Opinion ID: 1653322
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Heading: The Commerce Clause Argument.

Text: The United States Constitution gives Congress the power [t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.... Art. I, § 8, clause 3. The commerce clause not only confers power on the federal government to regulate commerce but also limits state power to interfere with it. Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 35, 100 S.Ct. 2009, 2015, 64 L.Ed.2d 702, 711 (1980). This limitation on state power is often referred to as the negative implication of the commerce clause. New Energy Co. v. Limbach, 486 U.S. 269, 273, 108 S.Ct. 1803, 1807, 100 L.Ed.2d 302, 308 (1988); L. Tribe, American Constitutional Law § 6-2, at 403 (2d ed. 1988). The Supreme Court has articulated a four-part test to determine whether a state tax violates the commerce clause. A tax is valid under a commerce clause challenge when the 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. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326, 331 (1977) (emphasis added). When the challenged state tax affects commerce outside the United States, as here, a more extensive constitutional inquiry is required. Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 446, 99 S.Ct. 1813, 1820, 60 L.Ed.2d 336, 346 (1979). When foreign commerce is involved, two additional inquiries must be made: [F]irst, whether the tax ... 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. Id. at 451, 99 S.Ct. at 1823, 60 L.Ed.2d at 349. If a state tax contravenes either of these precepts, it is unconstitutional. Id. Kraft does not ask us to apply this test which is specifically applicable to foreign commerce; rather, it confines its argument to the third prong of Complete Auto Transit, claiming that Iowa's tax system unconstitutionally discriminates against foreign commerce. State statutes are presumed to be constitutional. Iowa Auto. Dealers v. State Appeal Bd., 420 N.W.2d 460, 462 (Iowa 1988). In addition, [a]ll presumptions are in favor of the constitutionality of the statute and it will not be held invalid unless it is clear, plain and palpable that such decision is required. City of Waterloo v. Selden, 251 N.W.2d 506, 508 (Iowa 1977). Accord Harden v. State, 434 N.W.2d 881, 885 (Iowa), cert. denied, ____ U.S. ____, 110 S.Ct. 194, 107 L.Ed.2d 149 (1989). This presumption in favor of constitutionality is especially strong where the statute was enacted to promote a public purpose and relates to taxation. Lee Enters., Inc. v. Iowa State Tax Comm'n, 162 N.W.2d 730, 739 (Iowa 1968). The department of revenue argues that the Iowa tax structure does not unconstitutionally discriminate because it does not advantage any local Iowa activity at the expense of non-Iowa activities. According to the department, unlawful discrimination does not exist under the commerce clause unless the statute provides a direct commercial advantage to local business. See Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 268, 104 S.Ct. 3049, 3053-54, 82 L.Ed.2d 200, 207 (1984); P. Hartman, Federal Limitations in State and Local Taxation § 2.19, at 50 (Supp.1990) (A tax is generally said by the Court to be discriminatory when the taxing State provides a commercial advantage to local business at the expense of out-of-state business.). Kraft agrees that, in the interstate context, the cases could be read to support the department's argument that some advantage to local business must be shown. It argues, however, that the rules are different in the case of foreign commerce. Kraft relies in part on Hale v. Bimco Trading, Inc., 306 U.S. 375, 59 S.Ct. 526, 83 L.Ed. 771 (1939). In Hale, the Supreme Court invalidated a Florida statute which provided for the inspection of all imported cement and the payment of a fee for such inspection. The inspection and fee applied to cement brought into Florida from a foreign country, but not to domestic cement. The statute's preamble provided two justifications for the inspection of foreign cement and its attendant fees: first, public safety required that the cement sold in Florida must meet minimum standards, and second, the imported cement created unfair competition to Florida's cement industry. The Supreme Court pointed out the defects in the public safety rationale: That no Florida cement needs any inspection while all foreign cement requires inspection at a cost of fifteen cents per hundredweight is too violent an assumption to justify the discrimination here disclosed. Id. at 380, 59 S.Ct. at 528, 83 L.Ed. at 776. It noted, as to the second justification, that it was a candid admission that the very purpose of the statute is to keep out foreign goods. Id. Thus, in Hale, the Florida statute gave Florida's cement industry a distinct, and unconstitutional, advantage over foreign commerce. Kraft also relies on Japan Line, Ltd. to support its discrimination argument. In Japan Line, Ltd., California's ad valorem property tax on Japanese-owned shipping containers was held to violate the commerce clause because it resulted in possible multiple taxation, thereby preventing the United States from speaking with one voice in regulating foreign affairs. Id. at 452, 99 S.Ct. at 1823, 60 L.Ed.2d at 350. Japan Line, Ltd. did not involve discrimination against foreign commerce, which is the basis of Kraft's commerce clause argument. Although Supreme Court decisions are unclear whether such a local bias must be found when discrimination against foreign commerce is alleged, the authors of one article have stated: Arguably, disparity between interstate and foreign commerce is not the evil that the commerce clause generally is supposed to prevent. The commerce clause may be viewed as a protection from local biases against either interstate or foreign commerce. Thus, it can be concluded that not only negative effects on protected commerce, but also positive effects on local commerce are necessary to find a statute unconstitutional under the commerce clause. Tatarowicz & Mims-Velarde, An Analytical Approach to State Tax Discrimination Under the Commerce Clause, 39 Vand.L.Rev. 879, 941 (1986). In the commerce-clause challenge here, we hold that Kraft must show, as in the case of alleged interstate discrimination, that Iowa businesses receive a commercial advantage over foreign commerce due to Iowa's taxing scheme. Kraft alleges that local Iowa businesses are advantaged because taxpayers which receive dividends from domestic subsidiaries are benefited in the form of a lower Iowa income tax than if dividends from both foreign and domestic subsidiaries were taxed alike. We do not subscribe to this argument; this benefit is not created at the disadvantage of out-of-state businesses. Kraft is incorrect in comparing Iowa businesses to each other; the question is whether Iowa businesses are benefited at the expense of foreign businesses. Because the Iowa tax does not differentiate between in-state or out-of-state taxpayers, no impermissible discrimination exists. This case is therefore factually distinguishable from Hale.