Opinion ID: 2630311
Heading Depth: 3
Heading Rank: 4

Heading: Incidental Inequality Is Permissible Within a Rational Scheme.

Text: Where a tax or fee that differentiates between residents and nonresidents is rationally related to a valid state purpose, mere inequality in a given year will not necessarily implicate the Privileges and Immunities Clause. In Travelers' Insurance Co. v. Connecticut, [50] for instance, the Supreme Court stated that the mere fact that in a given year the actual workings of the system may result in a larger burden on the nonresident [does not necessarily] vitiate the system, for a different result might obtain in a succeeding year.... [51] It is in this sense, in terms of unavoidable anomalies within a rational system, that the state is required to guarantee only substantial, rather than precise, equality. [52] As we made clear in Carlson III, precise equality in taxation between residents and non-residents is not required. [53] This is clearly the case with the prospective method of calculating the permissible differential to which the parties agreed and which the superior court approved. Under this scheme, the state determines the permissible differential to be charged nonresidents over the next three years by averaging the resident contribution to fisheries management over the previous five years. Under this scheme, the nonresident differential is directly related to the fisheries budget, although exact equality is not guaranteed. Since the state is not required to guarantee precise equality prospectively, we conclude that it should not be required to provide it retrospectively, either. We see no reason why the superior court may not apply a rational retrospective scheme, similar to that stipulated by the parties going forward in their February 2001 stipulation, in order to determine the legitimate variation between actual nonresident fees and permissible nonresident fees and the amount of any refunds. The problem is to determine the extent to which fee differentials may depart from perfect equality and still pass constitutional muster. In determining whether the inequality between residents and nonresidents exceeds substantial equality of treatment  that is, in determining whether the variation between nonresident fee differentials and the nonresidents' fair burden of fisheries management costs is permissible  the superior court should determine whether the difference falls within a reasonable margin of error. We have been unable to locate cases that analyze the appropriate margin of error in the context of the substantial equality of treatment standard. But in the parallel context of tax apportionment, which examines the constitutionality, under due process, of allowable margins of error for determining taxation for corporations that conduct business across state lines, there is helpful precedent. In such cases the Supreme Court has held that in order to show that a formula is unconstitutional, the taxpayer [must prove] by `clear and cogent evidence' that the income attributed to the State (analogous in this case to the permissible nonresident fees), is out of all appropriate proportion to the business transacted [54] (analogous to the actual nonresident fees), or has `led to a grossly distorted result.' [55] While the cases establish no bright line for determining what qualifies as out of all appropriate proportion, we consider it significant that the Supreme Court has only twice found a variation to be unconstitutional. In Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, [56] the Court found the statutory formula unconstitutional when there was more than a 250 percent difference [57] between the statutory formula's calculation of the amount of in-state taxpayer income and the actual amount of in-state taxpayer income. Likewise, in Norfolk & Western Railway v. Missouri State Tax Commission, [58] the Court held unconstitutional a formula with a margin of error of approximately 163 percent. In all other cases to come before it, the Court has upheld all margins of error that fell below those at issue in Hans Rees' Sons and Norfolk & Western Railway. Thus, for example, in Container Corporation of America v. Franchise Tax Board , the Court upheld a fourteen percent difference between alternative tax formulas. [59] In Moorman Manufacturing Company v. Bair , the Court held that a forty-eight percent difference between the alternative formulas was constitutional. [60] State appellate courts, following these cases, have consistently held differences under 100 percent to be constitutional. [61] These cases demonstrate that the search for precision is illusory and that there are constitutionally acceptable variations from mathematical equality in the structuring of tax regimes. The same is true for the structuring of resident and nonresident fishing fees. From this case law, we conclude that an allowable margin of error may be found in the range up to fifty percent. [62] Because the superior court required precise equality between the burdens shouldered by residents and nonresidents, we vacate the superior court's order pertaining to calculation of refunds. We remand for the superior court to determine whether any inequality between residents and nonresidents was incidental  and therefore constitutionally tolerable  or substantial  and thus unconstitutional. [63]