Source: https://www.law.cornell.edu/supremecourt/text/516/325
Timestamp: 2016-07-29 02:15:31
Document Index: 506544823

Matched Legal Cases: ['§ 105', '§ 105', '§ 1979', '§ 105', '§ 722', '§ 8', '§ 78', '§ 6', '§ 105', '§ 105']

FULTON CORPORATION, Petitioner, v. Janice H. FAULKNER, Secretary of Revenue of North Carolina. | US Law | LII / Legal Information Institute
Supreme Court aboutsearch liibulletin subscribe previews FULTON CORPORATION, Petitioner, v. Janice H. FAULKNER, Secretary of Revenue of North Carolina.
516 U.S. 325116 S.Ct. 848133 L.Ed.2d 796 (516 U.S. 325116 S.Ct. 848133 L.Ed.2d 796, 516 U.S. 325116 S.Ct. 848133 L.Ed.2d 796)
Decided: Feb. 21, 1996.
[HTML] On Writ of Certiorari to the Supreme Court of North Carolina.
(c) The second condition requires that the tax on interstate commerce approximate, but not exceed, the tax on intrastate commerce. Oregon Waste, supra, at ----, 114 S.Ct. at ----. The relevant comparisonbetween the size of the intangibles tax and that of the corporate income tax component that purportedly funds the capital marketis for practical purposes impossible. The corporate income tax is a general form of taxation, not assessed according to the taxpayer's use of particular services, and before its revenues are earmarked for particular purposes they have been commingled with funds from other sources. Hence, the Secretary cannot show what proportion of that tax goes to support the capital market, or whether that proportion represents a burden greater than the one the intangibles tax imposes on interstate commerce. Pp. __-__.
* During the period in question here, North Carolina levied an "intangibles tax" on the fair market value of corporate stock owned by North Carolina residents or having a "business, commercial, or taxable situs" in the State. N.C. Gen.Stat. § 105-203.
Although the tax was assessed at a stated rate of one quarter of one percent, residents were entitled to calculate their tax liability by taking a taxable percentage deduction equal to the fraction of the issuing corporation's income subject to tax in North Carolina. Ibid. This figure was set by applying a corporate income tax apportionment formula averaging the portion of the issuing corporation's sales, payroll, and property located in the State. See N.C. Gen.Stat. § 105-130.4(i).
Fulton's intangibles tax liability for the 1990 tax year amounted to $10,884. It paid the tax and brought this action in state court under Rev. Stat. § 1979, as amended, 42 U.S.C. 1983, seeking a declaratory judgment that the scheme based on the taxable percentage deduction violated the Commerce Clause by discriminating against interstate commerce. Fulton also sought a refund under the terms of the appropriate state statute, N.C. Gen.Stat. § 105-267 (1992), and attorney's fees under Rev. Stat. § 722, as amended, 42 U.S.C. 1988. On the parties' cross-motions for summary judgment, the state trial court ruled in favor of the Secretary.
The constitutional provision of power "to regulate Commerce . . . among the several States," U.S. Const., Art. I, § 8, cl. 3, has long been seen as a limitation on state regulatory powers, as well as an affirmative grant of congressional authority. See, e.g., Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. ----, ----, 115 S.Ct. 1331, 1335, 131 L.Ed.2d 261 (1993); Gibbons v. Ogden, 9 Wheat. 1, 6 L.Ed. 23 (1824) (Marshall, C.J.) (dictum). In its negative aspect, the Commerce Clause "prohibits economic protectionismthat is, 'regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.' " Associated Industries of Mo. v. Lohman, 511 U.S. ----, ----, 114 S.Ct. 1815, 1820, 128 L.Ed.2d 639 (1994) (quoting New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 273-274, 108 S.Ct. 1803, 1807, 100 L.Ed.2d 302 (1988)). This reading effectuates the Framers' purpose to "prevent 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." Jefferson Lines, supra, at ----, 115 S.Ct., at 1335.
In evaluating state regulatory measures under the dormant Commerce Clause, we have held that "the first step . . . is to determine whether it 'regulates evenhandedly with only 'incidental' effects on interstate commerce, or discriminates against interstate commerce.' " Oregon Waste Systems, Inc. v. Department of Environmental Quality of Ore., 511 U.S. ----, ----, 114 S.Ct. 1345, 1350, 128 L.Ed.2d 13 (1994) (quoting Hughes v. Oklahoma, 441 U.S. 322, 336, 99 S.Ct. 1727, 1729, 60 L.Ed.2d 250 (1979)). With respect to state taxation, one element of the protocol summarized in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), treats a law as discriminatory if it " 'taxes a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State.' " Chemical Waste Management, Inc. v. Hunt, 504 U.S. 334, 342, 112 S.Ct. 2009, 2014, 119 L.Ed.2d 121 (1992) (quoting Armco, Inc. v. Hardesty, 467 U.S. 638, 642, 104 S.Ct. 2620, 2622, 81 L.Ed.2d 540 (1984)); see also Boston Stock Exchange v. State Tax Comm'n, 429 U.S. 318, 332, n. 12, 97 S.Ct. 599, 608, n. 12, 50 L.Ed.2d 514 (1977) (noting that a State "may not discriminate between transactions on the basis of some interstate element"). State laws discriminating against interstate commerce on their face are "virtually per se invalid." Oregon Waste, supra, at ----, 114 S.Ct., at 1350; see also Philadelphia v. New Jersey, 437 U.S. 617, 624, 98 S.Ct. 2531, 2535-2536, 57 L.Ed.2d 475 (1978).
We have also recognized, however, that a facially discriminatory tax may still survive Commerce Clause scrutiny if it is a truly " 'compensatory tax' designed simply to make interstate commerce bear a burden already borne by intrastate commerce." Associated Industries, supra, at ----, 114 S.Ct., at 1821.
Thus, in Henneford v. Silas Mason Co., 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814 (1937), we upheld the State of Washington's tax on the privilege of using any article of tangible personal property within the State. The statute exempted the use of any article that had already been subjected to a sales tax equal to the use tax or greater, so that the use tax effectively applied only to goods purchased out of state. Although the use tax was itself facially discriminatory, we held that the combined effect of the sales and use taxes was to subject intrastate and interstate commerce to equivalent burdens. " 'There is no demand in . . . the Constitution that the State shall put its requirements in any one statute,' " we said; rather, " 'it may distribute them as it sees fit, if the result, taken in its totality, is within the State's constitutional power.' " Id., at 584, 57 S.Ct., at 527 (quoting Gregg Dyeing Co. v. Query, 286 U.S. 472, 480, 52 S.Ct. 631, 634, 76 L.Ed. 1232 (1932)). As Justice Cardozo explained for the Court, the complementary arrangement assures that "when the account is made up, the stranger from afar is subject to no greater burdens as a consequence of ownership than the dweller within the gates. The one pays upon one activity or incident, and the other upon another, but the sum is the same when the reckoning is closed." 300 U.S., at 584, 57 S.Ct., at 527.
Since Silas Mason, our cases have distilled three conditions necessary for a valid compensatory tax. First, "a State must, as a threshold matter, 'identify . . . the intrastate tax burden for which the State is attempting to compensate.' " Oregon Waste, 511 U.S., at ----, 114 S.Ct., at 1352 (quoting Maryland v. Louisiana, 451 U.S. 725, 758, 101 S.Ct. 2114, 2135, 68 L.Ed.2d 576 (1981)). Second, "the tax on interstate commerce must be shown roughly to approximatebut not exceed the amount of the tax on intrastate commerce." Oregon Waste, supra, at ----, 114 S.Ct., at 1352. "Finally, the events on which the interstate and intrastate taxes are imposed must be 'substantially equivalent'; that is, they must be sufficiently similar in substance to serve as mutually exclusive 'proxies' for each other." Ibid. (quoting Armco, Inc. v. Hardesty, supra, at 643, 104 S.Ct., at 2623).
The only issue, then, is whether the taxable percentage deduction can be sustained as compensatory.
* As we have said, a State that invokes the compensatory tax defense must identify the intrastate tax for which it seeks to compensate, see ante, at __, and it should go without saying that this intrastate tax must serve some purpose for which the State may otherwise impose a burden on interstate commerce. In Maryland v. Louisiana, 451 U.S. 725, 101 S.Ct. 2114, 68 L.Ed.2d 576 (1981), for example, we rejected Louisiana's argument that, because it imposed a severance tax on natural resources extracted from its own soil, it could impose a compensating "first use" tax on resources produced out of state but used within Louisiana. Because "Louisiana has no sovereign interest in being compensated for the severance of resources from the federally owned Outer Continental Shelf land," we held that "the two events are not comparable in the same fashion as a use tax complements a sales tax." Id., at 759, 101 S.Ct., at 2135.
In this case, the Secretary suggests that the intangibles tax, with its taxable percentage deduction, compensates for the burden of the general corporate income tax paid by corporations doing business in North Carolina. But because North Carolina has no general sovereign interest in taxing income earned out of state, Maryland v. Louisiana teaches that the Secretary must identify some in-state activity or benefit in order to justify the compensatory levy. Indeed, we have repeatedly held that "no state tax may be sustained unless the tax . . . has a substantial nexus with the State . . . and is fairly related to the services provided by the State." Id., at 754, 101 S.Ct., at 2133; see also Oklahoma Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. ----, ----, 115 S.Ct. 1331, 1337, 131 L.Ed.2d 261 (1995); Complete Auto Transit, Inc. v. Brady, 430 U.S., at 279, 97 S.Ct., at 1079. The Secretary does not disagree, but rather insists that North Carolina may impose a compensatory tax upon foreign corporations because they may avail themselves of access to North Carolina's capital markets.
The argument is unconvincing, and we rejected a counterpart of it in Oregon Waste, where we held that Oregon could not charge an increased fee for disposal of waste generated out of state on the theory that in-state waste generators supported the cost of waste disposal facilities through general income taxes. Although we relied primarily upon the conclusion that earning income and disposing of waste are not "substantially equivalent taxable events," id., at ----, 114 S.Ct., at 1353, we also spoke of the danger of treating general revenue measures as relevant intrastate burdens for purposes of the compensatory tax doctrine. "Permitting discriminatory taxes on interstate commerce to compensate for charges purportedly included in general forms of intrastate taxation would allow a state to tax interstate commerce more heavily than in-state commerce anytime the entities involved in interstate commerce happened to use facilities supported by general state tax funds." Id., at ----, n. 8, 114 S.Ct., at 1353, n. 8 (internal quotation marks and citation omitted). We declined then, as we do now, "to open such an expansive loophole in our carefully confined compensatory tax jurisprudence." Ibid.
Even shutting our eyes to that loophole, we are unpersuaded that North Carolina's corporate income tax is designed to support the maintenance of an intrastate capital market. North Carolina, like most States, regulates access to its capital markets by means of Blue Sky laws, see generally N.C. Gen.Stat. ch. 78A (1994), and their accompanying regulations, which prescribe who may sell securities in North Carolina, the procedures that must be followed to do so, and the fees imposed for the privilege. See, e.g., N.C. Gen.Stat. § 78A-28 (1994) (registration procedures and fees); 18 N.C. Admin. Code § 6.1304 (1990) (same). Absent probative evidence to the contrary, which the Secretary has not supplied, we can reasonably assume that North Carolina has provided for the upkeep of its capital market through these provisions, not through the general corporate income tax.
The second prong of our analysis requires that "the tax on interstate commerce . . . be shown roughly to approximatebut not exceedthe amount of the tax on intrastate commerce." Oregon Waste, supra, at ----, 114 S.Ct., at 1352. The Secretary argues that the relative magnitudes of the corporate income tax and the intangibles tax can be evaluated best by reference to the price/earnings (P/E) ratios of taxpayer firms. This ratio represents the relationship of the value of a corporation's stock, the target of the intangibles tax, to the corporation's earnings, which are subjected to the income tax. See 3 New Palgrave Dictionary of Money & Finance 176 (1992). North Carolina taxes corporate income and ownership of stock at rates of 7.75% and .25%, respectively. Given these rates, the State Supreme Court found that "a North Carolina corporation need only have a P/E ratio less than 31 (7.75/.25) in order to have the tax against its income exceed the intangibles tax against the stockholders of a comparable corporation doing business only in other States and having all its shareholders in North Carolina. Since P/E ratios are only rarely greater than 31, most out-of-state corporations will in fact be paying less taxes to North Carolina . . . th an a similar North Carolina corporation." 338 N.C., at 480, 450 S.E.2d, at 733.
This difficulty simply confirms our general unwillingness to "permit discriminatory taxes on interstate commerce to compensate for charges purportedly included in general forms of intrastate taxation." Oregon Waste, 511 U.S., at ----, n. 8, 114 S.Ct., at 1353, n. 8. Where general forms of taxation are involved, we ordinarily cannot even begin to make the sorts of quantitative assessments that the compensatory tax doctrine requires. See also infra, at __.
The tax, finally, fails even the third prong of compensatory tax analysis, which requires the compensating taxes to fall on substantially equivalent events. Although we found such equivalence in the sales/use tax combination at issue in Silas Mason, our more recent cases have shown extreme reluctance to recognize new compensatory categories. In Oregon Waste, we even pointed out that "use taxes on products purchased out of state are the only taxes we have upheld in recent memory under the compensatory tax doctrine." 511 U.S., at ----, 114 S.Ct., at 1353. On the other hand, we have rejected equivalence arguments for pairing taxes upon the earning of income and the disposing of waste, ibid., the severance of natural resources from the soil and the use of resources imported from other states, Maryland v. Louisiana, 451 U.S., at 759, 101 S.Ct., at 2135-2136, and the manufacturing and wholesaling of tangible goods. Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue, 483 U.S. 232, 244, 107 S.Ct. 2810, 2818, 97 L.Ed.2d 199 (1987); Armco Inc. v. Hardesty, 467 U.S. 638, 642, 104 S.Ct. 2620, 2622-2623, 81 L.Ed.2d 540 (1984). In each case, we held that the paired activities were not "sufficiently similar in substance to serve as mutually exclusive proxies for each other." Oregon Waste, supra, at ----, 114 S.Ct., at 1352 (internal quotation marks and citation omitted).
it does not explain away the fact that the taxes are apparently different (quite apart from stated rates) in a number of obvious respects, including the parties ostensibly taxed. Something more than mere influence of the one stated tax base on the value of the other would therefore be necessary before we could conclude that equivalent events (or "values") are taxed. The nature of that something more flows from the objective of the equivalent-event requirement, which is to enable in-state and out-of-state businesses to compete on a footing of equality. In Silas Mason, for example, we observed that "the practical effect" of Washington's sales/use tax regime "must be that retail sellers in Washington will be helped to compete upon terms of equality with retail dealers in other states who are exempt from a sales tax or any corresponding burden." 300 U.S., at 581, 57 S.Ct., at 526; see also Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 70, 83 S.Ct. 1201, 1204, 10 L.Ed.2d 202 (1963) ("Equal treatment for in-state and out-of-state taxpayers similarly situated is the condition precedent for a valid use tax on goods imported from out-of-state"). This equality of treatment does not appear when the allegedly compensating taxes fall respectively on taxpayers who are differently described, as, for example, resident shareholders and corporations doing business out of state. A State defending such a scheme as one of complementary taxation, therefore, has the burden of showing that the actual incidences of the two tax burdens are different enough from their nominal incidences so that the real taxpayers are within the same class, and that therefore a finding of combined neutrality on interstate competition would at least be possible.
In principle, the door may be open for such an argument. It is well established that "the ultimate distribution of the burden of taxes may be quite different from the distribution of statutory liability," McClure, Incidence Analysis and the Supreme Court: An Examination of Four Cases from the 1980 Term, 1 Sup.Ct. Econ. Rev. 69, 72 (1982), with such divergence occurring when the nominal taxpayer can pass i t through to other parties, like consumers. The Secretary's equivalence argument might work in the present case, then, if we could find that the economic impact of North Carolina's corporate income tax is passed through to shareholders of corporations doing business in state in a way that offsets the disincentive imposed by the intangibles tax to buying stock in corporations doing business out of state.
But there is a problem with this line of argument, and it lies in the frequently extreme complexity of economic incidence analysis. The actual incidence of a tax may depend on elasticities of supply and demand, the ability of producers and consumers to substitute one product for another, the structure of the relevant market, the time frame over which the tax is imposed and evaluated, and so on. See, e.g., Commonwealth Edison Co. v. Montana, 453 U.S. 609, 619, n. 8, 101 S.Ct. 2946, 2954-2955, n. 8, 69 L.Ed.2d 884 (1981) (determining "whether the tax burden is shifted out of State, rather than borne by in-state producers and consumers, would require complex factual inquiries about such issues as elasticity of demand for the product and alternative sources of supply").
We declined to shoulder any such analysis in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 589-590, and nn. 12-14, 103 S.Ct. 1365, 1374-1375, and nn. 12-14, 75 L.Ed.2d 295 (1983), noting that "courts as institutions are poorly equipped to evaluate with precision the relative burdens of various methods of taxation. The complexities of factual economic proof always present a certain potential for error, and courts have little familiarity with the process of evaluating the relative economic burden of taxes" (footnote omitted). We were likewise unwilling to "plunge . . . into the morass of weighing comparative tax burdens by comparing taxes on dissimilar events" in Oregon Waste. 511 U.S., at ----, 114 S.Ct., at 1353 (internal quotation marks omitted). Indeed, the general difficulty of comparing the economic incidence of state taxes paid by different taxpayers upon different transactions goes a long way toward explaining why we have so seldom recognized a valid compensatory tax outside the context of sales and use taxes.
Our find ing that North Carolina has failed to show that its intangibles tax satisfies any of the three requirements for a valid compensatory tax leaves the tax unconstitutional as facially discriminatory under our modern tests. The Secretary argues, however, that our decision in Darnell v. Indiana, 226 U.S. 390, 33 S.Ct. 120, 57 L.Ed. 267 (1912), compels us to sustain the North Carolina statute. The statutory scheme at issue in Darnell taxed all shares in foreign corporations owned by Indiana residents as well as all shares in domestic corporations to the extent that the issuing corporations' property was not subject to Indiana's general property tax. Writing for the Court, Justice Holmes found that "the only difference of treatment . . . that concerns the defendants is that the State taxes the property of domestic corporations and the stock of foreign ones in similar cases." Id., at 398, 33 S.Ct., at 121. This arrangement, he concluded, "is consistent with substantial equality notwithstanding the technical differences." Ibid.
Justice Holmes has been praised for the lucidity of his reasoning, as having been "wrong clearly" even where he erred, see Hart, Positivism and the Separation of Law and Morals, 71 Harv. L.Rev. 593 (1958), but the opinion in Darnell does not exemplify his customary merit. He gives no explanation for the conclusion quoted, commenting only that the discrimination issue "was decided in Kidd v. Alabama, 188 U.S. 730, 732, 23 S.Ct. 401, 402, 47 L.Ed. 669 (1903) ." 226 U.S., at 398, 33 S.Ct., at 120-121. Kidd, however, was decided under the Equal Protection Clause of the Fourteenth Amendment and emphasized "the large latitude allowed to the states for classification upon any reasonable basis." 188 U.S., at 733, 23 S.Ct., at 402 (citations omitted). The exclusive reliance upon Kidd in Darnell thus indicates that the latter case should be viewed primarily as one of equal protection, despite the fact that Indiana's shareholder tax was challenged under both the Equal Protection and Commerce Clauses.
To the extent that Darnell evaluated a discriminatory state tax under the Equal Protection Clause, time simply has passed it by. While we continue to measure the equal protection of economic legislation by a "rational basis" test, see, e.g., FCC v. Beach Communications, Inc., 508 U.S. 307, ----, 113 S.Ct. 2096, 2101, 124 L.Ed.2d 211 (1993), we now understand the dormant Commerce Clause to require "justifications for discriminatory restrictions on commerce to pass the 'strictest scrutiny.' " Oregon Waste, 511 U.S. at ----, 114 S.Ct., at 1350 (quoting Hughes v. Oklahoma, 441 U.S. 322, 337, 99 S.Ct. 1727, 1737, 60 L.Ed.2d 250 (1979)); see also Chemical Waste Management, Inc. v. Hunt, supra, at 342-43, 112 S.Ct., at 2013-2015; Philadelphia v. New Jersey, 437 U.S. 617, 624, 98 S.Ct. 2531, 2535-2536, 57 L.Ed.2d 475 (1978).
Hence, while cases like Kidd and Darnell may still be authorities under the Equal Protection Clause, they are no longer good law under the Commerce Clause. Cf. Associated Industries of Mo. v. Lohman, 511 U.S., at ----, 114 S.Ct., at 1823, (holding that, although a prior case applied a more lenient equal protection analysis to a Commerce Clause challenge, it had been "bypassed by later decisions"). North Carolina's intangibles tax cannot pass muster under modern compensatory tax cases, and Darnell cannot save it.
North Carolina's intangibles tax facially discriminates against interstate commerce, it fails justification as a valid compensatory tax, and, accordingly, it cannot stand. At the same time, of course, it is true that "a State found to have imposed an impermissibly discriminatory tax retains flexibility in responding to this determination." McKesson v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18, 39-40, 110 S.Ct. 2238, 2252, 110 L.Ed.2d 17 (1990). In McKesson, for example, we said that a State might refund the additional taxes imposed upon the victims of its discrimination or, to the extent consistent with other constitutional provisions (notably due process), retroactively impose equal burdens on the tax's former beneficiaries. A State may also combine these two approaches. Ibid. These options are available because the Constitution requires only that "the resultant tax actually assessed during the contested period reflect a scheme that does not discriminate against interstate commerce." Id., at 41, 110 S.Ct., at 2252.
In this case, that choice may well be dictated by the severability clause enacted as part of the intangibles tax statute. N.C. Gen.Stat. § 105-215. That issue, however, as well as the question whether Fulton has properly complied with the procedural requirements of North Carolina's tax refund statute, § 105-267, ought to come before the state courts in the first instance. Cf. Swanson v. State, 335 N.C. 674, 680-681, 441 S.E.2d 537, 541 (noting that "failure to comply with the requirements in section 105-267 bars a taxpayer's action against the State for a refund of taxes"), cert. denied, 513 U.S. ----, 115 S.Ct. 662, 130 L.Ed.2d 598 (1994).
Where "the federal constitutional issues involved in the remedial determination may well be intertwined with, or their consideration obviated by, issues of state law," our practice is to leave the remedy for the state supreme court to fashion on remand. Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 277, 104 S.Ct. 3049, 3058, 82 L.Ed.2d 200 (1984); see also Tyler Pipe Industries v. Dept. of Revenue, 483 U.S., at 252, 107 S.Ct., at 2822; Williams v. Vermont, 472 U.S. 14, 28, 105 S.Ct. 2465, 2474, 86 L.Ed.2d 11 (1985). We do that here.