The Constitution of the United States of America: Analysis and Interpretation Part 20

With "commerce among the States" it is very different. This is conducted in the interior of the country, by persons and corporations that are ordinarily engaged also in local business; its usual incidents are acts which, if unconnected with commerce among the States, would fall within the State's powers of police and taxation; while the things it deals in and the instruments by which it is carried on comprise the most ordinary subject matter of State power. In this field the Court has, consequently, been unable to rely upon sweeping solutions. To the contrary, its judgments have often been fluctuating and tentative, even contradictory; and this is particularly the case as respects the infringement of the State taxing power on interstate commerce. In the words of Justice Frankfurter: "The power of the States to tax and the limitations upon that power imposed by the Commerce Clause have necessitated a long, continuous process of judicial adjustment. The need for such adjustment is inherent in a Federal Government like ours, where the same transaction has aspects that may concern the interests and involve the authority of both the central government and the const.i.tuent States. The history of this problem is spread over hundreds of volumes of our Reports. To attempt to harmonize all that has been said in the past would neither clarify what has gone before nor guide the future.

Suffice it to say that especially in this field opinions must be read in the setting of the particular cases and as the product of preoccupation with their special facts."[537]

THE STATE FREIGHT TAX CASE

The great leading case dealing with the relation of the State's taxing power to interstate commerce is that of the State Freight Tax,[538]

decided in 1873. The question before the Court was the validity of a Pennsylvania statute, pa.s.sed eight years earlier, which required every company transporting freight within the State, with certain exceptions, to pay a tax at specified rates on each ton of freight carried by it.

Overturning the act, the Court held: "(1) The transportation of freight, or of the subjects of commerce, is a const.i.tuent part of commerce itself; (2) a tax upon freight, transported from State to State, is a regulation of commerce among the States; (3) whenever the subjects in regard to which a power to regulate commerce is a.s.serted are in their nature National, or admit of one uniform system or plan of regulation, they are exclusively within the regulating control of Congress; (4) transportation of pa.s.sengers or merchandise through a State, or from one State to another, is of this nature; (5) hence a statute of a State imposing a tax upon freight, taken up within the State and carried out of it, or taken up without the State and brought within it, is repugnant to that provision of the Const.i.tution of the United States, which ordains that 'Congress shall have power to regulate commerce with foreign nations and among the several States, and with the Indian tribes.'"[539]

GOODS IN TRANSIT

States, therefore, may not tax property in transit in interstate commerce. A nondiscriminatory tax, however, is permitted if the goods have not yet started in interstate commerce, or have completed the interstate transit even though still in the original package, unless they are foreign imports in the original package; and States may also impose a nondiscriminatory tax when there is a break in an interstate transit, and the goods have not been restored to the current of interstate commerce. Such is the law in brief. Two questions arise, first, when do goods originating in a State pa.s.s from under its power to tax; and, second, when do goods arriving from another State lose their immunity?

The leading case dealing with the first of these questions is Coe _v._ Errol,[540] in which the matter at issue was the right of the town of Errol, New Hamps.h.i.+re, to tax certain logs on their way to points in Maine, while they lay in the river before the town or along its sh.o.r.e awaiting the spring freshets and consequent rise of the river. As to the logs in the river, which had come from Maine on their way to Lewiston in the same State, but had been detained at Errol by low water, the Supreme Court of New Hamps.h.i.+re itself ruled that the local tax did not apply, the logs being still in transit. As to the logs which had been cut in New Hamps.h.i.+re and lay on the sh.o.r.e or in tributaries of the river, both courts were again in agreement that they were still subject to local taxation, notwithstanding the intention of their owners to send them out of the State. Said Justice Bradley: "* * * goods do not cease to be part of the general ma.s.s of property in the State, subject, as such, to its jurisdiction, and to taxation in the usual way, until they have been s.h.i.+pped, or entered with a common carrier for transportation to another State, or have been started upon such transportation in a continuous route or journey."[541]

STATE TAXATION OF MANUFACTURING AND MINING

Under the above rule, obviously, production is not interstate commerce even though the thing produced is intended for the interstate market.

Thus a Pennsylvania _ad valorem_ tax on anthracite coal when prepared and ready for s.h.i.+pment was held not to be an interference with interstate commerce although applied to coal destined for a market in other States;[542] and in Oliver Iron Company _v._ Lord[543] an occupation tax on the mining of iron ore was upheld, although substantially all of the ore was immediately and continuously loaded on cars and s.h.i.+pped into other States. Said the Court: "Mining is not interstate commerce, but, * * * subject to local regulation and taxation. Its character in this regard is intrinsic, is not affected by the intended use or disposal of the product, is not controlled by contractual engagements, and persists even though the business be conducted in close connection with interstate commerce."[544] Likewise an annual privilege tax on the business of producing natural gas in the State, computed on the value of the gas produced "as shown by the gross proceeds derived from the sale thereof by the producer," was held const.i.tutional even though most of the gas pa.s.sed into interstate commerce in continuous movement from the wells.[545] And in Utah Power and Light Co. _v._ Pfost[546] the generation of electricity in a State was held to be distinguishable from its transmission over wires to consumers in another State, and hence taxable by the former State.

Likewise, a State statute imposing a privilege tax on the production of mechanical power for sale or use did not contravene the interstate commerce clause although applied to an engine operating a compressor to increase the pressure of natural gas and thereby permit it to be transported to purchasers in other States.[547] Similarly, a tax so much per pound on shrimp taken within the three-mile belt of the coast of the taxing State was valid, since the taxable event, the taking of the shrimp, occurred before they could be said to have entered the interstate commerce stream.[548]

PRODUCTION FOR AN ESTABLISHED MARKET

But while the production of goods intended for the interstate market is taxable by the State where it takes place, their purchase for an established market in another State is interstate commerce and as such is neither regulatable nor taxable by the State of origin, provided at any rate their trans-s.h.i.+pment is not unduly delayed.[549] Thus, oil gathered into the pipe lines of a distributing company and intended for the most part for customers outside the State, is in interstate commerce from the moment it leaves the wells;[550] and a like result has been reached as to natural gas.[551] "The typical and actual course of events," says the Court, "marks the carriage of the greater part as commerce among the States and theoretical possibilities may be left out of account."[552]

REJECTION OF THE ORIGINAL PACKAGE CONCEPT IN INTERSTATE COMMERCE

But the question also arises as to when goods entering a State from another State become part of the ma.s.s of property of the former and hence taxable by it? In Brown _v._ Maryland,[553] Chief Justice Marshall, had remarked at the close of his opinion, "We suppose the principles laid down in this case, apply equally to importations from a sister State."[554] Forty-two years later, in Woodruff _v._ Parham,[555]

an effort was made to induce the Court, in reliance on this dictum, to apply the original package doctrine against a Mobile, Alabama tax on sales at auction, so far as it reached "imports" from sister States.

The Court refused the invitation; first on the ground that Marshall's statement was _obiter_, the point not having been involved in Brown _v._ Maryland; second, because usage contemporary with the Const.i.tution and of the Const.i.tution itself confined the term "imports" as employed in article I, section 10 to imports from abroad; third, because the tax in question was nondiscriminatory. At the same time, nevertheless, reference was made to the power of Congress to interpose at any time in exercise of its power over commerce, "in such a manner as to prevent the States from any oppressive interference with the free interchange of commodities by the citizens of one State with those of another."[556]

The same result was reached a few years later in Brown _v._ Houston,[557] where it was held that coal transported down the Mississippi from Pennsylvania had been validly subjected by Louisiana to a general _ad valorem_ property tax, having "come to its place of rest, for final disposal or use," and hence become "a part of the general ma.s.s of property in the State."[558] Again, however, a caveat was entered in behalf of the power of Congress to impose a different rule affording "a temporary exemption" of property transported from one State to another from taxation by the latter.[559]

INSPECTION CHARGES

Woodruff _v._ Parham and Brown _v._ Houston are still good law for the most part.[560] Nevertheless, there is one respect in which imports from sister States are treated as "imports" in the sense of the Const.i.tution, and that is in being exempt from "unreasonable" inspection charges.[561]

It is true, also, that in a series of cases involving sales of oil about 1920 the Court appeared to be contemplating reviving the original package doctrine,[562] but these holdings were presently "qualified" in a sweeping opinion by Chief Justice Taft, reviewing the cases.[563] But taxation is one thing, prohibition another. In the field of the police power, where its applicability was not so much as suggested in Brown _v._ Maryland, the original package doctrine has been frequently invoked by the Court against State legislation, and even today, perhaps retains a spark of life.[564]

LOCAL SALES: PEDDLERS

By the same token, local sales of goods brought into a State from another State are subject to a nondiscriminatory exercise of its taxing power. Such a tax, the Court has said, "has never been regarded as imposing a direct burden upon interstate commerce and has no greater or different effect upon that commerce than a general property tax to which all those enjoying the protection of the State may be subjected"; and this is true, even of goods immediately to be used in interstate commerce.[565] The commerce clause, therefore, does not prohibit a State from imposing special license taxes on merchants using profit sharing coupons and trading stamps although the coupons may have been inserted in retail packages by the manufacturer or s.h.i.+pper outside the State and are redeemable outside the State, either by such manufacturer or s.h.i.+pper, or by some other agency outside the State;[566] nor yet a nondiscriminatory tax upon local peddling of goods and sales thereof by peddlers even though the goods are foreign or interstate imports, since the sale occurs after foreign or interstate commerce thereof has ended.[567] And in Kehrer _v._ Stewart[568] it was held that a State tax upon resident managing agents of nonresident meatpacking houses did not conflict with the commerce clause, regardless of the fact that the greater portion of the business was interstate in character, the tax having been construed by the highest court of the State as applying only to the business of selling to local customers from the stock of "original packages" s.h.i.+pped into the State without a previous sale or contract to sell, and kept and held for sale in the ordinary course of trade. Contrariwise, a tax on sales discriminatory in its incidence against merchandise because of its origin in another State is _ipso facto_ unconst.i.tutional. The leading case is Welton _v._ Missouri,[569]

decided in 1876, in which a peddler's license tax confined to the sale of goods manufactured outside the State was set aside. The doctrine of Welton _v._ Missouri has been reiterated many times.[570]

STOPPAGE IN TRANSIT

It also follows logically from Coe _v._ Errol,[571] and the cases deriving from it, that a State may impose a nondiscriminatory tax when there is a break in interstate transit, and the goods have not been restored to the current of interstate commerce. The effect of an interruption upon the continuity of an interstate movement depends upon its causes and purposes. If the delay is due to the necessities of the journey, as in the Coe case, where the logs were detained for a time within the State by low water, they are deemed "in the course of commercial transportation, and * * * clearly under the protection of the Const.i.tution."[572] Intention thus often enters into the determination of the question whether goods from another State have come to rest sufficiently to subject them to the local taxing power. In a typical case the Court held that oil s.h.i.+pped from Pennsylvania and held in tanks in Memphis, Tennessee for separation, distribution and res.h.i.+pment, was subject to the taxing power of the latter State.[573] The delay in transportation resulting from these proceedings on the part of the owners, the Court pointed out, was clearly designed for their own profit and convenience and was not a necessary incident to the method of transportation adopted, as had been the delay of the logs coming from Maine in Coe _v._ Errol. The distinction is fundamental.[574]

Applying this rule in more recent cases, the Court has upheld State taxation: on the use and storage of gasoline brought into the State by a railroad company and unloaded and stored there, to be used for its interstate trains;[575] on gasoline imported and stored by an airplane company and withdrawn to fill airplanes that use it in their interstate travel;[576] on supplies brought into the State by an interstate railroad company to be used in replacements, repairs and extensions, and installed immediately upon arrival in the taxing State;[577] on equipment brought into the State by a telephone and telegraph company for operation, maintenance, and repair of its interstate system.[578] In all these cases the Court applied the principle that "use and storage"

are subject to local taxation when "there is an interval after the articles have reached the end of their interstate movement and before their consumption in interstate operation has begun."[579] On the other hand, in the absence of such an "interval," the Court declared invalid State gasoline taxes imposed per gallon of gasoline imported by interstate carriers as fuel for use in such vehicles, and used within the State as well as in their interstate travel.[580]

THE DRUMMER CASES; ROBBINS _v._ SHELBY COUNTY TAXING DISTRICT

But there is one situation in which goods introduced into one State from another have until recent years enjoyed a special immunity from taxation by the former, and that is when they were introduced in consequence of a contract of sale. The leading case is Robbins _v._ Shelby County Taxing District,[581] in which the Court, after a penetrating survey of commercial practices, ruled that "the negotiation of sales of goods"--in this instance by sample--"which are in another State, for the purpose of introducing them into the State in which the negotiation is made, is interstate commerce." In short, whereas in foreign commerce, importation is succeeded by the right to sell in the original package, in interstate commerce sale was succeeded by the right of importation, which continued until the goods reached the hands of the purchaser. The benefits of this holding were extended in a series of rulings in which it was held to apply whether solicitation of orders was or was not made with sample,[582] and to sales which were not, accurately speaking, consummated until the actual delivery of the goods, which was attended by local incidents. So, where a North Carolina agent of a Chicago firm took orders for framed pictures, which were then sent to him packed separately from the frames and then framed by him before delivery, the rule laid down in the Robbins case was held to apply throughout, with the result that North Carolina could tax or license no part of the transaction described;[583] so also as to a sewing machine ordered by a customer in North Carolina and sent to her C.O.D.;[584] so also as to brooms sent in quant.i.ty for the fulfillment of a number of orders, and subject to rejection by the purchaser if deemed by him not up to sample.[585] Said Justice Holmes in the case last referred to: "'Commerce among the States' is a practical conception not drawn from the 'witty diversities' * * * of the law of sales. * * * The brooms were specifically appropriated to specific contracts, in a practical, if not in a technical, sense. Under such circ.u.mstances it is plain that, wherever might have been the t.i.tle, the transport of the brooms for the purpose of fulfilling the contracts was protected commerce."[586] Nor did it make any difference that the solicitor received his compensation in form of down payment by the purchaser.[587] Moreover, sales under a mail order business, with delivery taking place within the State to a carrier for through s.h.i.+pment to another State to fill orders, was held to be beyond the taxing power of the first State.[588] The fact that a concern doing a strictly interstate business had goods on hand within the State which were capable of being used in intrastate commerce, did not, the Court declared, take the business out of the protection of the commerce clause and allow the State to impose a privilege tax on such concern.

LIMITATION OF THE ROBBINS CASE

On the other hand, it was early held that the rule laid down in the Robbins case did not prevent a State from taxing a resident citizen who engaged in a general commission business, on the profits thereof, although the business consisted "for the time being, wholly or partially in negotiating sales between resident and nonresident merchants, of goods situated in another State."[589] Also, it has been held that a stamp tax on transfers of corporate stock, as applied to a sale between two nonresidents, of the stock of foreign railway corporations, was not an interference with interstate commerce.[590] Likewise, the business of taking orders on commission for the purchase and sale of grain and cotton for future delivery not necessitating interstate s.h.i.+pment was ruled not to be interstate commerce, and as such exempt from taxation, although deliveries were sometimes made by interstate s.h.i.+pment.[591] And in Banker Bros. Co. _v._ Pennsylvania[592] it was held that a tax upon a domestic corporation selling automobiles built by a foreign corporation under an arrangement by which the latter agreed to build for and sell to the former, for cash, at a specified price less than list price, was not a tax on interstate transactions, there being nothing which connected the ultimate buyer with the manufacturer but a warranty and the buyer's agreement to pay the list price f.o.b. factory. Similarly, in Browning _v._ Waycross[593] it was held that the business of erecting lightning rods within the limits of a town by the agent of a nonresident manufacturer on whose behalf such agent had solicited orders for the sale of the rods, and from whom he had received them when s.h.i.+pped into the State, was validly subjected to a munic.i.p.al license tax. "It was not," said the Court, "within the power of the parties by the form of their contract to convert what was exclusively a local business, * * *, into an interstate commerce business * * *"[594] Also, a munic.i.p.al license tax upon persons engaged in the business of buying or selling cotton for themselves was found not to impose a forbidden burden upon interstate commerce even though the cotton was purchased with a view to ultimate s.h.i.+pment in some other State or country.[595] Nor was a gallonage tax imposed by a State upon a distributor of liquid fuel rendered repugnant to the commerce clause by the fact that the distributor caused fuel sold to customers in the State to be s.h.i.+pped from another State for delivery in tank cars--"deemed original packages"--on purchaser's siding, as agreed. Said the Court: "The contracts were executory and related to unascertained goods. * * * It does not appear that when they were made appellant had any fuels of the kinds covered, or that those to be delivered were then in existence.

There was no selection of goods by purchasers. Appellant was not required by the contracts to obtain the fuels at Wilmington but was free to effect performance by s.h.i.+pping from, any place within or without Pennsylvania."[596]

THE ROBBINS CASE TODAY

In the cases reviewed in the preceding paragraph protestants against local taxation appealed, but unavailingly, to the Robbins case. So it would seem that the generative powers of that prolific precedent had begun to wane somewhat even before the Depression, an event which rendered judicial reaction against it still more p.r.o.nounced. Indeed, by the Court's decision in McGoldrick _v._ Berwind-White Co.,[597] in 1940, the authority of the entire line of cases descending from Robbins _v._ Shelby County Taxing District was seriously impaired, for the time being, while a second holding the same year seemed to reduce the significance of the Robbins case itself to that of a rea.s.sertion of the elementary rule against discrimination. "The commerce clause," Justice Reed remarked sententiously, "forbids discrimination, whether forthright or ingenious."[598]

DEPRESSION CASES: USE TAXES

With a majority of the States on the verge of bankruptcy, extensive recourse was had to sales taxes and, as an offset to these in favor of the local economy, "use" taxes on competing products coming from sister States. The basic decision sustaining the use tax, in this novel employment of it, was Henneford _v._ Silas Mason Co.,[599] in which was involved a State of Was.h.i.+ngton two per cent tax on the privilege of using products coming from sister States. Excepted from the tax, on the other hand, was any property the sole use of which had already been subjected to an equal or greater tax, whether under the laws of Was.h.i.+ngton or any other State. Stressing this provision in its opinion, the Court said: "Equality is the theme that runs through all the sections of the statute. * * * When the account is made up, the stranger from afar is subject to no greater burdens as a consequence of owners.h.i.+p than the dweller within the gates."[600] There being no actual discrimination in favor of Was.h.i.+ngton products, the tax was valid.

DEPRESSION CASES: SALES TAXES

A companion piece of the Henneford case in motivation, although it occurred three years later, was McGoldrick _v._ Berwind-White Coal Mining Company,[601] in which it was held that in the absence of Congressional action, a New York City general sales tax was applicable to sales of coal under contracts entered into within the munic.i.p.ality and calling for delivery therein. Speaking for the majority, Justice Stone declared any "distinction * * * between a tax laid on sales made, without previous contract, after the merchandise had crossed the State boundary, and sales, the contracts for which when made contemplate or require the transportation of merchandise interstate to the taxing State," to be "without the support of reason or authority";[602] and the Robbins case was held to be "narrowly limited to fixed-sum license taxes imposed on the business of soliciting order for the purchase of goods to be s.h.i.+pped interstate, * * *"[603] Three Justices, speaking by Chief Justice Hughes, dissented. Three companion cases decided the same day were found to follow the Berwind-White pattern,[604] while a fourth was held not to, on the ground that foreign commerce was involved.[605] For the time being Robbins and family looked to be on the way out.

END OF THE DEPRESSION CASES

Two cases, decided respectively in 1944 and 1946, signalized the end of the Depression. In McLeod _v._ Dilworth Co.,[606] a divided Court ruled that a sales tax could not be validly imposed by a State on sales to its residents which were consummated by acceptance of orders in, and s.h.i.+pment of goods from another State, in which t.i.tle pa.s.sed upon delivery to the carrier. Said Justice Frankfurter for the majority: "A sales tax and a use tax in many instances may bring about the same result. But they are different in conception, are a.s.sessments upon different transactions, * * * A sales tax is a tax on the freedom of purchase * * * A use tax is a tax on the enjoyment of that which was purchased. In view of the differences in the basis of these two taxes and the differences in the relation of the taxing State to them, a tax on an interstate sale like the one before us and unlike the tax on the enjoyment of the goods sold, involves an a.s.sumption of power by a State which the Commerce Clause was meant to end."[607] He also "distinguished" the Berwind-White case--just as it had "distinguished"

the Robbins case--but not to the satisfaction of three of his brethren, who found the decision to mark a retreat from the Berwind-White case.[608]

The second case, Nippert _v._ Richmond,[609] involved a munic.i.p.al ordinance imposing upon solicitors of orders for goods a license tax of fifty dollars and one-half of one per cent of the gross earnings, commissions, etc., for the preceding year in excess of $1,000. Speaking for the same majority that had decided McLeod _v._ Dilworth Co., Justice Rutledge found that "as the case has been made, the issue is substantially whether the long line of so-called 'drummer cases'

beginning with Robbins _v._ Shelby County Taxing District, 120 U.S. 489, shall be adhered to in result or shall now be overruled in the light of what attorneys for the city say are recent trends requiring that outcome."[610] The tax was held void, Berwind-White being not only "distinguished" this time, but also "explained." "The drummer," said Justice Rutledge, "is a figure representative of a by-gone day," citing Wright, Hawkers and Walkers in Early America (1927). "But his modern prototype persists under more euphonious appellations. So endure the basic reasons which brought about his protection from the kind of local favoritism the facts of this case typify."[611]

A year later a Mississippi "privilege tax" laid upon each person soliciting business for a laundry not licensed in the State, was set aside directly on the authority of the Robbins case.[612] It would appear that Robbins and his numerous progeny can once more claim full const.i.tutional status.[613]

TAXATION OF CARRIAGE OF PERSONS

Whether the carriage of persons from one State to another was a branch of interstate commerce was a question which the Court was able to side-step in Gibbons _v._ Ogden.[614] A quarter of a century later, however, an affirmative answer was suggested in the Pa.s.senger Cases,[615] in which a State tax on each pa.s.senger arriving on a vessel from a foreign country was set aside, though chiefly in reliance on existing treaties and acts of Congress. But similar cases arising after the Civil War were disposed of by direct recourse to the commerce clause.[616] Meantime, in 1865, the newly admitted State of Nevada, in an endeavor to prevent a threatened dissipation of its population, levied a special tax on railroad and stage companies for every pa.s.senger they carried out of the State, and in Crandall _v._ Nevada[617] this act was held void on the general ground that the National Government had at all times the right to require the services of its citizens at the seat of government and they the correlative right to visit the seat of government, rights which, if the Nevada tax was valid, were at the mercy of any State, the power to tax being without limit. Reference was also made to the right of the government to transport troops at all times by the most expeditious method. Two of the Justices, however, rejected this line of reasoning and held the act to be void under the commerce clause.[618] But it was not until 1885 that the Court, in deciding Gloucester Ferry Company _v._ Pennsylvania,[619] stated flatly that "Commerce among the States * * * includes the transportation of persons,"[620] and hence was not taxable by the States, a proposition which is still good law.[621] Four years earlier it had been held that the transmission of telegraph messages from one State to another, being interstate commerce, was something that the State of origin could not tax.[622]