System used by state governments to raise revenue.
State governments rely on a variety of taxes to collect revenue, primarily income, sales and use, and property taxes. Because the U.S. Constitution restricts states’ right to tax, challenges to the taxing jurisdiction of states have come before the Supreme Court.
States have latitude to tax, and few taxes have been overturned under the equal protection clause, which prohibits states from denying any person within its jurisdiction the equal protection of the laws. The Supreme Court has consistently allowed states to tax types of property and classes of taxpayers differently. In San Antonio Independent School District v. Rodriguez
The primary constitutional limitations on a state’s right to tax are the commerce and due process clauses, which have been the subject of many Court cases. The Fourteenth Amendment
Article I of the Constitution gives Congress the power to regulate commerce
As interstate business expanded, the Court’s interpretation of the commerce clause evolved into four basic tests as stipulated in Complete Auto Transit v. Brady
Most of the debate focused on the degree of contact that must exist to establish substantial nexus. A landmark case, National Bellas Hess v. Department of Revenue of the State of Illinois
Throughout the battles between states and taxpayers, Congress stayed out of the fray. However, in 1959, the Court, for the first time, in Northwestern States Portland Cement Co. v. Minnesota, held that an income tax on an out-of-state corporation exclusively engaged in interstate commerce did not violate the commerce clause. The Court found sufficient nexus because the corporation leased a sales office in the state and employed salespersons who solicited business throughout the state. The business community was alarmed over this expanded latitude to impose a direct tax on a fair apportionment of income from interstate commerce.
Congress responded by enacting Public Law 86-272, which was the first federal legislation restricting the power of states to tax interstate activities. This law prohibits a state from imposing an income tax on a business whose only connection with the state is soliciting orders for sales of tangible personal property. The orders must be sent outside the state for approval, and if approved, are filled and shipped from a point outside the state. Solicitation was not defined in the law, but the Court, in Wisconsin Department of Revenue v. William Wrigley, Jr., Co.
Christopher, Mark, and Barbara Janaszek. “Limitations on State Income Taxation of Interstate Business After Wrigley and Quill.” Journal of State Taxation (Spring, 1992): 9-21. Hellerstein, Jerome. State Taxation. Boston: Warren Gorham Lamont, 1998. Hellerstein, Walter. Federal Constitutional Limitations on State Taxation. Washington, D.C.: Tax Management, 1994. Pogue, Thomas. State Taxation of Business: Issues and Policy Options. Westport, Conn.: Praeger, 1992.
Equal protection clause
San Antonio Independent School District v. Rodriguez
States’ rights and state sovereignty