STATE REGULATION AND TAXATION OF COMMERCE

THE DORMANT COMMERCE CLAUSE

The Dormant Commerce Clause limits the power of states to legislate in ways that impact interstate commerce. If Congress has not enacted legislation in a particular area of interstate commerce, then states can regulate interstate commerce so long as the regulation does not:

• Discriminate against out-of-state commerce

• Unduly burden interstate commerce or

• Purposefully regulate wholly out-of-state activity.

Discrimination Against Out-of-State Commerce

A state or local government cannot enact a discriminatory regulation that protects local economic interests at the expense of out-of-state competitors except in the rare instance when:

(Strict Scrutiny)

• The regulation is necessary to an important state interest and

• No nondiscriminatory means are available to achieve that purpose

Undue Burden on Interstate Commerce

A nondiscriminatory state regulation may be struck down if it imposes an undue burden on interstate commerce. To determine if an undue burden exists, a court will:

(Undue Burden Test)

• Balance the purpose of the state law against the burden on interstate commerce and

• Evaluate whether there is a less restrictive alternative.

Exceptions - State CANNOT regulate unless

• Market-participant exception – A state can favor local commerce or discriminate against nonresident commerce if the state is acting as a buyer or seller and not as a market regulator.

• Traditional government function exception – State and local regulations can favor state and local government (not private) entities if the entities are performing a traditional government function (e.g., waste disposal)

• Congressionally permitted discrimination – An otherwise impermissible state regulation is valid if it is unmistakably clear that Congress intended to permit it.

STATE TAXATION OF COMMERCE - Interstate Commerce

States may tax interstate commerce only if Congress has not already acted in the particular area and the tax does not discriminate against or unduly burden interstate commerce. A state tax of interstate commerce is valid if:

• There is a substantial nexus between the activity being taxed and the taxing state

• The tax is fairly apportioned pursuant to a rational formula such that interstate commerce does not pay total taxes greater than local commerce by having to pay tax in multiple states

• The tax does not discriminate (either on its face or in its effect), so there is no direct commercial advantage to local businesses over interstate competitors and

• The tax is fairly related to the services provided by the taxing state.

Ad Valorem Property Taxes

An ad valorem tax is one based on the value of property (real or personal) and is often assessed at a particular time of year. States can tax:

• Movable commodities that are within their borders on a specific date (but not goods that are merely in transit between states) and

• Instrumentalities of commerce if the instrumentality has a taxable situs or sufficient contacts within the taxing state.

Foreign Commerce

A state must have congressional consent to impose import or export taxes unless the tax is absolutely necessary for executing the state’s inspection laws.