🇺🇸
Constitutional Law • State Taxation of Interstate Commerce
CONLAW#051
Legal Definition
States may not use their tax systems to help in-state business, and may only tax activities if there is a substantial nexus to the state. Further, state taxation of interstate business must be fairly apportioned.
Plain English Explanation
The Constitution gives Congress power over interstate commerce, which includes taxation. If states could tax interstate commerce however they wanted, they could impede national economic integration.
So the Supreme Court limits state taxation of interstate commerce. First, states can only tax businesses that have a substantial physical or economic connection ("nexus") to the state, not just because goods passed through the state at some point. Otherwise states could tax activity with little or no relation to the state.
Second, for businesses operating in multiple states, the taxes must be split fairly based on activities in each state. For example, if 40% of a company's sales are in State A, 60% in State B, the taxes must reflect that breakdown. States can’t “double tax” the full amount.
Finally, states cannot use taxes to favor in-state businesses over out-of-state competitors. The taxes must apply equally without discrimination.
So the Supreme Court limits state taxation of interstate commerce. First, states can only tax businesses that have a substantial physical or economic connection ("nexus") to the state, not just because goods passed through the state at some point. Otherwise states could tax activity with little or no relation to the state.
Second, for businesses operating in multiple states, the taxes must be split fairly based on activities in each state. For example, if 40% of a company's sales are in State A, 60% in State B, the taxes must reflect that breakdown. States can’t “double tax” the full amount.
Finally, states cannot use taxes to favor in-state businesses over out-of-state competitors. The taxes must apply equally without discrimination.
Hypothetical
Hypo 1: Bob's business, based in Hypofornia, sells handmade jewelry through an online store to customers nationwide, including Sam in New Hypoland. Bob's business operates solely from Hypofornia, with no physical locations or warehouses in New Hypoland. Result: Hypofornia cannot tax the sales made to Sam in New Hypoland because Bob's business lacks a substantial nexus, such as a physical presence, in New Hypoland.
Hypo 2: Bob owns a trucking company in Hypofornia that transports goods across the United States, including routes through New Hypoland. The company's headquarters and main operations are in Hypofornia, with no facilities or offices in New Hypoland. Result: New Hypoland cannot tax Bob's trucking company for miles driven within its borders, as there's no substantial nexus like an operational presence or headquarters in New Hypoland.
Hypo 3: Bob's telecommunications company, located in New Hypoland, offers internet and phone services to customers in multiple states, including Sam in Hypofornia. The company has cell towers and a small office in Hypofornia. Result: Hypofornia can impose a tax on Bob's company because the presence of cell towers and an office establishes a substantial nexus.
Hypo 4: Bob's tech company, headquartered in New Hypoland, operates data centers in Hypofornia, New Hypoland, and several other states. The income from its nationwide operations is substantial. Result: States with Bob's data centers can tax the company's income, but the taxation must be fairly apportioned based on the company's sales, property, and payroll in each state.
Hypo 2: Bob owns a trucking company in Hypofornia that transports goods across the United States, including routes through New Hypoland. The company's headquarters and main operations are in Hypofornia, with no facilities or offices in New Hypoland. Result: New Hypoland cannot tax Bob's trucking company for miles driven within its borders, as there's no substantial nexus like an operational presence or headquarters in New Hypoland.
Hypo 3: Bob's telecommunications company, located in New Hypoland, offers internet and phone services to customers in multiple states, including Sam in Hypofornia. The company has cell towers and a small office in Hypofornia. Result: Hypofornia can impose a tax on Bob's company because the presence of cell towers and an office establishes a substantial nexus.
Hypo 4: Bob's tech company, headquartered in New Hypoland, operates data centers in Hypofornia, New Hypoland, and several other states. The income from its nationwide operations is substantial. Result: States with Bob's data centers can tax the company's income, but the taxation must be fairly apportioned based on the company's sales, property, and payroll in each state.
