January 21, 2011
DIFFERENT TAX RATES ON IN- AND OUT-OF-STATE COMPANIES
By: Judith Lohman, Assistant Director
You asked whether any of Connecticut's neighboring states tax companies whose headquarters are located outside the state at higher rates than in-state companies. You also asked if such a tax would be open to a constitutional challenge.
As you know, the Office of Legislative Research is not authorized to give legal opinions and this report should not be considered one.
A computer search of the CCH database of state taxes shows that no state imposes higher state tax rates on corporations, limited liability companies, or S corporations based on where they are headquartered. For your information, we attach three tables compiled by CCH showing each state's tax, if any, on the three types of business entities.
In addition, it is likely that a state law that taxed out-of-state businesses at a higher rate than in-state companies would be challenged based on the Article I of the U.S. Constitution. That article, which includes the so-called “commerce clause,” reserves to Congress the power to regulate commerce “among the several states.” The U.S. Supreme Court has ruled that this constitutional provision requires state and local taxes to meet four conditions. They must “be applied to an activity with substantial nexus with the taxing state, fairly apportioned, not discriminate against interstate commerce, and [be] fairly related to the services provided by the state” (Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)).
A court would likely find that a state law that taxes out-of-state companies at a higher rate than in-state ones “discriminates against interstate commerce.” According to the U.S. Supreme Court:
It has long been accepted that the Commerce Clause not only grants Congress the authority to regulate commerce among the States, but also directly limits the power of the States to discriminate against interstate commerce. This “negative” aspect of the Commerce Clause prohibits economic protectionism — that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors. Thus, state statutes that clearly discriminate against interstate commerce are routinely struck down unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism (New Energy Co. of Indiana v. Limbach, 486 U.S. 269,. 273-274 (1988), citations omitted).