STATE AND LOCAL GOVERNMENT TAXATION (Update)

When a court is forced to draw a line between permissible and impermissible activities, one of its main goals should be to ensure that substantially identical activities do not fall on opposite sides of that line. In the area of constitutional limitations on state taxation, the Justice best known for promoting that goal was harlan fiske stone. In an era when the Supreme Court's commerce clause jurisprudence was marked by a rigid formalism, Stone's opinions stood apart as a fresh departure from the norm. In a series of decisions, Stone broke new ground by abandoning formalism and embracing a more pragmatic, less absolutist approach.

It should come as no surprise, then, that references to Stone's opinions figure prominently in the modern Court's state tax opinions. Ever since the 1977 decision in Complete Auto Transit, Inc. v. Brady, the Court's state tax opinions typically begin with a discussion and rejection of the Court's "old formalism" and the endorsement of a new, realistic, pragmatic approach. Despite the Court's rejection of "latter-day formalism," it is questionable whether the Court is truly being faithful to the antiformalist underpinnings of Stone's state tax jurisprudence. In fact, in a number of recent cases, the Court seems to have embraced a "new formalism," under which substantively identical state tax statutes can be either constitutional or unconstitutional, depending on the form they take.

In West Lynn Creamery, Inc. v. Healy (1994), the Court rejected on commerce clause grounds a Massachusetts statutory scheme that combined an excise tax on milk dealers engaged in the sale of milk within Massachusetts and a subsidy—funded by the milk tax—to Massachusetts dairy farmers. The Court conceded that each of the two pieces of the statute would be constitutional if considered independently. Because the permissible tax was "conjoined" with a permissible subsidy, however, the Court held the statute to be unconstitutional. The Court's opinion seems to imply that the Massachusetts subsidy was unconstitutional because the source of funds was milk tax revenues. It did not take long for states to learn the lesson of West Lynn Creamery and, not surprisingly, Maine immediately amended its statute (which was identical to the Massachusetts statute) to incorporate the exact same features with two formal differences. First, the Maine statutes were enacted separately (one in January, one in February), so that the statute could not be considered to be "integrated" and thus subject to West Lynn Creamery –type analysis. Second, the subsidy was funded out of Maine's "general fund" (into which the milk tax revenues were paid), rather than out of a special milk tax fund. So, to avoid having a statute declared unconstitutional, it appears that a state need not change its policy, but merely reenact a "nonintegrated" statute in accordance with such formal requirements.

In Oklahoma Tax Commission v. Jefferson Lines (1995), the Court upheld an unapportioned Oklahoma tax on gross receipts derived from the sale of bus tickets for interstate travel. Nearly a half-century earlier, the Court had rejected a similar New York tax as violative of the commerce clause in Central Greyhound Lines v. Mealey (1948). The Oklahoma tax in Jefferson Lines had one important difference from the New York tax in Central Greyhound : Oklahoma called its tax a "sales tax" while New York called its tax a "gross receipts" tax. Under the Court's rationale in Jefferson Lines, this distinction was critical. While many states might justifiably assert jurisdiction to impose a tax upon a company's gross receipts, only one has the authority to impose a tax upon a sale. The detail that the Court seems to have neglected is that New York's tax, like Oklahoma's, extended only to gross receipts derived from sales within the state. So, in fact, there was no meaningful difference between the two taxes. The lesson from Jefferson Lines to state legislators seems to be that any tax based on a vendor's gross receipts derived from sales within a state must be labeled a "sales tax" and not a "gross receipts" tax in order to withstand constitutional scrutiny.

Finally, the Court's recent decision in Camps Newfound/Owatonna, Inc. v. Town of Harrison, Maine (1997), is another example of the Court's "new formalism." In this case, the Court considered Maine's property tax exemption for charitable organizations. Under the Maine statute, the exemption was not allowed for organizations serving principally nonresidents. The majority opinion suggests that there is nothing constitutionally impermissible about a town's favoring organizations that serve Maine residents over organizations that serve nonresidents, so long as the town does so through direct cash subsidies and not through discriminatory tax exemptions. Under the Court's approach, it would seem to be permissible for the town to disallow the exemption for all organizations (that is, impose the tax uniformly on all organizations) and then to enact a cash subsidy limited to charitable organizations that serve Maine residents. Once again, the Court appears to treat differently two statutes with little substantive difference.

Some commentators have suggested that the lines drawn in each of the cases described above are indeed meaningful, distinguishing between substantively different statutes. Thus, with regard to West Lynn Creamery, some have considered it constitutionally significant that the funds must be drawn from the general fund rather than a milk tax fund. Some have defended Jefferson Lines, noting the different legislative intent and design characteristics of sales taxes and gross receipts taxes and according these differences constitutional significance. And there is some scholarly support for a constitutional distinction between cash subsidies and "tax expenditures" of the sort at issue in Camps Newfound/Owatonna. Still, even if one concludes that the lines drawn by the Court in these cases make sense, it is ironic that the Court continues to praise Stone's rejection of the "old formalism" and then proceeds to articulate new formalistic requirements. The law concerning constitutional limitations on state taxing authority involves a delicate balancing of interests, including deference to state sovereignty and some reasonable protection of interstate commerce. Striking that balance may be impossible without resorting to some degree of formalism. Perhaps the Court could be more forthright in its articulation of new standards and confess that, in this complex area of law, maintaining formal distinctions is the best that the Court can do.

Kirk J. Stark
(2000)