amendment(s), a process that may be unsuccessful. To be effective, a compact must be approved with identical or nearly identical language in each state. Occasionally, a compact contains a provision stipulating the compact becomes effective when enacted by a specified number of state legislatures.

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A draft compact enacted by a state legislature may face a gubernatorial veto. The New England Water Pollution Compact, for example, was enacted by the Vermont General Assembly, but was vetoed by the governor because there was no provision for the elimination of existing water pollution. A compact may contain a self-execution provision or necessitate its execution by the governor. The New York State Legislature in 1936 enacted the Interstate Compact for the Supervision of Parolees, but it was not executed until 1944 because Governor Herbert H. Lehman was opposed to it.

Consent of Congress The constitutionally required consent of Congress for making a compact effective was designed to protect the interests of the federal government by ensuring the compact does not encroach on federal prerogatives.10 Congress in recent years usually did not place a time limit on its consent, but has done so on a few occasions as illustrated by the Low-Level Radioactive Waste Compacts and the Northeast Dairy Compact. Failure of the states to obtain the consent of Congress for a compact opens it to a challenge that it is invalid under the interstate compact clause of the U.S. Constitution. Consent Types. The U.S. Constitution is silent relative to the procedure for granting congressional consent and places no limit on the period of effectiveness of the grant.11 In 1893, the U.S. Supreme Court rendered a most important decision by holding congressional consent is required only for a concordat increasing “the political influence” of the concerned states and encroaching “upon the full and free exercise of federal authority.”12 Congress may grant its consent prior to the drafting of a compact (permissive) or subsequent to its enactment (ratification) by state legislatures. Congress grants permission-in-advance for the drafting of a compact on a specified subject to encourage state legislatures to enact the resulting compact. In 1910, Congress for the first time granted consentin-advance; the subject matter was crime control.13 Permissive compacts enacted by state legislatures are not effective until they are submitted to Congress and receive its consent. To date, only one grant of congressional consent has been vetoed. In 1941, President Franklin D. Roosevelt disallowed the grant of consent to the Republican River Compact. It was amended to meet his objections and received the approval of Congress and his signature in 1943.14 Consent Effects. The U.S. Supreme Court has changed its view of the effects of a compact that received congressional consent with respect to

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whether consent converts a compact into federal law. In 1938, the court ruled consent does not give a compact the status of a congressional statute or an international treaty entered into by the United States.15 The court in 1940, however, modified its earlier opinion by explaining a compact granted congressional consent that involves “a federal ‘title, right, privileges, or immunity’ which when explicitly identified and claimed in a state court” may be reviewed by the court on appeal.16 In 1981, the court issued its opinion in Cuyler v. Adams holding the grant of congressional consent to a compact makes it federal law while also continuing as state law.17 The court had required U.S. courts since 1874 to apply the concerned state’s highest court’s interpretation of a pertinent state law to the facts in a dispute.18 This reversal of precedent allowed the court to render its own interpretation by disregarding the Pennsylvania Supreme Court’s interpretation of a state law.

Amendment and Termination Although compact experience may suggest a need for an amendment(s), the process of receiving all necessary approvals may involve a considerable period of time as each proposed amendment must follow the same enactment procedures as required for a new compact. State negotiators must reach an agreement on an amendment(s), submit it to their respective state legislatures where it may be rejected or amended by one or both houses. If rejected or amended, the negotiators must return to the bargaining table. If approved by all party state legislatures and governors, the proposed amendment must be submitted to Congress for its consent if the original compact had been so submitted. Congressional grant of consent may meet with a presidential veto if the amendment conflicts with the administration’s policies. Each compact, except an interstate boundary compact, can be terminated in accordance with a compact’s termination provision. Compacts typically require advance notification that a state intends to withdraw. The Colorado River Compact (art. 10) stipulates the approval of all other member states is required before a member state may withdraw. The Delaware River Basin Compact and the Susquehanna River Basin Compact each contains a provision stipulating the compact has been entered into for a period of 100 years and for additional periods of 100 years unless a member state notifies the commission of its intention to terminate the compact “not later than 20 years nor sooner than 25 years prior to the termination of the initial period or any succeeding period. . . . ”19

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THE MULTISTATE TAX COMPACT Two events precipitated the formation of this compact in 1967. The first event was the 1959 U.S. Supreme Court decision in Northwestern States Portland Cement Company v. Minnesota opining that a state may levy a tax on the net income of a foreign corporation (chartered in a sister state) only if the tax is a nondiscriminatory one and is apportioned fairly on the basis of the activities of a corporation with a nexus to the state.20 This decision produced corporate lobbying of Congress that resulted in the hasty enactment in the same year of the first statute, based on the interstate commerce clause, imposing a tax jurisdiction standard on states.21 The law prohibits a state or a local government to levy a net income tax on the income of a person or firm derived within its jurisdiction if the business activities are limited to solicitation of orders for sales of tangible property with the orders sent outside the state for approval or rejection and shipment of approved orders (see chapter 8). This statute was responsible for the second event as it authorized congressional committees to study state taxation of interstate commerce. In 1964, the House of Representatives Special Subcommittee on State Taxation of Interstate Commerce of the Committee on the Judiciary, popularly known as the Willis Committee, released its four volume report suggesting that Congress enact a statute establishing income apportionment rules, tax base definitions, and tax jurisdiction standards that states must use in taxing firms engaged in interstate commerce.22 States were aware Congress might follow the committee’s advice in the absence of states voluntarily harmonizing their tax statutes. Eight states in 1965 responded to the two events by enacting the Multistate Tax Compact, effective in 1967, establishing a commission that currently has twenty-one states including the District of Columbia as full members. An additional twenty-two states are associate members of the compact and three other states—Iowa, Nebraska, and Rhode Island—are project members which participate in certain commission activities, particularly the national nexus program that seeks to persuade noncomplying multistate business firms to register and pay major state taxes. The nonparticipating states in 2006 are Delaware, Indiana, Nevada, New Hampshire, and Virginia. New Hampshire was an associate member participating in the commission’s Nexus program when it withdrew because of cost considerations.23 The state plans to rejoin the compact as an associate member in a year or two. The compact has four purposes: (1) Facilitation of the proper determination of the state and local government tax liability of multistate taxpayer and the equitable apportionment of tax bases and resolution of apportionment

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disputes, (2) promotion of uniformity or compatibility in the major components of state tax systems, (3) facilitation of taxpayer convenience and compliance in the filing of required tax returns and in other aspects of tax administration, and (4) avoidance of duplicative taxation. The United States Steel Corporation unsuccessfully challenged the constitutionality of the Multistate Tax Compact on the ground Congress had not granted its consent to the compact. The U.S. Supreme Court in 1978 ruled that the compact was constitutional and observed it does not “authorize the member states to exercise any powers they could not exercise in its absence. Nor is there any delegation of sovereign power to the Commission; each State retains complete freedom to adopt or reject the rules and regulation of the Commission. Moreover, . . . each State is free to withdraw at any time.”24 Art. IV of the compact incorporates the Uniform Division of Income for Tax Purposes Act (UDITPA), drafted by the National Conference of Commissioners on Uniform State Laws, that provides a broad taxation framework. A total of thirty-six state legislatures enacted UDITPA by adopting the compact directly or by separate enactment. The compact commission first drafted detailed regulations in 1971, revised significantly in 1973, designed to facilitate the determination of the state and local government tax liabilities of multistate taxpayers through the equitable apportionment of tax bases. Later, the commission drafted the Uniform Protest Statute and Uniform Principles Governing State Transactional Taxation of Telecommunications, and a Recommendation Formula for the Apportionment and Allocation of Net Income of Finance Institutions. The commission also drafted model regulations for corporate income tax allocation and apportionment; special rules for airlines, construction contractors, publishing, radio and television broadcasting, railroads, and trucking companies; and record-keeping regulation for sales and use tax purposes.25 It is important to note that no member state or other state is bound by the commission’s regulations as they are advisory. The problem of duplicative corporate income taxation, for example, would be eliminated if all states promulgated the commission’s model regulations for corporate income tax allocation and apportionment. The commission’s alternative dispute resolution program, developed in cooperation with the Committee on State Taxation, is a particularly valuable program as it employs a voluntary, cooperative approach to reaching agreements ending taxation controversies among sister states that otherwise would be costly to resolve and might not be fair to all involved states. And the commission, as a statutory interstate tax body, engages in tax enforcement with member states.

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Another commission program, the National Nexus Program, is also a voluntary program allowing taxpayers to resolve their tax liabilities disputes with two or more states. The program allows business firms to contact, through the commission, any or all program state members and suggest a settlement of potential state income or franchise tax liabilities and sales/use tax liabilities resulting from their past activities in the states. Commission staff performs most of the work at no charge to the taxpayers who benefit from resolving disputes prior to the concerned states imposing prior-year assessment of taxes, interest, and penalties. A taxpayer may request the commission to conduct a joint audit on behalf of the participating states. In addition, the commission furnishes state sales and use tax vendor registration forms and instructions at the request of taxpayers and developed a Uniform Sales and Use Tax Certificate utilized by thirty-six states. The commission promotes a fuller understanding by Congress, federal tax officers, and state legislators and tax officers of the complexities of state taxation of the income of multistate and multinational corporations. In particular, the commission works to persuade Congress not to preempt unnecessarily the taxation powers of states. The state educational programs of the commission focus “on how States can adapt their business tax systems—often by working together—to operate effectively in the complex, changing environment of interstate and international commerce.”26 Another important activity is the filing of amicus curie briefs in court suits and providing states with continuing legal advice on multistate tax litigation. UNIFORM STATE LAWS A very limited degree of uniformity in state laws occurred during the early period subsequent to the ratification of the U.S. Constitution as the result of the practice of state legislatures borrowing successful statutes from sister states. This practice was random and there was no organized effort to promote enactment by all state legislatures of uniform laws. The need for uniform state laws was recognized prior to the Civil War. W. Brooke Graves identified attorney David Dudley Fields as a leader in promoting such laws.27 The New York State Legislature in 1857 appointed Fields to draft a political, civil, and penal code. Several state legislatures enacted his political and civil codes. He promoted enactment by California in 1872 of a code of business law that subsequently was enacted by the legislature in several sister states. The movement for uniform state laws received a boost when the American Bar Association was established in 1878 to promote judicial

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and legislative uniformity. In 1889, the association appointed a committee on uniform state laws in the then forty-four states and played a key role in the establishment of the National Conference of Commissioners on Uniform State Laws in 1892. The New York State Legislature in 1890 enacted a statute authorizing the governor to appoint commissioners charged with promoting the enactment of uniform laws by all state legislatures and advising whether New York should invite sister states to send delegates to a conference to draft uniform laws. These commissioners recommended the convening of a conference and it was held in Saratoga, New York, in 1892 and attended by representatives of seven states who organized NCCUSL which is funded by state legislatures. The early draft uniform laws related to acknowledgments on written instruments and recognition of wills probated in sister states as valid. The commissioners also prepared a table of uniform weights and measures. By 1912, each state had appointed uniform law commissioners. The District of Columbia, Puerto Rico, and the U.S. Virgin Islands subsequently appointed commissioners. The governor appoints attorneys and judges as commissioners for specified terms with the approval of the senate in the typical state. The approximately 300 commissioners, who must be members of the bar, receive no compensation beyond expenses in performing their duties, meet together as the conference, and promote the enactment of uniform laws in their respective home state. To date, the commissioners have drafted more than 250 uniform laws on a wide variety of subjects as illustrated by ones relating to fiduciaries (1922), child support (1950), parentage (1973), interstate family support (1992), uniform computer information transactions act (1999), uniform securities act (2002), and uniform wage withholding and unemployment procedure act (2004). The uniform computer information transaction act initially was included in the Uniform Commercial Code. There were 155 introductions of 36 different uniform acts in state legislatures during 2003 to 2004 and 74 enactments of 23 different acts.28 On the one hand, twenty-five uniform state laws have been enacted by forty-five or more state legislatures. On the other hand, there are five uniform state laws that have not been enacted by a single state legislature.29 The procedure for the drafting of a uniform state act involves five steps. (1) A resolution is introduced for the appointment of a scope and program committee to investigate and report to the executive committee whether it is desirable and feasible to draft a uniform law on a specific topic. The committee meets twice annually and reports to the executive committee. (2) Executive committee approval of the committee’s recommendation for preparation of a uniform act leads to the appointment of a committee that meets throughout the year to draft the uniform act. A

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draft act is posted, twenty-one to thirty days prior to a committee meeting, on the conference’s University of Pennsylvania Web site (www.law.upenn.edu/bll/ulc/ulc/htm). (3) A draft act is submitted to the conference at its annual meeting to be discussed section by section by the commissioners serving as a committee of the whole. Not unexpectedly, the commissioners often amend a draft act. (4) If the committee on the whole approves a draft act, it is submitted for a vote of the commissioners representing all states with each state casting one vote. Approval requires a majority of the states present and voting, and not less than twenty states, affirming the draft as a uniform or model act with each state casting one vote. Each draft is subject to examination, amendment, and approval by the commissioners at a minimum of two annual meetings. (5) If approved, the uniform or model act is promulgated for consideration by state legislatures and they are urged to enact it as drafted. A model act, in contrast to a uniform act, is designed to guide state legislatures which may modify the act to meet the specific needs of each state. Negotiations among the commissioners to reach an agreement on a uniform state law, in common with negotiations of interstate compacts, may be lengthy. A more difficult task is persuading all or most states to adopt a uniform state law. Data reveal certain states are more apt to enact the conference’s uniform laws and model acts than other states, and it is apparent commissioners representing certain states may have more political influence in their respective state legislatures than commissioners representing other states. The Uniform Commercial Code, for example, was drafted in 1951, but was not enacted by all state legislatures 1991. Kim Q. Hill and Patricia A. Hurley reported in 1988 the results of their study of state responsiveness to uniform law proposals involving the relationship between the number of such laws enacted by state legislatures and four possible explanatory factors: state industrialization, affluence, legislative professionalism, and political culture.30 Only the latter factor was found to be statistically significant and the authors concluded “more than just political culture must account for variation among the states in their uniform law adoptions.”31 Individual states, of course, are free to promote the drafting and enactment of uniform state laws. The 1990 New York State Legislature, for example, granted the governor authority to appoint commissioners to examine statutes relating to marriage and divorce, notarial certificates, insolvency, and other specified topics and to recommend methods for encouraging other state legislatures to enact uniform statutes. Uniform acts and model acts prepared by the conference cover a wide variety of topics. Only five acts, however, involve taxation: division

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of income for tax purposes, estate tax apportionment and probate code, interstate arbitration of death taxes act, interstate compromise of death taxes act, and unclaimed property act. Experience to date reveals the National Conference of Commissioners on Uniform State Laws, despite its good work, cannot provide the necessary political leadership to persuade all state legislatures to harmonize their major tax laws. The legislatures generally desire to retain their independence in determining their taxation policies and this fact is reflected by the decision of a majority of the states not to be full members of the Multistate Tax Compact.

INTERSTATE ADMINISTRATIVE AGREEMENTS Heads of state departments and agencies, acting under legislative authorization, have entered into numerous written and verbal agreements with their counterparts in sister states covering a wide arrangement of topics. The International Fuel Agreement and the International Registration Plan are agreements involving the raising of revenue for the states and simplifying the burden placed on motor carrier firms (see chapter 2). The commissioner of the New Hampshire Department of Revenue Administration reported in 2005 that his department has cooperative agreements with all states, shares audit techniques with New York and Vermont, and in 2005 was showing Vermont how to use U.S. Internal Revenue Service computer tapes on personal computers, and Connecticut and Massachusetts were helpful when New Hampshire implemented a motor vehicle rental tax.32 In 1958, New Jersey and New York signed a reciprocal administrative agreement providing for the exchange of tax information and cooperative tax administration.33 The purpose of the agreement is to improve the effectiveness of the collection of each state’s use tax that is levied at the same rate as the state’s sales tax. A merchant with offices and/or stores in both states is made responsible for collecting the use tax from a customer residing in the other state. Other interstate administrative agreements relate to tax enforcement including the exchange of tapes containing the income tax returns of individuals and corporations. In 1985, for example, New Jersey and New York officers signed an administrative agreement designed to stop sales tax evasion by business firms and their in-state customers who avoided these taxes by shipping purchases of expensive items to addresses in sister states.34 This agreement focuses on the collection of each state’s use tax. Each state requests merchants to register voluntarily with its state department of taxation to collect a sales tax on goods

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shipped to the other state. Failure of a merchant to register with the department results in more frequent audits of its financial records by the department and the merchant must provide proof, including names and addresses of purchasers, that the sales on which they collected no sales tax were to customers in a sister state. The New York State Department of Taxation and Finance, for example, sends the names and addresses of New Jersey purchasers of merchandise to the New Jersey Department of Taxation, which notifies the individuals that they must pay the state-use tax. In 1988, a similar reciprocal administrative agreement was entered into by Connecticut and New York, authorizing the exchange of tax information and cooperative tax administration. New York has such agreements with all sister states with the exceptions of New Mexico and Nevada.35 Information gained by the exchange allows the New York State Department of Taxation and Finance to increase tax compliance through audits, thereby generating additional revenues for the state. Ten (currently eleven) states in the northeast and the District of Columbia signed an agreement in 1986 promoting the detection of taxpayers residing and employed in one state who claim residency in another state with a low or no state income tax.36 Although no data are available, it is estimated that a relatively large number of taxpayers file income tax returns as nonresidents in one or more states and file no resident return, thereby enabling them to evade payment of taxes on unearned (dividend and interest) income. The Federation of Tax Administrators since 1937 has served as a tax information clearinghouse.37 The federation drafted a Uniform Exchange of Information Agreement, effective in 1993, that has been signed by forty-four states, the District of Columbia, and New York City. Prior to this date, each state entered into bilateral tax information exchange agreements with other states. The National Governors’ Association, National Conference of State Legislatures, and local governments developed a proposal that became the Streamlined Sales and Use Tax Agreement.38 Approved on December 22, 2000, the agreement establishes a system encompassing: • Uniform definitions with tax bases. Legislatures still choose what is taxable and exempt but will use common definitions for key items in the tax base. • Simplified exemption administration for use- and entity-based exceptions. Sellers are relieved of the “good faith” requirements that exist in current law and will not be liable for uncollected tax. Purchasers will be responsible for correct exemptions claimed.

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• Rate simplification. States will be responsible for the administration of all state and local taxes and the distribution of the local taxes to the local governments. State and local governments will use common bases and accept responsibility for notice of rate and boundary changes. States will be encouraged to simplify their own state and local tax rates. • Uniform sourcing rules. The states will have uniform sourcing rules for all property and services. • Uniform audit procedures. Seller who participate in one of the certified Streamlined Sales Tax system technology models will either not be audited or will have a limited scope audit, depending on the technology model used. • Paying for the system. To reduce the financial burdens on sellers, states will assume responsibility for implementing the Streamlined Sales Tax system.39 Enabling legislation in participating states is required to implement the agreement. Registration in the system by a vendor does not establish a nexus for business activity or income tax purposes. Each vendor has the choice of one of three technology models. The first model involves a certified service provider performing all sales tax functions of a seller. The second model is a certified automated system performing only tax calculations. The third model allows a firm with nationwide sales to utilize its own proprietary sales tax software subject to certification by the participating states. The agreement became effective on October 1, 2005, with thirteen full members and five associate members. Current law, established by the U.S. Supreme Court and Congress, does not require mail order and Internet companies to collect and remit sales taxes on sales in their respective jurisdiction where they lack a physical nexus. However, the agreement states anticipate a number of large companies will volunteer to collect sales taxes via the simplified system. The agreement, among other things, reduces sales tax rates in certain states to the agreement established level and also eliminates certain exemptions from the tax. Vermont, for example, had exempted from its sales tax purchases of clothes and shoes up to $100 (no tax on steel-toed work shoes) in order to lighten the tax burden on lower-income working families. Participation in the agreement required Vermont either to tax all clothing and shoe sales or exempt them from the tax. The state implemented the later alternative.40 State administrative taxation agreements have been helpful in improving the enforcement of state taxation statutes, but generally

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have been ineffective in terms of harmonizing the taxation policies of the states.

CONGRESSIONAL ENCOURAGEMENT OF UNIFORM STATE LAWS Congress is well aware that the lack of uniformity in certain state laws causes serious problems for many citizens and business firms, but has initiated only very limited actions to promote enactment of uniform state laws. As noted above, Congress has granted its consent in advance to states to enter into interstate compacts on specified topics, including taxation, and in addition enacted the Federal-State Tax Collection Act of 1972 whose provisions require a state desiring to have the U.S. Internal Revenue Service collect the state personal income tax from residents and nonresidents with a nexus to the state must conform generally its tax statute with the U.S. Internal Revenue Code.41 This act, if implemented by one or more states, establishes a “piggyback” system of tax collection under which each participating state would have an income tax code closely conforming to the counterpart federal statute, thereby eliminating most nonuniform state provisions. States, however, determine the tax rate(s) and whether the tax is a flat tax or a graduated one. This cooperative arrangement would improve the economy and efficiency of tax administration and collection by eliminating duplicate state and national tax administrators, remove the necessity for extra filing of forms and record keeping by taxpayers, and reduce the workload of state courts that no longer would adjudicate tax suits.42 The act also provides decisions made by the secretary of the treasury or the internal revenue service relating to state “piggyback” tax liabilities and refunds can not be reviewed by state or local government officers, but tax returns are made available to states that may conduct supplemental audits and provide the findings to federal officers. Enforcement of the state tax statute would be a federal responsibility. Occasionally, Congress includes a sense of Congress provision in a statute illustrated by the Riegle Community Development and Regulatory Improvement Act of 1994 expressing the “sense of Congress states should establish uniform laws and regulations for businesses which provide check cashing, currency exchange or money transmitting or remittances services, or issue or redeem money orders, travelers’ checks and other similar instruments; and are not depository institutions.”43 Similarly, Congress in the Criminal Identification Technology Act of 1998 found “an interstate and federal-state compact is necessary

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to facilitate authorized criminal history exchanges for non-criminal justice purposes on a uniform basis, while permitting each state to effectuate its own dissemination policy within its own borders.”44 Although federal conditional grants-in-aid to states date to the Hatch Act of 1887, Congress did not apply such grants to encourage enactment of uniform state laws until 1974 when a cross-over sanction was incorporated in the Emergency Highway Energy Conservation Act threatening a reduction in federal highway construction funds if state legislature failed to establish a maximum highway speed limit of fifty-five miles per hour to conserve motor fuels.45 In 1975, a second cross-over sanction employed to promote enactment by state legislatures of a statute permitting motor vehicle drivers stopped at a traffic light to make a right turn on red if no vehicle on the left is approaching the intersection.46 Congress in 1984 enacted a third cross-over sanction threatening state legislatures with the loss of part of their federal highway funds should they fail to increase the minimum alcoholic beverages purchase age to twenty-one.47 A 1998 congressional cross-over sanction provided that a state would lose 10 percent of its federal highway grants for failure of the state legislature to enact a statute mandating a one-year suspension of the driver’s license of a person convicted for the second and subsequent times for drunk driving or driving under the influence of alcohol.48 The same act sought to establish a national minimum blood alcohol content (BAC) of 0.08 percent by stipulating that a state will lose 2.0 percent of its federal highway grants for failure to comply with the condition by 2004.49 In 1990, Congress required each state legislature to enact a law providing for the automatic revocation of the license of a driver of a motor vehicle convicted of a drug-related crime, but included an opt-out provision.50 The latter was designed to protect state sovereignty by allowing a state legislature to opt out of the directive by approving a resolution and the governor sending a letter of concurrence to the U.S. Secretary of Transportation. The enactment of the Gramm-Leach-Bliley Financial Modernization Act of 1999 represents a new congressional approach to persuading states to adopt uniform laws and regulations.51 A contingent preemption clause is included in the act and stipulates that a federal insurance agent licensing system would be implemented if twenty-six states do not adopt by November 12, 2002, a uniform licensing system for insurance agents.52 Preemption was averted when thirty-five states were certified on September 10, 2002, to have a uniform licensing system. The threat of enactment of additional preemption statutes prompted the National Association of Insurance Commissioners to draft in 2004

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the Interstate Insurance Product Regulation Compact. thirty state legislatures enacted by the compact by June 2007. None of the above congressional actions involve promotion of uniform state laws drafted by the National Conference of Commissioners on Uniform State Laws. The record clearly reveals that the national legislature has failed to initiate vigorous actions to encourage state legislatures to enact uniform tax statutes.

SUMMARY AND CONCLUSIONS The lack of uniform state taxation laws and administrative rules and regulations pertaining to the taxation of persons and corporations engaged in interstate commerce and associated tax discrimination causes distortions in national and worldwide markets and imposes a heavy compliance burden on individuals and business firms. Even more serious is the resultant lack of equity in taxation. The almost total “silence of Congress” with respect to state taxation of interstate commerce, in spite of suggestions by the U.S. Supreme Court that the political branch should harmonize such taxation, leads to the conclusion that it is most improbable that Congress will enact into law the major recommendations of the Willis Committee and other reformers. In consequence, there is only one other path possessing the potential to produce more harmonized state taxation laws and that is interstate cooperation in the forms of interstate compacts and uniform state laws. Admittedly, such cooperation in the area of taxation has been limited to date. Should two or more major states, California and New York in particular, decide to achieve uniformity in taxation by means of an interstate compact, the prospects are good that most of the remaining states would enact such a compact. Separate compacts could be drafted and enacted for taxation of the income of persons and multijurisdictional corporations. Many states levying income taxes link them to the U.S. Internal Revenue Code but make several adjustments. The federal and state income tax systems would become more harmonized if all states entered into an agreement with the U.S. Secretary of the Treasury under provisions of Federal-State Tax Collection Act of 1972, which authorizes the U.S. Internal Revenue Service to collect state income taxes and states to make specific adjustments that differ from the code’s provisions.53 Each taxpayer would benefit as only one income tax return would have to be filed and each participating state would save most of the cost of processing the filed returns. Nevertheless, no state has entered into a collection agreement with the secretary of the treasury.

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We offered in chapter 8 a number of recommendations designed to encourage state legislatures to revise their taxation statutes and harmonize them with the statutes of sister states. In particular, we suggested that Congress should promote interstate tax cooperation by encouraging states to enter into interstate tax regulatory compacts and interstate administrative agreements, and enact uniform state taxation laws. The International Fuel Agreement and the International Registration Plan, described in chapter 2, each established a national system that has lowered significantly the compliance costs of motor carrier firms. Our review of state taxation of interstate commerce reveals that three tax maxims should be added to Adam Smith’s 1776 four maxims: A tax should (1) fall equally on each taxpayer, (2) be certain and not arbitrary, (3) be convenient in terms of payment, and (4) be economical to collect.54 The first maxim was developed prior to graduated income taxation and hence should be modified to read “fall equally on each taxpayer according to his or her ability to pay.” Tax complexities in a federal system suggest three additional maxims: A tax should (5) not result in double taxation, (6) have low compliance costs, (7) and minimize organized criminal tax evasion. Employment of the seven maxims would perfect the economic union and its common market. In conclusion, the research findings and recommendations contained in this volume can be drawn on to develop a general theory of interstate relations in the United States. The “Three Cs Theory” explains the types of such relations—cooperative, conflictive, and competitive. This theory also contains postulates explaining the powers that Congress may employ to (1) foster cooperation among the several states (consent-inadvance for compacts, conditional grants-in-aid, tax credits, tax sanctions, and contingent preemption statutes), (2) prevent most types of interstates disputes from arising by enacting major river water apportionment statutes and establishing tax jurisdiction and apportionment standards and (3) discourage interstate competition damaging the national economic union by distorting markets.

Notes

CHAPTER 1 1. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: The Modern Library, 1937), pp. 777–79. 2. Joseph F. Zimmerman, Interstate Economic Relations (Albany: State University of New York Press, 2004), pp. 141–69. 3. See Joseph F. Zimmerman, Interstate Disputes: The Supreme Court’s Original Jurisdiction (Albany: State University of New York Press, 2006). 4. Alan Cooper, “Out-of-This World Taxes Are Voided: Satellite Devices Levy to Be Refunded,” Richmond Times Dispatch, April 2, 2002, p. 1. The decision is available online at www.courts.state.va.us/txtops/1011307.txt. 5. City of Virginia Beach v. International Family Entertainment, Incorporated, 263 Va. 501, 561 S.E.2d 696 (Va.2002). 6. “VT: Millions Spent in NH,” Union Leader (Manchester, NH), August 18, 2005, pp. 1, A15. 7. John Milne, “N.H. Tax Burden Eased by Outsiders, Study Says,” Boston Globe, September 24, 1987, pp. 1 and 21. 8. Jim Robbins, “Forget the Call of the Wild: In Montana, the R.V. Set is Drawn by the Words ‘No Taxes,’” New York Times, August 17, 2005, p. A14. 9. “N.H. Man Gets Moose Permit for $7,777.” Keene (NH) Sentinel, August, 2005, p. 2. 10. Russ Choma, “NH Fires New Salvo in Tax War.” Union Leader (Manchester, NH), August 2, 2005, p. 1. 11. The letters have been published as The Federalist Papers (New York: New American Library, 1961). 12. Ibid., pp. 267-68.

193

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The Silence of Congress 13. Ibid., pp. 54 and 61.

14. Gaillard Hunt, ed., The Writings of James Madison (New York: G. P. Putnam’s Sons, 1901), vol. II, p. 365. 15. Max Farrand, ed., The Records of the Federal Convention of 1787 (New Haven: Yale University Press, 1966), vol. II, p. 27. 16. The Federalist Papers, p. 491. 17. Ralph Ketcham, ed., The Anti-Federalist Papers and the Constitutional Convention Debates (New York: New American Library, 1986). 18. McCulloch v. Maryland, 17 U.S. 316 at 431, 4 Wheaton 316 at 431 (1819). 19. Consult Joseph F. Zimmerman, Congressional Preemption: Regulatory Federalism (Albany: State University of New York Press, 2005). 20. Indian Gaming Regulatory Act of 1988, 102 Stat. 2457, 25 U.S.C. §2710. 21. 1 Stat.191. 22. Sterns v. Minnesota, 179 U.S. 223, 21 S.Ct. 73 (1900) and Ervien v. United States, 251 U.S. 41 (1919). 23. Coyle v. Smith, 113 P. 944 (1911). 24. Coyle v. Smith, 221 U.S. 559 at 619, 31 S.Ct. 688 at 690 (1911). 25. The Federalist Papers, p. 271. 26. 1 Stat.122 (1790), 28 U.S.C. §2738, and 2 Stat. 298 (1804), 28 U.S.C. §1738. 27. Defense of Marriage Act of 1996, 110 Stat. 2419, 1 U.S.C. §1. 28. Consult Mills v. Duryee, 11 U.S. 481 at 485, 7 Cranch 481 at 485 (1813), and Bank of Augusta v. Earle, 38 U.S. 519, 13 Pet. 519 (1839). 29. Green v. Van Buskirk, 72 U.S. 307, 5 Wall. 307 (1866). 30. Chicago and Alton Rail Road v. Wiggins Ferry Company, 119 U.S. 615 at 622, 7 S.Ct. 398 at 403 (1877). 31. Alaska Packers Association v. Industrial Accident Commission, 294 U.S. 532 at 549–50, 55 S.Ct. 518 at 526 (1935). 32. Pacific Employers Insurance Company v. Industrial Commission, 306 U.S. 493 at 501, 59 S.Ct. 629 at 633 (1955).

Accident

33. A. C. Carpenter, “Some History and Functions of the Potomac River Fisheries Commission,” Commercial Fisheries News, September 1976, p. 4. Continuing disputes induced the two state legislatures to enact the Potomac River Compact that established the Potomac River Fisheries Commission with congressional consent. See 76 Stat. 797 (1962). 34. Virginia v. Tennessee, 148 U.S. 503 at 520, 13 S.Ct. 728 at 735 (1893). 35. United States Steel Corporation v. Multistate Tax Commission, 434 U.S. 452 at 473, 98 S.Ct. 799 at 813 (1978).

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36. Joseph F. Zimmerman, Interstate Cooperation: Compacts Administrative Agreements (Westport, CT: Praeger Publishers, 2002).

and

37. Ward v. Maryland, 79 U.S. 418, 12 Wall. 418 (1870). 38. Travis v. Yale and Town Manufacturing Company, 252 U.S. 60, 40 S.Ct. 228 (1920). 39. Toomer v. Witsell, 334 U.S. 385 at 396, 68 S.Ct. 1156 at 1162 (1948). 40. New Hampshire Statutes Annotated, §77-B:2(II) (1970). 41. Ibid., §77-B:2(I)(1970). 42. Austin v. New Hampshire, 420 U.S. 656 at 66-67, 95 S.Ct. 1191 at 1197–198 (1975). 43. Ibid., 420 U.S. 656 at 668, 95 S.Ct.1191 at 1198–199. 44. Rendition Act of 1793 1 Stat. 302, 18 U.S.C. §3182. The U.S. Supreme Court upheld the constitutionality of the act in Prigg v. Pennsylvania, 41 U.S. 528 at 536, 16 Pet. 528 at 536 (1852). 45. Kentucky v. Dennison, 65 U.S. 66, 24 How. 66 (1861). 46. Puerto Rico v. Branstad, 483 U.S. 219 at 230, 109 S.Ct. 2802 at 2809 (1987). 47. Zimmerman, Interstate Disputes: The Supreme Court’s Original Jurisdiction and Vincent L. McKusick, “Discretionary Gatekeeping: The Supreme Court’s Management of Its Original Jurisdiction Docket Since 1961,” Maine Law Review 45, no. 2, 1993, pp. 185–242.

CHAPTER 2 1. Richard Perez-Pena, “Smoking in State and City Is at New Low, Surveys Say,” New York Times, June 11, 2005, p. B3. 2. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: New American Library, 1937), pp. 777–79. See chapter 9 for additional maxims. 3. The Federalist Papers (New York: New American Library, 1961), p. 200. 4. Ibid., p. 267. 5. Ibid., p. 268. 6. See Frederick H. Cooke, The Commerce Clause of the Federal Constitution (New York: Baker, Voorhis & Company, 1908), p. 5. 7. Jenkins Act of 1949, 63 Stat. 884, 15 U.S.C. §375.

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8. See Jonathan I. Sirois, “Remote Vender Cigarette Sales, Tribal Sovereignty, and the Jenkins Act: Can I Get a Remedy?” Duquesne University Law Review 42, Fall 2003, pp. 27–111. 9. Mail Fraud Act of 1909, 35 Stat. 1088, 18 U.S.C. §1341. 10. To Amend the Act of October 19, 1949, Entitled an Act to Assist States in Collecting Sales and Use Taxes on Cigarettes, 69 Stat. 627, 15 U.S.C. §375 (1955). 11. United States v. E. A. Goodyear, Incorporated, 344 F. Supp. 1096 (SD NY 1971). 12. United States v. Melvin, 544 F.2d 767 (5th Cir. 1977) and Melvin v. United States, 430 U.S. 910, 97 S.Ct. 1184 (1977). 13. “At Cigarette Tax Enforcement Conference, New York Hilton Hotel, New York City, September 12, 1967.” Public Papers of Nelson A. Rockefeller 1967 (Albany: State of New York, 1968), pp. 1309–311. 14. James K. Batten, “Tax, Law Aides to Map Cigarette Bootleg War,” Knickerbocker News (Albany, NY), August 30, 1967, p. 3B. 15. “Governor Seeks New Approaches to Eliminate Cigarette Bootlegging.” Public Papers of Nelson A. Rockefeller 1973 (Albany, NY: State of New York 1974), pp. 732–34. 16. Diane Henry, “Interstate Police Force Urged to Combat Cigarette Smuggling,” New York Times, March 26, 1975, p. 31. 17. Farnsworth Fowle, “Goodman Renews Efforts to Lift City’s Cigarette Tax,” New York Times, January 22, 1976, p. 31. 18. Cigarette Bootlegging: A State and Federal Responsibility (Washington, DC: U.S. Advisory Commission on Intergovernmental Relations, 1977). 19. Cigarette Tax Evasion: A Second Look (Washington, DC: U.S. Advisory Commission on Intergovernmental Relations, 1985), p. 2. 20. Contraband Cigarette Trafficking Act of 1978, 53 Stat. 1291, 18 U.S.C. §2341. 21. Cigarette Tax Evasion: A Second Look, p. 23. 22. Jerry G. Thursby and Marie C. Thursby, “Interstate Cigarette Bootlegging: Extent, Revenue Losses, and Effects of Federal Intervention,” National Tax Journal 53, March 2000, pp. 59–77. 23. “Mass. Tax Is Good News: Cigarette Buyers Pour into N.H.,” Keene (NH) Sentinel, January 4, 1993, pp. 3, 5. 24. Craig Brandon, “Butt Smugglers,” Times Union (Albany, NY), June 24, 1993, p. 1. 25. Price-Waterhouse, “Voting with Their Feet: A Study of Tax Incentives and Economic Consequences of Cross-Border Activity in New England,” The State Factor 18, August 1992, pp. 11–21. The subsequent sharp increases in the

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cigarette excise tax in neighboring states allowed New Hampshire to raise its excise tax to fifty-two cents per package by 2005. See also R. Morris Coats, “A Note on Estimating Cross-Border Effects of State Cigarette Taxes,” National Tax Journal 47, December 1995, pp. 573–84. 26. Price-Waterhouse, “Voting with Their Feet,” p. 21. 27. Price-Waterhouse, “Voting with Their Feet II: The Economic Consequences of Cross-Border Activity in the Southeastern U.S.” The State Factor 19, August 1993, p. 14. 28. Personal interview with Commissioner G. Philip Blatsos of the New Hampshire Department of Revenue Administration, Concord, NH, August 23, 2005. 29. Shaila K. Dewan, “Cigarette Tax Would Cost State Millions, Critics Say,” New York Times, March 2, 2002, p. B6. 30. Internet Tax Nondiscrimination Act of 2004, 118 Stat. 2615, 47 U.S.C. §809. 31. Indian Trade and Intercourse Act of 1790, 1 Stat. 135, and Indian Trader Act of 1876, 19 Stat. 200, 25 U.S.C. §261. See also Bureau of Indian Affairs Regulations, 25 CFR 140.1–126. 32. Moe v. Confederated Slaish and Kootenal Tribes of Flathead Reservations, 425 U.S. 463, 96 S.Ct. 1634 (1976). 33. Washington v. Confederated Colville Tribes, 447 U.S.134, 100 S.Ct. 1969 (1980). 34. Citizen Band Potawatom Indian Tribe of Oklahoma v. Oklahoma Tax Commission, 888 F.2d 1303 (10th Cir. 1989). 35. Oklahoma Tax Commission v. Citizen Band Potawatom Indian Tribe of Oklahoma, 498 U.S. 505 at 506, 111 S.Ct. 905 at 907 (1991). 36. Ibid., 498 U.S. 505 at 510, 111 S.Ct. 905 at 909–10. 37. Sirois, “Remote Vendor Cigarette Sales,” p. 88. 38. Milhelm Attea & Brothers, Incorporated v. Department of Taxation and Finance, 164 A.D.2d 300, 564 N.Y.S.2d 491 (N.Y.A.D. 3rd Dept., 1990) and Milhelm Attea & Brothers, Incorporated v. Department of Taxation and Finance, 81 NY2d 417, 615 N.E.2d 994 (1993). 39. Department of Taxation and Finance v. Milhelm Attea & Brothers, 512 U.S. 61, S.Ct. 2028 (1994). 40. City of Sherrill v. Oneida Indian Nation of New York, 544 U.S. 197, 125 S.Ct. 1478, (2005). 41. Ibid., 544 U.S. 197 at 220, 125 S.Ct. 1478 at 1493. 42. Ibid., 544 U.S. 197 at 229, 125 S.Ct. 1478 at 1495. 43. Internet Tax Freedom Act of 2004, 118 Stat. 2615, 47 U.S.C. §809.

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Notes to Chapter 2

44. New York Laws of 2000, Chap. 518, New York Public Health Law, §1399-//. 45. Brown & Williamson Tobacco Corporation v. Pataki, 2001 WL 636441. 46. Brown & Williamson Tobacco Corporation v. Pataki, 320 F.3d 200 (2d Cir. 2003). 47. Michael Cooper, “Bill Takes Aim at Delivery of Tax-Free Cigarettes in Mail,” New York Times, June 9, 2005, p. B4. 48. Mail Fraud Act of 1909, 35 Stat. 1088, 18 USC §1341, and Racketeer Influenced and Corrupt Organizations Act of 1970, 84 Stat. 942, 18 U.S.C. §§1961–968. 49. Racketeer Influenced and Corrupt Organizations Act of 1970, 84 Stat. 943, 18 U.S.C. §1964(c). 50. Internet Cigarette Sales: Giving ATF Investigative Authority May Improve Reporting and Enforcement (Washington, DC: U.S. General Accounting Office, August 2002). The office has been renamed the U.S. Government Accountability Office. 51. Ibid., p. 10. 52. Ibid., p. 17. 53. Ibid., p. 20. 54. Webb-Kenyon Act of 1913, 37 Stat. 699, 27 U.S.C. §122. See also 21st Century Department of Justice Appropriations Authorization Act of 2002, 116 Stat. 1758. 55. Internet Cigarette Sales, p. 21. 56. Michael Gormley, “Credit Cards Prohibit Use in Internet Smokes Sales,” Times Union (Albany, NY), March 18, 2005, p. B3. 57. “UPS Agrees to Stop Delivering Cigarettes,” Times Union (Albany, NY), October 25, 2005, p. A3. 58. Price-Waterhouse, “Voting with Their Feet: A Study of Tax Incentives and Economic Consequences of Cross-Border Activity in New England,” The State Factor 18, August 1992, pp. 32–60. 59. Wilson Act of 1890, 26 Stat. 313, 27 U.S.C. §121. 60. Webb-Kenyon Act of 1913, 37 Stat. 313, 27 U.S.C. §122. 61. “Iowa Is Putting Retail Liquor Into Hands of Private Stores,” New York Times, December 1, 1986, p. B11. 62. NABCA Survey Book 2005 Edition (Alexandria, VA: National Alcohol Beverage Control Association, Incorporated, 2005), pp. 136–38. 63. Rhode Island General Laws, §3-1-5 (1987). 64. 44 Liquormart, Incorporated v. Rhode Island, 517 U.S. 484 at 505, 116 S.Ct. 1495 at 1509 (1996).

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65. Ibid. 517 U.S. 484 at 516, 116 S.Ct. 1495 at 1515. 66. See Carlos Seiglie, “A Theory of the Politically Optimal Commodity Tax.” Economic Inquiry 28, July 1990, pp. 486–603. 67. NABCA Survey Book 2005, p. i. 68. Interview with Chairman John W. Byrne and Commissioner Patricia T. Russell of the New Hampshire State Liquor Commission, Concord, New Hampshire, May 19, 2005. 69. Tom Fahey, “Study: Low Alcohol, Cigarette Taxes Attract Spending to N.H., VT, and RI,” Union Leader (Manchester, NH), August 6, 1992, p. 6. 70. Lawrence Dwyer, “Border Battle: Bottle Bill Is Driving Bay State Customers to Shop in New Hampshire,” Boston Globe, February 20, 1983, p. 21. 71. New Hampshire State Liquor Commission: Annual Report and Statistical Appendix, Fiscal Year June 30, 2004 (Concord, NH: New Hampshire State Liquor Commission, 2004), pp. 4–5. 72. 21st Century Department of Justice Appropriations Authorization Act of 2002, 116 Stat. 1758. 73. Clayton L. Silvernail, “Smoke, Mirrors, and Myopia: How the States Are Able to Pass Unconstitutional Laws Against the Direct Shipping of Wine in Interstate Commerce,” South Texas Law Review 44, Spring 2003, pp. 499–553. 74. NABCA Survey Book 2005 Edition, pp. 29–30. See also Vijay Shanker, “Alcohol Direct Shipment Laws, the Commerce Clause, and the Twenty-First Amendment,” Virginia Law Review 45, March 1999, pp. 356–57, and Ellen Perlman, “Vintage Politics: The Complexities of Shipping Chardonnay across State Lines,” Governing 9, December 1995, p. 47. 75. Consult Sidney J. Spaeth, “The Twenty-First Amendment and State Control Over Intoxicating Liquor: Accommodating the Federal Interest,” California Law Review 79, January 1991, pp. 161–204. 76. State Board of Equalization of California v. Young’s Market Company, 299 U.S. 59, 57 S.Ct. 77 (1936). 77. House of New York v. Ring, 332 F. Supp. 530 (S.D. N.Y. 1970). 78. Bacchus Imports Limited v. Dias, 468 U.S. 263 at 275–76, 104 S.Ct. 3049 at 3058 (1984). 79. Bridenbaugh v. Freeman-Wilson, 227 F.3d 848 (7th Cir. 2000). See also Bridenbaugh v. O’Bannon, 78 F. Supp.2d 828 (N.D. Ind. 1999). 80. Bridenbaugh v. Freeman-Wilson, 227 F.3d 848 at 854. 81. Bridenbaugh v. Carter, 532 U.S. 1002, 121 S.Ct. 1672. 82. Dickerson v. Bailey, 87 F. Supp.2d 691 (S.D. Tex. 2000). 83. Dickerson v. Bailey, 212 F. Supp.2d 673 at 694–95 (2002). 84. Bainbridge v. Bush, 148 F.Supp.2d 1306 at1315 (M.D. Fla. 2001).

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Notes to Chapter 2 85. Bainbridge v. Turner, 311 F.3d 1104 at 1115 (11th Cir. 2002). 86. Bolicks v. Roberts, 199 F. Supp.2d 394 at 407–09 (E.D. VA 2002). 87. Beskind v. Easley, 197 F. Supp.2d 464 at 476 (W.D.N.C. 2002).

88. Thomas S. Green, Jr., “State Discriminations Against Out-of-State Alcoholic Beverages,” Paper prepared for the National Conference on Interstate Trade Barriers, Chicago, April 5–7, 1939. 89. Shanker, “Alcohol Direct Shipment Laws, The Commerce Clause, and the Twenty-First Amendment,” p. 354. 90. Swedenburg v. Kelly, 358 F.3rd 223 (2nd Cir. 2004) and Heald v. Engler, 342 F.3rd 517 (6th Cir. 2003). See also Bob Tedeschi, “Justices to Hear Arguments on Interstate Wine Sales,” New York Times, November 29, 2004, p. C2. 91. Granholm v. Heald, 125 S.Ct. 1478, 161 L.Ed. 2d 386 (2005). See also Linda Greenhouse, “Court Lifts Ban on Wine Shipping.” New York Times, May 17, 2005, pp. 1, A14. 92. Ben Dobbin, “Winery Law Uncorks New Era,” Times Union (Albany, NY), July 14, 2005, pp. 1, A12. 93. Tom Barnes, “Direct Sales by Wineries Barred, Pittsburgh Post Dispatch, October 5, 2005, pp. 1, A7. 94. “Roadblocks Used by State to Shut Off Tax-Free Liquor,” Knickerbocker News (Albany, NY), February 9, 1966, p. 6A. 95. “The Eyes of Taxes: They’re Upon You If You Buy VT Booze,” Times Union (Albany, NY), December 26, 1976, pp. B1, B10. 96. Homer Bigart, “Jersey Routs Pennsylvania Spies in Border War on Whiskey Prices,” New York Times, March 5, 1965, pp.1, 26. 97. “Two States Clash on Liquor Sales,” New York Times, December 14, 1969, p. 73 and Ben A. Franklin, “Christmas Cheer Is Smuggled Out of Washington,” New York Times, December 24, 1969, pp. 1, 11. 98. A rectifier purchases distilled spirits and adds flavoring. 99. New York Laws of 1993, chap. 508 and New York Tax Law, §421. 100. Kenneth C. Crowe II, “State Stockpiling Contraband Liquors,” Times Union (Albany, NY), December 9, 1993, pp. B1, B11. 101. “The Eyes of Taxers,” Times Union (Albany, NY), December 26, 1976, p. B1. 102. John H. Fenton, “Officials of Mass. And N.H. to Study Liquor Price War, New York Times December 14, 1969, p. 73. 103. Kenneth C. Crowe II, “Pair to Answer Liquor-Smuggling Charges Today.” Times Union (Albany, NY), June 9, 1994, p. B7.

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104. Stacy MacTaggert, “The Neverending Whiskey Wars,” Governing 8, October 1994, p. 32. 105. Motor Carrier Safety Act of 1991, 105 Stat. 2140, 49 U.S.C. App. §2302(b)(1). 106. Ibid. 107. IFTA Legislation and State Constitutional Provisions Project: Final Report (Denver: National Conference of State Legislatures, 1999), p. 1. 108. Robert C. Pitcher, “The International Fuel Tax Agreement: Are There Lessons Here for Sales and Use Taxation?” State Tax Notes 20, March 12, 2001, p. 890. 109. Personal interview with Director Michael J. Filmer, International Registration Bureau, New York State Department of Motor Vehicles, Albany, February 9, 2001. 110. The Intergovernmental Aspects of Documentary Taxes (Washington, DC: U.S. Advisory Commission on Intergovernmental Relations, 1964). 111. Ibid., p. 3. 112. Christian Davenport, “Md. Tax Washington Post, January 23, 2005, p. B1.

Loophole

Targeted

Again,”

CHAPTER 3 1. The Federalist Papers (New York: New American Library), pp. 267–68. 2. See, for example, the decision of the Oklahoma Supreme Court in Large Oil Company v. Howard, 63 Okla. 143 at 155, 163 P. 537 at 548 (1917). 3. Report of the National Conservation Commission (Senate document number 676) (Washington, DC: U.S. Government Printing Office, 1909). 4. Fred R. Fairchild, “Taxation of Timber Lands” in Ibid., pp. 581–631. See in particular, pp. 584–85. 5. Ibid., p. 618. 6. Michigan Public Acts of 1911, Act 135. 7. Clark-McNary Act of 1924, 43 Stat. 653, 16 U.S.C. §471. 8. Fred R. Fairchild and Associates, Forest Taxation in the United States (Washington, DC: U.S. Department of Agriculture, 1935). 9. Mississippi Acts of 1940, chap. 114. 10. Walter Hellerstein, State and Local Taxation of Natural Resources in the Federal System: Legal, Economic, and Political Perspectives (Chicago:

202

Notes to Chapter 2

American Bar Association, 1986), p. 7. This book is the most comprehensive one on the subject. 11. Ibid., p. 17. 12. “Court Holds States Free to Set Resource Taxes,” New York Times, July 3, 1981, p. B12 and William K. Stevens, “Taxes by Energy States Causing East-West Split,” New York Times, October 15, 1994, p. B12. 13. Northwestern States Portland Cement Company v. Minnesota, 358 U.S. 450 at 490, 79 S.Ct. 357 at 375 (1959). See also 71 Stat. 555 and 15 U.S.C. §§381–84. 14. Railroad Revitalization and Regulatory Reform Act of 1976, 90 Stat. 31, 49 U.S.C. §11503; Tax Reform Act of 1976, 90 Stat.1914, 15 U.S.C. §391; Airline Deregulation Act of 1978, 92 Stat. 1708, 49 U.S.C. §1513(s); Motor Carrier Act of 1980, 94 Stat. 793, 49 U.S.C. §11503(a); and An Act to Clarify the Liability of National Banks for Certain Taxes of 1969, 83 Stat. 434, 12 U.S.C. §548. 15. Tax Reform Act of 1976, 90 Stat. 1914, 15 U.S.C. §391. 16. Arizona Public Service Company v. Snead, 91 N.M. 485, 576 P.2d 291 (1979). 17. Arizona Public Service Company v. Snead, 441 U.S. 141 at 150, 99 S.Ct. 1629 at 1634 (1979). 18. Ibid., 441 U.S. 141 at 150–51, 99 S.Ct. 1629 at 1634. 19. Case of the State Freight Tax, 82 U.S. 232, 15 Wallace 232 (1872). 20. Hope Natural Gas Company v. Hall, 274 U.S. 284, 47 S.Ct. 639 (1927); Oliver Mining Company v. Lord, 262 U.S. 172, 43 S.Ct. 526 (1923), and Heisler v. Thomas Colliery Company, 260 U.S.245, 43 S.Ct. 83 (1922). 21. Heisler v. Thomas Colliery Company, 260 U.S. 245 at 259–60, 43 S.Ct. 83 at 86 (1922). 22. Utah Power & Light Company v. Pfost, 286 U.S. 165, 52 S.Ct. 548 (1932). 23. Kaveh Shahrokhshahi, “The Constitutionality of a Federal Ceiling on State Severance Taxes,” Santa Clara Law Review 23, Summer 1993, p. 871. 24. Pike v. Bruce Church, Incorporated, 397 U.S. 137 at 142, 90 S.Ct. 844 at 847. 25. Complete Auto Transit Incorporated v. Brady, 430 U.S. 274 at 281, 97 S.Ct.1076 at 1080 (1977). 26. Ibid., 430 U.S. 274 at 279, 97 S.Ct. 1076 at 1079. 27. The justification for the increased tax rate is included in the “Statement to Accompany the Report of the Free Joint Conference Committees on Coal Taxation” (Helena: Montana Legislative Assembly, April 16, 1975).

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28. Consult Joseph F. Zimmerman, Congressional Preemption: Regulatory Federalism (Albany: State University of New York Press, 2005). 29. Commonwealth Edison Company v. Montana, 189 Mont. 191, 615 P.2d 847 (1980). 30. Max Baucus, “Montana Severance Tax—A Supreme Court Defense,” Congressional Record, March 25, 1981, p. S 2678. 31. Commonwealth Edison Company v. Montana, 453 U.S. 609, 101 S.Ct. 2946 (1981). 32. Mineral Lands Leasing Act of 1920, 41 Stat. 437, 30 U.S.C. §181, and Federal Coal Leasing Amendments of 1975, 90 Stat. 1089, 30 U.S.C. §181. 33. Commonwealth Edison Company v. Montana, 453 U.S. 609, 101 S.Ct. 2946. 34. Ibid., 453 U.S. 609 at 637-38, 101 S.Ct. 2946 at 2963–964. 35. Stephen F. Williams, “Severance Taxes and Federalism: The Role of the Supreme Court in Preserving a National Common Market for Energy Supplies,” University of Colorado Law Review 53, Winter 1982, pp. 293–94. 36. United States v. Louisiana, 339 U.S. 699 at 706, 70 S.Ct. 914 at 917 (1950). 37. Pennsylvania v. West Virginia, 262 U.S. 553, 43 S.Ct. 658 (1923), and Maryland v. Louisiana, 451 U.S. 725 at 739, 101 S.Ct. 2114 at 2125 (1981). 38. Maryland v. Louisiana, 451 U.S. 725 at 756, 759, 101 S.Ct. 2114 at 2134–135 (1981). 39. Ibid., 451 U.S. 725 at 760, 101 S.Ct. 2114 at 2136. 40. Oklahoma Statutes, tit. 45, §§939, 939.1 (Supp. 1988). 41. Wyoming v. Oklahoma, 502 U.S. 437 at 458, 112 S.Ct. 789 at 802 (1992). 42. Ibid., 502 U.S. 437 at 462 , 112 S.Ct. 789 at 804. 43. Ibid., 502 U.S. 437 at 476, 112 S.Ct. 789 at 811-12. 44. Walter Hellerstein, “Commerce Clause Restraints on State Taxation: Purposeful Economic Protectionism and Beyond,” Michigan Law Review 85, February 1987, pp. 762–63. 45. Consult Michael L. Carrioco, “‘Te Pee’ as in Taxpayer: Tribal Severance Taxes—Canvassing the Reservation—Do Tribes Have the Power to Impose Severance Taxes on Minerals Extracted on Non-Indian Fee Lands Within the Reservation?” Journal of Mineral Law & Policy 7, 1991-92, pp. 73–104. 46. See the congressional findings in section 101 of the Indian Land Consolidation Act Amendment of 2000, 114 Stat. 1991, 25 U.S.C. §2201. 47. Indian Reorganization Act of 1934, 48 Stat. 984, 25 U.S.C. §461.

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48. Mineral Leasing Act of 1938, 52 Stat. 347, 25 U.S.C. §396A. See also the Indian Minerals Development Act of 1982, 96 Stat. 1938, 25 U.S.C. §2102. 49. Indian Civil Rights Act of 1968, 82 Stat. 77, 25 U.S.C. §1302. Congress amended the act. See 100 Stat. 3207–146, 25 U.S.C. §1302. 50. Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 102 S.Ct. 894 (1982). 51. Kerr-McGee Corporation v. Navajo Tribe of Indians, 731 F.2d 597 (C.A. 9th Cir. 1984). 52. Kerr-McGee Corporation v. Navajo Tribe of Indians, 471 U.S. 195, 105 S.Ct. 1900 (1985). 53. Ibid., 471 U.S. 195 at 198, 105 S.Ct. 1900 at 1902. 54. Crow Tribe of Indians v. State of Montana, 469 F. Supp. 154 (D. Mont.1979). 55. Crow Tribe of Indians v. State of Montana, 657 F. Supp. 573 (D. Mont.1985). 56. Crow Tribe of Indians v. State of Montana, 819 F.2d 895 (C.A. 9th Cir. 1987). 57. Crow Tribe of Indians v. State of Montana, 484 U.S. 997, 109 S.Ct. 685 (1988). 58. Cotton Petroleum Corporation v. New Mexico, 106 N.M. 517, 745 P.2d 1170 (1987). 59. Cotton Petroleum Corporation v. New Mexico, 106 N.M. 511, 745 P.2d 1159 (1987). 60. Cotton Petroleum Corporation v. New Mexico, 490 U.S. 163 at186, 189, 192, 109 S.Ct. 1698 at 1713–714, 1716. 61. Hellerstein, State and Local taxation of Natural Resources in the Federal System, p. 208.

CHAPTER 4 1. New York Tax Law, §631(b)(6). 2. Goodwin v. State Tax Commission, 286 A.D. 694 at 702, 146 N.Y.S.2d 172 at 180 (3rd Dept. 1955). The decision was affirmed by the Court of Appeals, 1 N.Y.2d 680, 150 N.Y.S.2d 203 (1956). The U.S. Supreme Court dismissed an appeal, 352 U.S. 805, 77 S.Ct. 47 (1956). 3. 75 Stat. 555, 15 U.S.C. §§381–84 (1959). 4. Income Tax Act of 1913, 38 Stat. 166. 5. See, for example, New York Tax Law, §620 (McKinney, 1999).

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6. The Federalist Papers (New York: The New American Library, 1961), p. 478. 7. Ralph Ketcham, ed., The Anti-Federalist Papers (New York: New American Library, 1986), 303. 8. Paul v. Virginia, 75 U.S. 168 at 180, 8 Wall. 168 at 180 (1868). 9. Corfield v. Coryell, 6 F.Cas. 546 at 551–52 (CC ED Pa, 1823). 10. Bank of Augusta v. Earle, 38 U.S. 519, 13 Peters 519 (1839). 11. Ward v. Maryland, 79 U.S. 418 at 430, 12 Wallace 418 at 430 (1870). 12. Shaffer v. Carter, 252 U.S. 37 at 59, 40 S.Ct. 221 (1920). See also Oklahoma Laws of 1915, chaps. 107 and 164. 13. Shaffer v. Carter, 252 U.S. 37 at 51, 40 S.Ct. 221 at 225. 14. Ibid., 252 U.S. 37 at 55, 40 S.Ct. 221 at 227. 15. Travis v. Yale and Towne Manufacturing Company, 252 U.S. 60, 40 S.Ct. 228 (1920). See also New York Laws of 1919, chap. 627. 16. Yale & Town Manufacturing Company v. Travis, 262 F. 576 at 582 (1919). 17. The question of the denial of exemptions to nonresidents had been raised in 1912 in the Wisconsin Supreme Court, which opined: “We regard it as a question involved in considerable doubt, and one not necessary to be passed upon now.” State ex rel. Bolens v. Frear, 134 N.W. 673 at 690 (1912). 18. Travis v. Yale and Towne Manufacturing Company, 252 U.S. 60 at 77, 40 S.Ct. 228 at 231–32. 19. New Hampshire Revised Statutes Annotated, §77-B:2(II) (1970). 20. Ibid., §77-B:2(1) (1970). 21. Austin v. New Hampshire, 114 N.H. 137, 316 A.2d 165 (1974). 22. Ibid., 420 U.S. 656 at 663, 95 S.Ct.1191 at 1196. 23. Ibid., 420 U.S. 656 at 668–70, 95 S.Ct. 1191 at 1198-199. 24. Pennsylvania v. New Jersey et al., 426 U.S. 660, 96 S.Ct. 2333 (1976). 25. Ibid., 426 U.S. 660 at 664, 96 S.Ct. 2333 at 2334. 26. Ibid., 426 U.S. 660 at 666, 96 S.Ct. 2333 at 2336. 27. Wood v. Department of Revenue, 305 Or. 23, 749 P.2d 1169 (1987). See also Oregon Revised Statutes, §316.127(1)(a). 28. Wood v. Department of Revenue, 305 Or. 23 at 29, 749 P.2d. 1169 at 1171 (1987). 29. Friedsam v. State Tax Commission, 470 N.Y.S.2d 848 at 850, 98 A.D.2d 26 at 28 (1983). 30. Ibid.

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31. New York Laws of 1987, chap. 28, §78; New York Tax Law, §631(b)(6) (1988 Supp.). 32. Lunding v. Tax Appeal Tribunal, 218 A.D.2d 268 at 269, 639 N.Y.S.2d 519 at 521 (1996). 33. Lunding v. Tax Appeal Tribunal, 89 N.Y.2d 283, 653 N.E.2d 62 (1996). 34. Lunding v. New York Tax Appeals Tribunal, 522 U.S. 287 at 308, 118 S.Ct. 766 at 779 (1998). 35. Ibid., 522 U.S. 287 at 314, 118 S.Ct. 766 at 782. 36. New York Tax Law, §601(d-e) (1999). 37. Brady v. State, 80 N.Y.2d 596 at 604, 607 N.E.2d 1060 at 1063 (1992). 38. David Schmudde, “Constitutional Limitations on State Taxation of Nonresident Citizens.” Law Review of Michigan State University–Detroit College 1999, Spring 1999, p. 145. 39. Information in this section is derived primarily from Special Report No. 115 (Washington, DC: Tax Foundation, July 2002) and “State Pioneers Tax Change for Visiting Athletes,” Times Union (Albany, NY), August 4, 1994, p. B2. 40. David K. Hoffman and Scott a Hodge, “Nonresident State and Local Income Taxes in the United States: The Continuing Spread of ‘Jock Taxes.’” Special Report No. 130 (Washington, DC: Tax Foundation, July 2004), p. 6. 41. John Salmas, “Professional Athletes Taxed to Death? Even They Can Strike Out!!!” Sports Lawyers Journal 4, Spring 1997, pp. 255–77. 42. John J. Coneys Jr., “To Tax or Not to Tax: Is a Non-Resident Tennis Player’s Endorsement Income Subject to Taxation in the United States?” Fordham Intellectual Property, Media, & Entertainment Law Journal 9, Spring 1999, pp. 885–90. 43. Special Report No. 115, p. 3. 44. “‘Jock Taxes’ Spread to Other Professions as State and City Governments Maximize Revenue,” Tax Features 47, July/August 2003, p. 6. 45. Phillips et al. v. State Department of Taxation and Finance, 267 A.D.2d 927 at 929–30, 700 N.Y.S.2d 566 at 568-69 (3d Dept. 1999). See also Peter Spiegel, “Telegrab.” Forbes 65, May 1, 2000, pp. 74, 76. 46. In the Matter of Huckaby v. New York State Division of Tax Appeals, 6 A.D.3rd 988, 776 N.Y.S.2d 125 (3d Dept. 2004). 47. In the Matter of Huckaby v. New York State Division of Tax Appeals, 4 N.Y.3d 427, 796 N.Y.S.2d 312 (2005). 48. Ibid. 49. In the Matter of Huckaby v. New York State Division of Tax Appeals, 126 S.Ct. 546 (2005).

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50. See, for example, New York Tax Law, §631(b)(1)(B). 51. State Taxation of Pension Income Act of 1995, 109 Stat. 979, 4 U.S.C. §414. 52. Pension Income: Hearing Before the Subcommittee on Economic and Commercial Law of the Committee on the Judiciary of the House of Representatives, July 22, 1993. Washington, D.C.: U.S. Government Printing Office, 1993. 53. U.S. House of Representatives. Report of the Committee on the Judiciary Together with Dissenting Views to Accompany H.R. 394 (Washington, DC: U.S. Government Printing Office, 1995), pp. 16-18. See also Douglas L. Lindholm, Mary B. Hevener, and Carolyn Kelley, “State ‘Source’ Taxation of Retirement Benefits—What’s Barred, What’s Left?” Journal of Taxation 84 (May 1996): 299–302. 54. The Commuter and the Municipal Income Tax (Washington, DC: U.S. Advisory Commission on Intergovernmental Relations, 1970), p. 2. 55. Ibid., p. 5. 56. New York Laws of 1966, chap. 774. 57. New York Laws of 1999, chap. 5. 58. Igoe v. Pataki, 696 N.Y.S.2d 355, 182 Misc.2d 298 (S.Ct. NY County 1999). 59. City of New York v. State, 265 A.D.2d 151, 696 N.Y.S.2d 426 (1st Dept. 1999). 60. City of New York v. State, 94 N.Y.2d 122, 730 N.E.2d 920 (2000). See also Richard Perez-Pena, “Court Upholds Law to Repeal Commuter Tax,” New York Times, April 5, 2000, pp. B1, B7. 61. City of New York v. State, 94 N.Y.2d 122 at 132, 730 N.E.2d 920 at 930. 62. Consult Joseph F. Zimmerman, State-Local Relations: A Partnership Approach, 2nd ed. (Westport, CT: Praeger Publishers, 1995). 63. City of New York v. State, 94 N.Y.2d 577 at 590, 730 N.E.2d 920 at 926. 64. “Paying for Politics,” Times Union (Albany, NY), November 18, 2002, p. A6. 65. Adler v. Deegan, 251 N.Y. 457 at 467, 483, 167 N.E. at 705, 711 (1929).

CHAPTER 5 1. Wisconsin Laws of 1911, chap. 658. 2. Consult Jerome R. Hellerstein, “State Taxation Under the Commerce Clause: An Historical Perspective,” Vanderbilt Law Review 29, March 1976, pp. 335–51.

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3. Western Live Stock v. Bureau of Revenue, 303 U.S. 250 at 254, 58 S.Ct. 546 at 548 (1938). 4. Detlev F. Vagts, “The Multinational Enterprise: A New Challenge for Transnational Law,” Harvard Law Review 83 (1970): 745–46. 5. Spector Motor Service V. McLaughlin, 47 F. Supp. 671 (D.C. Conn. 1942). See also Connecticut General Statutes Cumulative Supplement, §418c (1935). 6. Spector Motor Service v. O’Connor, 340 U.S. 602, 71 S.Ct. 508 (1951). See also Spector Motor Service v. Walsh, 139 F.2d 809 (1943). 7. 2005–06 New York State Executive Budget (Albany: New York State Division of the Budget, 2005), p. 249. 8. NH Taxes at a Glance (Concord: New Hampshire Department of Revenue Administration, 2005), p. 2. 9. See Brown v. Maryland, 25 U.S. 419, 12 Wheaton 419 (1827). 10. Raymond Vernon, Storm Over the Multinationals (Cambridge: Harvard University Press, 1977), pp. 124–25. 11. Jerome B. Libin and Timothy H. Gillis, “It’s a Small World After All: The Intersection of Tax Jurisdiction at International, National, and Subnational Levels,” Georgia Law Review 38, Fall 2003, pp. 197–298. 12. D. Dale Bandy, Henry R. Anderson, and Lawrence C. Maingot, “Apportioning Multistate Income,” Taxes 64, October 1986, pp. 654–61. 13. Report of the Special Subcommittee on State Taxation of Interstate Commerce of the Committee on the Judiciary, House of Representatives Pursuant to Public Law 86-272 as Amended (Washington, DC: U.S. Government Printing Office, 1964), p. 562. 14. New York Laws of 2005, chap. 61 and New York Tax Law, §210(3)(a)(iii). 15. James R. Rogers, “State Tax Competition and Congressional Commerce Power: The Original Prudence of Concurrent Taxing Authority,” Regent University Law Review 7, Fall 1996, p. 136. 16. Walter Hellerstein, “State Income Taxation of Multijurisdictional Corporations, Part II: Reflections on ASARCO and WOOLWORTH,” Michigan Law Review 81, November 1982, p. 186. 17. Adams Express Company v. Ohio State Auditor, 165 U.S. 194 at 311, 17 S.Ct. 305 at 311 (1897). 18. Underwood Typewriter Company v. Chamberlain, 94 Conn. 47, 108 Atl. 154 (1919). 19. Underwood Typewriter Company v. Chamberlain, 254 U.S. 113 at 121, 41 S.Ct. 45 at 47 (1920). 20. Ibid.

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21. Bass, Ratliff & Gretton, Limited v. State Tax Commission, 266 U.S. 271 at 280, 45 S.Ct. 82 (1924). 22. Ibid., 266 U.S. 271 at 282, 45 S.Ct. 82 at 84. 23. IRS Could Better Protect U.S. Tax Interests in Determining the Income of Multinational Corporations (Washington, DC: U.S. General Accounting Office, 1981), p. 52. 24. Northwestern States Portland Cement Company v. Minnesota, 358 U.S. 450, 79 S.Ct. 357 (1959). 25. An Act Relating to the Power of the States to Impose Net Income Taxes on Income Derived from Interstate Commerce, and Authorizing Studies by Congressional Committees of Matters Pertaining Thereto, 73 Stat. 555 (1959). 26. Report of the Special Subcommittee on State Taxation of Interstate Commerce, Committee on the Judiciary, House of Representatives, Pursuant to Public Law 86-272 as Amended. 27. United States Steel Corporation v. Multistate Tax Commission, 434 U.S. 452 at 473, 98 S.Ct. 799 at 813 (1978). 28. ASARCO Incorporated v. Idaho Tax Commission, 458 U.S. 307 at 31112, 102 S.Ct. 3103 at 3107 (1982). 29. Model Regulations, Statutes, and Guidelines: Uniformity Recommendations to the States (Washington, DC: Multistate Tax Commission, 1995). 30. Key Issues Affecting Sate Taxation of Multijurisdictional Corporate Income Need Resolving (Washington, DC: U.S. General Accounting Office, 1982), p. 11. The office has been renamed the U.S. Government Accountability Office. 31. Matson Navigation Company v. State Board of Equalization, 3 Cal. 2d 1, 43 P.2d 805 (1935) and Matson Navigation Company v. State Board of Equalization, 297 U.S. 441, 56 S.Ct. 553 (1936). 32. Butler Brothers v. McColgan, 17 Cal.2d 664, 111 P.2d 334 (1941). Consult also California Laws of 1929, chap. 13. 33. Butler Brothers v. McColgan, 315 U.S. 502, 62 S.Ct. 701 (1942). 34. Edison California Stores, Incorporated v. McColgan, 176 P.2d 697 (1947). 35. Ibid., 176 P.2d 697 at 701, 703. Decision affirmed upon rehearing, Mudd v. Mc Colgan,183 P.2d 15 (1947) 36. Alcan Aluminum Limited v. Franchise Board, 1987 WL15386 (N.D. Ill 1987). 37. Alcan Aluminum Limited v. Franchise Board, 860 F.2d 666 at 698-99 (7th Cir. 1989).

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38. Franchise Tax Board of California v. Alcan Aluminum Limited, 493 U.S. 331 at 336, 338, 110 S.Ct. 661 at 665–66 (1990), and Tax Injunction Act of 1937, 50 Stat. 738, 28 U.S.C. §1341. See also the 1948 amendment, 62 Stat. 932. 39. Hardwick v. Cuomo, 891 F.2d. 1097 (1989). 40. Ibid., 891 F.2d. 1097 at 1104, footnote 11. 41. Moorman Manufacturing Company v. Bair, 254 N.W.3d 737 (1977). 42. Moorman Manufacturing Company v Bair, 437 U.S. 267 at 278, 98 S.Ct. 2340 at 2347 (1978). 43. Ibid. 44. Walter Hellerstein, “Commerce Clause Restraints on State Taxation: Purposeful Economic Protectionism and Beyond,” Michigan Law Review 85, February 1987, p. 765. 45. Mobil Oil Corporation v. Commissioner of Taxation of Vermont, 136 Vt. 545, 394 A.2d 1147 (1978). 46. Mobil Oil Corporation v. Commissioner of Taxation of Vermont, 445 U.S. 425, 100 S.Ct. 1223 (1980). 47. Ibid., 445 U.S. 425 at 441-42, 100 S.Ct. 1223 at 1234. For an excellent analysis of the decision, consult Walter Hellerstein, “State Income Taxation of Multijurisdictional Corporations: Reflection on Mobil, Exxon, and H.R. 5076,” Michigan Law Review 79, November 1980, pp. 113–71. 48. Mobil Oil Corporation v. Commissioner of Taxation of Vermont, 445 U.S. 425 at 451, 100 S.Ct. 1223 at 1238. 49. Ibid., 445 U.S. 425 at 451, 462, 100 S.Ct. 1223 at 1238, 1244. 50. Exxon Corporation v. Wisconsin Department of Revenue, 90 Wis.2d 700, 281 N.W.2d 94 (1979). 51. Exxon Corporation v. Wisconsin Department of Revenue, 447 U.S. 207 at 224–26, 229-30, 100 S.Ct. 2109 at 2120–121, 2123–124 (1980). 52. Mobil Oil Corporation v. Commissioner of Taxation of Vermont, 445 U.S. 425 at 439, 100 S.Ct. 1223 at 1233. 53. ASARCO Incorporated v. Idaho Tax Commission, 458 U.S. 307, 102 S.Ct. 3103 (1982). 54. ASARCO Incorporated v. Idaho Tax Commission, 99 Idaho 924, 592 P.2d 39 (1979). 55. ASARCO Incorporated v. Idaho Tax Commission, 458 U.S. 307, 102 S.Ct. 3103 (1982). 56. F. W. Woolworth Company v. Taxation and Revenue Department of New Mexico, 458 U.S. 354, 102 S.Ct. 3128 (1982). 57. Barclays Bank International Limited v. Franchise Tax Board, 275 Cal. Reptr. 626 (3d Dist. 1990).

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58. Barclays Bank International Limited v. Franchise Tax Board, 2 Cal. 4th 708, 8 Cal. Reptr. 2d 31 (1992). 59. Barclays Bank PLC v. Franchise Tax Board of California, 512 U.S. 298 at 323–24, 114 S.Ct. 2268 at 2283-284 (1994). 60. Dan Freedman, “High Court Upholds Global Tax Scheme,” Times Union (Albany, NY), June 21, 1994, p. C8. 61. Wisconsin Department of Revenue v. William Wrigley, Jr. Company, 505 U.S. 214, 112 S.Ct. 2447 (1992). See also An Act Relating to the Power of the States to Impose Net Income Taxes on Income Derived from Interstate Commerce of 1959, 73 Stat. 555, 15 U.S.C. §381. 62. Allied-Signal, Incorporated v. Director, Division of Taxation, 504 U.S. 768, 112 S.Ct. 2251 (1992). 63. Ibid., 504 U.S. 768 at 780, 112 S.Ct. 2251 at 2259. 64. Hak K. Dickenson, “State Taxation of Multinational Companies: Time for Change,” Taxes 80, August 2002, p. 18. 65. Hunt-Wesson, Incorporated v. Franchise Board of California, 528 U.S. 458 at 464, 120 S.Ct. 1022 at 1026 (2000). 66. Key Issues Affecting State Taxation of Multijurisdictional Corporate Income Need Resolving, p. 14. 67. Pullman’s Palace Company v. Pennsylvania, 141 U.S. 18, 11 S.Ct. 876 (1891). 68. Union Refrigerator Transit Company v. Kentucky, 199 U.S. 194, 26 S.Ct. 36 (1905). 69. New York ex rel. New York Central & Harlem River Rail Road v. Miller, 202 U.S. 584, 26 S.Ct. 714 (1906). 70. Wallace et al. v. Hines, 253 U.S. 66 at 69, 40 S.Ct. 435 at 436–37 (1920). 71. Ibid., 253 U.S. 66 at 69-70, 40 S.Ct. 435 at 437. 72. General American Tank Corporation v. Day, 270 U.S. 367, 46 S.Ct. 234 (1926). 73. Constitution of Louisiana, Art.10, §16 (1921). 74. General American Tank Corporation v. Day, 270 U.S. 367 at 373, 46 S.Ct. 234 at 236. 75. Northwest Airlines, Incorporated v. Minnesota, 322 U.S. 292, 64 S.Ct. 950 (1944). 76. Ibid., 322 U.S. 292 at 295, 64 S.Ct. 950 at 952. 77. Braniff Airways, Incorporated v. Nebraska State Board, 347 U.S. 590, 74 S.Ct. 757 (1954). 78. Central Greyhound Lines, Incorporated v. Mealey, 334 U.S. 653, 68 S.Ct. 1260 (1948).

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79. Ott v. Mississippi Valley Barge Line Company et al., 336 U.S. 169, 69 S.Ct. 432 (1949). 80. American Barge Line Company v. Cave, 68 F. Supp. 30 (1946). 81. Ott v. De Bardeben Coal Corporation, 166 F.2d 509 (1948). 82. Ott v. Mississippi Valley Barge Line Company et al., 336 U.S. 169 at 174, 69 S.Ct. 432 at 435 (1949). 83. Northwestern States Portland Cement Company v. Minnesota, 358 U.S. 450 at 452–63, 79 S.Ct. 357 at 364 (1959). 84. Alaska v. Artic Maid, 366 U.S. 199 at 204, 81 S.Ct. 929 at 939 (1961). 85. Complete Auto Transit Incorporated v. Brady, 430 U.S. 274 at 279, 97 S.Ct.1076 at 1079 (1977). 86. Japan Line Limited v. County of Los Angeles, 441 U.S. 434 at 452, 99 S.Ct. 1813 at 1823 (1979). 87. Ibid., 441 U.S. 434 at 444, n. 7, 99 S.Ct. 1813 at 1819, n. 7. 88. Container Corporation of America v. Franchise Tax Board, 463 U.S. 159 at 187–88, 103 S.Ct. 2933 at 2952 (1983). 89. Ibid., 463 U.S. 159 at 192, 196-97, 103 S.Ct. 2933 at 2954, 2956. 90. Florida Statutes, §212.08(4)(a)(2) (1985). 91. WardAir Canada, Incorporated v. Florida Department of Revenue, 477 U.S. 1 at 11–12, 106 S.Ct. 2369 at 2374–2375 (1986). 92. American Trucking Associations v. Scheiner, 483 U.S. 266, 107 S.Ct. 2829 (1987). 93. Ibid., 483 U.S. 266 at 269, 107 S.Ct. 2829 at 2832. 94. Ibid., 483 U.S. 266 at 294-95, 107 S.Ct. 2829 at 2845–846. 95. Ibid., 483 U.S. 266 at 305, 107 S.Ct. 2829 at 2851–852. 96. Oklahoma Tax Commission v. Jefferson Lines, Incorporated, 514 U.S. 175, 115 S.Ct. 1331 (1995). 97. California Revenue and Tax Code, §§23601.5 and 23609. 98. Illinois Revised Statutes, chap. 120, par. 2-201(G), Virginia Laws of 1990, chap. 709 and Virginia Code Annotated, §58.1–445.1. 99. New York Laws of 1968, chap. 827 and New York Tax Law, §270c. 100. Boston Stock Exchange v. State Tax Commission, 429 U.S. 318 at 336–37, 97 S.Ct. 599 at 610 (1977). 101. Westinghouse Electric Corporation v. Tully, 466 U.S. 388, 104 S.Ct. 1856 (1984). 102. Arizona Public Service Company v. Snead, 441 U.S. 141 at 145, 99 S.Ct. 1629 at 1632 (1979).

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103. Tax Reform Act of 1976, 90 Stat. 1914, 15 U.S.C. §391. 104. West Virginia Code, §1–13–1 et seq. 105. Armco Incorporated v. Hardesty, 172 W.Va. 67, 303 S.E.2d 706 (1983). 106. Armco Incorporated v. Hardesty, 467 U.S. 638 at 642–43, 104 S.Ct. 2620 at 2622–623 (1984). 107. Ibid., 467 U.S. 638 at 648, 104 S.Ct. 2620 at 2625. 108. Alabama Code, §§27-4-4, 27-4-5 (1975). 109. Metropolitan Life Insurance Company v. Ward, 437 So.2d 535 (1983) and 447 So.2d 142 (1983). 110. Metropolitan Life Insurance Company v. Ward, 470 U.S. 869 at 878, 106 S.Ct. 1676 at 1681. 111. Ibid., 470 U.S. 869 at 880, 106 S.Ct. 1676 at 1683 (1985). See also the McCarran-Ferguson Act of 1945, 59 Stat. 33, 15 U.S.C. §101. 112. Ibid., 470 U.S. 869 at 883–84, 106 S.Ct. 1676 at 1684–685. 113. Revised Code of Washington, §§82.04.220, 82.04.270 (1985 Supp.). 114. Tyler Pipe Industries, Incorporated v. Washington Department of Revenue, 105 Wash. 2d 318, 715 P.2d 123 (1986). 115. Tyler Pipe Industries v. Washington Department of Revenue, 433 U.S. 232 at 234–44, 107 S.Ct. 2810 at 2818 (1987). 116. New Energy Company v. Limbach, 486 U.S. 269 at 279–80, 118 S.Ct. 1803 at 1810–811 (1988). 117. Goldberg v. Sweet, 488 U.S. 252, 109 S.Ct. 482 (1989). 118. Ibid., 488 U.S. 252 at 266, 109 S.Ct. 582 at 591. 119. North Carolina General Statutes, §105–203. Chapter 41 of the North Carolina Laws of 1995 repealed the tax. 120. Fulton Corporation v. Justus, 110 N.C.App.93, 430 S.E.2d 494 (1993) and 338 N.C. 472, 450 S.E.2d 728 (1994). 121. Fulton Corporation v. Faulkner, 516 U.S. 325 at 344, 116 S.Ct. 118 at 860 (1996). 122. Joseph F. Zimmerman. Congressional Preemption: Federalism (Albany: State University of New York Press, 2005).

Regulatory

123. Natural Gas Policy Act of 1978, 92 Stat. 3351, 15 U.S.C. §3301. 124. New York Laws of 1991, chap. 166, New York Tax Law, §189. 125. Tennessee Gas Pipeline Company v. Urbach, 96 N.Y.2d 124 at 130, 750 N.E.2d 52 at 56 (2001). 126. Ibid., 96 N.Y.2d 124 at 134, 750 N.E.2d 52 at 59.

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127. Trinova Corporation v. Michigan Department of the Treasury, 498 U.S. 358 at 386, 111 S.Ct. 818 at 836 (1991).

CHAPTER 6 1. For information on the Virginia Uniform Disposition of Unclaimed Property Act, consult K. Reed Mayo, “Virginia’s Acquisition of Unclaimed and Abandoned Personal Property,” William and Mary Law Review 27, Winter 1986, pp. 409–41. 2. Information provided by Katie Robinson of the National Conference of Commissioners on Uniform State Laws, July 11, 2005. 3. See, for example, New York Abandoned Property Law, §511. 4. Tennessee Code Annotated, §§66-27-113 and 66-29-115(a). 5. For details on the Tennessee unclaimed property laws, consult Joan M. Heminway, “Don’t Cheat: Escheat! What Every Business Lawyer Ought to Know About Tennessee’s Abandoned Property Laws.” Transaction: The Tennessee Journal of Business Law 3, Fall 2001, pp. 7–14. 6. Texas v. New Jersey, 379 U.S. 674, 85 S.Ct. 626 (1965). 7. Ibid., 379 U.S. 674 at 681–82, 85 S.Ct. 626 at 631. 8. Pennsylvania v. New York, 407 U.S. 206, 92 S.Ct. 2075 (1972). 9. Ibid., 407 U.S. 206 at 215–16, 92 S.Ct. 2075 at 2080. 10. Ibid., 407 U.S. 206 at 219–20, 92 S.Ct. 2075 at 2082. 11. Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974, 88 Stat. 1500, 12 U.S.C. §§2501–503. 12. Delaware v. New York, 507 U.S. 490 at 494, 113 S.Ct. 1550 at 1553 (1993). Consult Joseph F. Zimmerman, Interstate Disputes: The Supreme Court’s Original Jurisdiction (Albany: State University of New York Press, 2006). 13. Delaware v. New York, 507 U.S. 490 at 509, 113 S.Ct. 1550 at 1561. 14. Ibid., 507 U.S. 490 at 510, 113 S.Ct. 1550 at 1562. 15. Suellen M. Wolfe, “Escheat and the Concept of Apportionment: A Bright Line Test to Slice a Shadow,” Arizona State Law Journal 27, Spring 1995, p. 176. 16. Ibid., p. 249. 17. Coordination of State and Federal Inheritance, Estate, and Gift Taxes (Washington, DC: U.S. Advisory Commission on Intergovernmental Relations, 1961). 18. Union Refrigerator Transit Company v. Kentucky, 199 U.S. 196 at 204, 26 S.Ct. 36 at 38 (1935), and Frick v. Pennsylvania, 268 U.S. 473 at 488, 45 S.Ct. 603 at 605 (1925).

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19. Greenough v. Tax Assessors, 331 U.S. 486 at 493, 67 S.Ct. 1400 at 1403 (1947). 20. Revenue Act of 1926, 44 Stat. 9, 26 U.S.C. §2011. 21. Economic Growth and Tax Relief Reconciliation Act of 2001, 115 Stat. 70–73, 26 U.S.C. §§2001, 2011, 2511, 2631. 22. William Yardley, “Connecticut Restores Estate Tax in Move to Balance Budget,” New York Times, June 8, 2005, pp. B1, B5. 23. Worcester County Trust Company v. Riley, 302 U.S. 292 at 299, 58 S.Ct. 185 at 188 (1937), and Federal Interpleader Act of 1936, 49 Stat. 1096, 28 U.S.C. §1335. 24. Zimmerman, Interstate Disputes: The U.S. Supreme Court’s Original Jurisdiction. 25. Texas v. Florida et al. 306 U.S. 398 at 407–08, 59 S.Ct. 563 at 568 (1939). 26. Ibid., 306 U.S. 398 at 424, 59 S.Ct. 563 at 576. 27. Ibid., 306 U.S. 398 at 431, 59 S.Ct. 563 at 579. 28. Ibid., 306 U.S. 398 at 432–33, 59 S.Ct. 563 at 579. 29. Massachusetts v. Missouri, 308 U.S. 1 at 15, 60 S.Ct. 39 at 42 (1939). 30. Ibid., 308 U.S. 1 at 16–17, 60 S.Ct. 39 at 43. 31. Ibid., 308 U.S. 1 at 17, 60 S.Ct. 39 at 43. 32. Ibid., 308 U.S. 1 at 19–20, 60 S.Ct. 39 at 44. 33. California v. Texas, 437 U.S. 601, 98 S.Ct. 3107 (1978). 34. Ibid. 35. Ibid., 437 U.S. 601 at 605, 98 S.Ct. 3107 at 3110. 36. Ibid., 437 U.S. 601 at 607, 98 S.Ct. 3107 at 3111. 37. Ibid., 437 U.S. 601 at 614, 98 S.Ct. 3107 at 3115. 38. California v. Texas, 457 U.S. 164, 102 S.Ct. 2335 (1982). 39. Ibid. See also Cory v. White, 457 U.S. 85, 102 S.Ct. 2325 (1982). 40. California v. Texas, 457 U.S. 164 at 169, 102 S.Ct. 2325 at 2338. 41. Ibid., 457 U.S. 164 at 170, 102 S.Ct. 2325 at 2338. 42. Ibid., 457 U.S. 164 at 171, 102 S.Ct. 2335 at 2339. 43. Dunlieth & Dubuque Bridge Company v. County of Dubuque, 44 Iowa 558, 8 N.W. 443 (1881). 44. Iowa v. Illinois, 147 U.S. 1 at 8, 13 S.Ct. 239 at 241 (1893). 45. Buttenuth v. Bridge Company, 123 Ill. 535, 17 N.E. 439 (1888). 46. Iowa v. Illinois, 147 U.S. 1 at 10, 13 S.Ct. 239 at 242. 47. Ibid., 147 U.S. 1 at 13, 13 S.Ct. 239 at 244.

216

Notes to Chapter 6 48. New Mexico Statutes Annotated, §§72-34-1 et seq. (1975 Supp.). 49. Ibid., §72-16A-16.1B (1975 Supp.).

50. Arizona v. New Mexico, 425 U.S. 794 at 798, 96 S.Ct. 1845 at 1847 (1976). 51. Ibid. 52. Pennsylvania v. New Jersey et al., 426 U.S. 660, 96 S.Ct. 2333 (1976). 53. New Jersey Transportation Benefits Tax Act, New Jersey Laws of 1971, chap. 222, New Jersey Statutes Annotated, §§54:8A et seq. (1976–77 Supp.). 54. Austin v. New Hampshire, 420 U.S. 656, 95 S.Ct. 1191 (1975). 55. Pennsylvania v. New Jersey, 426 U.S. 660 at 662, 96 S.Ct. 2333 at 2334 (1976). 56. Ibid., 426 U.S. 660 at 664, 96 S.Ct. 2333 at 2335. 57. Ibid., 426 U.S. 660 at 665, 96 S.Ct. 2333 at 2336. 58. Ibid., 426 U.S. 660 at 666, 96 S.Ct. 2333 at 2336. 59. Ibid., 426 U.S. 660 at 666-67, 96 S.Ct. 2333 at 2336–337. 60. Louisiana Laws of 1978, chap. 294, Louisiana Revised Statutes Annotated, §§47:1301–47:1307 (1981 West Supp.). 61. Pennsylvania v. West Virginia, 262 U.S. 553, 43 S.Ct. 658 (1923), and Maryland v. Louisiana, 451 U.S. 725 at 739, 101 S.Ct. 2114 at 2125 (1981). 62. Illinois v. City of Milwaukee, 406 U.S. 91, 92 S.Ct. 1385 (1972). 63. Maryland v. Louisiana, 451 U.S. 725 at 741, 101 S.Ct. 2114 at 2126 (1981). 64. Arizona v. New Mexico, 425 U.S. 794 at 797, 96 S.Ct. 1845 at 1847 (1976). 65. Natural Gas Policy Act of 1978, 92 Stat. 3351, 15 U.S.C. §3301, 42 U.S.C. §7255. 66. Maryland v. Louisiana, 451 U.S. 725 at 749, 101 S.Ct. 2114 at 2130. 67. Ibid., 451 U.S. 725 at 757, 101 S.Ct. 2114 at 1234. 68. Ibid., 451 U.S.725 at 759, 101 S.Ct. 2114 at 2135. For details of subsequent Louisiana proposed hydrocarbon taxes, consult Ernest L. Edwards, Deborah F. Zenner, and B. Richard Moore, Jr., “Constitutional and Policy Implications of Louisiana’s Proposed Environmental Energy Tax: Political Expediency or Effective Regulation?” Tulane Law Review 58, October 1983, pp. 215-98; and James C. Exnicios, “The Louisiana Hydrocarbon Processing Tax,” Louisiana Law Review 61, Summer 2001, pp. 833–59. 69. United States v. Louisiana, 339 U.S. 699 at 706, 70 S.Ct. 914 at 917 (1950). 70. Maryland v. Louisiana, 451 U.S. 725 at 760, 101 S.Ct. 2114 at 2136.

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71. Ibid., 451 U.S. 725 at 764–65, 101 S.Ct. 2114 at 2138. 72. Ibid., 451 U.S. 725 at 760, 101 S.Ct. 2114 at 2136. 73. New Hampshire Laws of 1991, chap. 354, New Hampshire Revised Statutes Annotated, chap. 83-D. 74. Tax Reform Act of 1976, 90 Stat. 1914, 15 U.S.C. §391. 75. Connecticut et al. v. New Hampshire: Answer of Defendant State of New Hampshire, March 24, 1992. 76. Connecticut, Massachusetts, and Rhode Island v. New Hampshire, 502 U.S. 1069, 112 S.Ct. 962 (1992). 77. Ibid., 504 U.S. 982, 112 S.Ct. 2961–962 (1992). 78. New Hampshire Revised Statutes Annotated, chap. 77-A, §2 and chap. 83-c, §2 (1991 and 1991 Supp.). 79. New Hampshire Laws of 1991, chap. 354 and New Hampshire Revised Statutes Annotated, chap. 83-D (1991 Supp.). 80. New Hampshire Revised Statutes Annotated, chap. 83D, §9 (1991 Supp.). 81. Ibid., chap. 77-A, §§1-2 (1991 and 1991 Supp.). 82. Ibid., §3(1) (1991 and 1991 Supp.). 83.Connecticut, Massachusetts, and Rhode Island v. New Hampshire: Report of the Special Master, December 30, 1992, p. 11. 84. Answering Brief of New Hampshire Before the Special Master, November 9, 1992, p. 1. 85. Ibid., p. 2. 86. Ibid. 87. Ibid., p. 6. See also New Hampshire Revised Statutes Annotated, chap. 83-C, §2 (1991). 88. Connecticut, Massachusetts, and Rhode Land v. New Hampshire: Report of the Special Master, December 30, 1992, pp. 16–17. 89. Telephone interview with New Hampshire Senior Assistant Attorney General Harold T. Judd, October 22, 1993 (hereinafter referred to as Judd Interview). 90. New Hampshire Laws of 1993, chap. 49, New Hampshire Revised Statutes Annotated, §83-C (1994 Supp.); and Connecticut, Massachusetts, and Rhode Island v. New Hampshire, 507 U.S. 1026, 113 S.Ct. 1837 (1993). 91. Judd Interview. 92. Ibid. 93. Oklahoma Laws of 1986, chap. 43, Oklahoma Statutes Annotated, tit. 45, §§939 and 939.1 (1988 Supp.).

218

Notes to Chapter 6 94. Wyoming Statutes, §§39-6-301–39-6-308 (1990 and 1991 Supp.). 95. Oklahoma Laws of 1985, chap. 1694.

96. Oklahoma Laws of 1986, chap. 43, and Oklahoma Statutes Annotated, tit. 56, §§939 and 939.1 (1988 Supp.). 97. Oklahoma Laws of 1988, chap.1915. 98. Wyoming v. Oklahoma, 502 U.S. 437 at 446, 112 S.Ct. 789 at 796 (1992). 99. Maryland v. Louisiana, 451 U.S. 725 at 735–36, 101 S.Ct. 2114 at 2123–124 (1981). 100. Hunt v. Washington State Apple Advertising Commission, 432 U.S. 333, 97 S.Ct. 2424 (1977). 101. New York v. New Jersey, 256 U.S. 296 at 309, 41 S.Ct. 492 at 496. 102. Pennsylvania v. West Virginia, 262 U.S. 533, 43 S.Ct. 658 (1923). 103. Public Utility Regulatory Practices Act of 1978, 92 Stat. 3117, 16 U.S.C. §824(b)(1). 104. New England Power Company v. New Hampshire, 455 U.S. 331, 102 S.Ct. 1096 (1982). 105. Wyoming v. Oklahoma, 502 U.S. 437 at 453–54, 112 S.Ct. 789 at 799–800. 106. Ibid., 502 U.S. 437 at 462, 112 S.Ct. 789 at 804. 107. Clarke v. Securities Industry Association, 479 U.S. 388 at 394, 399, 207 S.Ct. 750 at 754, 757 (1987). 108. Air Courier Conference v. Postal Workers, 498 U.S. 517 at 528, 111 S.Ct. 913 at 920 (1991). 109. Wyoming v. Oklahoma, 502 U.S. 437 at 477, 112 S.Ct. 789 at 812.

CHAPTER 7 1. Tax Expenditure Report (Albany, NY: Office of the Governor, 2005), p. 165. 2. Revenue Act of 1913, 28 Stat. 166. 3. “New War Between the States,” New England Business Review, October 1963, pp. 1–5. 4. Revenue and Expenditure Control Act of 1968, 82 Stat. 251, 16 U.S.C. §103. 5. Tax Reform Act of 1986, 98 Stat. 793, 4 U.S.C. §§421-26. 6. Interjurisdictional Tax and Policy Competition: Good or Bad for the Federal System (Washington, DC: U.S. Advisory Commission on Intergov-

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ernmental Relations, 1991), p. 4. See also Daphine A. Kenyon and John Kincaid, eds., Competition Among States and Local Governments (Washington, DC: The Urban Institute, 1991). 7. Industrial Development Bonds: Achievement of Public Benefits Is Unclear (Washington, DC: U.S. General Accounting Office, 1993), p. 10. 8. “The Boom Belt: There’s No Speed Limit on Growth Along the South’s I-85,” Business Week (September 1, 1993): 98. 9. David Firestone, “Black Families Resist Mississippi Land Push,” New York Times, September 10, 2001, p. A20. 10. Jamie Butters and Tom Walsh, “Tax Break for Toyota: $38.9 Million,” Detroit Free Press, April 12, 2005, p. 1. 11. Eric Heisler, “Subsidies Were Key to Keeping Firm Here.” St. Louis Post-Dispatch (September 8, 2005): 1. 12. “Reverse the Pendulum,” Cincinnati Post, September 21, 2004, p. 10. 13. Cuno v. DaimlerChrysler, 154 F.2d 1196 (N.D. Ohio 2001), and 386 F.3d 738 (2004). 14. Greenhouse, Linda, “Supreme Court to Determine Fate of Business Tax Credits,” New York Times, September 28, 2005, p. C3. 15. Keon S. Chi, “State Business Incentives: Options for the Future,” State Trends Forecasts, June 1994, pp. 13, 15. 16. Michelle Maynard, “A Pension Fund Chief Bets on US Airways,” New York Times, October 5, 2002, pp. C1, C3. 17. David Brunori, “Principles of Tax Policy and Targeted Tax Incentives,” State and Local Government Review 29, Winter 1997, pp. 50–61. 18. David Brunori, State Tax Policy: A Political Perspective (Washington, DC: The Urban Institute Press, 2001), p. 114. 19. State-Local Taxation and Industrial Location (Washington, DC: U.S. Advisory Commission on Intergovernmental Relations, 1967), p. 63. 20. Ibid., p. 61. 21. Dana Scott, “State Taxes Helped Drive Out KeyCorp, Riley Says,” Times Union (Albany, NY), February 17, 1994, p. C10. 22. Donald Moffitt, “More States Cancel Inventory Tax on Items for Sales Elsewhere,” Wall Street Journal, January 25, 1964, p. 1. 23. State-Local Taxation and Industrial Location, p. 61. 24.Kenneth Aaron, “Railing Against the State Machines,” Times Union (Albany, NY), April 23, 2002, p. E1. 25. Regional Growth: Interstate Tax Competition (Washington, DC: U.S. Advisory Commission on Intergovernmental Relations, 1981), p. 32.

220

Notes to Chapter 7

26. David Firestone, “States Lures Good Jobs, but Companies Worry About Workers,” New York Times, January 28, 2002, p. A8. 27. Water Quality Act of 1965, 79 Stat. 903, 33 U.S.C. §1151. Consult Joseph F. Zimmerman, Congressional Preemption: Regulatory Federalism (Albany: State University of New York Press, 2005). 28. Alan B. Abbey, “Cuomo Intensifies Bank Reform Effort,” Times Union (Albany, NY), January 9, 1994, pp. B1, B6. 29. “State Won’t Become N.J.’s Power Broker,” Times Union (Albany, NY), July 22, 1995, p. B2. 30. Charles Mahtesian, “Romancing the Smokestack,” Governing 8, November 1994, p. 38. 31. Thomas J. Lueck, “New York Buys Ads Charging ‘Raid’ of Company by Connecticut,” New York Times, October 11, 1994, p. B1. 32. Ibid., p. B5. 33. Steven L. Myers, “Guiliani Says Connecticut Broke Truce,” New York Times, October 13, 1995, pp. B6, B14. 34. Brett Pulley, “New York Makes Staying Put Irresistible to Coffee Exchange,” New York Times, October 13, 1995, pp. B1. B3. 35. Ibid., p. B1. 36. Winne Hu, “Stock Exchange May Move Some Operations to New Site,” New York Times, July 25, 2002, p. B5. 37. Charles V. Bagli, “Playing the ‘Jersey Card,’ Firms in Manhattan Compare Incentives,” New York Times, December 28, 2001, p. D1. 38. Robert E. Koch and Dan Gearino, “Keene Lands C&S Complex,” Keene (NH) Sentinel, April 1, 2002, pp. 1–2. 39. Dan Gearino, “Insurance Heads Moving South,” Keene (NH) Sentinel, March 27, 2002, p. 1. 40. Sherman Antitrust Act of 1890, 26 Stat. 209, 15 U.S.C. §§1–7. 41. Federal Baseball Club of Baltimore, Incorporated v. National League of Professional Baseball Clubs, Incorporated, 259 U.S. 200 at 208-09, 42 S.Ct. 465 at 466. 42. Joanna Cagan and Neil DeMause, Fields of Schemes: How the Great Stadium Swindle Turns Public Money into Private Profit, rev. ed. (Monroe, ME: Common Courage Press, 1998), p. 29. 43. Sol Stern, “No to Sports Stadium Madness,” City Journal 8, Autumn 1998, p. 78. 44. Information on the Metrodome is derived primarily from Amy Klobuchar, Uncovering the Dome: Was the Public Interest Served in Minnesota’s

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10 Year Political Brawl Over the Metrodome? (Prospect Heights, Ill: Waveland Press, Incorporated, 1986). 45. Jay Weiner, Stadium Games: Fifty Years of Big League Greed and Bush League Boondoggles (Minneapolis: University of Minnesota Press, 2000). 46. Rochelle Olson, “Twins, Hennepin Have Stadium Deal.” Star Tribune (Minneapolis), April 24, 2005, p. 1. 47. “Cuomo Warns N.J. to Let Yankees Alone,” Times Union (Albany, NY), October 7, 1993, p. B2. 48. Jennifer Steinhauser and Richard Sandomir, “Let’s Play Two: Giuliani Presents Deal on Stadiums,” New York Times, December 29, 2001, pp. 1, D6. 49. Jennifer Steinhauser, “Mayor Says There’s No Money to Build 2 Baseball Stadiums,” New York Times, January 8, 2002, p. B3. 50. Laura Mansnerus, “New Meadowlands Stadium Is Approved for the Giants,” New York Times, April 23, 2005, p. B6. 51. Michele McNeil, “State OKs Deal with City and Colts,” Indianapolis Star, September 9, 2005, p. 1. 52. Charles V. Bagli, “Giants and Jets Agree to Share a New Stadium,” New York Times, September 30, 2005, pp. 1, B7. 53. Impact of Travel on State Economies 1998 (Washington, DC: The Travel Industry Association of America, 2000), p. 2. 54. Edwin T. Fujii, Mohammed Khaled, and James Mak, “An Almost Ideal Demand System for Visitor Expenditures,” Journal of Transport Economics and Policy 19, May 1985, p. 170. 55. Carl Bonham, Edwin Fujii, Eric Im, and James Mak, “The Impact of the Hotel Room Tax: An Interrupted Times Series Approach,” National Tax Journal 54, December 2001, p. 439. 56. Jerry Miller, “Travelers Spend Billions in Granite State,” New Hampshire Sunday News, February 27, 2005, pp. 1, 10. 57. New York State Division of Tourism Master Plan 2000–2004 (Albany: Empire State Development, 2000), p. 8. 58. Ben Dobbin, “Wine Industry Creating Buzz Across State,” Times Union (Albany, NY), September 6, 2005, p. A3. 59. The Destructive Impact of New York State’s Hotel Occupancy Tax and Travel Promotion Cutbacks (Washington, DC: American Economics Group, Incorporated, 1992), pp. 5, 30. 60. Christopher Elliott, “For Business Travelers, Fees and Taxes Everywhere,” New York Times, April 19, 2005, p. C6. 61. Garry Rayno, “Snackers find Tax Confusing.” Union Leader (Manchester, NH), August 3, 2005, p. 1, A10.

222

Notes to Chapter 7 62. New York Laws of 1992, chap. 766.

63. 1997–2002 Capital Plan (Albany: New York State Thruway Authority, 1997), exhibits I–IV. 64. Peter A. Brown, “Big Business Exploits War Between the States for New Jobs,” Times Union (Albany, NY), February 6, 1994, p. B3. 65. Fox Butterfield, “As Gambling Grows, States Depend on Their Cut to Bolster Revenues,” New York Times, March 31, 2005, p. A24. 66. “Gambling Now Third Largest Source of Revenue for R.I.,” Union Leader (Manchester, NH), February 18, 2002, p. B3. 67. New York State Racing and Wagering Board Annual Report and Simulcast Report for Calendar Year 2004 (Albany: 2005) and Matthew Mosk, “Pimlico Owners Plan to Cut Racing Days,” Washington Post, September 8, 2005, p. B1. 68. Interstate Horseracing Act of 1978, 92 Stat. 1813, 15 U.S.C. §3004. 69. Kentucky Division, Horsemen’s Benevolent & Protective Association Incorporated v. Turfway Park Racing Association, 2832 F. Supp. 1097 (E.D.Ky 1993). 70. Kentucky Division, Horsemen’s Benevolent & Protective Association Incorporated v. Turfway Park Racing Association, 20 F.3d 1406 at 1416-417 (6th Cir. 1994). 71. James M. Odato, “NYRA Sheds Federal Indictment,” Times Union (Albany, NY), September 14, 2005, p. 1. 72. “An Act Relating to the Control of Organized Crime in the United States of 1970, 84 Stat. 922. See also Gambling in America: Final Report of the Commission on the Review of the National Policy Toward Gambling (Washington, DC: 1976). 73. Ibid., p. 2. 74. 26 Stat. 465, 18 U.S.C. §1302 and 28 Stat. 963, 18 U.S.C. §1301. 75. See Mehmet S. Tosun and Mark Skidmore, “Interstate Competition and State Lottery Revenues,” National Tax Journal 57, June 2004, pp. 163–78. 76. 15 U.S.C. §1172a and 18 U.S.C. §1301. 77. 18 U.S.C. §1307. 78. Message from the Director (Schenectady: New York Lottery, 2005), pp. 1–2. 79. “Maine Investigates Illegal Resale of Massachusetts Megabucks Tickets,” Keene (NH) Sentinel, April 10, 1984, p. 14. 80. Dave Michaels, “Lotto Chief Says Prizes Exaggerated,” Dallas News, June 24, 2005, pp. 1, A8.

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81. Peter Hecht, “Monster Jackpots on the Horizon,” Sacramento Bee, June 22, 2005, p. B1. 82. “Siblings Claim Final Share of Powerball,” USA Today, August 31, 2001, p. 3A. 83. Fox Butterfield, “Losing Shirt, Via Wireless, at Casino Pool,” New York Times, July 2, 2005, 1, A9. 84. Fox Butterfield, “A Virtual Horse Race? Massachusetts Lottery’s Plan for Game Angers Tracks,” New York Times, April 15, 2005, p. A13. 85. Indian Gaming Regulatory Act of 1988, 102 Stat. 2467, 25 U.S.C. §2710. 86. Ranjana G. Madhusudhan, “Betting on Casino Revenues: Lessons from State Experiences,” National Tax Journal 49, September 1996, pp. 401–12. 87. Ibid. 88. Mary J. Pitzl and Tom Zoeliner, “Hull, Tribes OK Gaming Deals,” Arizona Republic (Phoenix), February 21, 2002, p. 1. 89. Fox Butterfield, “Indians’ Wish List: Big-City Sites for Casinos,” New York Times, April 8, 2005, p. A24. 90. New York Laws of 2001, chaps. 94 and 383. Consult also James C. McKinley, Jr., “Gambling Expansion is Part of Albany Budget Agreement,” New York Times, October 24, 2001, pp. D1, D5. 91. Al Baker, “Video Lottery not Paying Off as Anticipated,” New York Times, April 12, 2005, B1, B5. 92. Constitution of New York, Art. I, §9 (2006). 93. Robert Morais, “New York State of Mind,” Forbes 169, April 29, 2002, p. 68. 94. Robert Goodman, The Luck Business (New York: Martin Kessler Books, 1995), p. 5. 95. “The Effects of Land-Based and Riverboat Gaming in New Orleans,” Louisiana Business Survey 28, Spring 1997, p. 2. 96. Ibid., p. 9. 97. Ken Belson and Gary Rivlin, “The Perils of Casinos That Float,” New York Times, September 7, 2005, pp. C1, C4. 98. “Mississippi Governor Signs Bill to Rebuild Gulf Casinos on Land.” New York Times, October 18, 2005, p. A20. 99. John Wilgoren, “Midwest Towns Feel Gambling Is a Sure Thing,” New York Times, May 20, 2002, pp. 1, A14. See also Ross C. Alexander and Brent A. Paterline, “Boom or Bust? Casino Gaming and Host Municipalities.” International Social Science Review 80, Nos. 1 & 2, 2005, pp. 20–28. 100. Kelo v. City of New London, 545 U.S. 469, 125 S.Ct. 2655, (2005).

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Notes to Chapter 7

101. Michelle York, “With Casino Poised to Grow, Some Fear Impact on City,” New York Times, August 2, 2005, p. B5. 102. Goodman, The Luck Business, p. 4. 103. Michael Cousineau and John Distaso, “Dog Track Execs Indicted,” Union Leader (Manchester, NH), January 15, 2005, pp. 1, A10. 104. John Distaso, “AG Links Track to Illegal Gambling,” Union Leader (Manchester, NH), March 12, 2005, pp. 1, A8. 105. “Rhode Island: Dog Track Officials Convicted,” New York Times, August 9, 2005, p. A16. 106. David M. Halbfinger, “California Considers Tax Breaks for Filming,” New York Times, August 18, 2005, p. E7. 107. Ibid., p. E1.

CHAPTER 8 1. William F. Fox and LeAnn Luna, “State Tax Collections: Eroding Tax Bases,” The Book of the States 2005 Edition (Lexington, KY: The Council of State Governments, 2005), p. 412. 2. The Act to Regulate Commerce of 1887, 24 Stat. 379, 49 U.S.C. §1. For a broad historical overview, consult Paul J. Hartman, State Taxation of Interstate Commerce (Buffalo, NY: Dennis & Company, Incorporated, 1953). 3. Gibbons v. Ogden, 22 U.S. 1, 9 Wheaton 1 (1824). 4. Brown v. Maryland, 25 U.S. 419, 12 Wheaton 419 (1827). 5. Ibid., 25 U.S. 419 at 449, 12 Wheaton 419 at 449. 6. Hinson v. Lott, 75 U.S. 148, 8 Wall. 148 (1868). 7. Brown v. Houston, 114 U.S. 622 at 634, 5 S.Ct. 1091 at 1097 (1885). 8. Robbins v. Shelby County Taxing District, 120 U.S. 489 at 493, 7 S.Ct. 592 at 596 (1887). 9. Michelin Tire Corporation v. Wages, 423 U.S. 276 at 286, 96 S.Ct. 535 at 541 (1976). 10. General American Tank Corporation v. Day, 270 U.S. 367 at 373, 46 S.Ct. 234 at 236 (1926). 11. Gregg Dyeing Company v. Query, 286 U.S. 472, 52 S.Ct. 631 (1932). 12. Western Live Stock v. Bureau of Revenue, 303 U.S. 250 at 254, 58 S.Ct. 546 at 548 (1938). 13. Clark v. Paul Gray Incorporated, 306 U.S. 538 at 594, 59 S.Ct. 744 at 751 (1939). 14. McCarran-Ferguson Act of 1945, 59 Stat. 33, 15 U.S.C. §1011.

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15. Prudential Insurance Company v. Benjamin, 328 U.S. 408, 66 S.Ct. 1142 (1946). 16. Western & Southern Life Insurance Company v. State Board of Equalization, 451 U.S. 648 at 655-56, 101 S.Ct. 2070 at 2076–077 (1981). 17. Ibid. See also Bank of Augusta v. Earle, 38 U.S. 519, 13 Pet. 519 (1839). 18. Metropolitan Life Insurance Company v. Ward, 470 U.S. 869, 105 S.Ct. 1676 (1985). 19. Northwestern States Portland Cement Company v. Minnesota, 358 U.S. 450, 79 S.Ct. 357 (1959). 20. Ibid., 358 U.S. 450 at 456, 79 S.Ct. 357 at 366. 21. Ibid., 358 U.S. 450 at 474–75, 79 S.Ct. 357 at 381. 22. Ibid., 358 U.S. 450 at 476, 79 S.Ct. 357 at 382. 23. Alaska v. Artic Maid, 366 U.S. 199, 81 S.Ct. 929 (1961). 24. National Bellas Hess, Incorporated v. Department of Revenue of Illinois, 386 U.S. 573, 87 S.Ct. 1389 (1967). 25. Boston Stock Exchange v. State Tax Commission, 429 U.S. 318 at 329, 97 S.Ct. 599 at 606 (1977). 26. Quill Corporation v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904 (1992). 27. McCarroll v. Dixie Greyhound Lines, Incorporated, 309 U.S. 176 at 188–89, 60 S.Ct. 504 at 510 (1939). 28. Northwest Airlines, Incorporated v. Minnesota, 322 U.S. 292 at 303-04, 64 S.Ct. 950 at 956 (1944). 29. Northwestern States Portland Cement Company v. Minnesota, 358 U.S. 450 at 457, 79 S.Ct. 357 at 362 (1959). 30. Ibid., 358 U.S. 450 at 476–77, 79 S.Ct. 357 at 382–83. 31. Moorman Manufacturing Company v. Bair, 437 U.S. 267 at 289, 98 S.Ct. 2340 at 2348 (1978). 32. Quill Corporation v. North Dakota, 502 U.S. 298 at 318, 112 S.C. 1904 at 1916 (1992). 33. Tariff Act of 1930, 46 Stat. 690, 19 U.S.C. §1309(a). 34. New York City Local Law No. 4 of 1934 and New York Laws of 1934, chap. 873. 35. McGoldrick v. Gulf Oil Corporation, 256 App. Div. 207, 9 N.Y.S.2d 544 (1939) and 281 N.Y. 647, 22 N.E.2d 480 (1939). 36. McGoldrick v. Gulf Oil Corporation, 309 U.S. 414 at 429, 60 S.Ct. 664 at 669 (1940).

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37. Soldiers and Sailors Civil Review Act of 1940, 54 Stat. 1190, 50 U.S.C. Appendix §573. 38. An Act Relating to the Power of the States to Impose Net Income Taxes on Income Derived from Interstate Commerce of 1959, 73 Stat. 555, 15 U.S.C. §381. 39. Report of the Special Subcommittee on State Taxation of Interstate Commerce of the Committee on the Judiciary, House of Representatives Pursuant to Public Law 86-272, as Amended (Washington, DC: U.S. Government Printing Office, 1964). Hereinafter referred to as Willis committee report. 40. Ibid., p. 425. 41. Paul J. Hartman, Federal Limitations on State and Local Taxation (Rochester, NY: The Lawyers Co-operative Publishing Company, 1981), p. 516. 42. An Act to Clarify the Liability of National Banks for Certain Taxes of 1969, 83 Stat. 434, 12 U.S.C §548. 43. Airport Development Acceleration Act of 1973, 87 Stat. 220, 49 U.S.C. Appendix §1573 (1974 Supp.). See also Evansville-Vanderburgh Airport Authority District v. Delta Airlines, 405 U.S. 707, 92 S.Ct. 1349 (1972). 44. Wendell H. Ford Aviation Investment and Reform Act for the 21st Century of 2000, 114 Stat. 71, 49 U.S.C. §40117(b)(4). 45. Omnibus Budget and Reconciliation Act of 1990, 104 Stat. 1388–357, 1388–370, 49 U.S.C. §40117(b)(1). 46. State Taxation of Depositories Act of 1973, 87 Stat. 342, 12 U.S.C. §1464(C). 47. Securities Acts Amendments of 1975, 89 Stat. 97, 15 U.S.C. §78bb(d). See also Boston Stock Exchange v. State Tax Commission, 429 U.S. 318, 97 S.Ct. 599 (1977). 48. United States Senate Report No. 94–75, 1975, p. 60. 49. Railroad Revitalization and Regulatory Reform Act of 1976, 90 Stat. 54, 49 U.S.C. §§11501, 11502(a). 50. Tax Reform Act of 1976, 90 Stat. 1914, 15 U.S.C. §391. 51. Arizona Public Service Company v. Snead, 441 U.S. 141 at 145 (1979). 52. Act of July 19, 1977, 91 Stat. 271, 4 U.S.C. §113. 53. Motor Carrier Act of 1980, 94 Stat. 793, 49 U.S.C. §40116(b) (1981 Supp.). The current provisions affecting motor carrier and water carrier employees are contained in the Interstate Commerce Commission Termination Act of 1995, 109 Stat. 803, 49 U.S. C. §14503(1), 49 U.S.C. §14503(a)(2). 54. Tax Equity and Fiscal Responsibility Act of 1982, 96 Stat. 324, 49 U.S.C. §40116(d).

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55. Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 103 Stat. 262, 12 U.S.C. §1825(b). 56. AMTRAK Reauthorization Act of 1990, 104 Stat. 296–97, 49 U.S.C. §11504(a-b). 57. Motor Carrier Act of 1991, 105 Stat. 2140, 49 U.S.C. Appendix. §2302(b)(1). 58. Federal Aviation Administration Authorization Act of 1994, 108 Stat. 1588, 49 U.S.C. §40116(f)(3). 59. Ibid., 108 Stat. 1573, 49 U.S.C. §47101(a)(12). 60. An Act to Codify Without Substantive Change Recent Laws Related to Transportation and to Improve the United States Code of 1994, 108 Stat. 4379, 49 U.S.C. §24501(A)(f)(A–B). 61. Interstate Commerce Commission Termination Act of 1995, 109 Stat. 904, 49 U.S.C. §14505. 62. State Taxation of Pension Income Act of 1995, 109 Stat. 979, 4 U.S.C. §114(a). President William J. Clinton on January 10, 1996, signed the act that contains an effective date of December 31, 1995. 63. Internet Tax Freedom Act of 1998, 112 Stat. 2681, 47 U.S.C. §151. 64. Internet Nondiscrimination Act of 2001, 115 Stat. 703, 47 U.S.C. §151. 65. Internet Tax Freedom Act of 2004, 118 Stat. 2615, 47 U.S.C. §609. 66. Ibid., 118 Stat. 2616, 47 U.S.C. §151. 67. An Act to Provide Equitable Treatment with Respect to State and Local Income Taxes for Certain Individuals Who Perform Duties on Vessels of 2000, 114 Stat. 2207, 46 U.S.C. §11108(b)(1). 68. Willis committee report, p. 583. Information in the following paragraph is derived from Ibid., pp. 583–88. 69. Paul Studenski, “The Need for Federal Curbs on State Taxes on Interstate Commerce: An Economist’s Viewpoint,” Virginia Law Review 46, 1960, p. 1144. 70. Ibid., p. 1146. 71. Moorman Manufacturing Company v. Bair, 437 U.S. 267 at 280, 98 S.Ct. 2340 at 2348 (1978). 72. Key Issues Affecting State Taxation of Multijurisdictional Corporate Income Need Resolving (Washington, DC: U.S. General Accounting Office, 1982), p. 27. The office has been renamed the U.S. General Accountability Office. 73. Ibid., p. 30. 74. Daniel Shaviro, Federalism in Taxation: The Case for Greater Uniformity (Washington, DC: The AEI Press, 1993), p. 98.

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75. Federal-State Tax Collection Act of 1972, 86 Stat. 936, 26 U.S.C. §6361. See also Staff of the Joint Committee on Internal Revenue Taxation, General Explanation of the State and Local Fiscal Assistance Act and the Federal-State Tax Collection Act of 1972 (Washington, DC: U.S. Government Printing Office, 1973). 76. Commonwealth Edison Company v. Montana, 453 U.S. 609 at 637–38, 101 S.Ct. 2946 at 2963. 77. Ibid., 451 U.S. 725 at 756, 759, 101 S.Ct. 2114 at 2134–135. 78. Jenkins Act of 1949, 63 Stat. 884, 15 U.S.C. §375. 79. Report of the Special Subcommittee on State Taxation of Interstate Commerce of the Committee on the Judiciary, House of Representatives Pursuant to Public Law 86-272, as Amended, p. 599. 80. The Federalist Papers (New York: New American Library, 1961), p. 198. 81. Gramm-Leach-Bliley Financial Modernization Act of 1999, 113 Stat 1353, 5 U.S.C. §6701(d)(2)(A). 82. Consult Joseph F. Zimmerman, Congressional Preemption: Regulatory Federalism (Albany, NY: State University of New York Press, 2005).

CHAPTER 9 1. Contraband Cigarette Act of 1978, 92 Stat. 2463, 18 U.S.C. §2345(b). 2. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: The Modern Library, 1937), pp. 777–79. 3. Nonresident Tax Study Nonresidents (Albany: 1959), p. 43.

Committee,

Report

on

Taxation

of

4. W. Brooke Graves, Uniform State Action: A Possible Substitute for Centralization (Chapel Hill: University of North Carolina Press, 1934). 5. William K. Voit, Nancy J. Vickers, and Thomas L. Gavenois, Interstate Compacts and Agencies 2003 (Lexington, KY: The Council of State Governments, 2003). 6. Joseph F. Zimmerman, Interstate Cooperation: Compacts and Administrative Agreements (Westport, CT: Praeger Publishers, 2002), pp. 54–61. 7. Petty v. Tennessee-Missouri Bridge Commission, 359 U.S. 275 at 285, 79 S.Ct. 785 at 792 (1952). 8. Frederick L. Zimmermann and Mitchell Wendell, The Law and Use of Interstate Compacts (Lexington, KY: The Council of State Governments, 1976), p. 19.

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9. Interview with Executive Director Daniel J. Smith of the Northeast Dairy Compact Commission, Montpelier, VT, September 18, 2001. 10. Barron v. Baltimore, 32 U.S. 243 at 249, 7 Pet. 243 at 249 (1833). 11. Green v. Biddle, 21 U.S. 1, 8 Wheaton 1 (1823). 12. Virginia v. Tennessee, 148 U.S. 503 at 520, 13 S.Ct. 728 at 734–35 (1893). 13. Crime Control Act of 1910, 36 Stat. 882. 14. Congressional Record, April 2, 1941, pp. 3285-286. The amended compact received congressional consent on May 26, 1943. See 57 Stat. 86 (1943). 15. Hinderlider v. La Plata River and Cherry Creek Ditch Company, 304 U.S. 92, 58 S.Ct. 803 (1938). 16. Delaware River Joint Toll Bridge Commission v. Colburn, 310 U.S. 419, 60 S.Ct. 1039 (1940). 17. Cuyler v. Adams, 449 U.S. 433, 101 S.Ct. 703 (1981). 18. Murdoch v. City of Memphis, 87 U.S. 590, 20 Wallace 590 (1874). 19. See the Delaware River Basin Compact, Art.1, §1.6(a). 20. Northwestern States Portland Cement Company v. Minnesota, 358 U.S. 450, 79 S.Ct. 357 (1959). 21. An Act Relating to the Power of States to Impose Net Income Taxes on Income Derived from Interstate Commerce of 1959, 73 Stat. 555, 15 U.S.C. §381. 22. Report of the Special Subcommittee on Taxation of Interstate Commerce, Committee on the Judiciary, House of Representatives, 88th Congress, 2d session (Washington, DC: U.S. Government Printing Office, 1964), 4 vols. 23. Personal interview with Commissioner G. Philip Blatsos of the New Hampshire Department of Revenue Administration, Concord, NH, August 23, 2005. Hereinafter referred to as Blatsos interview. 24. United States Steel Corporation v. Multistate Tax Commission, 434 U.S. 452 at 473, 98 S.Ct. 799 at 813 (1978). 25. Model Regulations, Statutes, and Guidelines (Washington, DC: Multistate Tax Commission, 1995). 26. Membership and Current Activities (Washington, DC: Multistate Tax Commission, 1995), p. 11. 27. W. Brooke Graves, Uniform State Action: A Possible Substitute for Centralization (Chapel Hill: University of North Carolina Press, 1934), p. 33. See also Walter P. Armstrong Jr., A Century of Service: A Centennial History of the National Conference of Commissioners on Uniform State Laws (St. Paul, MN: West Publishing Company, 1991). 28. Annual Report 2003–2004 (Chicago: Commissioners on Uniform Laws, 2005), p. 2.

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29. Information provided by Katie Robinson of the National Conference of Commissioners on Uniform State Laws, September 16, 2005. 30. Kim Q. Hill and Patricia A. Hurley, “Uniform State Law Adoptions in the American States: An Explanatory Analysis,” Publius: The Journal of Federalism 18, Winter 1988, pp. 117–26. 31. Ibid., p. 124–26 32. Blatsos interview. 33. “N.Y.-N.J. Tax Pact Targets Cheaters,” Knickerbocker News (Albany, NY), February 9, 1958, p. 22. 34. William R. Greer, “New York Joining Jersey to Combat Sales-Tax Evasion,” New York Times, June 7, 1985, pp. 1, B5. 35. Letter to author from New York State Deputy Commissioner of Taxation and Finance Michelle Cummings dated June 4, 2001. 36. Richard J. Meislin, “10 States Link Efforts to Hunt Tax Cheaters,” New York Times, January 17, 1986, p. B1. 37. Julie Bennett, “States Look to Share Data, Collect More Taxes,” City & State 10, May 24, 1993, p. 13. 38. “Rewriting the Rules,” Government Technology, January 2001, p. 50. 39. “Streamlined Sales Tax Project,” a fact sheet provided by project cochair Diane Hardt, Wisconsin Department of Revenue, January 16, 2001. See also Doug Sheppard, “Streamlined Project Moves Ahead with 2001 Agenda,” State Tax Notes 20, March 12, 2001, pp. 874–78. 40. Personal interview with Chairman Michael Obuchowski of the Vermont House of Representatives Ways and Means Committee, Putney, Vermont, July 20, 2005. 41. Federal-State Tax Collection Act of 1972, 86 Stat. 936, 26 U.S.C. §6361. 42. Staff of the Joint Committee on Internal Revenue Taxation, General Explanation of the State and Local Fiscal Assistance Act and the Federal-State Tax Collection Act of 1972 (Washington, DC: U.S. Government Printing Office, 1973), p. 51. 43. Riegle Community Development and Regulatory Improvement Act of 1994, 108 Stat. 2247, 31 U.S.C. §5311. 44. Criminal Identification Technology Act of 1998, 112 Stat. 1874, 42 U.S.C. §146. 45. Emergency Highway Energy Conservation Act of 1974, 87 Stat. 1046, 23 U.S.C. §101. 46. Energy Policy and Conservation Act of 1975, 89 Stat. 933, 42 U.S.C. §6201. 47. National Minimum Drinking Age Amendments of 1984, 98 Stat. 437, 23 U.S.C. §158.

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48. Transportation Equity Act for the 21st Century of 1998, 112 Stat. 328, 23 U.S.C. §410. 49. Ibid., 112 Stat. 240, 23 U.S.C. §163. 50. Department of Transportation Appropriation Act of 1990, 104 Stat. 2185, 23 U.S.C. §104. Consult also 57 Federal Register 35,986–36,001 (1992). 51. Gramm-Leach-Bliley Financial Modernization Act of 1999, 113 Stat. 1353, 5 U.S.C. §6701(d)(2)(A). 52. Ibid., 113 Stat. 1422, 15 U.S.C. §6751. 53. Federal-State Tax Collection Act of 1972, 86 Stat. 936, 26 U.S.C. §6361. See also Ray M. Ware, Piggybacking: The Federal-State Collection Act of 1972 (Lexington: Kentucky Council of Economic Advisors, 1980). 54. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, pp. 777–79.

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Index

An Act to Clarify the Liability of National Banks for Certain Taxes, 162–63 An Act to Codify Recent Laws Related to Transportation, 165 The Act to Provide Equitable Treatment with Respect to State and Local Income Taxes, 166 The Act to Regulate Commerce of 1887, 154 Adams Express v. State Auditor, 83 Adler v. Deegan, 77 Air Courier Conference v. Postal Workers, 129 Airport Development Acceleration Act of 1973, 163 alcoholic beverages taxation, 33–41 bootlegging, 39–41 direct shipment laws, 36–39 state regulation, 33–36 alien corporation, 2 American bar association, 176 AMTRAK Reauthorization Act, 164 Annapolis convention, 8 Antifederalist Papers, 10, 63 Arizona v. New Mexico, 118–19, 121–22 Arizona Public Service Company v. Snead, 99 arm’s-length method, 81

Articles of Confederation and Perpetual Union, vii, 5–10 15–17, 25, 177 defects, 6–7 ASARCO v. Idaho Tax Commission, 86, 90 Austin v. New Hampshire 17–18, 68–69, 119–21 Ayotte, Kelly, 150–51 Bacchus Imports Limited v. Dias, 37 Bank of Augusta v. Earle, 63 Barclay’s Bank v. Franchise Board, 91,103 Bass, Ratliff v. State Tax Commission, 84 Baucus, Max, 53 Black, Hugo, 113, 159 Blackman, Harry A., 18, 67, 89, 108, 120–21 Blake, Madge B., 114 Boston Stock Exchange v. Tax Commission, 98, 158 Brennan, William, 100, 115 Braniff Airways v. Nebraska, 94 Brown v. Maryland, 155 Brutus, 63 Burger, Warren, 123 business firms’ tax base, 132–38 business climate, 135–37 interstate competition, 137–38

279

280

Index

casinos, 148–50 cigarette taxation and smuggling, 25–33 Internet sales, 30–33 tax-exempt sales, 28–30 City of Virginia Beach, 3 Clark-McNary Act of 1924, 49 Clarke v. Securities Industry Association, 129 Clean Water Act, 137 Clifford, Nathan, 64 Colorado River Compact, 180 Commonwealth Edison v. Montana, 52–54 competition for film makers, 151 competition for gamblers, 145–51 casinos, 148–50 lotteries, 146–48 social costs, 150–51 competition for tourists, 141–45 Complete Auto Transit v. Brady, 52, 95–96,103 concurrent powers, 13 congressional encouragement of uniform laws,189–91 congressional regulation of state taxation, 161–66 Connecticut Corporation Business Tax Act, 80 consent of Congress, 179–80 consent effects, 179–80 consent types, 179 Container Corporation v. Franchise Tax Board, 96, 103 Contraband Cigarette Trafficking Act of 1978, 27, 31, 176 Conyers, John, 31 corporate income taxation, 79–103 Cory v. White, 116 Council of State Governments, 134–35 Cozier, Barry A., 76 Criminal Identification Technology Act of 1998, 189–90 C&S wholesale grocers, 138 Currie, George R., 90

Customs Regulations of 1931, 161 Cuyler v. Adams, 180 Defense of Marriage Act, 15 Delaware v. New York, 108–09 Delaware River Basin Compact, 180 Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974, 108 documentary taxes, 43–44 dormant interstate commerce clause, 56, 154 due process of law, 110, 153 Douglas, William, 159 Dunlieth & Dubuque Bridge Company v. County of Dubuque, 117 Edison California Stores v. McColgan, 87 Eleventh Amendment, 19, 110 Emergency Highway Energy Conservation Act, 190 eminent domain, 149–50 escheats, 105–16 estate tax disputes, 109–116 Texas v. Florida et al., 111 Massachusetts v. Missouri, 113 California v. Texas, 114–16 excise and documentary taxes, 23–45 equal protection of the laws, 17–18, 153 fairness in taxation, 175–92 Federal Aviation Administration Authorization Act of 1994, 165 Federal Coal Leasing Amendments of 1975, 53 Federal Interpleader Act of 1936, 110, 115 Federal Mineral Lands Leasing Act of 1920, 53 Federal Power Act, 128 Federal-State Tax Collection Act of 1972 170, 189, 192

Index Federalist Papers, 6–7, 10 Number 5, 7 Number 6, 7 Number 4, 7 Number 21,6 Number 25, 7 Number 28, 7 Number 32, 24, 47 Number 42, 15, 25 Number 74, 7 Number 80, 63 Number 82, 9 federation of tax administrators, 187 Fields, David Dudley, 183 Financial Institutions, Reform, Recovery Act of 1989, 164 First Amendment, 34, 145–56 foreign corporation, 2 forest taxation, 49 formula apportionment, 81 Fourteenth Amendment, 153–54 Fox, William F., 154 Frankfurter, Felix, 113, 157–60 full faith and credit, 14–16 F.W. Woolworth v. State Taxation Department, 91 Gibbons v. Ogden, 154–55 Goldberg v. Sweet, 101 Goodman, Roy M., 27 Granholm v. Heald, 39 Gramm-Leach-Bliley Financial Modernization Act of 1998, 172, 190–91 Graves, W. Brooke, 183 Green, Edward H.R., 111, 116 Green, Thomas, Jr., 38 Guiliani, Rudolph W., 141 Hamilton, Alexander, 9, 24, 47, 63 Hartman, Paul J. 162 Hatch Act of 1887, 190 Heisler trilogy, 51, 53 Hellerstein, Walter 49, 56, 83 Holmes, Oliver Wendell, 93, 139 Hughes, Howard, 114–16

281

Hunt v. Washington Apple Commission, 128 Illinois v. City of Milwaukee, 121 implied powers, 12–13 Income Tax Act of 1913, 62, 65 Indian Civil Rights Act of 1968, 57 Indian Gaming Regulatory Act of 1988, 148–49 Indian Mineral Leasing Act of 1938, 57–58 Indian Reorganization Act of 1934, 57 Indian reservations, 57–59 Indian Trade and Intercourse Act of 1790, 28 Indian Trader Act of 1876, 28, 30 Indian tribes, 12 industrial development bonds, 132–33 intangible holding companies, 158 International Fuel Agreement, 41–42, 164–65 International Registration Plan, 42–43 Internet Tax Freedom Act of 1998, 165–66 Internet Tax Freedom Act of 2004, 30, 166 interstate administrative agreements, 186–89 interstate commission on crime, 178 Interstate Commerce Commission Termination Act of 1994, 165 interstate compact for supervision of parolees, 179 interstate compacts, 16, 176–80 amendment and termination, 180 consent of Congress, 179–80 negotiations and enactment, 177–79 interstate free trade, 15–17 Interstate Horseracing Act of 1978, 145–46 interstate rendition, 18–19 interstate taxation disputes, 19,116–30 Arizona v. New Mexico, 118–19 California v. Texas, 114–16 Connecticut et al, v. New Hampshire, 123–26 Delaware v. New York, 108–09, 129

282

Index

interstate taxation disputes, Cont’d Iowa v. Illinois, 117–18, 129 Maryland v. Louisiana, 121–23, 127 Massachusetts v. Missouri, 113–14 New York v. New Jersey, 128 Pennsylvania v. New Jersey et al., 119–21 Pennsylvania v. New York, 107–08 Texas v. Florida, et al., 111–13 Texas v. New Jersey, 106–07 Wyoming v. Oklahoma, 127–29 Jackson, Robert H. Japan Line v. Los Angeles, 96, 103 Jenkins Act of 1949, 25–26, 29 31–32, 171 jock tax, 3, 70, 72–73 Judd, Harold T., 126 Kennedy, Anthony M., 92 Kentucky v. Dennison, 19 legal equality of states, 13–14 Lehman, Herbert H., 179 Long, Henry F., 39 Luna, LeAnn, 154 Lunding v. New York Tax Appeals Tribunal, 62, 69 Madison, James, 6–7, 15, 25, 47–48 Mail Fraud Act of 1909, 26, 31 Marshall, John, 155 Marshall, Thurgood, 67, 100, 116 Maryland v. Louisiana, 54–55, 127 Matson Navigation Company v. State, 86–87 McCarroll v. Dixie Greyhound, 159 McCarran-Ferguson Act of 1945, 100, 156–57 McCulloch v. Maryland, 12 McHugh, John M., 31 Merrill, Stephen E., 126 Michelin Tire Corporation v. Wages, 155 Minnesota Twins, 139–40 Moorman Manufacturing Company v. Bair, 160, 168

Motor Carrier Act of 1980, 164 Motor Carrier Act of 1991, 41, 164 multistate tax compact, 85–86, 172, 181–83 municipal commuter income tax, 75–77 National Bellas Hess v. Department of Revenue, 158 National Association of Insurance Commissioners, 191 National Conference of Commissioners on Uniform State Laws, 105–06, 166, 172, 176, 183–86 National Conference of State Legislatures, 41, 187–8 National Governors Association, 187–88 National Municipal League, 176 national nexus program, 183 Natural Gas Policy Act of 1978, 102, 122 natural resource taxation, 48–51 negative commerce clause, 55–57, 127–29 New England Power Company v. New Hampshire, 128 New England Water Pollution Compact, 179 New Jersey Transportation Benefits Tax Act, 119–21 New York City Local Law 4 of 1934, 161 New York Giants, 141 New York v. New Jersey, 128 New York stock exchange, 138 new war between states, 133 nonresident income tax, 77 nonresident pension source taxation, 74–75 Northwest Airlines. V. Minnesota, 94, 159 Northwestern States Cement Company v. Minnesota, 84, 95, 157, 162, 181

Index O’Connor, Sandra Day, 100 Omnibus Budget Reconciliation Act of 1990,163 passive investment companies, 158 Paul v. Virginia, 63 peace treaty of 1763, 117 Pennsylvania v. New Jersey et al., 67 Pennsylvania v. New York, 107–08 Pennsylvania v. West Virginia, 121 Pike v. Bruce Church, Incorporated 51–52 Pitcher, Robert C., 42 Pohlad, Carl, 140 Powell, Lewis F., 108, 115–16 Preska, Loretta A., 31 Price-Waterhouse, 28, 33 privileges and immunities,17, 153 professional athletes, 3, 70, 72–73 public law 86–272, 84–85, 162 Puerto Rico v. Branstad, 19 Quill Corporation v. North Dakota, 158, 160–61,166 Racketeer Influenced and Corrupt Organizations Act of 1970, 31 Railroad Revitalization and Regulatory Reform Act of 1976, 163 recommendations for congressional Action, 168–72 Rehnquist, William, 55–56, 99–100, 108, 116, 122–23, 128–29 Rendition Act of 1793, 19 resultant powers, 12–13 Revenue Act of 1926, 110 Revenue and Expenditure Control Act of 1968, 133 Riegle Community Development Act of 1994,189 Riverboat casinos, 149 Robbins v. Shelby County, 155 Rockefeller, Nelson A., 26 Roosevelt, Theodore, 28 Seabrook nuclear power plant, 123–26 Securities Acts Amendments of 1975, 163

283

severance taxes, 47–60 Scalia, Antonin, 97–98, 128–29 Schmudde, David, 70 separate accounting, 81 Shaffer v. Carter, 64–66, 69, 74 Shanker, Vijay, 38–39 Shays, Daniel, 7 silence of Congress, 153–73, 175 Smith, Adam, 1, 24, 192 Smith, Robert K., Jr., 99 Soldiers and Sailors Relief Act of 1940, 161 Southern Regional Education Compact, 178 specific allocation, 81 Spector Motor Service v. O’Connor, 80 sports franchises, 139–41 state competition for tax revenue, 1–21 state nonresident income tax, 64 State Taxation of Pension Income Act of 1995, 75, 163, 165 Steinbrenner, George, 140 Steward, Potter, 115 Stevens, John Paul, 89, 97, 108, 115–16 119 Stone, Harlan F., 94 Streamlined Sales and Use Tax Agreement, 187–88 supreme court taxation rules, 51–59 Susquehanna River Basin Compact, 180 Tariff Act of 1930, 161 tax credits, 98–101 Tax Equity and Fiscal Responsibility Act of 1982, 164 tax exportation, 48–51 tax incentives, 133 Tax Injunction Act of 1937, 88 tax loss suit, 125–29 tax maxims, 1 Tax Reform Act of 1976, 50, 123, 163–64 tax resource competition, 131–52

284

Index

telecommuting, 73–74 Texas v. New Jersey, 106–07, 115–16 Thomas, Clarence, 128–29 transportation taxes, 93–98 Travis v. Yale and Towne Manufacturing Company, 65, 68–69 Twenty-First Amendment, 34, 37, 39

legal equality of states, 13–14 powers of Congress, 11–12 ratification, 9–10 U.S. General Accounting Office, 168–69 U.S. Internal Revenue Code, 189, 191 Vernon, Raymond, 81

Uniform Disposition of Unclaimed Property, Act, 106 uniform division of income act, 82–83, 182 uniform sales and use tax certificate, 183 uniform state laws, 183–86 Uniform Unclaimed Property Act, 106 unitary taxation system, 83–92 U.S. advisory commission on Intergovernmental relations, 27, 133, 135–36 U.S. Constitution, 8–19 concurrent powers, 13 full faith and credit, 14–16 implied and resultant powers, 12–13 Indian tribes, 12

Wallace et al. v. Hines, 93 Ward v. Maryland, 64 Water Quality Act of 1965, 137 Webb-Kenyon Act of 1913, 32–33 Wendell H. Ford Aviation Investment Reform Act, 163 Western Live Stock v. Bureau of Revenue, 79, 156 Williams, Stephen F., 54 White, Byron, 88, 108, 170–71 Willis committee, 162, 167, 181 Wilson Act of 1890, 33 Wyoming v. Oklahoma, 55–57, 127–29 Yankee stadium, 140–41

POLITICAL SCIENCE

THE SILENCE OF CONGRESS State Taxation of Interstate Commerce Joseph F. Zimmerman The Silence of Congress is the first book to examine state taxation of interstate commerce and the relative inactivity on the part of Congress to regulate such commerce. As states actively seek to maximize tax revenues, Congressional silence has affected both citizens and corporations and resulted in myriad tax inequalities from one state to another on such things as personal income, estates, cigarettes and alcoholic beverages, tourism, and even visiting athlete status. Inconsistencies also affect a state’s ability to attract and hold lucrative business investments such as sports franchises and gambling facilities. Noting that Congress has been slow to take advantage of the broad powers granted it by the United States Constitution in this area, Joseph F. Zimmerman evaluates the usefulness of Adam Smith’s four universally acclaimed maxims of fair taxation and recommends changes to ground rules that would increase cooperation between states while aiding in the creation of a more perfect economic union. “This book is extremely well organized and written, and is supported by careful and appropriate research. It fills an intellectual void that accounts for why various states have such different tax policies.” — Nelson Wikstrom, coauthor of American Intergovernmental Relations: A Fragmented Federal Polity Joseph F. Zimmerman is Professor of Political Science at the University at Albany, State University of New York. He is the author of many books, including Interstate Disputes: The Supreme Court’s Original Jurisdiction and Congressional Preemption: Regulatory Federalism, both also published by SUNY Press.

State University of New York Press www.sunypress.edu