The United States constitution gives every state the sovereign right to tax any property, tangible or intangible, which is within its jurisdiction. However, the same constitution grants Congress the power to limit any such rights in exercising its federal authority. The federal government limits the taxation powers in property that is involved in interstate commerce . Therefore, there is debate towards distinguishing between interstate commerce and property involved in interstate commerce within the jurisdiction of a state. Understanding the difference between these two aspects is more of a legal matter. This research analyses the rules and laws regarding state taxation power and the stance of the judiciary regarding taxation matters.
Interstates commerce and the power of the state
States do not have the power to tax interstate commerce. That is, commerce such as interstate railroads, telephone companies, travelling sales persons and other property of commerce that traverse state boundaries cannot be taxed by a state. Therefore if the state decides to tax property involved in interstate commerce it is, by extension, taxing interstate commerce, a matter of the federal government . Without clear distinction about the matter will certainly lead to a legal quagmire.
One such a case is the Aloha Airline Inc v Director of Taxation of Hawaii (1983), heard before the Supreme Court of Hawaii. The state of Hawaii was seeking to tax Aloha Airline Incorporated on the annual gross income of the airline. The director of taxation argued that taxation was levied on the airlines’ personal property which was within the jurisdiction of the property tax due to the state. In their argument, Aloha Airline Inc. turned to Section 7(a) of the Airport Development Acceleration Act of 1973 (ADAA). In this act, states are barred from levying taxes, directly or indirectly, on air commerce. In that states are barred from to taxing persons traveling via air or carriages of such persons. Additionally the law forbids any state from taxing sales of air transportation or any gross earnings from any such a commerce. This is due to the fact aerospace industry is an interstate commerce. However, this rule does include property taxes.
Aloha airlines argued that the state was in contravention of the Act when it imposed taxes on its business claiming the statute was pre-empted. The appellant airline therefore sought redress for a refund of the taxes as the state was in fault. The statute under section 7(a) in precise terms prohibits a state from imposing taxes on interstate commerce. The Supreme Court used this assertion in coming to their verdict. The Supreme argued that the federal law expressly prohibits the state from imposing on airlines business, either directly or indirectly. Thus the state was found to be out of its jurisdiction in imposing taxes on the airlines and was at fault .
Furthermore, the state of Hawaii had approached the taxes from a property tax point. In that, the taxes that Hawaii was seeking to impose was to be in the form of property tax measured by gross receipts . The federal is very clear on taxation of on gross income from the aerospace business. Approaching the taxes on the basis of property is quite misleading but since it was prohibited to tax the airline whether directly or indirectly. In the end the taxes imposed on the airline were reversed.
Discussion of implication of the case result
The result from the case at the Supreme Court in Hawaii has produced candid point of discussion. First and foremost, Congress has the power to regulate the taxation power of a state regarding interstate commerce in which aviation falls. Therefore any state that levies taxes on interstate commerce is in contravention of the Commerce Clause. Even though Congress may expressly permit a state to levy taxes on an interstate commerce, any such taxes must be clearly rationalized to a legitimate state purpose .
However, there are cases in which the state is allowed to tax business that affects interstate commerce. One such tax is the Ad valorem tax, which is taxed on property used in the business. Property must have taxable situs in a state for it to be subject to the ad valorem tax. Prentic (2008) illustrates that a taxable situs property is any property that receives benefits or protection from the state. For instance any vehicle or other business property that benefit from the road maintenance of the state are under the ad valorem tax bracket. If any property is in this bracket, then the taxes should be apportioned in a fair manner.
Such apportionment may be in form of miles travelled or number of item goods in the state. The state is mandated to provide proof of fairness in the manner that it apportions its taxes and any tax payer has the right to seek court redress where the rational is not justified. States are not allowed to tax interstate transit. Items in transit are said to be in interstate commerce and lies within the Federal jurisdiction . As to the taxes of using an airport, fees paid for using the airport is valid if the fee paid does not outweigh the benefits of using such a state facility. Such a tax based on using a facility is commonly referred to as the use tax. A use tax is allowed at a rate lower than the sales tax of the specific state.
In conclusion, there exist a permanent possibly of conflict in a case where a country is run by a dual form of government like the US. Of practical concern is the process in which the federal government may give powers to the states to tax on a business and the same business may be subjected to other forms of federal taxes (Hartshorne, 1981). The airline industry suffers this possibility. Federal government imposes several taxes on airlines while states also seek some sought of taxes. The reason for such taxes is that each government seeks to have enough resources to run its administrative functions smoothly. To ease such concern, there suggestion that issues of tax collection from interstate-participating businesses is left to the federal government. After the federal government has collected taxes, it is then equitably apportioned to the concerned states. However this would present grave political and constitutional complexities. If the states are not allowed to operate independently, then it would present serious managerial concerns. This leaves aviation business in further predicament in the issues of state and federal taxes.
Hartshorne, F. C. ( Jun., 1891). State Taxation of Property Used for Purposes of Interstate Commerce. The American Law Register (1852-1891) Vol. 39, No. 6, , 432-443.
Prentice, E. P. (2008). The Commerce Clause of the Federal Constitution. Washington: BiblioLife.
U.S. Supreme Court. (1983). Aloha Airlines, Inc. V. Director Of Taxation Of Hawaii. Retrieved Feb 13, 2012, from findlaw.com: http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?linkurl=%3C%linkurl%%3E&graphurl=%3C%graphurl%%3E&friend=%3C%20riend%%3E&navby=case&court=us&vol=464&invol=7
United States Interstate Commerce Commission. (1895). Interstate commerce reports: decisions and proceedings of the Interstate Commerce Commission . Lawyers' Co-operative Pub. Co.