Article 1, Section 8, Clause 3 — Apportionment Prong Of Complete Auto Test For Taxes On Interstate Commerce

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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; . . .

In Complete Auto Transit, Inc. v. Brady,[1](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn1art1 " 430 U.S. 274 (1977). ") the Court held that a state 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.” [2](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn2art1 " Id. at 279. “In reviewing Commerce Clause challenges to state taxes, our goal has instead been to ‘establish a consistent and rational method of inquiry’ focusing on ‘the practical effect of a challenged tax.’” Commonwealth Edison Co. v. Montana, 453 U.S. 609, 615 (1981) (quoting Mobil Oil Corp. v. Comm’r of Taxes, 445 U.S. 425, 443 (1980)). ") The second prong of the Complete Auto test, which this essay concerns, is the apportionment of the tax.[3](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn3art1 " ; ; . ") This requirement is of long standing,[4](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn4art1 " E.g., Pullman’s Palace Car Co. v. Pennsylvania, 141 U.S. 18, 26 (1891); Maine v. Grand Trunk Ry., 142 U.S. 217, 278 (1891). ") but its importance has broadened as the scope of the states’ taxing powers has enlarged. When a business carries on a single integrated enterprise both within and without the state, the 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,[5](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn5art1 " See Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (1992); Tyler Pipe Indus. v. Dep’t of Revenue, 483 U.S. 232, 251 (1987); Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983); F. W. Woolworth Co. v. N.M. Tax. & Revenue Dep’t, 458 U.S. 354 (1982); ASARCO Inc. v. Idaho State Tax Comm’n, 458 U.S. 307 (1982); Exxon Corp. v. Wis. Dep’t of Revenue, 447 U.S. 207 (1980); Mobil Oil Corp. v. Comm’r of Taxes, 445 U.S. 425 (1980); Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978). Cf. Am. Trucking Ass’ns v. Scheiner, 483 U.S. 266 (1987). ") 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.[6](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn6art1 " Comptroller of the Treasury of Md. v. Wynne, No. 13-485, slip op. at 13 (U.S. May 18, 2015) ( “The Due Process Clause allows a State to tax 'all the income of its residents, even income earned outside the taxing jurisdiction.’ But ‘while a State may, consistent with the Due Process Clause, have the authority to tax a particular taxpayer, imposition of the tax may nonetheless violate the Commerce Clause.” ) (internal citations omitted). The challenge in Wynne was brought by Maryland residents, whose worldwide income three dissenting Justices would have seen as subject to Maryland taxation based on their domicile in the state, even though it resulted in the double taxation of income earned in other states. Id. at 2 (Ginsburg, J., dissenting) ( “For at least a century, ‘domicile’ has been recognized as a secure ground for taxation of residents’ worldwide income.” ). However, the majority took a different view, holding that Maryland’s taxing scheme was unconstitutional under the Dormant Commerce Clause because it did not provide a full credit for taxes paid to other states on income earned from interstate activities. Id. at 21–25 (majority opinion). ") The 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.[7](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn7art1 " Moorman Mfg. Co. v. Bair, 437 U.S. 267, 278–80 (1978). ")

In Goldberg v. Sweet, the Court articulated an “internally consistent test” and an “externally consistent test” when it 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.[8](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn8art1 " Goldberg v. Sweet, 488 U.S. 252 (1989). The tax law provided a credit for any taxpayer who was taxed by another state on the same call. Actual multiple taxation could thus be avoided, the risks of other multiple taxation was small, and it was impracticable to keep track of the taxable transactions. ") Explaining its “internally consistent test” and its “externally consistent test” for determining whether a tax has been fairly apportioned, the Goldberg 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.[9](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn9art1 " Id. at 261, 262 (citations omitted). ")

In American Trucking Ass’ns v. Scheiner, the Supreme Court held that 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.[10](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn10art1 " Am. Trucking Ass’ns v. Scheiner, 483 U.S. 266 (1987). ") Similarly, in Comptroller of the Treasury of Maryland v. Wynne, 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.” [11](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn11art1 " Comptroller of the Treasury of Md. v. Wynne, No. 13-485, slip op. at 22 (U.S. May 18, 2015). The Court in Wynne expressly declined to distinguish between taxes on gross receipts and taxes on net income or between taxes on individuals and taxes on corporations. Id. at 7, 9. The Court also noted that Maryland could “cure the problem with its current system” by granting a full credit for taxes paid to other states, but the Court did “not foreclose the possibility” that Maryland could comply with the Commerce Clause in some other way. Id. at 25. ") 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.[12](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn12art1 " Id. at 22–23. ")

Deference to state taxing authority was evident in Oklahoma Tax Commission v. Jefferson Lines, Inc., 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.[13](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn13art1 " Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995). ") The tax was unapportioned to reflect the intrastate travel and the interstate travel.[14](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn14art1 " Id. The Court distinguished Oklahoma Tax Comm’n v. Jefferson Lines, Inc. from Central Greyhound Lines v. Mealey, 334 U.S. 653 (1948), in which the Court struck down a state statute that failed to apportion its taxation of interstate bus ticket sales to reflect the distance traveled within the state. ") The tax in Oklahoma was different from the tax upheld in Central Greyhound, the Court held, because the tax in Central Greyhound constituted a levy on gross receipts, payable by the seller, whereas the tax in Oklahoma was a sales tax, also assessed on gross receipts, but payable by the buyer.[15](https://www.law.cornell.edu/constitution-conan/article-1/section-8/clause-3/apportionment-prong-of-complete-auto-test-for-taxes-on-interstate-commerce#fn15art1 " Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995). ") 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 t