Important Tax Cases: Complete Auto Transit v. Brady and the Constitutional Limits on State Tax Authority

May 19, 2005

States have nearly complete authority to tax activities within their own borders. These broad taxing powers, however, are subject to limitations of the U.S. Constitution. The most important structural limit on state tax power is the Commerce Clause.

The Commerce Clause gives Congress the sole power to regulate commerce among the states. The Supreme Court has used the Clause to strike down state tax schemes that place an undue burden on interstate commerce. In Complete Auto Transit v. Brady, the Supreme Court articulated a four-part test to determine if a state tax violates the Commerce Clause:

· Nexus: there must be a sufficient connection between the taxpayer and the state to warrant the imposition of state tax authority
· Fair Apportionment: the state must not tax more than it’s fair share of the income of a taxpayer
· No discrimination: the state must not treat out-of-state taxpayers differently than in-state taxpayers
· Related to services: the tax must be fairly related to services provided to the taxpayer by the state

The Complete Auto test serves to protect the free flow of commerce from undue state regulation, including taxes that operate like tariffs to impede interstate commerce. Without the Commerce Clause, states would be free to use their tax powers to benefit in-state businesses by burdening their out-of-state competitors.


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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

Tariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers.

Apportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders.