Opinion ID: 1187727
Heading Depth: 2
Heading Rank: 2

Heading: Interstate Commerce Clause

Text: Former section 225's exemption also may not be invalidated as interfering with interstate commerce. The majority applies the test of Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274, 279 [51 L.Ed.2d 326, 331, 97 S.Ct. 1076], which is used to determine whether a state tax interferes with interstate commerce, to analyze whether this exemption unduly burdens interstate commerce. I submit that the application of Complete Auto in this wholly different context is erroneous. The majority cites no case where Complete Auto is used to analyze whether a state tax exemption or credit violates the commerce clause. Moreover, the inappropriateness of applying Complete Auto in this context is further demonstrated when one attempts to apply the three parts of its four-part analysis which the majority does not discuss. [3] For example, it seems absurd to say that a state's choice not to impose a tax somehow violates the commerce clause unless the activity not taxed has a substantial nexus to that state. Likewise, it is difficult to imagine what commerce clause policy concerns are promoted by requiring that the exemption be fairly apportioned or fairly related to the services for which the state has chosen not to tax. (See ante, p. 15.) These various factors relate to the propriety of taxing the in-state activity, assuring that the taxes are properly exacted for the services rendered by the state; the test was not designed to determine whether it is proper to exempt such property from tax. The proper inquiry is whether the exemption statute, protecting only imports and exports, burdens the free flow of commerce among the several states. A recent United States Supreme Court case appears controlling. In Westinghouse Electric Corp. v. Tully (1984) 466 U.S. 388 [80 L.Ed.2d 388, 104 S.Ct. 1856], the State of New York, responding to federal tax legislation affecting Domestic International Sales Corporations (DISC), restructured its procedures for taxing distributions received by a parent corporation from its subsidiary. It also provided in part for a partially offsetting tax credit, applied to DISC income from export products shipped from a regular place of business of the taxpayer within [New York]. ( Id., at p. 393 [80 L.Ed.2d at p. 394].) The amount of the credit, applied to the parent corporation's tax obligation for business activity conducted in New York, was dependent not only on the amount of goods the DISC shipped from New York, but also upon the percentage of the DISC's shipping activity conducted in New York vis-a-vis other states. [4] Parent corporations with identical business allocation percentages (the percentage of its total business activity conducted in New York), and identical New York DISC income were taxed differently depending upon the amount of DISC income derived from shipping activities in other states. ( Id., at pp. 400-402, fn. 9 [80 L.Ed.2d at pp. 398-400].) In analyzing whether the method of allowing the credit is discriminatory in a manner that violates the Commerce Clause ... ( id., at p. 399 [80 L.Ed.2d at p. 398], italics added), the court focused on the fact that not only does the New York tax scheme `provide a positive incentive for increased business activity in New York State' ... it [ also ] penalizes increases in the DISC's shipping activities in other States. ( Id., at pp. 400-401 [80 L.Ed.2d at p. 398].) The court also reiterated the settled principles that `[t]he very purpose of the Commerce Clause was to create an area of free trade among the several States' ( id., at p. 402 [80 L.Ed.2d at p. 400]), and that `[n]o State, consistent with the Commerce Clause, may impose a tax which discriminates against interstate commerce ... by providing a direct commercial advantage to local business.' ( Id., at p. 403 [80 L.Ed.2d at p. 400].) Acknowledging that in each case the court must balance the national interest in free trade with the state's interest in exercising its taxing powers ( id., at p. 403), the court found the principles enunciated in Boston Stock Exchange, supra, and Maryland v. Louisiana (1981) 451 U.S. 725 [68 L.Ed.2d 576, 101 S.Ct. 2114], controlling. [5] In both cases, the court struck down state statutes imposing greater economic burdens on similar activities occurring out-of-state than occurring in-state. The court concluded that the New York tax credit violated the commerce clause because it `foreclose[d] tax-neutral decisions and ... create[d] ... an advantage' for firms operating in New York by placing `a discriminatory burden on commerce to its sister States. ' [Citation.] ( Westinghouse Electric, supra, 466 U.S. at p. 406 [80 L.Ed.2d at p. 402], italics added.) [6] Nonetheless, the Westinghouse Electric court hastened to add that not all schemes to attract a particular segment of industry into a state are unconstitutional. The court stated: We reiterate that it is not the provision of the credit that offends the Commerce Clause, but the fact that it is allowed on an impermissible basis, i.e., the percentage of a specific segment of the corporation's business that is conducted in New York. As in Boston Stock Exchange, we do not `hold that a State may not compete with other States for a share of interstate commerce; such competition lies at the heart of a free trade policy. We hold only that in the process of competition no State may discriminatorily tax the products manufactured or the business operations performed in any other State. ' ( Id., at pp. 406-407, fn. 12 [80 L.Ed.2d at p. 403], italics added.) The tax exemption granted by former section 225 to attract commerce to California ports was not grounded on an impermissible basis. There was no penalty imposed on activity conducted outside of California. Shippers not wishing to pay the inventory tax, levied as a quid pro quo for the services rendered by California, simply may have chosen to transship through another state. Unlike Boston Stock Exchange, Westinghouse Electric, and Maryland v. Louisiana, supra, no burden was imposed on interstate commerce by placing a penalty or disincentive on the choice to transact business in another state. Moreover, unlike the paradigm commerce clause case, local interests are not favored. (See Westinghouse Electric, supra, 466 U.S. at p. 403 [80 L.Ed.2d at p. 400].) The exemption is available regardless of the residency of the shipper or the place of manufacture of the goods, with the exception of those goods whose point of origin is California which do not qualify for the exemption because they are not being transshipped through California. In my view, respondents' claim at bottom is really an equal protection attack. They are complaining in essence that the state's differential treatment of import and export business inventories from that of domestic goods lacks a rational basis. Assuming respondents would have standing to raise this issue, an unlikely conclusion under the majority's analysis (see ante, p. 6), I submit that former section 225 would be upheld against such a challenge because the distinction it draws `is neither capricious nor arbitrary, and rests upon some reasonable consideration of difference or policy....' ( Allied Stores of Ohio v. Bowers (1959) 358 U.S. 522, 527 [3 L.Ed.2d 480, 485, 79 S.Ct. 437] [upholding against an equal protection clause challenge an Ohio statute providing only nonresidents an exemption for merchandise held in storage, from a tax otherwise imposed on [a]ll personal property located and used in business in the state].) One such reasonable policy consideration may be the greater threat of business flight from California posed by importers and exporters rather than by those dealing in interstate commerce, which justifies a greater incentive for the former group. (See Zee Toys, Inc. v. County of Los Angeles (1978) 85 Cal. App.3d 763, 776 [149 Cal. Rptr. 750].) In any event, the Legislature was not required to expressly state these policy considerations. The statute would not violate the equal protection clause if any state of facts reasonably can be conceived that would sustain it. [Citations.] ( Allied Stores, supra, 358 U.S. at p. 528 [3 L.Ed.2d at p. 486].) The exemption provided by former section 225 does not run contrary to the limitations on state power implicit in either the foreign or interstate components of the commerce clause. The exemption neither interferes with the federal government's ability to speak with one voice when regulating commercial relations with foreign governments, nor does it burden the free flow of interstate commerce by imposing a penalty on business activity conducted outside of California. I would find the tax exemption constitutional and would reverse the trial court's ruling denying plaintiff's claim for a refund of the improperly levied inventory tax. Appellant's petition for a rehearing was denied August 28, 1986. Lucas, J., was of the opinion that the petition should be granted.