Opinion ID: 1423388
Heading Depth: 1
Heading Rank: 3

Heading: The Dormant Foreign Commerce Clause Doctrine

Text: Despite the framers' explicit commitment to Congress of the power to regulate commerce with foreign nations, and among the several states (U.S. Const., art. I, § 8, cl. 3), by far the bulk of commerce clause jurisprudence has been developed by the high court itself under the judicially created doctrine of the unexercised, negative, or dormant commerce clause. From its origin early in the nation's constitutional history with the opinion of Chief Justice Marshall in Gibbons v. Ogden (1824) 22 U.S. (9 Wheat.) 1, 209 [6 L.Ed. 23, 73], through its reformulation at the hands of Justice Curtis in Cooley v. Board of Wardens of Port of Philadelphia et al. (1852) 53 U.S. (12 How.) 299 [13 L.Ed. 996], the high court has posited irreducible and self-executing constitutional minima that limit state action affecting interstate and foreign commerce, even where Congress has failed to exert its plenary commerce clause power. (5) [T]he Commerce Clause was not merely an authorization to Congress to enact laws for the protection and encouragement of commerce among the States, but by its own force created an area of trade free from interference by the States. In short, the Commerce Clause even without implementing legislation by Congress is a limitation upon the power of the States.... ( Freeman v. Hewit (1946) 329 U.S. 249, 252 [91 L.Ed. 265, 67 S.Ct. 274]; see also Southern Pacific Co. v. Arizona (1945) 325 U.S. 761, 769 [89 L.Ed. 1915, 1924-1925, 65 S.Ct. 1515] [For a hundred years it has been accepted constitutional doctrine that the commerce clause, without the aid of Congressional legislation... affords some protection from state legislation inimical to the national commerce, and that in such cases, where Congress has not acted, this Court, and not the state legislature, is under the commerce clause the final arbiter of the competing demands of state and national interests. [Citations.]]; Hood & Sons v. Du Mond (1949) 336 U.S. 525, 534 [93 L.Ed. 865, 872, 69 S.Ct. 657]; Northwestern Cement Co. v. Minn. (1959) 358 U.S. 450, 458 [3 L.Ed.2d 421, 427, 79 S.Ct. 357, 67 A.L.R.2d 1292]; Hughes v. Oklahoma (1979) 441 U.S. 322, 326, fns. 2 & 3 [60 L.Ed.2d 250, 99 S.Ct. 1727]; Wyoming v. Oklahoma (1992) ___ U.S. ___, ___ [117 L.Ed.2d 1, 21-24, 112 S.Ct. 789, 799-801] In the modern era, the consolidative work of the court led it to recast the interstate dimension of the dormant commerce clause doctrine as it applies to state taxation. (6) In Complete Auto Transit, Inc. v. Brady, supra, 430 U.S. 274, the court adopted a four-part test to evaluate state tax schemes to ensure compliance with the inherent demands of the unexercised commerce clause. If a tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State, it does not burden impermissibly interstate commerce. ( Id., at p. 279 [51 L.Ed.2d at p. 331].) (7) This four-part test is not adequate, however, to subserve the additional policies underlying the foreign commerce clause. In Japan Line, Ltd. v. County of Los Angeles, supra, 441 U.S. 434 ( Japan Line ), the court held that [w]hen construing Congress' power to `regulate Commerce with foreign Nations,' a more extensive constitutional inquiry is required. ( Id., at p. 446 [60 L.Ed.2d at p. 346].) Specifically, two additional considerations, beyond those articulated in Complete Auto, come into play. ( Ibid. ) In addition to answering the nexus, apportionment, and nondiscrimination questions posed in Complete Auto, a court must also inquire, first, whether the tax, notwithstanding apportionment, creates a substantial risk of international multiple taxation, and second, whether the tax prevents the Federal Government from `speaking with one voice when regulating commercial relations with foreign governments.' If a state tax contravenes either of these precepts, it is unconstitutional under the [foreign] Commerce Clause. ( Id., at p. 451, italics added.) Although the court's opinion in Japan Line, supra, 441 U.S. 434, stressed the paramount national need for and plenary nature of congressional power over foreign commerce  greater, perhaps, than Congress's textually parallel power over interstate commerce ( id., at p. 448 & fns. 12-13 [60 L.Ed.2d at pp. 347-348])  as one of the fundamental policies animating the framers, it had little to say concerning the preemptive role of Congress in defining the contours of permissible state taxation of foreign commerce. The court illuminated that question a year later when it decided Mobil Oil, supra, 445 U.S. 425, a challenge by Mobil to Vermont's tax on foreign dividend income. Rejecting what it termed Mobil's forced analogy to California's tax on Japanese shipping containers at issue in Japan Line, the court said that the real issue before it was not one of multiple taxation at the international level, as in Japan Line, but of multiple taxation at the state level. Concurrent federal and state taxation of income, of course, is a well-established norm, the court wrote. Absent some explicit directive from Congress, we cannot infer that treatment of foreign income at the federal level mandates identical treatment by the States. The absence of any explicit directive to that effect is attested by the fact that Congress has long debated, but has not enacted, legislation designed to regulate state taxation of income. [Citations.] ( Mobil Oil, supra, 445 U.S. at p. 448 [63 L.Ed.2d at pp. 527-528], italics added.) The view taken in Mobil Oil, supra, 445 U.S. 425, that Congress, under its `exclusive and absolute' power ... over foreign commerce ( Japan Line, supra, 441 U.S. at p. 448, fn. 13 [60 L.Ed.2d at p. 348], quoting Buttfield v. Stranahan (1904) 192 U.S. 470, 492 [48 L.Ed. 525, 534, 24 S.Ct. 349]), is the source of explicit directive[s] preempting state taxation of foreign commerce, was amplified in the court's treatment of the issue in Container, supra, 463 U.S. 159. The court first noted that allocating income among various jurisdictions bears some resemblance ... to slicing a shadow, and concluded that it would be perverse, simply for the sake of avoiding double taxation, to require California to give up one allocation method that sometimes results in double taxation [i.e., formula apportionment] in favor of another allocation method [i.e., AL/SA] that also sometimes results in double taxation. ( Id., at pp. 192-193 [77 L.Ed.2d at pp. 570-571].) It then turned to the second inquiry suggested by Japan Line,  namely, whether California's use of formula apportionment in an international context might `impair federal uniformity in an area where federal uniformity is essential,' and `prevent the Federal Government from speaking with one voice in international trade.' ( Ibid. ) In examining the one voice branch of the dormant commerce clause doctrine, the court in Container was careful to distinguish between state tax schemes that are unconstitutional because they implicate foreign affairs and those that, although they may have foreign resonances, are void because they violate[] a clear federal directive. While either infirmity will offend the one voice standard, the latter does so, the court said, not as a result of a dormant commerce clause analysis, but because of some explicit directive from Congress.  This latter analysis, the court noted, is, of course, essentially a species of pre-emption.... ( Container, supra, 463 U.S. at p. 194 [77 L.Ed.2d at pp. 571-572], italics added.) Applying the explicit directive from Congress language of Mobil Oil, supra, 445 U.S. 425, and canvassing specific indications of congressional intent, the Container opinion found neither statutory preemption by Congress nor any requirement that the AL/SA method be applied to the states in any of the many bilateral tax treaties to which the United States was a signatory. Indeed, the court pointed out, the Senate has on at least one occasion, in considering a proposed treaty, attached a reservation declining to give its consent to a provision in the treaty that would have extended [an AL/SA] restriction to the States. ( Container, supra, 463 U.S. at p. 196 [77 L.Ed.2d at p. 573].) [I]t remains true, the court concluded, as we said in Mobil, that `Congress has long debated, but has not enacted, legislation designed to regulate state taxation of income.' ( Id., at p. 197 [77 L.Ed.2d at p. 573].) Although the court concluded in Container that the Board's use of formula apportionment did not violate the foreign commerce clause under a dormant analysis, it is important for our purposes to observe that the opinion carefully separates the analytical thread of congressional preemption from what the court termed a more relaxed standard which takes into account our residual concern about the foreign policy implications of California's tax. ( Container, supra, 463 U.S. at p. 197 [77 L.Ed.2d at pp. 573-574].) In the former case, there obviously is no need for resort to a dormant analysis since Congress has explicitly exerted its plenary authority under the commerce power to preempt a state tax scheme that, far from implicating foreign affairs, has only foreign resonances. [9] As the Container opinion makes clear, however, the court will not lightly overturn the historic prerogatives of the states to administer their own tax systems. Before being declared nullified by Congress under this species of pre-emption, the federal directive that a state tax scheme allegedly violates must be clear. (463 U.S. at p. 194 [77 L.Ed.2d at pp. 571-572].) The more relaxed standard of a dormant analysis  based on residual concern[s] about the foreign policy implications of a given state tax scheme  is appropriate only in the absence of explicit action by Congress preempting a given state taxation method. It is undertaken by a judiciary with little competence in determining precisely when foreign nations will be offended by particular acts, and even less competence in deciding how to balance a particular risk of retaliation against the sovereign right of the United States as a whole to let the States tax as they please. ( Container, supra, 463 U.S. at p. 194 [77 L.Ed.2d at pp. 571-572].) Thus, it is for reasons of its limited foreign policy expertise that, in conducting a dormant one voice inquiry, the best that [a court] can do, in the absence of explicit action by Congress [preempting a challenged state tax scheme], is to attempt to develop objective standards that reflect very general observations about the imperatives of international trade and international relations. ( Ibid. ) Where they apply, the development of such standards is informed significantly by the views of executive officials charged with implementing the nation's foreign policy  including its foreign commercial policy  whose nuances ... are much more the province of the Executive Branch and Congress than of this Court. ( Id., at p. 196 [77 L.Ed.2d at p. 573].) As might be expected, the Bank argues at length that the Board's application of formula apportionment to the unitary business of which it is a part offends the foreign commerce clause precisely because it violates a clear federal directive. That directive, the Bank tells us, is embodied in an impressive array of federal executive communications  presidential statements and press releases; official letters from cabinet officers charged with overseeing national monetary, trade, and foreign policies; the testimony of senior Treasury Department officials; and the white paper of an executive task force established to study and present recommendations on the issues surrounding state use of formula apportionment to foreign-based unitary groups. Without exception, the Bank argues, these executive sources vigorously and explicitly support the exclusive use of the AL/SA method in such circumstances and condemn the use of formula apportionment by the states. The Court of Appeal essentially agreed with the Bank's underlying premise that executive pronouncements of what national foreign commercial policy should be qualifies as a source of the clear federal directive. It reasoned that because the Container opinion ( supra, 463 U.S. 159) subsumed the search for specific indications of congressional intent within the one voice standard, congressional intent must therefore be an integral component of the dormant commerce clause test. From that analytical keystone, it had little difficulty in concluding on the basis of a substantial executive-compiled record that the federal directive was clear and explicit: according to executive branch officials, formula apportionment, in the words of the Court of Appeal, is not to be applied to foreign-based corporate groups  those groups are to be taxed by the states only on income derived from the United States. Were we confronted with the Bank's argument in the immediate aftermath of the Container decision, it might carry some force, although given the absence of textual support for the claim  both in the Container opinion and the commerce clause itself  it is by no means facially convincing. The fact is, however, that dormant foreign commerce clause jurisprudence has evolved in the nine years since Container, supra, 463 U.S. 159, was decided, an evolution that, as we parse the cases, has reoriented the doctrine. That development has reduced the scope for a dormant analysis and makes its invocation here particularly inappropriate.