Opinion ID: 1242046
Heading Depth: 2
Heading Rank: 1

Heading: Commerce Clause Issues

Text: The Douglases argue that the application of the sales tax to charges for interborough calls within Alaska and interstate calls places an undue burden on commerce in violation of the United States Constitution. [4] With respect to calls completed entirely within Alaska, this argument is misplaced. The commerce clause of the United States Constitution poses no bar to local taxation of purely intrastate transactions which are not components of interstate commerce. Ozark Pipe Line Corp. v. Monier, 266 U.S. 555, 45 S.Ct. 184, 69 L.Ed. 439 (1925); Ratterman v. Western Union Telegraph Co., 127 U.S. 411, 424, 8 S.Ct. 1127, 1130, 32 L.Ed. 229, 232 (1888). With regard to interstate phone call charges, we also reject the argument of the Douglases, for the following reasons. Early United States Supreme Court cases considering the application of a local tax to interstate electronic communications dealt with license taxes imposed directly on the business of telegraph companies. These taxes were held invalid under the commerce clause where they were applied to interstate telegraph messages, whether the tax rate was based on the number of interstate messages handled by the company or the revenue derived from such service. The principle enunciated was that because such messages were themselves elements of interstate commerce, the commerce clause excluded them from the legislative jurisdiction of any state and forbade direct taxation of a business which consisted of such interstate commerce. Western Union Telegraph Co. v. Alabama State Board of Assessment, 132 U.S. 472, 10 S.Ct. 161, 33 L.Ed. 409 (1889); Western Union Telegraph Co. v. Pennsylvania, 128 U.S. 39, 9 S.Ct. 6, 32 L.Ed. 345 (1888); Ratterman v. Western Union Telegraph Co., 127 U.S. 411, 8 S.Ct. 1127, 32 L.Ed. 229 (1888). This doctrine was restated clearly in a later case, Cooney v. Mountain States Telephone & Telegraph Co., 294 U.S. 384, 55 S.Ct. 477, 79 L.Ed. 934 (1935). Montana levied an annual license tax on the telephone company based upon the number of telephones furnished by the company to customers in the state. Since it was shown that a substantial number of the phones was used to make interstate as well as intrastate calls, the Supreme Court held the tax as a whole invalid, stating: [A] state cannot tax interstate commerce; it cannot lay a tax upon the business which constitutes such commerce or the privilege of engaging in it. And the fact that a portion of the business is intrastate and therefore taxable does not justify a tax either upon the interstate business or upon the whole business without discrimination. There are sufficient modes in which the local business may be taxed without the imposition of a tax which covers the entire operations. 294 U.S. at 392-93, 55 S.Ct. at 481-82, 79 L.Ed. at 941-42 (citations and footnotes omitted). Fisher's Blend Station v. State Tax Commission, 297 U.S. 650, 56 S.Ct. 608, 80 L.Ed. 956 (1936), also followed the principle forbidding direct taxation of business which consists of interstate commerce. There, the State of Washington imposed an occupation tax on radio broadcasting stations operating within the state, measured by the gross revenue a station derived from its entire operations. Since the primary source of revenue for these stations was broadcasting, and since the complaining station showed that its broadcasts reached listeners in other states, the Court, citing Cooney, held that the tax created an unconstitutional burden on interstate commerce. 297 U.S. at 656, 56 S.Ct. at 610, 80 L.Ed. at 960. Three years after the decisions in Cooney and Fisher's Blend Station were reached, however, the Court announced a more flexible and pragmatic test than the per se prohibition against direct taxation of interstate commerce relied upon in the earlier cases. This landmark decision, Western Livestock v. Bureau of Revenue, 303 U.S. 250, 58 S.Ct. 546, 82 L.Ed. 823 (1938), involved a New Mexico tax imposed upon various publishing businesses in the state, measured by gross receipts from sale of advertising space. The Supreme Court upheld the tax as applied to a business which circulated its magazine both in and out of the state, and which also received revenue from out-of-state advertisers. In reaching its decision, the Court emphasized that the work done to perform the advertising contracts was completed within New Mexico's boundaries, constituting a local taxable activity distinct from interstate circulation of the magazine. 303 U.S. at 258, 58 S.Ct. at 549, 82 L.Ed. at 829. However, the Court also premised its holding on a cumulative burden or multiple taxation theory. Under this doctrine the Court concluded that a tax applied equally to interstate and local business did not discriminate unconstitutionally against interstate commerce unless another state could impose an additional tax on the same business activity. The Court felt that the challenged New Mexico tax was justified, as long as no potential for multiple taxation by other states was present, as a fair assessment on interstate commerce for the support of local government services which benefit all business: [W]e think the tax assailed here finds support in reason, and in the practical needs of a taxing system which, under constitutional limitations, must accommodate itself to the double demand that interstate business shall pay its way, and that at the same time it shall not be burdened with cumulative exactions which are not similarly laid on local business. 303 U.S. at 258, 58 S.Ct. at 550, 82 L.Ed. at 829. The Court referred to prior cases wherein taxes measured by revenue from interstate commerce had been upheld in circumstances where the amounts assessed were fairly apportioned to that part of the commerce carried on within the taxing state, [5] and struck down when not so apportioned. [6] 303 U.S. at 255-256, 58 S.Ct. at 548-549, 82 L.Ed. at 827-28. The Court further articulated the cumulative burden principle in stating the reason for invalidating unapportioned taxes on the gross receipts of interstate businesses: [These taxes] have placed on the commerce burdens of such a nature as to be capable, in point of substance, of being imposed with equal right by every state which the commerce touches, merely because interstate commerce is being done, so that without the protection of the commerce clause it would bear cumulative burdens not imposed on local commerce. 303 U.S. at 255-56, 58 S.Ct. at 549, 82 L.Ed. at 828 (emphasis added) (citations omitted). Recognizing that the gross receipts tax under consideration was not limited to revenues attributable to in-state circulation of the publisher's magazines, the Court further observed: So far as the advertising rates reflect a value attributable to the maintenance of a circulation of the magazine interstate, we think the burden on the interstate business is too remote and too attenuated to call for a rigidly logical application of the doctrine that gross receipts from interstate commerce may not be made a measure of a tax. Experience has taught that the opposing demands that the commerce shall bear its fair share of local taxation, and that it shall not, on the other hand, be subjected to multiple tax burdens merely because it is interstate commerce, are not capable of reconciliation by resort to the syllogism. Practical rather than logical distinctions must be sought. 303 U.S. at 259, 58 S.Ct. at 550, 82 L.Ed. at 830 (emphasis added) (citations omitted). The Supreme Court in Western Livestock went on, following this practical approach, to distinguish the New Mexico tax on advertising revenues from a direct tax on receipts from out-of-state subscriptions of the publisher's magazines, noting that a tax on such subscription sales could be repeated by other states where the magazines were sold, while the advertising services performed within the publisher's state presumably would not be within the taxing jurisdiction of other states. 303 U.S. at 260, 58 S.Ct. at 549, 82 L.Ed. at 830. The Court also distinguished the tax in Western Livestock from business taxes based on gross receipts derived from interstate communications under the cumulative burden test, referring to the Fisher's Blend Station case: In this and other ways the case differs from Fisher's Blend Station v. State Tax Commission, 297 U.S. 650, 56 S.Ct. 608, 80 L.Ed. 956, supra, on which appellants rely. There the exaction was a privilege tax laid upon the occupation of broadcasting, which the court held was itself interstate communication, comparable to that carried on by the telegraph and the telephone, and was measured by the gross receipts derived from that commerce. If broadcasting could be taxed, so also could reception. In that event a cumulative tax burden would be imposed on interstate communication such as might ensue if gross receipts from interstate transportation could be taxed. 303 U.S. at 260-61, 58 S.Ct. at 551, 82 L.Ed. at 830-31 (citation omitted). Scores of cases treating state and local taxation under the commerce clause have followed Western Livestock. The Supreme Court of the United States has conceded on more than one occasion that it was beyond its abilities to reconcile this body of decisions into a consistent analytic framework. [7] Furthermore, none of these cases has dealt directly with the tax which the Douglases challenge, a general sales tax applied to consumers of interstate telephone services, rather than the telephone company. [8] However, the Western Livestock cumulative burden doctrine remains viable, and its refinement over the years indicates that such a sales tax is constitutional under the facts of this case, contrary to what Fisher's Blend Station and previous cases dealing with taxes on interstate communications businesses might indicate. Of particular interest are those decisions involving taxes similar to the one at bar-general taxes applied to the sale, use, or manufacture of goods made in one state but delivered to a user in another state, and imposed on the consumer rather than directly on the privilege of the seller doing business in the state. Such taxes do not discriminate against interstate commerce on their face where an equal tax rate is applied, for instance, to all sales within the state, regardless of the origin of the goods sold. They nevertheless pose a danger of multiple taxation if sufficient nexus exists in more than one state to tax the manufacture, sale, or consumption of the same item. Yet the Supreme Court has not viewed apportionment of the tax rate to the intrastate aspect of the taxed event as the solution for avoiding this risk. Instead the Court has tended to validate such taxes when imposed by the state where goods are sold and invalidate them when imposed by the state from which the goods are sent, at least where no offsetting credit for tax paid in another state is a part of the scheme. [9] This pragmatic choice has its basis in the fact that if only the state of destination is prohibited from taxing goods shipped interstate, then the tax rate it applies to locally produced goods could easily be lower than that applied by another state to goods shipped into the state, thus placing the foreign goods at a competitive disadvantage in the state where they are marketed. If only the state of origin is forbidden to tax the sale of goods destined for consumption in other states, then the equal application of a sales tax to all goods consumed in the state of destination poses no such threat. [10] Thus, the United States Supreme Court has not precluded itself from preferring one state over another in permitting taxation of transactions affecting interstate commerce, in order to obviate risks of multiple taxation. Recent cases have also suggested more leniency by the United States Supreme Court regarding taxes imposed directly on the business of engaging in interstate commerce, where those taxes appear to be nondiscriminatory and fairly apportioned to services provided to an out-of-state seller by the taxing entity. See National Geographic Society v. California Equalization Board, 430 U.S. 551, 558, 97 S.Ct. 1386, 1391, 51 L.Ed.2d 631, 638 (1977); Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 288-89, 97 S.Ct. 1076, 1083-1084, 51 L.Ed.2d 326, 337, reh. denied, 430 U.S. 976, 97 S.Ct. 1669, 52 L.Ed.2d 371 (1977). Thus, the per se rule against direct interference with interstate commerce followed in Fisher's Blend Station and the earlier telegraph and telephone company cases may be regarded as no longer good law. [11] Finally, of central importance to this case are other United States Supreme Court opinions which suggest that the party alleging an undue burden on interstate commerce from local taxation must show a tangible likelihood that multiple taxation will result if the tax is upheld. The Supreme Court has not specified the substantiality of risk which must be demonstrated, but it has indicated that a bare allegation that the risk exists, absent a showing that cumulative taxation from other states is at least possible from a practical and legal standpoint, is insufficient. [12] Turning now to the tax challenged by the Douglases, we first observe that the Kenai Peninsula Borough Sales Tax does not on its face discriminate against interstate commerce, since an equal rate is applied to all sales, proportional to their retail value. The tax burden, though measured by the price of sending telephone messages, does not fall directly on the phone company but on the consumer of the service. [13] Therefore, under Western Livestock and its progeny, the primary test of whether the tax is valid as applied to interstate phone calls is whether it imposes a risk of multiple taxation that creates a cumulative burden on interstate phone service, out of proportion to the local government services from which that activity benefits. The Douglases make the bare assertion that a risk of multiple taxation such as that on broadcasting in Fisher's Blend Station, and recognized in Western Livestock, exists here because receipt of a call charged to a phone in the Borough could be taxed by another state to which the call is made. We disagree. The calls taxed by the Borough ordinance are only those charged to phones located within the Borough. Even if sufficient nexus to legally tax these calls in another state exists, the impracticality of doing so, in that the phone in another state is never billed for such calls, makes it extremely unlikely that any state or local entity would attempt to enact such a tax. The Douglases have cited no instance of any such attempt. They have not distinguished the analogous cases where sales or use taxes upon consumers in the state where interstate goods compete with local goods (here the location where both long-distance calls and local calls are billed) have been upheld by the United States Supreme Court. [14] The Douglases' argument fails to recognize the discredit to the Fisher's Blend Station holding implicit in the modern cases concerning burden of proof under the cumulative burden test, for the practical likelihood of taxing the receipt of broadcasting messages must be compared with that of a tax on the receipt of phone calls billed to a phone in another state. [15] In sum, we cannot agree that Fisher's Blend Station and preceding cases concerning telephone and telegraph communications [16] are convincing precedent in light of more recent United States Supreme Court decisions and the unique facts of this case. We find that the Douglases have failed to meet their burden of showing that a palpable risk of multiple taxation, constituting a burden on interstate phone communications beyond its fair share of supporting local services, will result from validating this tax. [17]