Overview of the Dormant Commerce Clause
The Dormant Commerce Clause, also known as the Negative Commerce Clause, is a judicial doctrine created by the United States Supreme Court that prohibits states from enacting legislation that improperly burdens or discriminates against interstate commerce. The Dormant Commerce Clause is enforced by the United States Supreme Court and its subordinate federal courts.
The Dormant Commerce Clause is derived from the Commerce Clause of Article 1, Section 8. The Commerce Clause of Article 1, Section 8 empowers Congress (not the federal courts) to enact federal legislation (if Congress chooses to act) to supersede (or “preempt“) state laws that improperly burden or discriminate against interstate commerce. This Dormant Commerce Clause doctrine empowers the Supreme Court and its subordinate federal courts to act as a defacto legislature. With this defacto legislative power, federal courts both create federal law and strike down state laws that (in the court’s opinion) burden or discriminate against interstate economic activity.
The important takeaway is that the Supreme Court and its subordinate federal courts are doing Congress’ job. It is Congress’ responsibility to act to strike down state laws that interfere with interstate commerce. If Congress chooses to act on a given matter, federal courts will generally respect and defer to Congress’ will. For our purposes, the point is that federal courts have usurped this power to stand in judgment of state laws that may or may not burden interstate economic activity. This is not to say that many of the Supreme Court’s decisions have been bad policy. State laws that interfere with interstate commerce or discriminate against out of state businesses are generally undesirable. However, it is not the proper role of the courts to assume the powers of the federal legislature. Congress is the only appropriate body to exercise the Commerce power.
Legal Analysis of the Dormant Commerce Clause
Article 1, Section 10 imposes restrictions upon the state governments. Article 1, Section 10 essentially grants courts the power (assuming a legitimate case or controversy finds itself before the court) to strike down state laws that conflict with the provisions of Article 1, Section 10.
The Commerce Clause is found within Article 1, Section 8. The Commerce power was granted to empower Congress to act (if Congress wishes) to strike down state laws that have an adverse impact on interstate commerce.
For more on the meaning of “Commerce” and the Commerce Clause, click here. In short, the power to “regulate” meant the power “to make regular.” “Commerce” simply referred to “trade, traffic, flow of goods.” The interstate commerce clause simply authorizes Congress to pass laws to make regular the trade, traffic, flow of goods across state lines.
To understand logic of what the Supreme Court has done to create the Dormant Commerce Clause, imagine copying the Commerce Clause of Article 1, Section 8 and pasting it into Article 1, Section 10. From there, the courts interpret the Commerce Clause as imposing restrictions and restraints upon the states that the courts can unilaterally enforce.
How do Federal Courts use the Dormant Commerce Clause?
In West Lynn Creamery, Inc. v. Healy, 1994, the United States Supreme Court struck down a Massachusetts statute intended to subsidize Massachusetts dairy farmers. The Massachusetts statute at issue imposed a non-discriminatory tax on in-state producers and out-of-state producers of milk sold in Massachusetts. The proceeds of this tax were then given as a subsidy to in-state producers of milk in Massachusetts.
The Supreme Court said it was impermissible to combine a tax on out-of-state (and in-state) producers of milk with a subsidy for in-state milk producers. Separately the non-discriminatory tax was permissible and the subsidy for in-state milk producers was permissible. However, jointly, the tax and subsidy violated the Dormant Commerce Clause.
Why Does the Dormant Commerce Clause Matter Today?
With state and local governments across the United States facing bankruptcy (largely from bloated and unsustainable public pension schemes), states have been aggressively fighting to collect sales and use taxes from out-of-state retailers. Out-of-state retailers that do not have a physical presence in the same state as their customers have generally been shielded from charging, collecting and remitting sales taxes to those localities. Likewise, states do not have information systems or other schemes to track consumer purchases to compel in-state residents to pay their use taxes. In recent years, out-of-state retailers have been protected by Quill v. North Dakota, 1992.
Quill v. North Dakota, 1992
The United States Supreme Court in Quill v. North Dakota said a retailer in State X was not required to file sales and use tax returns (i.e., not required to charge, collect and remit sales taxes) with State Y if the retailer did not establish a physical presence within State Y. If the retailer does not have any employees enter State Y and does not have any property inside State Y, then the retailer does not have “substantial nexus” with the State Y. According to the Supreme Court, “substantial nexus” is required under the Dormant Commerce Clause before a retailer can be compelled to file sales and use tax returns with a state.
The Supreme Court’s reasoning in Quill was based on some earlier landmark cases, such as National Bellas Hess v. Illinois, 1967 and Complete Auto Transit v. Brady, 1977. Where did the court’s reasoning in Quill, National Bella Hess and Complete Auto come from? The imagination of Supreme Court justices.
Online Sales Tax
For several years, so-called “brick and mortar” retailers have complained that online retailers, such as Amazon, have an unfair advantage because consumers in most states can purchase goods from Amazon without having to pay sales tax. Politicians have used the plight of brick and mortar retailers as the basis for an attack on Quill and the protections it affords online retailers. These protections were not created by Congress under the Commerce Clause. These protections were created by the Supreme Court under the Dormant Commerce Clause.
Irrespective of whether Quill was wise policy or whether business owners should have to charge, collect and remit sales taxes in up to approximately 7,500 sales tax jurisdictions throughout the country, the important takeaway is: (1) existing policy throughout the United States was created by the United States Supreme Court, and; (2) the United States Constitution does not grant the Supreme Court the authority to settle or address these matters. Only Congress has authority under the Constitution to knock down or eradicate barriers to the free flow of goods across state lines. In a unique quirk of modern constitutional law (which exemplifies the illegitimacy of the Dormant Commerce Clause doctrine), Congress can pass laws overturning decisions rendered by the Supreme Court under the Dormant Commerce Clause. As such, advocates of tax increases who seek to overturn Quill find themselves in the position of pushing for Congressional legislation to overturn law/precedent the Supreme Court made up out of thin air.