Article I, Section 8, Clause 3:
[The Congress shall have Power . . .] To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes; . . .
During the 1940s and 1950s, there was conflict within the Court between the view that interstate commerce could not be taxed at all, at least
directly, and the view that the negative commerce clause protected against the risk of double taxation. 1 In Northwestern States Portland Cement Co. v. Minnesota, 2 the Court reasserted the principle expressed earlier in Western Live Stock, that the Framers did not intend to immunize interstate commerce from its just share of the state tax burden even though it increased the cost of doing business. 3 Northwestern States held that a state could constitutionally impose a nondiscriminatory, fairly apportioned net income tax on an out-of-state corporation engaged exclusively in interstate commerce in the taxing state.
For the first time outside the context of property taxation, the Court explicitly recognized that an exclusively interstate business could be subjected to the states' taxing powers. 4 Thus, in Northwestern States, foreign corporations that maintained a sales office and employed sales staff in the taxing state for solicitation of orders for their merchandise that, upon acceptance of the orders at their home office in another jurisdiction, were shipped to customers in the taxing state, were held liable to pay the latter's income tax on that portion of the net income of their interstate business as was attributable to such solicitation.
Yet, the following years saw inconsistent rulings that turned almost completely upon the use of or failure to use
magic words by legislative drafters. That is, it was constitutional for the states to tax a corporation's net income, properly apportioned to the taxing state, as in Northwestern States, but no state could levy a tax on a foreign corporation for the privilege of doing business in the state, both taxes alike in all respects. 5 In Complete Auto Transit, Inc. v. Brady, 6 the Court overruled the cases embodying the distinction and articulated a standard that has governed the cases since. The tax in Brady was imposed on the privilege of doing business as applied to a corporation engaged in interstate transportation services in the taxing state; it was measured by the corporation’s gross receipts from the service. The appropriate concern, the Court wrote, was to pay attention to
economic realities and to
address the problems with which the commerce clause is concerned. 7 The standard, a set of four factors that was distilled from precedent but newly applied, was firmly set out. A tax on interstate commerce will be sustained
when the tax 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. 8
Nexus. – The first prong of the Complete Auto test asks whether the tax applies to an activity with a "substantial nexus" with the taxing state, which requires the taxpayer to "avail itself of the substantial privilege of carrying on business in that jurisdiction."  9 This requirement runs parallel to the "minimum contacts" requirement under the Due Process Clause that a state must meet to exercise control over a person, that person's property, or a transaction involving the person.  10 Specifically, under the due process requirement, there must be "some definite link, some minimum connection between a state and the person, property, or transaction it seeks to tax."  11 The "broad inquiry" under "both constitutional requirements"  12 is "whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state—"i.e., "whether the state has given anything for which it can ask return."  13
The Court, however, imposed a relatively narrow interpretation of the minimum contacts test in two cases in the latter half of the Twentieth Century, both involving a state's ability to require an out-of-state seller to collect and remit tax from a sale to a consumer within that state. First, in the 1967 case of National Bellas Hess, Inc. v. Department of Revenue, the Court considered an Illinois law that required out-of-state retailers to collect and remit taxes on sales made to consumers who purchased goods for use within Illinois.  14 The Bellas Hess Court concluded that a mail-order company "whose only connection with customers in the State is by common carrier or the United States mail" lacked the requisite minimum contacts with the state required under either the Due Process Clause or the Commerce Clause.  15 In so doing, the case established a rule that unless the retailer maintained a physical presence with the state, the state lacked the power to require that retailer to collect a local use tax.  16 A quarter of a century later, the Court reexamined Bellas Hess's physical presence rule in Quill v. North Dakota.  17 In Quill, the Court overruled the Bellas Hess due process holding,  18 but reaffirmed the Commerce Clause holding,  19 concluding that the physical presence rule was grounded in the substantial nexus requirement of Complete Auto.  20
Twenty-six years after Quill and more than half a century after Bellas Hess, the Court, in an opinion by Justice Kennedy, overruled both cases in South Dakota v. Wayfair, rejecting the rule that a retailer must have a physical presence within a state before the state may require the retailer to collect a local use tax.  21 Several reasons undergirded the Wayfair Court's rejection of the physical presence rule. First, the Court noted that the rule did not comport with modern dormant Commerce Clause jurisprudence, which viewed the substantial nexus test as "closely related" to and having "significant parallels" with the due process minimum contacts analysis.  22 Second, Justice Kennedy viewed the Quill rule as unmoored from the underlying purpose of the Commerce Clause: to prevent states from engaging in economic discrimination.  23 Contrary to this purpose, the Quill rule created artificial market distortions that placed businesses with a physical presence in a state at a competitive disadvantage relative to remote sellers.  24 Third, the Wayfair Court viewed the physical presence rule, in contrast with modern Commerce Clause jurisprudence, as overly formalistic.  25 More broadly, the majority opinion criticized the Quill rule as ignoring the realities of modern e-commerce wherein a retailer may have "substantial virtual connections" to a state without having a physical presence.  26 The Court also maintained that the physical presence rule undermined public confidence in the tax system and in the "Court's Commerce Clause decisions" by providing online retailers an arbitrary advantage over competitors who collect state sales tax.  27 While acknowledging that caution is needed when reconsidering past precedent, the Wayfair Court concluded that the doctrine of stare decisis could "no longer support" Bellas Hess and Quill, as the Court "should be vigilant in correcting" an error that prevents the states from "exercising their lawful sovereign powers in our federal system."  28 In particular, Justice Kennedy noted that the financial impact of the Quill rule had increased with the prevalence of the Internet, and in recent years, denied states already facing revenue shortages the ability to collect taxes on more than a half a trillion dollars in sales.  29 Ultimately, the Wayfair Court concluded that the physical presence rule of Quill was "unsound and incorrect," overruling both Bellas Hess and Quill.  30
Outside of the anomalies of Bellas Hess and Quill, as the Court in Wayfair noted, the substantial nexus inquiry has tended to reject formal rules in favor of a more flexible inquiry.  31 Thus, maintenance of one full-time employee within the state (plus occasional visits by non-resident engineers) to make possible the realization and continuance of contractual relations seemed to the Court to make almost frivolous a claim of lack of sufficient nexus. 32 The application of a state business-and-occupation tax on the gross receipts from a large wholesale volume of pipe and drainage products in the state was sustained, even though the company maintained no office, owned no property, and had no employees in the state, its marketing activities being carried out by an in-state independent contractor. 33 The Court also upheld a state's application of a use tax to aviation fuel stored temporarily in the state prior to loading on aircraft for consumption in interstate flights. 34
there is no dispute that the taxpayer has done some business in the taxing State, the inquiry shifts from whether the State may tax to what it may tax. To answer that question, [the Court has] developed the unitary business principle. Under that principle, a State need not isolate the intrastate income-producing activities from the rest of the business but may tax an apportioned sum of the corporation's multistate business if the business is unitary. The court must determine whether intrastate and extrastate activities formed part of a single unitary business, or whether the out-of-state values that the State seeks to tax derive[d] from unrelated business activity which constitutes a discrete business enterprise. . . . If the value the State wishe[s] to tax derive[s] from a 'unitary business' operated within and without the State, the State [may] tax an apportioned share of the value of that business instead of isolating the value attributable to the operation of the business within the State. Conversely, if the value the State wished to tax derived from a discrete business enterprise, then the State could not tax even an apportioned share of that value. 35 But, even when there is a unitary business,
[t]he Due Process and Commerce Clauses of the Constitution do not allow a State to tax income arising out of interstate activities – even on a proportional basis – unless there is a 'minimal connection' or 'nexus' between the interstate activities and the taxing State and 'a rational relationship between the income attributed to the State and the intrastate values of the enterprise.' 36
Apportionment. – This requirement is of long standing, 37 but its importance has broadened as the scope of the states' taxing powers has enlarged. It is concerned with what formulas the states must use to claim a share of a multistate business' tax base for the taxing state, when the business carries on a single integrated enterprise both within and without the state. A state may not exact from interstate commerce more than the state's fair share. Avoidance of multiple taxation, or the risk of multiple taxation, is the test of an apportionment formula. Generally speaking, this factor has been seen as both a Commerce Clause and a due process requisite, 38 although, as one recent Court decision notes, some tax measures that are permissible under the Due Process Clause nonetheless could run afoul of the Commerce Clause. 39The Court has declined to impose any particular formula on the states, reasoning that to do so would be to require the Court to engage in
extensive judicial lawmaking, for which it was ill-suited and for which Congress had ample power and ability to legislate. 40
Instead, the Court wrote,
we determine whether a tax is fairly apportioned by examining whether it is internally and externally consistent. To be internally consistent, a tax must be structured so that if every State were to impose an identical tax, no multiple taxation would result. Thus, the internal consistency test focuses on the text of the challenged statute and hypothesizes a situation where other States have passed an identical statute. . . . The external consistency test asks whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed. We thus examine the in-state business activity which triggers the taxable event and the practical or economic effect of the tax on that interstate activity. 41
In Goldberg v. Sweet, the Court upheld as properly apportioned a state tax on the gross charge of any telephone call originated or terminated in the state and charged to an in-state service address, regardless of where the telephone call was billed or paid. 42 A complex state tax imposed on trucks displays the operation of the test. Thus, a state registration tax met the internal consistency test because every state honored every other states', and a motor fuel tax similarly was sustained because it was apportioned to mileage traveled in the state, whereas lump-sum annual taxes, an axle tax and an identification marker fee, being unapportioned flat taxes imposed for the use of the state's roads, were voided, under the internal consistency test, because if every state imposed them, then the burden on interstate commerce would be great. 43 Similarly, the Court held that Maryland’s personal income tax scheme—which taxed Maryland residents on their worldwide income and nonresidents on income earned in the state and did not offer Maryland residents a full credit for income taxes they paid to other states—
fails the internal consistency test. 44 The Court did so because, if every state adopted the same approach, taxpayers who
earn income interstate would be taxed twice on a portion of that income, while those who earned income solely within their state of residence would be taxed only once. 45
Deference to state taxing authority was evident in a case in which the Court sustained a state sales tax on the price of a bus ticket for travel that originated in the state but terminated in another state. The tax was unapportioned to reflect the intrastate travel and the interstate travel. 46 The tax in this case was different from the tax upheld in Central Greyhound, the Court held. The previous tax constituted a levy on gross receipts, payable by the seller, whereas the present tax was a sales tax, also assessed on gross receipts, but payable by the buyer. The Oklahoma tax, the Court continued, was internally consistent, because if every state imposed a tax on ticket sales within the state for travel originating there, no sale would be subject to more than one tax. The tax was also externally consistent, the Court held, because it was a tax on the sale of a service that took place in the state, not a tax on the travel. 47
However, the Court found discriminatory and thus invalid a state intangibles tax on a fraction of the value of corporate stock owned by state residents inversely proportional to the state's exposure to the state income tax. 48
Discrimination. – The
fundamental principle governing this factor is simple.
'No State may, consistent with the Commerce Clause, impose a tax which discriminates against interstate commerce . . . by providing a direct commercial advantage to local business.' 49 That is, a tax that by its terms or operation imposes greater burdens on out-of-state goods or activities than on competing in-state goods or activities will be struck down as discriminatory under the Commerce Clause. 50 In Armco, Inc. v. Hardesty, 51 the Court voided as discriminatory the imposition on an out-of-state wholesaler of a state tax that was levied on manufacturing and wholesaling but that relieved manufacturers subject to the manufacturing tax of liability for paying the wholesaling tax. Even though the former tax was higher than the latter, the Court found that the imposition discriminated against the interstate wholesaler. 52 A state excise tax on wholesale liquor sales, which exempted sales of specified local products, was held to violate the Commerce Clause. 53 A state statute that granted a tax credit for ethanol fuel if the ethanol was produced in the state, or if it was produced in another state that granted a similar credit to the state's ethanol fuel, was found discriminatory in violation of the clause. 54 The Court reached the same conclusion as to Maryland’s personal income tax scheme, previously noted, which taxed Maryland residents on their worldwide income and nonresidents on income earned in the state and did not offer Maryland residents a full credit for income taxes they paid to other states, finding the scheme “inherently discriminatory.” 55
Expanding, although neither unexpectedly nor exceptionally, its dormant commerce jurisprudence, the Court in Camps Newfound/Owatonna, Inc. v. Town of Harrison, 56 applied its nondiscrimination element of the doctrine to invalidate the state's charitable property tax exemption statute, which applied to nonprofit firms performing benevolent and charitable functions, but which excluded entities serving primarily out-of-state residents. The claimant here operated a church camp for children, most of whom resided out-of-state. The discriminatory tax would easily have fallen had it been applied to profit-making firms, and the Court saw no reason to make an exception for nonprofits. The tax scheme was designed to encourage entities to care for local populations and to discourage attention to out-of-state individuals and groups.
For purposes of Commerce Clause analysis, any categorical distinction between the activities of profit-making enterprises and not-for-profit entities is therefore wholly illusory. Entities in both categories are major participants in interstate markets. And, although the summer camp involved in this case may have a relatively insignificant impact on the commerce of the entire Nation, the interstate commercial activities of nonprofit entities as a class are unquestionably significant. 57
Benefit Relationship. – Although, in all the modern cases, the Court has stated that a necessary factor to sustain state taxes having an interstate impact is that the levy be fairly related to benefits provided by the taxing state, it has declined to be drawn into any consideration of the amount of the tax or the value of the benefits bestowed. The test rather is whether, as a matter of the first factor, the business has the requisite nexus with the state; if it does, then the tax meets the fourth factor simply because the business has enjoyed the opportunities and protections that the state has afforded it. 58