The “Dormant” Commerce Clause ultimately means that because Congress has been given power over interstate commerce, states cannot discriminate against interstate commerce nor can they unduly burden interstate commerce, even in the absence of federal legislation regulating the activity.
The idea behind the Dormant Commerce Clause is that this grant of power implies a negative converse — a restriction prohibiting a state from passing legislation that improperly burdens or discriminates against interstate commerce.
The "Dormant" Commerce Clause, also known as the "Negative" Commerce Clause, is a legal doctrine that courts in the United States have inferred from the Commerce Clause in Article I of the United States Constitution. The Commerce Clause expressly grants Congress the power to regulate commerce "among the several states." The idea behind the Dormant Commerce Clause is that this grant of power implies a negative converse — a restriction prohibiting a state from passing legislation that improperly burdens or discriminates against interstate commerce. The restriction is self-executing and applies even in the absence of a conflicting federal statute.
The premise of the doctrine is that the U.S. Constitution reserves for the United States Congress at least some degree of exclusive power "to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes" (Article I, § 8). Therefore, individual states are limited in their ability to legislate on such matters. The Dormant Commerce Clause does not expressly exist in the text of the United States Constitution. It is, rather, a doctrine deduced by the U.S. Supreme Court and lower courts from the actual Commerce Clause of the Constitution. Justice O'Connor has written that: The central rationale for the rule against discrimination is to prohibit state or municipal laws whose object is local economic protectionism, laws that would excite those jealousies and retaliatory measures the Constitution was designed to prevent. See The Federalist No. 22, pp. 143–145 (C. Rossiter ed. 1961) (A. Hamilton); Madison, Vices of the Political System of the United States, in 2 Writings of James Madison 362–363 (G. Hunt ed. 1901).
When a federal statute contains language explicitly barring states from passing legislation regulating the activity which is the subject of the federal law, state law is expressly preempted in that area.
When a state law conflicts with a federal law or impedes the objective of federal law, the state law is impliedly preempted. This also applies when Congress clearly evidences their intent to preempt state law in the area but does not include explicit language to that effect in the legislation.
Article VI of the Constitution states that “This Constitution, and the Laws of the United States…shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby.”
The Dormant Commerce Clause involves not federal power to act but the restrictions on state power which are inherent in the Commerce Clause. There is no actual “Dormant Commerce Clause” found in the Constitution. Rather, the restrictions on state action have been inferred by the Supreme Court from the Commerce Clause.
You will recall that in Gibbons v. Ogden, 9 Wheat. 1 (1824) the issue involved a state-granted monopoly which conflicted with a federal licensing law for the operation of steamboats. Ogden’s New York monopoly, according to the Court would render the federal law impotent in New York, and therefore the Supremacy Clause required the Court to enforce the federal law.
EXAMPLE: In order to encourage a free market, federal law requires all trucking companies to charge a single per-pound weight for all non-hazardous freight, regardless of the nature of the freight carried. The state of Verhampshire, in an effort to bolster its dairy economy, establishes a lower state-enforced price for the transport of locally produced dairy products. The Verhampshire law is preempted by the federal legislation, and will likely be struck down.
When enacting legislation, Congress has the ability to expressly preempt any competing state laws. Even absent such a statement of exclusivity, if a state law conflicts with federal law or impedes the achievement of a federal objective, such as in the trucking example above, or if Congress evidences a clear intent to preempt state law, the theory of implied preemption applies, and the federal law will rule rather than the state law.
Preemption applies, however, only when there is a federal law which is on point. When there is no existing federal law, the Dormant Commerce Clause applies to tell us what states may or may not do.
The “Dormant” Commerce Clause ultimately means that because Congress has been given power over interstate commerce, states cannot discriminate against interstate commerce nor can they unduly burden interstate commerce, even in the absence of federal legislation regulating the activity.
Any state law which affects interstate commerce must be:
(1) rationally related to a legitimate state concern and
(2) the burden on interstate commerce must be outweighed by the benefit to the state’s interests.
In determining whether the burden is outweighed by the benefits, a court must examine whether the state objective could be achieved by a means less restrictive on interstate commerce . Furthermore, it is important to note that promoting the economic interest of its own citizens at the expense of out-of-state citizens is not a legitimate state objective.
EXAMPLE: The Oregon state highway system is falling into disrepair despite constant road maintenance efforts. An exhaustive study of road usage determines that the excessive road wear is largely due to large trucks which pass through the state from an origination point in one state to a destination in another state. The state considered establishing a toll system, but could not find a way to do so without also tolling its own citizens. The state legislature therefore decides to pass a law banning any commercial vehicles from passing through the state by using state highways unless cargo is to be delivered or picked up within the state.
What effect would the Commerce Clause have on the proposed Oregon statute? (The Commerce Clause applies, and not preemption, because there is no federal law here.) First we must ask whether the maintenance of state roads is a legitimate state end, which we can surely answer in the affirmative. Then we ask whether the law prohibiting through-traffic is rationally related to that end, and the “exhaustive study” reassures us there. This satisfies the first portion of the two-part test. More problematic is part 2: Is the burden on interstate commerce outweighed by the state’s interest? The burden seems quite heavy here, so the benefits would have to be extraordinary in order to win out. Part of this balancing involves asking whether there is no less restrictive means to achieve the goal. (Perhaps by placing weight limits on trucks or restricting them to certain lanes?) Finally, is this merely a way of hiding a form of discrimination against out-of-staters, as most in-state truckers will have either pick-ups or deliveries inside the state? If it is discriminatory against interstate commerce, simply passing the two-part test will not be enough to save the law (this is discussed in more detail below).
In Lopez, Kennedy pointed out that “One element of our dormant Commerce Clause jurisprudence has been the principle that the States may not impose regulations that place an undue burden on interstate commerce, even where those regulations do not discriminate between in-state and out-of-state businesses” Lopez at 579. In the hypothetical Oregon example above, there may be hidden discrimination, but even absent such discrimination the statute may be unduly burdensome on interstate commerce. Consider another example:
EXAMPLE: The Colorado state legislature in an effort to appease the increasingly environmentally-concerned citizens of its state passes a law requiring that all commercial trucks traveling on public roads in Colorado run on electricity rather than diesel fuel or gasoline. An Arizona trucking company violates the statute and is fined $10,000. The company could bring the case to federal court claiming the Colorado statute violates the Dormant Commerce Clause because the activity regulated by the state of Colorado has some commercial connection with another state (Arizona), and the burden on interstate commerce is severe.
The Colorado statute certainly does not discriminate against out-of-state truckers, but the Commerce Clause still prohibits the state interference with interstate commerce. The state’s environmental goal is certainly a valid state concern, and the regulation is obviously related to that end. The difficult part of the analysis here involves balancing the benefits to the state as compared to the burden on interstate commerce. There may be no less restrictive means of meeting the state’s environmental goals, as even restricting the number of miles driven by diesel-fueled vehicles would not have the same environmentally friendly result as eliminating all such vehicles. Still, checking for less-restrictive means of accomplishing the state goal is only part of the burden-balancing analysis. The Supreme Court has held that “Where the statute regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.” Pike v. Bruce Church, Inc, 397 U.S. 137, 143 (1970), citing Huron Cement Co. v. Detroit, 362 U.S. 440, 443 (1960).
EXAMPLE: Bubba-Gump Shrimp is in the shrimp business. The company catches shrimp in Louisiana and ships what they catch to a canning facility in Biloxi, Mississippi, home to about 25% of the U.S. shrimp canning industry. Louisiana state law prohibits exporting shrimp from the state unless the heads and shells have been removed. Louisiana law also prohibits shipping such unshelled shrimp to any point in Louisiana. The unstated, but apparent, purpose of the law “is to favor the canning of the meat and the manufacture of [shrimp products] in Louisiana.” Foster-Fountain Packing Co. v. Haydel, 278 U.S. 1, 13 (1928). Although the local interest here is entirely legitimate, the Court will not uphold a state law which forces a company to conduct certain business operations within the state when those operations can be more efficiently carried out elsewhere.
So state laws which burden interstate commerce are permissible if they pass the two-part test. There are three exceptions which, when applicable, will permit a court to find a state law is constitutional despite being discriminatory against interstate commerce.
First, if the state law is necessary to achieve an important state goal, the law might not run afoul of the negative implications of the Commerce Clause. In order to be necessary, there must be no other means of achieving the goal. So while a non-discriminatory law only needs to be rationally related to a legitimate state goal, a law which discriminates against interstate commerce must be necessary to achieve an important state goal in order to be upheld.
Second, if Congress has authorized the states to pass legislation in a certain area despite the effect on interstate commerce, so long as the law does not violate other constitutional provisions it will be upheld.
Finally, the “Market Participant” exception allows states to discriminate against out-of-staters insofar as the state itself is acting as a market participant. For example, when a state is engaging in the buying or selling of goods it may choose to buy from local companies at a higher price than it would pay outside the state , or sell to local companies at a lower price than it would otherwise receive. But in the absence of one of these three exceptions, laws discriminating against out-of-staters will be struck down as violating the Commerce Clause.
EXAMPLE: Massahampshire refuses to give Sticky Syrup Co, a company based in a neighboring state a license to open a new maple syrup farm in Massahampshire. Sticky Syrup already operates 7 such farms in the state. Massahampshire’s refusal to issue the license is based on the fear that Sticky Syrup will divert even more of sweet local commodity out-of-state and take away business from small, local farmers. The refusal to issue the license would likely be ruled a Commerce Clause violation, because Massahampshire’s only interest is an economic one, which is insufficient to warrant discrimination against other states. See H.P. Hood & Sons v. DuMond, 336 U.S. 525 (1949).
EXAMPLE: There’s a new Mayor in town and his name is Reggie Hammond. He aims to clean up New York, starting with the many thousands of abandoned home appliances filling empty lots and cluttering curbs. In order to achieve this goal, the city offers to purchase used appliances for a certain price-per-pound. The price offered is substantially above the average market price paid per-pound. The only catch is that the offer is available only to New York residents and New York companies for 48 hours. Because New York would be acting as a market participant, there is no Commerce Clause violation here. See Hughes v. Alexandria Scrap Corp, 426 U.S. 794 (1976).
Dormant Commerce Clause
From Wikipedia, the free encyclopedia
The "dormant" Commerce Clause, also known as the "negative" Commerce Clause, is a legal doctrine that courts in the United States have inferred from the Commerce Clause in Article I of the United States Constitution. The Commerce Clause expressly grants Congress the power to regulate commerce "among the several states." The idea behind the dormant Commerce Clause is that this grant of power implies a negative converse—a restriction prohibiting a state from passing legislation that improperly burdens or discriminates against interstate commerce. The restriction is self-executing and applies even in the absence of a conflict between state and federal statutes, but Congress may allow states to pass legislation that would otherwise be forbidden by the dormant Commerce Clause.
The premise of the doctrine is that the U.S. Constitution reserves for the United States Congress at least some degree of exclusive federal power "to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes" (Article I, § 8). Therefore, individual states are limited in their ability to legislate on such matters. The dormant Commerce Clause does not expressly exist in the text of the United States Constitution. It is, rather, a doctrine deduced by the U.S. Supreme Court and lower courts from the actual Commerce Clause of the Constitution.
1Origin of the doctrine
2Effect of the doctrine
3.2Decline of formalism
4Taxation of international commerce
5Local processing requirements
5.1No local processing preference
5.2Carbone: local processing law benefiting private entity
5.3United Haulers: local processing law benefiting public entity
6Health and safety regulation
8Criticism of the doctrine
Origin of the doctrine
The idea that regulation of interstate commerce may to some extent be an exclusive Federal power was discussed even before adoption of the Constitution, though the framers did not use the word "dormant." On September 15, 1787, the Framers of the Constitution debated in Philadelphia whether to guarantee states the ability to lay duties of tonnage without Congressional interference, in order for states to finance the clearing of harbors and the building of lighthouses. James Madison believed that the mere existence of the Commerce Clause would bar states from imposing any duty of tonnage: "He was more and more convinced that the regulation of Commerce was in its nature indivisible and ought to be wholly under one authority."
Roger Sherman disagreed: "The power of the United States to regulate trade being supreme can control interferences of the State regulations when such interferences happen; so that there is no danger to be apprehended from a concurrent jurisdiction." Sherman saw the commerce power as similar to the tax power, the latter being one of the concurrent powers shared by the federal and state governments. Ultimately, the Constitutional Conventiondecided upon the present language about duties of tonnage in Article I, Section 10, which says: "No state shall, without the consent of Congress, lay any duty of tonnage...."
The word "dormant," in connection with the Commerce Clause, originated in dicta of Chief Justice John Marshall. For example, in the case of Gibbons v. Ogden, 22 U.S. 1 (1824), he wrote that the power to regulate interstate commerce "can never be exercised by the people themselves, but must be placed in the hands of agents, or lie dormant." Concurring Justice William Johnson was even more emphatic that the Constitution is "altogether in favour of the exclusive grants to Congress of power over commerce."
Later, in the case of Willson v. Black-Bird Creek Marsh Co., 27 U.S. 245 (1829), Chief Justice Marshall wrote: "We do not think that the [state] act empowering the Black Bird Creek Marsh Company to place a dam across the creek, can, under all the circumstances of the case, be considered as repugnant to the power to regulate commerce in its dormant state, or as being in conflict with any law passed on the subject."
If Marshall was suggesting that the power over interstate commerce is an exclusive federal power, the dormant Commerce Clause doctrine eventually developed very differently: it treats regulation that does not discriminate against or unduly burden interstate commerce as a concurrent power rather than an exclusive federal power, while treating regulation that does do those things as an exclusive federal power. Thus, the modern doctrine says that congressional power over interstate commerce is somewhat exclusive, but "not absolutely exclusive". This approach began in the 1851 case of Cooley v. Board of Wardens, in which Justice Benjamin R. Curtis wrote for the Court: "Either absolutely to affirm, or deny that the nature of this [commerce] power requires exclusive legislation by Congress, is to lose sight of the nature of the subjects of this power, and to assert concerning all of them, what is really applicable but to a part." The first clear holding of the U.S. Supreme Court striking down a state law under the dormant Commerce Clause came in 1873.
Effect of the doctrine
Justice Anthony Kennedy has written that: "The central rationale for the rule against discrimination is to prohibit state or municipal laws whose object is local economic protectionism, laws that would excite those jealousies and retaliatory measures the Constitution was designed to prevent." In order to determine whether a law violates a so-called "dormant" aspect of the Commerce Clause, the court first asks whether it discriminates on its face against interstate commerce. In this context, "discrimination" simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.
Thus, in a dormant Commerce Clause case, a court is initially concerned with whether the law facially discriminates against out-of-state actors or has the effect of favoring in-state economic interests over out-of-state interests. Discriminatory laws motivated by "simple economic protectionism" are subject to a "virtually per se rule of invalidity," City of Philadelphia v. New Jersey 437 U.S. 617 (1978), Dean Milk Co. v. City of Madison, Wisconsin, 340 U.S. 349 (1951), Hunt v. Washington State Apple Advertising Comm., 432 U.S. 333 (1977) which can only be overcome by a showing that the State has no other means to advance a legitimate local purpose, Maine v. Taylor, 477 U.S. 131(1986). See also Brown-Forman Distillers v. New York State Liquor Authority, 476 U.S. 573 (1986).
On the other hand, when a law is "directed to legitimate local concerns, with effects upon interstate commerce that are only incidental" (United Haulers Association, Inc.), that is, where other legislative objectives are credibly advanced and there is no patent discrimination against interstate trade, the Court has adopted a much more flexible approach, the general contours of which were outlined in Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970) and City of Philadelphia v. New Jersey, 437 U.S. at 624. If the law is not outright or intentionally discriminatory or protectionist, but still has some impact on interstate commerce, the court will evaluate the law using a balancing test. The Court determines whether the interstate burden imposed by a law outweighs the local benefits. If such is the case, the law is usually deemed unconstitutional. See Pike v. Bruce Church, Inc., 397 U.S. 137 (1970). In the Pike case, the Court explained that a state regulation having only "incidental" effects on interstate commerce "will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits." 397 U.S. at 142, 90 S.Ct. at 847. When weighing burdens against benefits, a court should consider both "the nature of the local interest involved, and ... whether it could be promoted as well with a lesser impact on interstate activities." Id. Thus regulation designed to implement public health and safety, or serve other legitimate state interests, but impact interstate commerce as an incident to that purpose, are subject to a test akin to the rational basis test, a minimum level of scrutiny. See Bibb v. Navajo Freight Lines, Inc. In USA Recycling, Inc. v. Town of Babylon, 66 F.3d 1272, 1281 (C.A.2 (N.Y.), 1995), the court explained:
If the state activity constitutes "regulation" of interstate commerce, then the court must proceed to a second inquiry: whether the activity regulates evenhandedly with only "incidental" effects on interstate commerce, or discriminates against interstate commerce. As we use the term here, "discrimination" simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter. The party challenging the validity of a state statute or municipal ordinance bears the burden of showing that it discriminates against, or places some burden on, interstate commerce. Hughes v. Oklahoma, 441 U.S. 322, 336, 99 S.Ct. 1727, 1736, 60 L.Ed.2d 250 (1979). If discrimination is established, the burden shifts to the state or local government to show that the local benefits of the statute outweigh its discriminatory effects, and that the state or municipality lacked a nondiscriminatory alternative that could have adequately protected the relevant local interests. If the challenging party cannot show that the statute is discriminatory, then it must demonstrate that the statute places a burden on interstate commerce that "is clearly excessive in relation to the putative local benefits." Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 471(1981) (quoting Pike, 397 U.S. at 142, 90 S.Ct. at 847).
Over the years, the Supreme Court has consistently held that the language of the Commerce Clause contains a further, negative command prohibiting certain state taxation even when Congress has failed to legislate on the subject. Examples of such cases are Quill Corp. v. North Dakota, 504 U.S. 298 (1992); Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458 (1959) and H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525(1949).
More recently, in the 2015 case of Comptroller of Treasury of MD. v. Wynne, the Court addressed Maryland's unusual practice of taxing personal income earned in Maryland, and taxing personal income of its citizens earned outside Maryland, without any tax credit for income tax paid to other states. The Court held this sort of double-taxation to be a violation of the dormant Commerce Clause. The Court faulted Justice Antonin Scalia's criticism of the dormant Commerce Clause doctrine by saying that he failed to "explain why, under his interpretation of the Constitution, the Import-Export Clause would not lead to the same result that we reach under the dormant Commerce Clause".
Application of the dormant commerce clause to state taxation is another manifestation of the Court's holdings that the Commerce Clause prevents a State from retreating into economic isolation or jeopardizing the welfare of the Nation as a whole, as it would do if it were free to place burdens on the flow of commerce across its borders that commerce wholly within those borders would not bear. The Court's taxation decisions thus "reflected a central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that in order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation." Wardair Canada, Inc. v. Florida Dept. of Revenue, 477 U.S. 1 (1986); Hughes v. Oklahoma, 441 U.S. 322 (1979); Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175 (1995).
As with the Court's application of the dormant commerce clause to discriminatory regulation, the pre-New Deal Court attempted to apply a formalistic approach to state taxation alleged to interfere with interstate commerce. The history is described in Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175 (1995):
The command has been stated more easily than its object has been attained, however, and the Court's understanding of the dormant Commerce Clause has taken some turns. In its early stages, the Court held the view that interstate commerce was wholly immune from state taxation "in any form," "even though the same amount of tax should be laid on (intrastate) commerce," This position gave way in time to a less uncompromising but formal approach, according to which, for example, the Court would invalidate a state tax levied on gross receipts from interstate commerce, or upon the "freight carried" in interstate commerce, but would allow a tax merely measured by gross receipts from interstate commerce as long as the tax was formally imposed upon franchises, or "'in lieu of all taxes upon (the taxpayer's) property,'" Dissenting from this formal approach in 1927, Justice Stone remarked that it was "too mechanical, too uncertain in its application, and too remote from actualities, to be of value."
Decline of formalism
Accompanying the revolution in approach in the Court's Congressional powers jurisprudence, the New Deal Court began to change its approach to state taxation as well. The Jefferson Lines decision continues:
In 1938, the old formalism began to give way with Justice Stone's opinion in Western Live Stock v. Bureau of Revenue, 303 U.S. 250, which examined New Mexico's franchise tax, measured by gross receipts, as applied to receipts from out-of-state advertisers in a journal produced by taxpayers in New Mexico but circulated both inside and outside the State. Although the assessment could have been sustained solely on prior precedent, Justice Stone added a dash of the pragmatism that, with a brief interlude, has since become our aspiration in this quarter of the law. ..... The Court explained that "[i]t was not the purpose of the commerce clause to relieve those engaged in interstate commerce from their just share of state tax burden even though it increases the cost of doing the business."
During the transition period, some taxes were upheld based on a careful review of the actual economic impact of the tax, and other taxes were reviewed based on the kind of tax involved, whether the tax had a nefarious impact on commerce or not. Under this formalistic approach, a tax might be struck down, and then re-passed with exactly the same economic incidence, but under another name, and then withstand review.
The absurdity of this approach was made manifest in the two Railway Express cases. In the first, a tax imposed by the state of Virginia on American business concerns operating within the state was struck down because it was a business privilege tax imposed on the privilege of doing business in interstate commerce. But then, in the second, Virginia revised the wording of its statute to impose a "franchise tax" on "intangible property" in the form of "going concern" value as measured by gross receipts.
The Court upheld the reworded statute as not violative of the prohibition on privilege taxes, even though the impact of the old tax and new were essentially identical. There was no real economic difference between the statutes in Railway Express I and Railway Express II. The Court long since had recognized that interstate commerce may be made to pay its way. Yet under the Spector rule, the economic realities in Railway Express I became irrelevant. The Spector rule (against privilege taxes) had come to operate only as a rule of draftsmanship, and served only to distract the courts and parties from their inquiry into whether the challenged tax produced results forbidden by the Commerce Clause.
The death knell of formalism occurred in Complete Auto Transit, Inc v. Brady, 430 U.S. 274 (1977),  which approved a Mississippi privilege tax upon a Michigan company engaged in the business of shipping automobiles to Mississippi dealers. The Court there explained:
Appellant's attack is based solely on decisions of this Court holding that a tax on the "privilege" of engaging in an activity in the State may not be applied to an activity that is part of interstate commerce. See, e. g.,Spector Motor Service v. O'Connor, 340 U.S. 602 (1951); Freeman v. Hewit, 329 U.S. 249 (1946). This rule looks only to the fact that the incidence of the tax is the "privilege of doing business"; it deems irrelevant any consideration of the practical effect of the tax. The rule reflects an underlying philosophy that interstate commerce should enjoy a sort of "free trade" immunity from state taxation.
Complete Auto Transit is the last in a line of cases that gradually rejected a per se approach to state taxation challenges under the commerce clause. In overruling prior decisions which struck down privilege taxes per se, the Court noted the following, in what has become a central component of commerce clause state taxation jurisprudence:
We note again that no claim is made that the activity is not sufficiently connected to the State to justify a tax, or that the tax is not fairly related to benefits provided the taxpayer, or that the tax discriminates against interstate commerce, or that the tax is not fairly apportioned.
These four factors, nexus, relationship to benefits, discrimination, and apportionment, have come to be regarded as the four Complete Auto Transit factors applied repeatedly in subsequent cases. Complete Auto Transit must be recognized as the culmination of the Court's emerging commerce clause approach, not just in taxation, but in all of its aspects. Application of Complete Auto Transit to State taxation remains a highly technical and specialized venture, requiring the application of commerce clause principles to an understanding of specialized tax law.
Taxation of international commerce
In addition to satisfying the four-prong test in Complete Auto Transit, the Supreme Court has held state taxes which burden international commerce cannot create a substantial risk of multiple taxation and must not prevent the federal government from "speaking with one voice when regulating commercial relations with foreign governments." Japan Lines, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979).
In Kraft Gen. Foods, Inc. v. Iowa Dept. of Revenue and Finance, 505 U.S. 71 (1992), the Supreme Court considered a case in which Iowa taxed dividends from foreign subsidiaries, without allowing a credit for taxes paid to foreign governments, but not dividends from domestic subsidiaries operating outside Iowa. This differential treatment arose from Iowa's adoption of the definition of "net income" used by the Internal Revenue Service. For federal income tax purposes, dividends from domestic subsidiaries are allowed to be exempted from the parent corporations income to avoid double taxation. The Iowa Supreme Court rejected a Commerce Clause claim because Kraft failed to show "that Iowa businesses receive a commercial advantage over foreign commerce due to Iowa's taxing scheme." Considering an Equal Protection Clause challenge, the Iowa Supreme Court held that the use of the federal government's definitions of income were convenient for the state and was "rationally related to the goal of administrative efficiency." The Supreme Court rejected the notion that administrative convenience was a sufficient defense for subjecting foreign commerce to a higher tax burden than interstate commerce. The Supreme Court held that "a State's preference for domestic commerce over foreign commerce is inconsistent with the Commerce Clause even if the State's own economy is not a direct beneficiary of the discrimination."
Local processing requirements
Discrimination in the flow of interstate commerce has arisen in a variety of contexts. A line of important cases has dealt with local processing requirements. Under the local processing requirement, a municipality seeks to force the local processing of raw materials before they are shipped in interstate commerce.
No local processing preference
The basic idea of the local processing ordinance was to provide favored access to local processors of locally produced raw materials. Examples of Supreme Court decisions in this vein are set out in its Carbone decision. They include Minnesota v. Barber, 136 U.S. 313, (1890) (striking down a Minnesota statute that required any meat sold within the State, whether originating within or without the State, to be examined by an inspector within the State);Foster-Fountain Packing Co. v. Haydel, 278 U.S. 1 (1928) (striking down a Louisiana statute that forbade shrimp to be exported unless the heads and hulls had first been removed within the State); Johnson v. Haydel, 278 U.S. 16 (1928) (striking down analogous Louisiana statute for oysters); Toomer v. Witsell, 334 U.S. 385 (1948) (striking down South Carolina statute that required shrimp fishermen to unload, pack, and stamp their catch before shipping it to another State); Pike v. Bruce Church, Inc., supra (striking down Arizona statute that required all Arizona-grown cantaloupes to be packaged within the State prior to export); South-Central Timber Development, Inc. v. Wunnicke, 467 U.S. 82 (1984) (striking down an Alaska regulation that required all Alaska timber to be processed within the State prior to export). The Court has defined "protectionist" state legislation as "regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors." New Energy Co. of Indiana v. Limbach, 486 U.S. 269, 273–74(1988).
Carbone: local processing law benefiting private entity
Main article: C&A Carbone, Inc. v. Town of Clarkstown, New York
In the 1980s, spurred by RCRA’s emphasis on comprehensive local planning, many states and municipalities sought to promote investment in more costly disposal technologies, such as waste-to-energy incinerators, state-of-the-art landfills, composting and recycling. Some states and localities sought to promote private investment in these costly technologies by guaranteeing a longterm supply of customers. See Phillip Weinberg, Congress, the Courts, and Solid Waste Transport: Good Fences Don't Always Make Good Neighbors, 25 Envtl. L. 57 (1995); Atlantic Coast Demolition & Recycling, Inc., 112 F.3d 652, 657 (3d Cir. 1997). For about a decade, the use of regulation to channel private commerce to designated private disposal sites was greatly restricted as the result of the Carbone decision discussed below.
Flow control laws typically came in various designs. One common theme was the decision to fund local infrastructure by guaranteeing a minimum volume of business for privately constructed landfills, incinerators, composters or other costly disposal sites. In some locales, choice of the flow control device was driven by state bonding laws, or municipal finance concerns. If a county or other municipality issued general obligation bonds for construction of a costly incinerator, for example, state laws might require a special approval process. If approval could be obtained, the bonds themselves would be counted against governmental credit limitations, or might impact the governmental body’s credit rating: in either instance the ability to bond for other purposes might be impaired. But by guaranteeing customers for a privately constructed and financed facility, a private entity could issue its own bonds, privately, on the strength of the public’s waste assurance.
The private character of flow control regimens can thus be explained in part by the desire to utilize particular kinds of public financing devices. It can also be explained by significant encouragement at the national level, in national legislation as well as in federal executive policy to achieve environmental objectives utilizing private resources. Ironically, these public-private efforts often took the form of local processing requirements which ultimately ran afoul of the commerce clause.
The Town of Clarkstown had decided that it wanted to promote waste assurance through a local private transfer station. The transfer station would process waste and then forward the waste to the disposal site designated by the Town. The ordinance had the following features:
Waste hauling in the Town of Clarkstown was accomplished by private haulers, subject to local regulation. The scheme had the following aspects: (A) The Town promoted the financing of a privately owned transfer station through a waste assurance agreement with the private company. Thus the designated facility was a private company. (B) The Town of Clarkstown forced private haulers to bring their solid waste for local processing at the designated transfer station, even if the ultimate destination of solid waste was an out-of-state disposal site. (C) The primary rationale for forcing in-state waste into the designated private transfer station was financial; it was seen as a device to raise revenue to finance the transfer station.
The Town of Clarkstown’s ordinance was designed and written right in the teeth of the long line of Supreme Court cases which had historically struck down local processing requirements. In short, it was as if the authors of the ordinance had gone to a treatise on the commerce clause and intentionally chosen a device which had been traditionally prohibited. A long line of Supreme Court case law had struck down local processing requirements when applied to goods or services in interstate commerce. As the Court in Carbone wrote:
We consider a so-called flow control ordinance, which requires all solid waste to be processed at a designated transfer station before leaving the municipality. The avowed purpose of the ordinance is to retain the processing fees charged at the transfer station to amortize the cost of the facility. Because it attains this goal by depriving competitors, including out-of-state firms, of access to a local market, we hold that the flow control ordinance violates the Commerce Clause.
The Court plainly regarded the decision as a relatively unremarkable decision, not a bold stroke. As the Court wrote: “The case decided today, while perhaps a small new chapter in that course of decisions, rests nevertheless upon well-settled principles of our Commerce Clause jurisprudence.” And, the Court made it plain, that the problem with Clarkstown’s ordinance was that it created a local processing requirement protective of a local private processing company:
In this light, the flow control ordinance is just one more instance of local processing requirements that we long have held invalid....The essential vice in laws of this sort is that they bar the import of the processing service. Out-of-state meat inspectors, or shrimp hullers, or milk pasteurizers, are deprived of access to local demand for their services. Put another way, the offending local laws hoard a local resource—be it meat, shrimp, or milk—for the benefit of local businesses that treat it. 511 U.S. at 392–393.
United Haulers: local processing law benefiting public entity
Main article: United Haulers Association v. Oneida-Herkimer Solid Waste Management Authority
The Court's 2007 decision in United Haulers Association v. Oneida-Herkimer Solid Waste Management Authority starkly illustrates the difference in result when the Court finds that local regulation is not discriminatory. The Court dealt with a flow control regimen quite similar to that considered in Carbone. The "only salient difference is that the laws at issue here require haulers to bring waste to facilities owned and operated by a state-created public benefit corporation." The Court decided that the balancing test should apply, because the regulatory scheme favored the government owned facility, but treated all private facilities equally.
Compelling reasons justify treating these laws differently from laws favoring particular private businesses over their competitors. "Conceptually, of course, any notion of discrimination assumes a comparison of substantially similar entities." General Motors Corp. v. Tracy, 519 U.S. 278 (1997). But States and municipalities are not private businesses—far from it. Unlike private enterprise, government is vested with the responsibility of protecting the health, safety, and welfare of its citizens. See Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985)... These important responsibilities set state and local government apart from a typical private business.
The Court's United Haulers decision demonstrates an understanding of the regulatory justifications for flow control starkly missing in the Carbone decision:
By the 1980s, the Counties confronted what they could credibly call a solid waste " 'crisis.' " .... Many local landfills were operating without permits and in violation of state regulations. Sixteen were ordered to close and remediate the surrounding environment, costing the public tens of millions of dollars. These environmental problems culminated in a federal clean-up action against a landfill in Oneida County; the defendants in that case named over local businesses and several municipalities and school districts as third-party defendants The "crisis" extended beyond health and safety concerns. The Counties had an uneasy relationship with local waste management companies, enduring price fixing, pervasive overcharging, and the influence of organized crime. Dramatic price hikes were not uncommon: In 1986, for example, a county contractor doubled its waste disposal rate on six weeks' notice
The Court would not interfere with local government's efforts to solve an important public and safety problem.
The contrary approach of treating public and private entities the same under the dormant Commerce Clause would lead to unprecedented and unbounded interference by the courts with state and local government. The dormant Commerce Clause is not a roving license for federal courts to decide what activities are appropriate for state and local government to undertake, and what activities must be the province of private market competition. In this case, the citizens of Oneida and Herkimer Counties have chosen the government to provide waste management services, with a limited role for the private sector in arranging for transport of waste from the curb to the public facilities. The citizens could have left the entire matter for the private sector, in which case any regulation they undertook could not discriminate against interstate commerce. But it was also open to them to vest responsibility for the matter with their government, and to adopt flow control ordinances to support the government effort. It is not the office of the Commerce Clause to control the decision of the voters on whether government or the private sector should provide waste management services. "The Commerce Clause significantly limits the ability of States and localities to regulate or otherwise burden the flow of interstate commerce, but it does not elevate free trade above all other values."
Health and safety regulation
The history of commerce clause jurisprudence evidences a distinct difference in approach where the state is seeking to exercise its public health and safety powers, on the one hand, as opposed to attempting to regulate the flow of commerce. The exact dividing line between the two interests, the right of states to exercise regulatory control over their public health and safety, and the interest of the national government in unfettered interstate commerce is not always easy to discern. One Court has written as follows:
Not surprisingly, the Court's effort to preserve a national market has, on numerous occasions, come into conflict with the states' traditional power to "legislat[e] on all subjects relating to the health, life, and safety of their citizens." Huron Portland Cement Co. v. City of Detroit, 362 U.S. 440, 443(1960). On these occasions, the Supreme Court has "struggled (to put it nicely) to develop a set of rules by which we may preserve a national market without needlessly intruding upon the States' police powers, each exercise of which no doubt has some effect on the commerce of the Nation." Camps Newfound/Owatonna v. Town of Harrison, 520 U.S. 564, 596 (1997) (Scalia, J., dissenting) (citing Okla. Tax Comm'n v. Jefferson Lines, 514 U.S. 175, 180–83 (1995)); see generally Boris I. Bittker, Regulation of Interstate and Foreign Commerce § 6.01[A], at 6–5 ("[T]he boundaries of the [State's] off-limits area are, and always have been, enveloped in a haze."). Those rules are "simply stated, if not simply applied." Camps Newfound/Owatonna, 520 U.S. at 596(Scalia, J., dissenting).
A frequently cited example of the deference afforded to the powers of state and local government may be found in Exxon Corp. v. Maryland, 437 U.S. 117 (1978), where the State of Maryland barred producers of petroleum products from operating retail service stations in the state. It is difficult to imagine a regimen which might have greater impact on the way in which markets are organized. Yet, the Court found the legislation constitutionally permitted: “The fact that the burden of a state regulation falls on some interstate companies does not, by itself establish a claim of discrimination against interstate commerce,” the Court wrote. The “Clause protects interstate market, not particular interstate firms, from prohibitive or burdensome regulations.”
Similarly, in Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456 (1981) the Court upheld a state law that banned nonreturnable milk containers made of plastic, but permitted other nonreturnable milk containers. The Court found that the existence of a burden on out-of-state plastic industry was not ‘clearly excessive’ in comparison to the state’s interest in promoting conservation. And the court continued:
In Exxon, the Court stressed that the Commerce Clause protects the interstate market, not particular interstate firms, from prohibitive or burdensome regulations. A nondiscriminatory regulation serving substantial state purpose is not invalid simply because it causes some business to shift from a predominantly out-of-state industry to a predominantly in-state industry. Only if the burden on interstate commerce clearly outweighs the State’s legitimate purpose does such a regulation violate the commerce clause. When a state statute regarding safety matters applies equally to interstate and intrastate commerce, the courts are generally reluctant to invalidate it even if it may have some impact on interstate commerce. In Bibb v. Navajo Freight Lines 359 U.S. 520, 524 (1959), the United States Supreme Court stated: 'These safety measures carry a strong presumption of validity when challenged in court. If there are alternative ways of solving a problem, we do not sit to determine which of them is best suited to achieve a valid state objective. Policy decisions are for the state legislature, absent federal entry into the field. Unless we can conclude on the whole record that "the total effect of the law as a safety measure in reducing accidents and casualties is so slight or problematical as not to outweigh the national interest in keeping interstate commerce free from interferences which seriously impede it" we must uphold the statute.
There are two notable exceptions to the dormant Commerce Clause doctrine that can permit state laws or actions that otherwise violate the Dormant Commerce Clause to survive court challenges.
The first exception occurs when Congress has legislated on the matter. See Western & Southern Life Ins. v. State Board of California, 451 U.S. 648 (1981). In this case the Dormant Commerce Clause is no longer "dormant" and the issue is a Commerce Clause issue, requiring a determination of whether Congress has approved, preempted, or left untouched the state law at issue.
Market participation exception
The second exception is "market participation exception". This occurs when the state is acting "in the market," like a business or customer, rather than as a "market regulator." For example, when a state is contracting for the construction of a building or selling maps to state parks, rather than passing laws governing construction or dictating the price of state park maps, it is a