Wednesday, October 11, 2017
The Ninth Circuit ruled yesterday that California's prorator license law likely violates the Dormant Commerce Clause. In the same ruling, the court held that California's mandatory disclosure requirements likely did not violate the First Amendment, and that the case did not warrant Younger abstention. The court sent the case back for further proceedings.
The case, Nationwide Biweekly v. Owen, arose when California prosecutors and regulators targeted Nationwide Biweekly Administration for fraud investigations involving one of its mortgage-payoff products. Here's how it works: a consumer would pay to Nationwide his or her monthly mortgage bill every two weeks, instead of paying to the lender directly every month. Nationwide would then pay the lender every month. This meant that a consumer would pay to his or her lender, through Nationwide, an extra monthly payment each year and thus pay off the loan sooner. Nationwide advertised the product as a "100% savings," but failed adequately to disclose the discount rate (based on the time-value of money) and fees for the product. So what appears to be a cost-free (and thus savings-only) product in fact is not cost-free.
The Monterey County District Attorney's Office sent Nationwide a letter about the practice and alleged that Nationwide was violating several California laws. In particular, the DA's office wrote that Nationwide was violating two provisions that required it to say that it's not affiliated with the lender in any solicitation to consumers for its product. The letter also said that Nationwide was violating California's "prorator" registration law, which required a "prorator" (a "person who, for compensation, engages in whole or in part in the business of receiving money or evidences thereof for the purpose of distributing the money or evidences thereof among creditors in payment or partial payment of the obligations of the debtor") to obtain a license. But under California law, such a license is only available to a corporation if the corporation is "organized under the laws of this State for that purpose." The Commissioner later sent Nationwide a letter notifying the corporation that it was investigating Nationwide's unlicensed business activity.
Nationwide filed suit in the Northern District, seeking to enjoin enforcement of the disclosure requirements by the DA. A Nationwide subsidiary later filed suit in the Northern District seeking to enjoin enforcement of the registration requirement against the Commissioner. The court rejected Nationwide's motion for a preliminary injunction in both cases, and Nationwide filed notices of appeal.
About a month after the opening appellate briefs were filed, the DA and the Commission filed a joint enforcement suit in California Superior Court. The district court dismissed both federal cases under Younger, and Nationwide appealed.
The Ninth Circuit ruled first that Younger abstention was not appropriate, because "before the date that the state case was filed, the district court had already conducted proceedings of substance on the merits." In particular, the court "spend a substantial amount of time evaluating the merits of the cases in considering and denying (in a detailed and reasoned order) Nationwide's motions for preliminary injunctions."
The court went on to hold that Nationwide was unlikely to succeed on its First Amendment claim. It ruled that under Zauderer, the "required disclaimers--short, accurate, and to the point--are reasonably related to California's interest in preventing . . . deception."
Finally, the court said that California's licensing requirement likely violated the Dormant Commerce Clause, because California's requirement makes in-state incorporation a prerequisite to getting a license to engage in interstate commerce.
Judge Montgomery argued in dissent that the federal proceedings were still at an embryonic stage and the court should have abstained under Younger.
Thursday, September 21, 2017
The Seventh Circuit upheld Chicago's "puppy mill" ordinance, which limits the sources from which city-licensed pet stores may obtain certain pets for resale, against a challenge under the Illinois Constitution's home-rule provision and the federal dormant Commerce Clause. The ruling leaves the ordinance in place.
Chicago's ordinance says that pet retailers in the city "may offer for sale only those dogs, cats, or rabbits" obtained from an animal control or care center, pound, or kennel operated by local, state, or federal government or "a humane society or rescue organization." The ordinance means that pet stores can't get their animals from large, mill-style breeders. Chicago adopted the law in order to protect against the "economic and emotional burdens for pet owners and [the] financial costs on the City as owners abandon their physically or emotionally challenged pets or surrender them to the [city shelter]."
Two Chicago pet stores and a Missouri dog breeder sued, arguing that the ordinance exceeded Chicago's authority under the Illinois Constitution's home-rule provision and violated the federal dormant Commerce Clause.
The Seventh Circuit disagreed. As to the home-rule argument, the court said that the Illinois Constitution permits Chicago to regulate in an area, concurrently with the state, so long as the General Assembly doesn't "specifically limit" it or "specifically declare the State's exercise to be exclusive." Because state law doesn't restrict, but actually preserves, municipal power to regulate animal care and welfare, the court said that Chicago's ordinance doesn't exceed its home-rule authority.
As to the dormant Commerce Clause, the court said that it didn't even apply, because Chicago's ordinance doesn't discriminate against interstate commerce. The court ruled that circuit law said that a state or local law that doesn't discriminate on its face or in effect doesn't even implicate the dormant Commerce Clause. "No disparate treatment, no disparate impact, no problem under the dormant commerce clause." The court therefore declined to apply Pike balancing, and ruled that the ordinance easily satisfied the default rationality review.
Judge Hamilton dissented in part, arguing that the court should have applied Pike balancing, because Dep't of Revenue of Kentucky v. Davis and United Haulers Ass'n v. Oneida-Herkimer Solid Waste clarified that "even nondiscriminatory burdens on commerce" are subject to Pike balancing and "may be struck down on a showing that those burdens clearly outweigh the benefits of a state or local practice." Judge Hamilton also argued that the majority applied an overly rigid pleading standard by not crediting the plaintiffs' allegations in the complaint that Chicago's ordinance would disparately impact out-of-staters.
Friday, November 18, 2016
The Ninth Circuit ruled in Missouri ex rel. Koster v. Harris that six states lacked standing to sue California over its laws protecting hens that lay eggs. The ruling dismisses the case in favor of California (and its egg laws), unless and until the plaintiffs amend their complaint.
The plaintiffs, six egg-producing states, sued California after that state enacted a law setting certain standards for egg-laying hens. (The law bans the sale of eggs in the state by hens that are kept in cages where they can't lay down, stand up, extend their limbs, and turn around.) The plaintiffs alleged parens patriae standing on behalf of egg farmers in their states.
The Ninth Circuit ruled against them. The court said that the states couldn't show "an interest apart from the interests of particular private parties," the first of two additional elements of parens patriae standing (over and above the normal elements of standing). (The second additional element, not at issue here, is "[t]he State must express a quasi-sovereign interest.") The court held that the states didn't allege that California's law harmed their entire population, and that those affected (the egg farmers) could bring their own suit against California. The court rejected the plaintiffs' claim that the California law would cause a fluctuation in the price of eggs and thereby harm all consumers. It also rejected the claim that the plaintiffs had standing because California's law was discriminatory. (It wasn't; it applies to all hens, wherever they live. The lack of discrimination in the law also goes to the merits (although not at issue yet): under the Dormant Commerce Clause, a nondiscriminatory law is upheld only if its burdens on interstate commerce outweigh its benefits--a relatively low standard.)
The court instructed the district court to dismiss the case without prejudice, however, allowing the states to amend their complaint.
Tuesday, September 13, 2016
The Third Circuit ruled in Associated Builders v. City of Jersey City that the City's efforts to enforce labor standards through its tax subsidies is subject to challenge under the National Labor Relations Act, ERISA, and the dormant Commerce Clause. In particular, the court said that Jersey City acted as a regulator, not a market participant, when in awarded tax subsidies to developers on the condition that they enter into certain agreements with labor unions that bind the developers to negotiate with a union and cover employees in union negotiations, even if employees aren't a members.
The ruling only says Jersey City's practice is subject to NLRA, ERISA, and dormant Commerce Clause challenge--not that the practices violates them. That's now the question on remand.
The case arose when a developer challenged Jersey City's practice of offering tax subsidies on the condition that a developer execute a project labor agreement ("PLAs"), an agreement that requires developers to abide by a pre-hire collective bargaining agreement that covers all employees during the term of the project. As such, a PLA is an agreement between the developer and a labor union, and, because it's entered into with a labor union, it requires a developer to negotiate with the union and requires that all employees be represented by that union in negotiations--even if the developer doesn't ordinarily employ unionized labor, and even if the employees are not union members.
Jersey City argued that it fell under the "market participant" exception to the NLRA, ERISA, and the dormant Commerce Clause, and that therefore those provisions didn't apply.
But the Third Circuit disagreed. The court ruled that Jersey City wasn't a market participant, because, under the circuit test, "the City lacks a proprietary interest in Tax Abated Projects." The court ruled that Camps Newfound/Owatonna, Inc. v. Town of Harrison dictated the result. In that case, the Supreme Court held that Maine wasn't acting as a market participant when it provided "general exemption from real estate and personal property taxes for 'benevolent and charitable institutions incorporated' in the state, but provided more limited or no tax benefits to charities benefiting residents of other states. The court also distinguished Dep't of Revenue v. Davis, saying that in that case Kentucky sold the bonds, whereas Jersey City isn't selling anything.
The ruling sends this case back to the district court for a ruling on the merits.
Thursday, August 25, 2016
The First Circuit ruled today in Wal-Mart Puerto Rico, Inc. v. Zaragoza-Gomez that Puerto Rico's amendment to its Alternative Minimum Tax discriminates against interstate commerce in violation of the Dormant Commerce Clause.
The ruling means that Puerto Rico can't apply its amended AMT against Wal-Mart, the largest private employer in Puerto Rico. The ruling also strikes a blow at Puerto Rico's effort to deal with its fiscal crisis and to prevent multi-state corporations doing business in Puerto Rico from shifting profits off-island by purchasing goods and services from related mainland entities at artificially inflated prices.
The amended AMT provided for a graduated corporate tax on goods sold or transferred to the corporate taxpayer by a related party or home office outside of Puerto Rico (for example, Wal-Mart's offices in the mainland US selling to Wall-Mart Puerto Rico). The top rate, 6.5%, applied to corporate taxpayers with $2.75 billion or more in gross sales. Wal-Mart was the only company big enough to be subject to this rate. Moreover, "[f]or a retailer like Wal-Mart PR that engages in a high volume of transactions with low profit margins on each item sold, this feature of the AMT can result in a particularly high tax liability relative to income."
Wal-Mart sued, and the First Circuit struck the tax. The court said that the tax plainly discriminated against interstate commerce, because it taxed only interstate transactions. Moreover, the court said that the amended AMT wasn't the only way (and therefore wasn't necessary) to meet Puerto Rico's interest in stopping profit shifting:
The amended AMT is a blunt and unnecessary overinclusive approach to combating profit-shifting abuse. It essentially establishes an irrebuttable presumption that all intercorporate transfers to a Puerto Rico branch from related mainland activities are fraudulently priced to evade taxes. In fact, the Secretary all but admits that there are narrower alternatives that target profit-shifting. . . . Having identified numerous less restrictive alternatives to advance Puerto Rico's legitimate local purpose, we hold that the AMT is a facially discriminatory law that does not survive heightened scrutiny under the dormant Commerce Clause.
Monday, September 28, 2015
Affirming the district judge's denial of a preliminary injunction, the Ninth Circuit's opinion in International Franchise Ass'n v. City of Seattle rejected all of the constitutional challenges to a Seattle provision that deemed franchises included in the definition of "large employers" and thus subject to the new $15 minimum wage. Recall that the complaint challenged the provision under the (dormant) commerce clause, equal protection clauses of the Fourteenth Amendment, the First Amendment, preemption under the Lanham Act (trademarks), and state constitutional provisions.
The unanimous Ninth Circuit panel's opinion found that there was not a likelihood of success on any of the constitutional claims, devoting most of its analysis to dormant commerce clause doctrine. The panel first rejected the argument that the franchise regulation expressly discriminated against franchises as interstate commerce and was thus not "facially neutral." The panel also rejected the argument that the Seattle provision had a discriminatory purpose, noting that while there was some evidence that some persons involved in considering the issue were critical of franchise employment practices, even the strongest evidence of this (in an email), did not show that even this person "intended to burden out-of-state firms or interfere with the wheels of interstate commerce," and "[m]ore importantly, they also do not show that City officials wished to discriminate against out-of- state entities, bolster in-state firms, or burden interstate commerce." Lastly, the panel rejected the argument that the Seattle provision discriminatory effects, agreeing with the district judge that the United States Supreme Court's decisions on dormant commerce clause can be "difficult to reconcile" and noting:
We lack Supreme Court authority assessing whether a regulation affecting franchises ipso facto has the effect of discriminating against interstate commerce. Nor has the Supreme Court addressed whether franchises are instrumentalities of interstate commerce that cannot be subjected to disparate regulatory burdens. While regulations that expressly classify based on business structure or impose disparate burdens on franchises present interesting questions, our review is limited to considering whether the district court applied improper legal principles or clearly erred in reviewing the record.
The footnote to this paragraph includes an extensive citation to lower courts that have considered the issue of whether measures that affect national chains violate the dormant Commerce Clause. The Ninth Circuit panel concluded:
[T]he evidence that the ordinance will burden interstate commerce is not substantial. It does not show that interstate firms will be excluded from the market, earn less revenue or profit, lose customers, or close or reduce stores. Nor does it show that new franchisees will not enter the market or that franchisors will suffer adverse effects.
The Ninth Circuit panel dispatched the Equal Protection Clause claim much more expeditiously. The Ninth Circuit applied the lowest form of rational basis scrutiny - - - citing F.C.C. v. Beach Commc’ns, Inc. (1993) sometimes called "anything goes" rational basis - - - and finding there was a legitimate purpose (without animus) and the law was reasonably related to that purpose.
The court's discussion of the First Amendment claim was similarly brief, not surprising given that the court found the Speech Clause's threshold requirement of "speech" was absent: "Seattle’s minimum wage ordinance is plainly an economic regulation that does not target speech or expressive conduct."
Additionally, the court agreed with the district judge that there was no preemption under the Lanham Act and no violation of the Washington State Constitution.
The Ninth Circuit panel did disagree with the district judge regarding some minor aspects of the non-likelihood to prevail on the merits preliminary injunction factors. But on the whole, the opinion is a strong rebuke to the constitutional challenges to the Seattle laws.
Given the stakes (and the attorneys for the franchisers) a petition for certiorari is a distinct possibility. Meanwhile, as we suggested when the case was filed, for ConLawProfs looking for a good exam review or exam problem, International Franchise Ass'n v. Seattle has much potential.
September 28, 2015 in Cases and Case Materials, Current Affairs, Dormant Commerce Clause, Equal Protection, First Amendment, Food and Drink, Fourteenth Amendment, Opinion Analysis, Speech, State Constitutional Law, Supreme Court (US), Teaching Tips | Permalink | Comments (0)
Thursday, May 21, 2015
The Supreme Court this week upheld Maryland's income tax system against a Dormant Commerce Clause challenge. The sharply divided ruling put on full display the Court's fault lines in this area, even as the five-Justice majority set out a bright line test for tax challenges under the Dormant Commerce Clause.
Our preview of the case, Comptroller v. Wynne, is here, with the full factual background. In brief: Maryland income tax consists of a state tax and a county tax. Residents who pay income tax to another jurisdiction (because they earn income there) are allowed a credit against the state tax, but not the county tax. This means that residents who earn out-of-state income are taxed on that income by the other jurisdiction, and by Maryland (under the county tax). (For out-of-staters earning income in Maryland, Maryland imposes a state income tax and a "special resident tax" (in lieu of the county tax).) Maryland residents who earned pass-through income from an S-corporation that earned income in several states sued, arguing that the "double taxation" violated the Dormant Commerce Clause.
The Court disagreed. Justice Alito wrote for the majority, joined by Chief Justice Roberts and Justices Kennedy, Breyer, and Sotomayor. Justice Alito wrote that the case was an easy application of precedent and the "internal consistency test." That test asks whether, if every state adopted the challenged tax structure, taxes would "inherently discriminate against interstate commerce without regard to the tax policies of other States." If so, the category of taxes "is typically unconstitutional." Justice Alito said that Maryland's tax system violated the rule, because a Marylander earning out-of-state income would be taxed on that income twice (once by the out-of-state jurisdiction, and once by the Maryland county), whereas a Maryland earning in-state income would be taxed only once.
Justice Ginsburg dissented, joined by Justice Scalia and Kagan. She argued that there's a long history "of States imposing and this Court upholding income taxes that carried a similar risk of double taxation," and that the majority's internal consistency test is deeply flawed. She also argued that "[f]or at least a century, 'domicile' has been recognized as a secure ground for taxation of residents' worldwide income," and based on the domicile principle Maryland's tax system (of its own residents) is valid. Justice Ginsburg gave several reasons for this principle, including the benefits that residents receive and the political influence that residents wield--both hotly disputed by Justice Alito. Justice Ginsburg also argued that the cases relied on by the majority involved gross receipts taxes, not income taxes. She said that the difference matters: "For decades--including the years when the majority's 'trilogy' was decided--the Court has routinely maintained that 'the difference between taxes on net income and taxes on gross receipts from interstate commerce warrants different results' under the Commerce Clause."
Finally, Justices Scalia and Thomas dissented separately, maintaining their positions that there is no Dormant Commerce Clause.
The upshot of this fractured ruling is that the internal consistency test is the rule for Dormant Commerce Clause challenges to state tax practices, and that the Court will strike tax practices that result in this kind of "double taxation" of out-of-state income.
Tuesday, March 3, 2015
The Supreme Court ruled today in Direct Marketing Ass'n v. Brohl that out-of-state retailers can move forward with their challenge to Colorado's requirement that the retailers notify Colorado customers of their Colorado sales and use tax burden and report tax-related information to those customers and to the Colorado Department of Revenue.
The case tests a state's best efforts at collecting sales and use taxes for out-of-state and internet purchases by its residents, given the long-standing rule that a state cannot tax out-of-state and internet retailers directly.
The underlying issue goes back to 1967, when the Court ruled in National Bellas Hess, Inc. v. Department of Revenue of Illinois that states cannot require a business to collect use taxes (the equivalent of sales taxes for out-of-state purchases) if the business does not have a physical presence in the state. That rule was based on the Dormant Commerce Clause. The Court reaffirmed that rule in 1992 in Quill Corp. v. North Dakota.
But that rule has created a significant loss of revenue for states, now that so many (and dramatically increasing) sales go through the internet, to out-of-state online retailers. The rule means that states cannot collect use taxes from those retailers.
So some states, like Colorado, implemented information and reporting requirements. For example, Colorado's law requires out-of-state retailers to inform its in-state customers of their use tax burden and to report tax-related information to Colorado tax authorities.
Out-of-state retailers sued, arguing that Colorado's requirements violated the Dormant Commerce Clause. The district court ruled in their favor, but the Tenth Circuit reversed, holding that the suit was barred by the Tax Injunction Act. In a relatively short and simple opinion today, the unanimous Court reversed, holding that the Tax Injunction Act did not bar the suit (because the Act only bars suits against a tax "assessment, levy or collection," and not information and reporting requirements).
The Court's ruling opens the door to the out-of-state retailers' challenge to Colorado's information and reporting requirements. If the district court is right, even these modest efforts violate the Dormant Commerce Clause--and create an even bigger headache for states trying to collect use taxes on their citizens' out-of-state and internet purchases.
On the other hand, Justice Kennedy signaled today in concurrence that the Court may be willing to reassess its Bellas Hess and Quill Corp. rule (or at least that the Court should reassess the rule) in light of the technological changes we've seen in the last 25 years (and the proliferation of online retailers) and the fact that the Dormant Commerce Clause changed enough between the two cases to render the Quill ruling questionable. (Justice Kennedy reminds us that three Justices upheld Bellas Hess in Quill on stare decisis grounds alone, and that the majority recognized that Bellas Hess stood on weak ground.)
Bellas Hess and Quill Corp. go to state use taxes, not information and reporting requirements like Colorado's. Still, the retailers' challenge to Colorado's information and reporting requirements could put Quill on the chopping block. (At least the district court decision striking the requirements relied on Quill.)
If so, this case (in its next round) could give the Supreme Court a chance to reassess the Quill rule and give states more latitude in collecting use taxes from out-of-state and internet retailers.
March 3, 2015 in Cases and Case Materials, Commerce Clause, Dormant Commerce Clause, Federalism, Jurisdiction of Federal Courts, News, Opinion Analysis, Recent Cases | Permalink | Comments (0) | TrackBack (0)
Tuesday, December 9, 2014
The Ninth Circuit yesterday upheld Arizona's reciprocal bar licensing rule against a host of federal constitutional claims. The ruling means that Arizona's rule stays in place.
At issue was Arizona's Rule 34(f), which permits admission to the state bar on motion for attorneys who are admitted to practice in states that permit Arizona attorneys to be admitted on a basis equivalent to Arizona's, but requires attorneys admitted to practice law in states that don't have such reciprocal admission rules to take the bar exam.
According to the National Conference of Bar Examiners and the ABA, just less than half the states and jurisdictions offer reciprocal admissions under this kind of rule.
Plaintiffs challenged the rule under the Equal Protection Clause, the Fourteenth Amendment Privileges or Immunities Clause, Article IV Privileges and Immunities, the Dormant Commerce Clause, and the First Amendment. The court rejected all of these claims.
As to equal protection, the court applied rational basis review and said that the state had legitimate interests in regulating its bar and in ensuring that its attorneys are treated equally in other states.
As to Article IV Privileges and Immunities and the Dormant Commerce Clause, the court said that the rule didn't discriminate against out-of-state attorneys--that it was a neutral rule that treated all attorneys alike--and that it advanced substantial state interests (the same as those above). The rule's neutrality also drove the result in the plaintiffs' Fourteenth Amendment privileges or immunities claim, because the right to travel isn't implicated (it can't be, if everybody is treated alike).
As to the First Amendment, the court applied the time-place-manner test and upheld the rule. The court flatly rejected the plaintiffs' right of association and right to petition claims.
December 9, 2014 in Association, Cases and Case Materials, Commerce Clause, Dormant Commerce Clause, Equal Protection, First Amendment, Fourteenth Amendment, News, Opinion Analysis, Privileges and Immunities, Privileges and Immunities: Article IV, Privileges or Immunities: Fourteenth Amendment , Speech | Permalink | Comments (0) | TrackBack (0)
Tuesday, November 11, 2014
The Supreme Court will hear oral arguments tomorrow in Comptroller v. Wynne, the case testing the scope of a state's authority to tax the out-of-state income of its residents. In particular, the case asks whether a state can provide a credit for income tax paid to other states against a resident's state income tax without also providing a credit against that resident's county income tax. Here's an exerpt from my preview of the case for the ABA's Preview of United States Supreme Court Cases:
Maryland imposes a “state income tax” and a “county income tax” on all of the income earned by a Maryland resident, even income earned out of state. (For those subject to the state income tax but not the county income tax, because they live out of state but earn income in Maryland, the state imposes a “Special Non-Resident Tax,” or “SNRT.”) That means that a Maryland resident who earns income out of state pays the Maryland “state income tax,” the Maryland “county income tax,” and the state income tax of the other state on that income. Maryland allows an off-setting credit for income tax on out-of-state income tax paid in another state, but only as to the Maryland state income tax, not as to the Maryland county income tax. (Maryland used to allow the off-setting credit as to the state income tax and the county income tax. But in 1975, the legislature amended the state tax code to eliminate the credit as to the county income tax.)
An example may help. (This comes from the Maryland Court of Appeals ruling in this case.) Suppose that Maryland imposes a state income tax of 4.75 percent on all income earned by its residents, a county income tax of 3.2 percent on all income earned by its residents, and an SNRT of 1.25 percent on the income earned by non-residents in Maryland. Suppose that Pennsylvania imposes the exact same taxes at the exact same rates.
Suppose that John lives in Maryland and earns $100,000 per year. Suppose he earns half of his income from activities in Maryland and half of his income from activities in Pennsylvania. If so, John owes $4,750 (or .0475 x $100,000) in Maryland state income tax and $3,200 (or .032 x $100,000) in Maryland county income tax, for a total of $7,950 for all Maryland taxes.
At the same time, John also owes $2,375 (or .0475 x $50,000) in Pennsylvania state income tax and $625 (or .0125 x $50,000) in Pennsylvania SNRT tax for a total of $3,000 for all Pennsylvania taxes.
Based on John’s tax owed to Pennsylvania, John qualifies for a Maryland state tax credit in the amount of $2,375 (the maximum allowable credit under the Maryland tax code, given the assumptions in this example). That means that John owes a total Maryland tax of $5,575, and John’s total state income tax burden is $8,575 (or $5,575 for all Maryland state taxes plus $3,000 for all Pennsylvania state taxes).
(Note that John’s total state tax burden is $625 more than the total state income tax burden for an individual, let’s call her Mary, who earned the same amount of income, but only in Maryland. Mary would only owe $7,950 in Maryland state taxes—the same as John’s Maryland state tax burden without the credit for taxes paid to Pennsylvania.)
In the 2006 tax year, Brian and Karen Wynne found themselves in a position like John’s—that is, paying state income taxes in other states, but not receiving a credit toward their Maryland county tax. Brian and Karen Wynne are a married couple living in Howard County, Maryland. Brian Wynne was one of seven owners of Maxim Healthcare Services, Inc., a company that does a national business providing healthcare services. Maxim is an S-corporation under the Internal Revenue Code, which means that Maxim’s income is imputed (or “passed through”) to its owners for federal income tax purposes. Maryland also accords pass-through treatment to the income of an S-corporation. In 2006, Maxim earned income in 39 states and, as an S-corporation, allocated to each owner a pro rata share of the taxes paid in each state.
The Wynnes reported Brian Wynne’s income from Maxim on their 2006 Maryland state tax return. The Wynnes claimed a credit based on Brian’s pro rata share of state and local income taxes paid to other states.
The Maryland Comptroller made a change in the computation of the local tax owed by the Wynnes and revised the credit for taxes paid to other states. This resulted in a deficiency in the Maryland taxes paid by the Wynnes, and they appealed. After exhausting their administrative appeals, the Wynnes appealed to the Maryland Tax Court, where they argued that the limitation on the credit to the Maryland state tax (which did not extend to the Maryland county tax) for tax payments made to other states discriminated against interstate commerce in violation of the Dormant Commerce Clause of the United States Constitution. The Tax Court rejected the argument, and the Wynnes appealed, until the Maryland Court of Appeals, the state high court, agreed. This appeal followed.
While the Commerce Clause gives Congress authority to regulate interstate commerce, the so-called Dormant Commerce Clause restricts the states from discriminating against interstate commerce. (The Dormant Commerce Clause is not in the Constitution as such. Instead, the Court infers it from the Commerce Clause and federalism principles.) One way that a state might discriminate against interstate commerce is through its tax scheme. When this happens, the Court uses a four-part test first articulated in Complete Auto Transit, Inc. v. Brady. 430 U.S. 274 (1977). Under that test, a state tax does not violate the Commerce Clause if
- [the tax] is applied to an activity with a substantial nexus to the taxing state;
- it is fairly apportioned so as to tax only the activities connected to the taxing state;
- it does not discriminate against out-of-staters; and
- it is fairly related to services provided by the state.
The Maryland Court of Appeals held that the Maryland tax scheme violates the second and third prongs of this test. The court ruled that the tax scheme was not fairly apportioned, because it amounted to double-taxation of income. The court ruled that the scheme discriminated against out-of-staters, because it favors individuals who do business only in Maryland over individuals who do business across state lines.
The parties disagree over whether and how the Complete Auto test applies to the Maryland tax scheme for individual income taxes passed through an S-corporation. (That last part is important, because, as described below, different rules may apply to a state tax scheme for corporate income taxes owed by a C-corporation.) They also disagree over the application of the time-honored principle that states can tax all the income of their residents, even income earned in other states.
Maryland argues first that states have authority to tax all income of their residents, including income earned outside the state’s borders. The state says that this authority is based on the taxpayer’s domicile, not the source of his or her income, and it claims that the state’s authority to tax its residents is justified based on the substantial benefits that residents receive from the state. The state contends that it has designed its income tax system to ensure that all Maryland residents contribute to the benefits that the state offers those residents. In particular, the state says that the tax credit for out-of-state income tax is designed to reduce Maryland tax payments for residents earning income outside the state while at the same time requiring those residents to pay some income tax to support state and local government programs.
The state argues that the Maryland Court of Appeals ruling—compelling Maryland to give a credit for tax payments to other states against both the state income tax and the county income tax—would mean that certain Maryland taxpayers could take advantage of state and local benefits “without contributing any income taxes in return.” The state claims that this is particularly unjustified, because Maryland taxpayers can exercise their political power within Maryland to change the state tax system. (In contrast, the state argues, other tax schemes invalidated by the Supreme Court involved disproportionate income taxes on nonresidents, who did not have political power within the taxing state.) The state says that “Maryland’s system simply asks something more of the State’s own citizens,” and that those citizens can work through the political process to change it, if they like.
The state argues next that the Maryland Court of Appeals ruling would undermine the principle that a state can tax all the income of its residents, wherever earned. It says that the ruling effectively means that a state is barred from taxing its residents’ out-of-state income to the extent that another state has already taxed that income. This, in turn, means that a state’s authority to tax its residents’ income is subordinate to another state’s authority to tax that income. The state contends that this does not square with the general rule that a state can tax all its residents’ income. It also says that this is not supported by the Constitution, which treats all states equally for this purpose and does not provide a priority of states’ authority to tax.
The state claims further that no principle of double taxation bars Maryland from denying a credit toward the Maryland county tax. It says that there is no problem with double taxation so long as both sovereigns have valid authority to impose the taxes that result in double taxation. It claims that this rule is consistent with the principle that a state can impose taxes to pay for a fair share of services, and the reality that “states do significantly more for their residents than they do for taxpayers who simply earn income within their territory.”
Finally, the state argues that the Maryland Court of Appeals wrongly applied the standard under Complete Auto Transit, Inc. v. Brady. It says that the court wrongly looked at the taxes that the Wynnes paid to all states, and not the taxes they paid only to Maryland. The state contends that the Maryland scheme, taken on its own, is completely neutral with respect to interstate commerce, and that a higher overall tax burden (as illustrated in the example above) is only due to the accident of two taxing sovereigns simultaneously exercising their valid taxing authorities. Moreover, the state claims that the Maryland Court of Appeals was wrong to conclude that the Maryland tax is not fairly apportioned. It says that the Maryland tax is based on Maryland residency, and that there is no need for it to be apportioned—indeed, that residency cannot be apportioned.
The federal government, weighing in as amicus curiae in support of Maryland, adds that Wynne is wrong to focus on whether the Commerce Clause requires states to offer credits for out-of-state income taxes paid by corporations. (Wynne’s argument on this point is summarized below.) The government says that C-corporations have a different relationship to, and receive different benefits from, the state than individuals (taxed as an S-corporation)—and that corporate income tax is different than personal income tax. The government contends that this means that the Commerce Clause analysis for these different types of taxes might be different. Moreover, the government says that it is an open question whether states must apportion income of resident corporations by providing credits for out-of-state income tax.
Wynne argues first that the Maryland tax scheme violates the Commerce Clause. He says that the scheme results in double taxation of out-of-state income as a result of engaging in interstate commerce. He says that the Court has long invalidated that kind of tax.
Wynne argues next that the state applies the wrong test. Wynne says that the state never applies the Complete Auto test and instead “tries to float above the Commerce Clause jurisprudence” to find an exception to the rule that a state may not double tax interstate commerce. He claims that the state’s reliance on its sovereign authority to tax its residents is misplaced, because the Court has struck state taxes—even taxes on residents—that violate the Commerce Clause. He contends moreover that this reliance is misplaced, because the Court’s jurisprudence has never turned on labels (like “residency”); instead it turns on whether a tax substantially affects interstate commerce. And Wynne says that Maryland’s scheme has a substantial effect on interstate commerce, because, as here, “it discourages interstate activity by a corporation that operates in dozens of States.”
Wynne argues that the state is wrong to say that it can double-tax income in order to ensure that residents pay for state services. He claims that he would still pay substantial state income taxes even with a credit against his county tax, and that he pays all manner of other state taxes that go to support state services. And Wynne contends that Maryland and other states provide extensive services to resident corporations, but that, under Supreme Court precedent, they cannot double-tax them. He says that this shows that Maryland’s argument about paying for services “proves too much.”
Finally, Wynne argues that the state’s position would have a “bizarre result.” He says that the state’s position means that states could not double-tax resident C-corporations, but could double-tax resident S-corporations. He claims that this makes no sense, given that each kind of corporation engages in interstate commerce.
This case could have immediate and important fiscal significance for Maryland and states and municipalities around the country. For Maryland, a ruling affirming the Maryland Court of Appeals could cost the state between $45 and $50 million per year in tax revenue, and as much as $120 million in retroactive tax-refund claims. Around the country, such a ruling could affect more than 2,000 municipal income taxes nationwide that might not provide credits for out-of-state income taxes. States could seek to make up losses by increasing income tax rates (or imposing or increasing other taxes), but that option could be politically difficult.
More generally, the case potentially tests the long-standing principle that a state may tax all the income of its residents, even if earned out of state. But this principle is well established and universally relied upon. The Court is unlikely to rule in a way that threatens it.
Finally, the ruling of the Maryland Court of Appeals is in tension with other state-court rulings on similar (but not exactly the same) issues. This case will settle the matter, and tell us whether a state must provide a credit against all aspects of the state income tax.
Wednesday, October 1, 2014
The Ninth Circuit ruled in PRMA v. County of Alameda that the County's drug disposal ordinance--which requires any prescription drug producer who sells, offers for sale, or distributes drugs in Alameda County to collect and dispose of the County's unwanted drugs--did not violate the Dormant Commerce Clause. The ruling ends the plaintiffs' challenge to the ordinance, with little chance of a rehearing en banc or Supreme Court review.
The case involves Alameda County's Safe Drug Disposal Ordinance, which requires any prescription drug producer who sells, offers for sale, or distributes drugs in the County to operate and finance a Product Stewardship Program. That means that the producer has to provide for the collection, transportation, and disposal of any unwanted prescription drug in the County, no matter which manufacturer made the drug. The plaintiffs, industry organizations, including a non-profit trade organization representing manufacturers and distributors of pharmaceutical products, challenged the Ordinance under the Dormant Commerce Clause.
The Ninth Circuit affirmed a lower court's grant of summary judgment in favor of the County. The court said that the Ordinance did not discriminate on its face or in application against out-of-state manufacturers--that it applied equally to all manufacturers, both in and out of the County. The court noted that three of PRMA's members had their headquarters or principal place of business, and two others had facilities, in Alameda County and so were effected equally by the Ordinance. This means that all the costs of the Ordinance weren't shifted outside the County (as the plaintiffs argued) and that at least some of those affected had a political remedy (and thus were not "restrained politically," as in United Haulers.)
The court then applied the balancing test in Pike v. Bruce Church, Inc., and concluded that the Ordinance's benefits (environmental, health, and safety benefits that were not contested on the cross-motions for summary judgment) outweighed any burden on interstate commerce (the plaintiffs provided no evidence of a burden on the interstate flow of goods).
This is almost certainly the end of the plaintiffs' challenge: the ruling is unlikely to get the attention of the en banc Ninth Circuit or the Supreme Court, if the plaintiffs seek rehearing or cert.
Thursday, June 12, 2014
Seattle - - - a "progressive and expensive city" - - - "struck a blow against rising income inequality" by raising its municipal minimum wage to $15 per hour earlier this month, as Maria La Ganga reported in the LA Times. Seattle Ordinance 12449 becomes effective in 2015, with a phase-in schedule of pay rates dependent on type of employer. But it has already been challenged as unconstitutional.
The complaint in International Franchise Association, Inc. v. City of Seattle challenges the ordinance on a variety of constitutional grounds: (dormant) commerce clause, equal protection clauses of the Fourteenth Amendment and state constitution, the state constitutional privileges or immunities provision, preemption under the Lanham Act (trademarks), the contract clauses of the federal and state constitutions, and the First Amendment.
A central issue in this complaint is the Ordinance's definitions of schedule 1 and schedule 2 employers as the definitions relate to franchises. As paragraph 50 provides:
The Ordinance provides that, for purposes of determining whether an employer is a Schedule 1 or Schedule 2 employer, “separate entities that form an integrated enterprise shall be considered a single employer ... where a separate entity controls the operation of another entity,” but this test applies only to a “non-franchisee employer.” Under the Ordinance, if a small franchisee is associated with a franchise network that employs more than 500 workers, the small franchisee is deemed a Schedule 1 Employer even if it is not part of an “integrated enterprise” as so defined.
Filed by Bancroft LLC and signed by Paul Clement, the pleading contains various arguments detailing why such a distinction is unconstitutional, largely revolving around the competitive disadvantage the ordinance will place on franchised and parent businesses by requiring higher wages.
LawProf David Ziff of University of Washington School of Law in Seattle has some helpful discussions of the complaint on his blog, including an overview and a specific discussion of the "classes of corporations" argument under the state constitution's privileges or immunities clause.
Certainly this is litigation to watch. And certainly cities across the United States that are considering similar measures will be looking closely. Cities are often rightly concerned with state constitutional powers of "home rule" allowing municpalities to vary from the state mandated wage; for example, the courts declared the 1964 attempted minimum wage raise from 1.25 to 1.50 in NYC to be beyond the powers of the city. But the Seattle challenge raises federal constitutional issues that are necessarily obvious.
June 12, 2014 in Cases and Case Materials, Current Affairs, Dormant Commerce Clause, Equal Protection, Federalism, Privileges and Immunities, State Constitutional Law | Permalink | Comments (0) | TrackBack (0)
Thursday, February 20, 2014
Largely reversing a district judge's opinion that had found various provisions of Pennyslvania's Funeral Director Law unconstitutional on various grounds, the Third Circuit opinion in Heffner v. Murphy upholds the law except for its restriction on the use of trade names as violative of the First Amendment.
One key to the panel's decision is that it surmised that the district judge's conclusions regarding the constitutionality of Pennsylvania's Funeral Director Law (FDL), enacted in 1952, "stem from a view that certain provisions of the FDL are antiquated in light of how funeral homes now operate." But, the Third Circuit stated, that is not a "constitutional flaw."
The challenged statutory provisions included ones that:
(1) permit warrantless inspections of funeral establishments by the Board;
(2) limit the number of establishments in which a funeral director may possess an ownership interest;
(3) restrict the capacity of unlicensed individuals and certain entities to hold ownership interests in a funeral establishment;
(4) restrict the number of funeral establishments in which a funeral director may practice his or her profession;
(5) require every funeral establishment to have a licensed full-time supervisor;
(6) require funeral establishments to have a “preparation room”;
(7) prohibit the service of food in a funeral establishment;
(8) prohibit the use of trade names by funeral homes;
(9) govern the trusting of monies advanced pursuant to pre-need contracts for merchandise; and
(10) prohibit the payment of commissions to agents or employees.
The constitutional provisions invoked - - - and found valid by the district judge - - - included the Fourth Amendment, the "dormant" commerce clause, substantive due process, the contract clause, and the First Amendment, with some provisions argued as violating more than one constitutional requirement.
In affirming the district judge's finding that the trade names prohibition violated the First Amendment, the Third Circuit applied the established four part test from Central Hudson Gas & Electric Corp. v. Public Service Commission regarding commercial speech and found:
The restrictions on commercial speech here are so flawed that they cannot withstand First Amendment scrutiny. Indeed, the District Court correctly identified the pivotal problem concerning the FDL’s proscription at Central Hudson’s third step: by allowing funeral homes to operate under predecessors’ names, the State remains exposed to many of the same threats that it purports to remedy through its ban on the use of trade names. A funeral director operating a home that has been established in the community, and known under his or her predecessor’s name, does not rely on his or her own personal reputation to attract business; rather, the predecessor’s name and reputation is determinative. Nor does a funeral home operating under a former owner’s name provide transparency or insight into changes in staffing that the Board insists is the legitimate interest that the State’s regulation seeks to further.
ConLawProfs looking for a good review or even a possible exam question, might well take a look at the case. It also seems that the Pennsylvania legislature might well take a look at its statutory scheme, which though largely constitutional, does seem outdated.
February 20, 2014 in Cases and Case Materials, Courts and Judging, Criminal Procedure, Dormant Commerce Clause, Due Process (Substantive), First Amendment, Fourteenth Amendment, Fourth Amendment, Interpretation, Opinion Analysis, Speech, Teaching Tips | Permalink | Comments (0) | TrackBack (0)
Thursday, January 2, 2014
Federal District Judge Upholds Most of New York's SAFE Act Against Second Amendment Challenge, Striking Some Provisions
In an opinion rendered on December 31, Judge William M. Skretny declared several provisions unconstitutional but upheld most of New York's SAFE Act in New York State Rifle and Pistol Association v. Cumo.
Judge Skretny, Chief Judge of the United States District Court for the Western District, sitting in Buffalo, applied intermediate scrutiny under the Second Amendment, drawing on the "post- Heller rulings that have begun to settle the vast terra incognita left by the Supreme Court." He concluded that the SAFE Act's definition and regulation of assault weapons and its ban on large-capacity magazines further the state’s important interest in public safety, and do not impermissibly infringe on Plaintiffs’ Second Amendment rights. However, he concluded that the seven-round limit did not satisfy intermediate scrutiny both on the governmental interest and the means chosen.
The plaintiffs also challenged ten specific provisions of the SAFE Act as void for vagueness and thus violative of due process:
- “conspicuously protruding” pistol grip
- threaded barrel
- magazine-capacity restrictions
- five-round shotgun limit
- “can be readily restored or converted”
- the “and if” clause of N.Y. Penal Law § 265.36 g muzzle “break”
- “version” of automatic weapon
- manufactured weight
- commercial transfer
The judge found three unconstitutional - - - the “and if” clause of N.Y. Penal Law § 265.36, the references to muzzle “breaks” in N.Y. Penal Law § 265.00(22)(a)(vi), and the regulation with respect to pistols that are “versions” of automatic weapons in N.Y. Penal Law § 265.00(22)(c)(viii) - - - concluding that these provisions were vague and "must be stricken because they do not adequately inform an ordinary person as to what conduct is prohibited."
The opinion also rejects the dormant commerce clause challenge to the provision of the SAFE Act that effectively bans ammunition sales over the Internet and imposes a requirement that an ammunition transfer “must occur in person.” The government had argued that the challenge was not ripe given that the section does not go into effect until January 15, 2014, but Judge Skretny decided the question was one of mere "prudential" ripeness and that the claim should be decided. Applying well-established dormant commerce clause doctrine, the judge found first that the SAFE Act did not "discriminate" against out of state interests and moving to the "balancing test" under Pike v. Bruce Church, Inc. (1970), the "incidental effects on interstate commerce" were not "excessive in relation to a legitimate local public interest."
Judge Skretny's 57 page opinion is scholarly and closely reasoned with specific findings. Yet the Second Amendment issues certainly reflect the fact that there are no established standard for judicial scrutiny of the regulations of the "right to bear arms. Recall that the Fifth Circuit's use of intermediate scrutiny in NRA v. AFT (regarding a federal restriction applying to persons less than 21 years of age) and in NRA v. McCraw (regarding Texas restrictions also applying to persons less that 21 years of age) are both being considered on petitions for writs of certiorari by the United States Supreme Court. Sooner or later, some sort of analytic framework for deciding Second Amendment issues will be established by the Court. Until then, federal judges are left to navigate what Judge Skretny called the "vast terra incognita" of Second Amendment doctrine.
January 2, 2014 in Courts and Judging, Dormant Commerce Clause, Due Process (Substantive), History, Interpretation, Opinion Analysis, Ripeness, Second Amendment, Supreme Court (US) | Permalink | Comments (0) | TrackBack (0)
Monday, April 29, 2013
A unanimous Supreme Court ruled today in McBurney v. Young that a state can restrict its own freedom of information law to its own citizens without violating the Privileges and Immunities Clause or the dormant Commerce Clause. We covered oral arguments here.
The ruling puts an exclamation point behind the idea that there's no fundamental right to public records. If there were any doubt going into the case, this ruling settled the matter: Our Constitution doesn't require freedom of information. If you want it, take it up with your legislature.
The case arose out of two out-of-state claimants' efforts to get Virginia state records through the state FOIA. One of those claimants, McBurney, sought records related to the state's 9-month delay in enforcing a child support order that he had against his ex-spouse, a Virginia resident. The other, Hurlbert, sought state real estate tax records on half of his clients. The state didn't provide the requested records pursuant to its FOIA, however, because its FOIA extends only to state citizens. (It did provide most of the records through other means.) Both McBurney and Hurlbert sued, arguing that the FOIA violated the Article 4 Privileges and Immunities Clause and the dormant Commerce Clause.
The Court disagreed. In an opinion by Justice Alito, the Court said that the FOIA doesn't interfere with a fundamental right in violation of the Privileges and Immunities Clause. It said that the FOIA doesn't violate the opportunity to pursue a common calling, because the law wasn't designed to provide a competitive advatage for Virginia citizens. It doesn't violate the right to own or transfer property in Virginia, because Virginia makes the necessary records available through the clerks of its circuit courts (even if not through its FOIA). The FOIA doesn't violate the right to gain equal access to Virginia courts, because its citizens-only application leaves open "reasoanble and adequate" access to the courts (because state procedure allows discovery and subpoenas, which would provide noncitizens with any relevant and nonprivileged information, and state law allows equal access to judicial records). And it doesn't violate a claimed right to gain access to public information on equal terms, because, well, there is no such right.
The Court also rejected Hurlbert's dormant Commerce Clause claim, ruling that Virginia's FOIA neither regulates nor burdens interstate commerce. "[R]ather, it merely provides a service to local citizens that would not otherwise be available at all." Op. at 13.
Justice Thomas joined the opinion but wrote separately to remind us of his view that "[t]he negative Commerce Clause has no basis in the text of the Constitution."
April 29, 2013 in Cases and Case Materials, Dormant Commerce Clause, Federalism, Fundamental Rights, News, Opinion Analysis, Privileges and Immunities: Article IV | Permalink | Comments (1) | TrackBack (0)
Thursday, March 28, 2013
The New York Court of Appeals today upheld a state statutory presumption that internet retailer "associates" operating within the state provide a sufficient nexus for the state to collect sales tax on the retailer's state sales. The ruling approves New York's end-run around the dormant Commerce Clause rule that a state can impose a sales tax on an out-of-state retailer only if the retailer has a physical presence--including economic activities by the retailer's employees, but not mere advertising.
With the rapid growth of internet sales across state lines, and with the last Supreme Court ruling on anything like this coming as far back as 1992 (on mail-order sales, of all things), this case may be a good candidate for high court review.
But on the other hand, the precise ruling in the case is rather limited. That's because the plaintiffs in the case pressed only their facial challenge at the Court of Appeals, not an as applied challenge. The problem here is that the statutory presumption can be rebutted, and an out-of-state retailer that can rebut it will also be exempt from it. This gives the presumption some wiggle room in certain cases and may be enough to protect out-of-state retailers against state sales taxes when they don't have sufficient business activity to constitute presence. The Court's ruling only says that the statutory presumption is not unconstitutional on its face. That's a far cry from saying that it's constitutional in every application.
The case, Overstock.com v. New York State Department of Taxation and Finance, tests New York's statutory presumption that an out-of-state internet retailer's in-state "associate" is soliciting business for the retailer:
a person making sales of tangible personal property or services taxable under this article ("seller") shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller . . . .
New York Tax Law Sec. 1101(b)(8)(vi). The provision exactly describes Amazon's and Overstock.com's "associates"--local web-sites that include links to Amazon.com or Overstock.com and that receive a commission on each purchase through that link.
But neither Amazon nor Overstock.com has a physical presence in New York. And according to the Supreme Court in Quill Corp. v. North Dakota (1992), an out-of-state retailer like Amazon or Overstock.com has to have a physical presence in order for New York to impose a tax. (Quill Corp. involved an out-of-state mail order retailer. If you don't know what that is (!), click here.) Physical presence includes engaging in economic activities (like selling goods), but not advertising alone.
Enter the statutory presumption. The presumption says that Amazon's and Overstock.com's "associates"--those New York-based web-sites that contain a link to Amazon or Overstock.com, and receive a commission on each sale--establish a sufficient nexus between the out-of-state retailers and the state so that New York can impose its tax.
And the New York Court of Appeals OK'd it. The Court said that the retailers' associates were engaged in sufficient economic activity on behalf of the out-of-state retailers--business solicitation, and not mere advertising--to allow the state to tax.
Judge Smith dissented. He thought that the associates' links looked more like mere advertising, not business solicitation, and therefore weren't enough to establish a nexus between the retailers and the state.
The Court also rejected the retailers' due process claims, because the presumption is rational. The Court explained:
It is plainly rational to presume that, given the direct correlation between referrals and compensation, it is likely that residents will seek to increase their referrals by soliciting customers. More specifically, it is not unreasonable to presume that affiliated website owners residing in New York State will reach out to their New York friends, relatives, and other local individuals in order to accomplish this purpose.
Thursday, February 21, 2013
The Supreme court heard oral arguments yesterday in McBurney v. Young, a case testing whether a state's freedom of information law, or FOIA, can limit access to government information to its own citizens consistent with the Article IV Privileges and Immunities Clause and the Dormant Commerce Clause. (Together these provisions restrict states in discriminating against out-of-staters in the exercise of fundamental rights or important economic interests, or in interstate commerce.) The case was brought by two out-of-staters against Virginia after the state denied them access to records related to the state's enforcement of a child support order and state property records collected for clients as part of a business. Virginia is one of only three states that restricts its FOIA records to in-staters.
The case is tough, because it's not obvious that Virginia's restriction is a restriction on interstate commerce (in violation of the Dormant Commerce Clause), and it's not obvious that the access that the petitioners seek is the kind of right that they, as out-of-staters, should enjoy with respect to Virginia.
The questions from the bench went right to these points. The Court was concerned about whether Virginia's restriction was, in fact, a restriction on commerce, or whether it was merely a law, not a commercial regulation, that had at most an incidental effect on interstate commerce. (The Dormant Commerce Clause points go to the property-records seeker, not the child-support seeker.) In other words: does the Dormant Commerce Clause even apply, given that this may not be a regulation of commerce?
Justices were also concerned about the magnitude of the effect, on both sides. As to the petitioners, they wondered why the cost to the petitioner wasn't negligible. After all, any out-of-stater could simply hire an in-stater for a nominal fee to file their request and thus dodge the restriction. As to the state, they wondered why the cost to the state in providing equal access to its records was significant. The burden of addition requests from out-of-staters didn't seem to be much.
Finally the Justices wondered whether Virginia shouldn't be allowed to restrict access to its records, given that its law is designed to provide access to government information to ensure good government--a concern that applies uniquely to Virginians. On this point, several Justices compared the right to access to the right to vote, and noted that out-of-staters don't get it. In short: Shouldn't Virginia be able to keep its records to its own state citizens? The question goes at least in part to the purpose of Virginia's FOIA--to provide information on governance (as the state would have it), or to restrict information in restraint of free trade (as the petitioner argued).
The parties didn't provide terrific answers to any of these questions. But counsel for the petitioner did note that the challenge was as applied, not facial. This could allow the Court to rule narrowly in favor of this individual, without overturning the restriction as to anyone else. But even that result seems likely only if the Court can get over two threshold problems. First, the restriction is not a direct discriminatory regulation of interstate commerce (even if it may have an indirect effect on interstate commerce in this case). Next, Virginia is certainly able to restrict some of its state functions to its own citizens. The question for the Court: Is this one of them?
February 21, 2013 in Cases and Case Materials, Commerce Clause, Dormant Commerce Clause, Federalism, News, Privileges and Immunities, Privileges and Immunities: Article IV | Permalink | Comments (0) | TrackBack (0)
Friday, November 30, 2012
The Sixth Circuit ruled in American Beverage Association v. Snyder that Michigan's requirement that returnable beverage containers bear a unique mark violated the Dormant Commerce Clause. The ruling strikes Michigan's requirement.
The ruling turns on the dormant Commerce Clause's "extraterritorial doctrine," which, according to one concurring judge on the panel, is "a relic of the old world with no useful role to play in the new[.]" If so, this case could offer the Supreme Court a good chance to clean up this corner of the dormant Commerce Clause.
The case involves Michigan's bottle-deposit law, which requires consumers to pay a ten-cent deposit on a beverage container (like a can or bottle). Containers sold in Michigan must bear a designation--"MI 10c"--in order to distinguish them from containers sold in other states. Consumers who return a container with the "MI 10c" designation get a ten-cent deposit back when they return the container. (Michigan is one of ten states with a bottle-deposit law.)
Some consumers discovered that they could return containers in Michigan that were purchased from states that have no deposit law (that is, non-"MI 10c" containers) and net ten cents on each return. This was especially easy with "reverse vending machines"--automated return machines that did not distinguish between Michigan containers and out-of-state containers.
The Michigan legislature responded by requiring beverage manufacturers to place a unique mark on Michigan returnable containers (in addition to the "MI 10c" mark) that would allow a reverse vending machine to determine whether the container was, in fact, a Michigan returnable container. Failure to comply could result in a penalty of up to six months' imprisonment or a $2,000 fine or both.
Manufacturers sued, arguing that the requirement amount to an unconstitutional restraint on interstate commerce in violation of the dormant Commerce Clause.
The Sixth Circuit agreed. It ruled that while the requirement did not discriminate against interstate commerce (on its face, in its purpose, or in its effect), it did "directly control commerce occurring wholly outside the boundaries of a State," and thus was extraterritorial under Healy v. Beer Inst. Inc. (1989). This doctrine renders extraterritorial regulation "virtually per se invalid under the dormant Commerce Clause." Op. at 13.
Judge Sutton concurred but wrote separately "to express skepticism about the extraterritoriality doctrine." Judge Sutton wrote that the doctrine may have outlived its usefulness.
Thursday, February 9, 2012
May a state limit its statutory Freedom of Information Act to "state citizens"?
Doesn't such a provision violate the Privileges and Immunities Clause of Article IV? Or the dormant aspect of the commerce clause?
Not according to the Fourth Circuit. In McBurney v. Young, decided earlier this month, the Fourth Circuit upheld the constitutionality of a Virginia statute that allows access to state records to "to citizens of the Commonwealth, representatives of newspapers and magazines with circulation in the Commonwealth, and representatives of radio and television stations broadcasting in or into the Commonwealth." Va. Code Ann. § 2.2-3704(A).
The challengers - - - one a former resident of Virginia with his divorce, child custody, and child support decrees from Virginia and another an information broker dealing in real estate tax assessments - - - argued that the state citizen limitation violated the Privileges and Immunities Clause of Article IV and the information broker also argued the "dormant" aspect of the Commerce Clause, Art. I §8 cl. 3.
The Fourth Circuit affirmed the district judge's rejection of both of these claims.
Regarding Article IV Privileges and Immunities (P&I), the panel opinion admitted that the contours of the P&I Clause are not well-developed, but noted that the "fundamental rights" its encompasses are distinct and "bear upon the vitality of the nation." With regard to the right to "pursue a common calling," the panel noted that the Virginia statute is not a residency requirement per se: the Virgina FOIA "does not act as a wholesale barrier to entering a business, nor does it establish a license, fee, or other burden to nonresidents entering or engaging in a profession" and on its face it "addresses no business, profession,
or trade." With regard to the less well-established rights under P&I, such as "equal access to information" or "ability to advance one's interests," the panel found these rights were not established. Having found no right sufficient to invoke P&I, the panel did not engage in any balancing of state interests and means chosen.
Regarding the dormant commerce clause (DCC), the panel again found that the clause was not properly at issue. The panel stated that although "the VFOIA discriminates against noncitizens of Virginia, it does not discriminate 'against interstate commerce' or 'out-of-state economic interests.' " Yet the panel somewhat confusingly added that "[a]ny effect on commerce is incidental and unrelated to the actual language of VFOIA or its citizens-only provision," and therefore a Pike balancing analysis, after Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) is appropriate. The panel, however, does not engage in any balancing, holding that "the opening brief does not challenge the district court's application of the Pike analysis and thus the argument is waived.
There is something about an open records act being limited to state citizens that seems inconsistent with our notions of a "United States," as well as inconsistent with our notions of openness. The Fourth Circuit's lack of a discussion of the state interests and how they are being served leaves an unfortunate gap, even as P&I and DCC doctrines do not seem adequate to address the issue.
Thursday, January 26, 2012
A three-judge panel of the Third Circuit ruled this week in Mabey v. Schoch that the federal Buy America Act and implementing regulations do not preempt Pennsylvania's Steel Act. Both acts require the use of steel made in the United States for public works projects funded by the federal and state governments, respectively. But the Buy America Act has broader exceptions, including, importantly, a provision that says that the Act is satisfied when a project "[i]ncludes no permanently incorporated steel or iron materials."
The case arose after the state, citing the state Steel Act, declined to use Mabey's temporary bridge on a project, because Mabey gets its steel from the United Kingdom. Pennsylvania previously contracted with Mabey, notwithstanding the state Steel Act. But it apparently changed its policy, decided to enforce the Steel Act against Mabey, and, according to Mabey, forced Mabey to cancel four of its state contracts.
Mabey sued, alleging that exception in the federal Buy America Act preempted the state Steel Act, and that its temporary bridge met the federal Act's provision relating to "no permanently incorporated steel or iron materials." The Third Circuit rejected this claim. It ruled that another section of the federal Buy America Act and its regulations, read as a whole, did not clearly reflect congressional intent to preempt; instead, they left room for states to issue more stringent regulations--exactly what Pennsylvania did here. Thus, the state's Steel Act restrictions applied with their full force to Mabey.
The court also rejected Mabey's Dormant Commerce Clause, Contract Clause, and equal protection claims. As to the dormant Commerce Clause, the court ruled that the Steel Act fell under the market participant exception (because Pennsylvania was a market participant when it contracted for public works) and, moreover, that Congress authorized Pennsylvania to discriminate against interstate commerce through the federal Buy America Act. The court said that the state's late-coming enforcement of the Steel Act against Mabey didn't violate the Contract Clause, because the Act was on the books since Mabey started contracting with the state, and the state agency's decision to enforce it didn't amount to "legislative authority subject to scrutiny under the Contract Clause." And finally the court ruled that the state didn't violate the Equal Protection Clause, because the state's action--first not enforcing, then enforcing, the Steel Act--was rational: "A state agency could rationally determine that application of domestic steel requirements to items used at the discretion of the contractor is too onerous and difficult to enforce."