Stuart A. Bronstein wrote:
- quote -

I have to disagree, Stu. It is true that the language of
the Commerce Clause merely gives Congress the power to
regulate interstate and foreign commerce, and says nothing
about state taxation or other actions by states. However,
the U.S. Supreme Court has interpreted the clause to impose
limits on state taxation in the absence of Congressional
action. In fact all Commerce Clause jurisprudence relating
to state taxation issues since 1872 (Case of the State
Freight Tax, 812 U.S. (15 Wall.) 232) has rested on this
"dormant" or "negative" Commerce Clause analysis.

Congress always has the power to overturn any Commerce
Clause case by legislation, although it has seldom done so.
The most famous such Congressional action was the enactment
of Public Law 86-272, the Interstate Income Act, in 1959,
which limits states' ability to impose income taxes on
out-of-state sellers who limit their activities in the state
to the solicitation of sales of tangible personal property.
That law was enacted in response to Supreme Court's 1959
Northwestern States Portland Cement decision (358 U.S. 450).

In 1977, the Court established four criteria for a state tax
to pass muster under the dormant Commerce Clause in Complete
Auto Transit v. Brady, 430 U.S. 274:

1. The tax must be imposed on an activity with a
substantial nexus to the taxing state.
2. The tax must not discrminate against interstate commerce.
3. The tax must be fairly apportioned.
4. The tax must be fairly related to benefits provided by
the taxing state.

A successful Commerce Clause challenge to a state tax under
the second prong of Complete Auto does not require that the
TAXPAYER have suffered discrimination. It is required to
show that the law treats INTERSTATE COMMERCE less favorably
than INTRASTATE COMMERCE. That is a quite different
analysis.

The Privileges & Immunities clause prevents states from
treating residents differently from nonresidents, and
applies only to individuals (not to corporations). P&I does
not appear to have been raised as an issue in either the
Ohio or Kentucky cases. Such a challenge would probably not
be successful, since the interest income of residents and
nonresidents is treated the same under the laws of both
states.

The Kentucky appeals court said, "Kentucky's bond taxation
scheme is facially unconstitutional under the Commerce
Clause; and none of the arguments in favor of its
constitutionality offered by the Department or relied upon
by the trial court are sufficient to save it. But under the
facts presented in this case, we have no choice but to find
that Kentucky's system of taxing only extraterritorial bonds
runs afoul of the Commerce Clause. Thus, the trial court's
decision to grant summary judgment to the Department was
erroneous."

Katie in San Diego

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"Katie" <katiej_1958[at]yahoo.com> wrote:

- quote -

Very.

The commerce clause talks about what Congress can do, not
what the states can do, so it won't apply.

What could apply is the "privileges and immunities" claus,
which prohibits states from discriminating against citizens
of different states.

In these cases the states aren't discriminating against
citizens, but the debts of other states. I suspect it will
come down to whether the courts feel there is a rational
basis for doing so.

Stu

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Last year we had quite a discussion here about a question
Rich raised, namely, why is it not unconstitutional for
states to exempt interest income from their own muni bonds,
while taxing interest on similar bonds issued by other
states? In that discussion I suggested that a valid
challenge might be raised on Commerce Clause grounds.

Well, it has happened. In fact, there was such a challenge
in Ohio back in 1994 ( Shaper v. Tracy, Tax Commissioner.,
97 Ohio App 3d 760 647 NE2d 550, 09/29/1994). In that case,
an Ohio resident individual income taxpayer argued that the
taxation of income from other state bonds, while exempting
Ohio bonds, violated the Commerce Clause, and sued for a
refund of taxes paid on income from out-of-state bonds. In
that case, the Ohio Court of Appeal held that the exemption
did not violate the Commerce Clause.

This month, a Kentucky appellate court considered a similar
argument, and found the exemption to violate the Commerce
Clause (Davis v. Revenue Cabinet, 2004-CA-001940-MR, Court
of Appeals of Kentucky, 01/06/2006). The Kentucky court
took note of the Ohio case and opined that it was wrongly
decided. The trial court had issued a summary judgment in
favor of the Revenue Cabinet. The taxpayers (individual
income taxpayers) had applied for class action status to
represent all Kentucky taxpayers, including corporations,
estates and trusts, and the trial court had found that they
did not have standing to represent such entities because
they had not been forced to pay any taxes on behalf of those
entities. The appellate decision suggests (though it did
not determine; that's a matter for the trial court) that the
plaintiffs do have standing to represent other kinds of
entities that are subject to the same discriminatory scheme.

The Kentucky case has been remanded to the trial court and
may end up being certified as a class action. No doubt the
issue will go to the Kentucky Supreme Court, and from there
to the U.S. Supreme Court, unless the plaintiffs are
persuaded to settle.

I thought this was interesting in light of our earlier
discussion of the issue.

Katie in San Diego

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >