Jurisdiction to Tax

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JURISDICTION TO TAX

Prior to the adoption of the fourteenth amendment, the Supreme Court derived from principles "inhering in the very nature of constitutional government" the rule that states do not have jurisdiction to impose taxes upon persons, things, or activities outside their borders. In modern times, such limits on the legislative jurisdiction of states are derived from the due process clause.

The jurisdictional limitations have been applied in a variety of settings. A state may not impose a property tax on real or tangible personal property physically located in another state, even though the owner of the property is domiciled and present in the taxing state. However, where movable instrumentalities of commerce—railroad rolling stock, ships, trucks, airplanes—are involved, a state is not limited to taxing those instrumentalities actually in the state on tax day. Instead, the state may use a formula to compute the average presence of such instrumentalities within the state. Such apportionment formulas have been upheld so long as they fairly allocate values to the taxing state.

Property taxes imposed on intangibles—such as stocks and bonds—are not subject to similar limitations. The Court initially permitted the state of domicile of the owner to tax the total value of such intangibles, reasoning that intangible property is often held secretly and might otherwise escape taxation entirely. During the 1920s and 1930s the Court attempted to derive rules that would prevent the multiple taxation of intangibles, but eventually it came to hold that any state within which some interest in an intangible exists can tax. For example, if stocks are held in a trust, the state of domicile of the trustee, the state of domicile of the beneficiary, and the state where the certificates are located may each impose a tax on the total value.

Domicile of the taxpayer is an adequate jurisdictional basis for taxing net income from property and activities outside the state. The only constitutional limitation is the commerce clause. Nondomiciliary states may also tax the income arising from property and activities within their borders subject to two limitations. A 1959 federal statute (section 381, Title 18, United States Code) provides that a state may not impose a net income tax if the taxpayer does no more within the state than solicit orders to be delivered from without the state by common carrier. Formulas used to apportion income must not have the effect of reaching out and taxing values beyond the state.

The long-standing rule that states may not levy sales taxes when the seller is in another state and does no more than solicit orders in the taxing state is justified in jurisdictional terms. The buyer's state cannot impose the tax because to do so would be to project its powers beyond its boundaries. A use tax, resting on the purchaser within the state, however, is within the jurisdiction of the buyer's state. But in order to collect use taxes effectively, the buyer's state must be able to compel the seller to collect and remit the tax. The Supreme Court holds that such a duty of collection can be imposed only when there is some definite link, some minimum connection (such as ownership of property or the presence of solicitors or other employees) between the seller and the state.

Often jurisdictional and commerce problems overlap. For example, if a state seeks to tax income of an interstate business attributable to activities outside the state, the tax can be invalidated either as an assertion of jurisdiction over out-of-state activities or as disadvantaging interstate commerce because more than one state taxes the same income.

Edward L. Barret, Jr.
(1986)

Bibliography

Hellerstein, Jerome R. 1968 Recent Developments in State Tax Apportionment and the Circumscription of Unitary Business. National Tax Journal 21:487–503.

Note 1975 Developments in the Law: Federal Limitations on State Taxation of Interstate Business. Harvard Law Review 75:953–1036.