Tax Law Review, Vol. 51, No. 1 (Fall 1995), pp. 47-114


The Supreme Court's 1977 decision in Complete Auto Transit, Inc. v. Brady signaled a paradigmatic shift in the Court's approach to state tax adjudication under the dormant Commerce Clause. In Complete Auto, the Court repudiated the formalistic school of interpretation that once had governed Commerce Clause analysis of state taxation because it bore ‘no relationship to economic realities.’ In its place, the Court embraced a decisional framework that ‘considered not the formal language of the tax statute but rather its practical effect.’ In furtherance of this objective, the Court suggested a four-part test to guide the constitutional analysis of state taxation of interstate commerce. The Court subsequently characterized its contemporary approach to Commerce Clause adjudication in the state tax field as a “consistent and rational method of inquiry [focusing on] the practical effect of a challenged tax.” This approach has “moved toward a standard of permissibility of state taxation based upon its actual effect rather than its legal terminology.” Over the two decades following Complete Auto, the Court has faithfully reaffirmed its central themes: Commerce Clause challenges to state taxes are to be resolved on the basis of the ‘practical or economic effect of the tax’; decisions should be grounded in ‘economic realities’; and the analysis should eschew ‘magic words or labels,’ ‘avoid formalism’ and reflect pragmatism. In implementing these views, the Court has invoked Complete Auto's four-part test in most subsequent Commerce Clause challenges to state taxation. The Court may appear to have retreated from these teachings in a case decided in 1995. In Oklahoma Tax Commission v. Jefferson Lines, Inc., the Court upheld an Oklahoma sales tax on the full sales price of bus tickets for interstate trips. At the same time, the Court reaffirmed Central Greyhound Lines, Inc. v. Mealey, which struck down a New York gross receipts tax on the full sales price of bus tickets for interstate trips. Jefferson Lines and Central Greyhound are essentially identical from an economic standpoint, and Justice Breyer, writing in dissent, accused the majority of elevating form over substance and ignoring economic reality. If Justice Breyer's criticisms are well taken, they could mean that the Court has jettisoned the basic doctrine of Complete Auto and has come to one more turning point in its historically unstable analysis of state taxes under the dormant Commerce Clause. Jefferson Lines may indeed be a pivotal case, but not for the reasons suggested by the dissent. The case is significant because the Court has recognized explicitly for the first time that the application of Complete Auto's Commerce Clause criteria can – and should – depend to a critical extent on the nature of the tax under scrutiny, a position that runs counter to the assumed universality of the Complete Auto standard that underlies the Court's earlier opinions. As explained below, the Court's new tax-by-tax approach is notable for many reasons, not the least of which is its implications concerning the role of economic analysis in resolving Commerce Clause issues. Justice Breyer was certainly correct in observing that the economic effects of the Oklahoma and New York taxes, as they applied to transportation services, were identical. If the case should have turned on that economic equivalence, Justice Breyer should be applauded. But we should hold our applause. Although economic considerations clearly have an important role to play in Commerce Clause adjudication of state tax cases, the establishment of uniform constitutional rules for economically equivalent exactions is not the only goal of Commerce Clause analysis of state taxation, as the Court correctly concluded in Jefferson Lines. Despite reaching a proper result, Jefferson Lines is significantly flawed in its reasoning. The Court fails to ground its opinion in the normative and structural considerations that would have responded fully to Justice Breyer’s critique. Instead, it appears to have engaged in the type of ad hoc decisionmaking that has substantially reduced the predictive power of its dormant Commerce Clause jurisprudence and has weakened the claims of that jurisprudence to legitimacy. Consequently, the Court did nothing to mollify the critics of its dormant Commerce Clause doctrine who, like Justice Scalia, ‘look forward to the day when Complete Auto will take its rightful place . . . among the other useless and discarded tools of our negative-Commerce-Clause jurisprudence.’ This Article analyzes Jefferson Lines and its implications for Commerce Clause adjudication of state taxation. Section II examines the Court's opinion in Jefferson Lines, discusses the flaws in the Court's analysis and presents a better justification for the result reached in that case. Section III considers the opinion's ramifications for the existing pattern of state sales and gross receipts taxation and, in particular, for state taxation of services. Section IV takes a broader look at Jefferson Lines' impact on the Court's Commerce Clause jurisprudence in state tax cases.