United States Steel Corp. v. Multistate Tax Comm'n
434 U.S. 452 (1978)

Annotate this Case

U.S. Supreme Court

United States Steel Corp. v. Multistate Tax Comm'n, 434 U.S. 452 (1978)

United States Steel Corp. v. Multistate Tax Commission

No. 76-635

Argued October 11, 1977

Decided February 21, 1978

434 U.S. 452

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

Syllabus

The Multistate Tax Compact was entered into by a number of States for the stated purposes of (1) facilitating proper determination of state and local tax liability of multistate taxpayers; (2) promoting uniformity and compatibility in state tax systems; (3) facilitating taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration; and (4) avoiding duplicative taxation. To these ends, the Compact created the appellee Multistate Tax Commission. Each member State is authorized to request that the Commission perform an audit on its behalf, and the Commission may seek compulsory process in aid of its auditing power in the courts of any State specifically permitting such procedure. Individual States retain complete control over all legislative and administrative action affecting tax rates, the composition of the tax base, and the means and methods of determining tax liability and collecting any taxes due. Each member State is free to adopt or reject the Commission's rules and regulations, and to withdraw from the Compact at any time. Appellants, on behalf of themselves and all other multistate taxpayers threatened with Commission audits, brought this action in District Court against appellees (the Commission, its members, and its Executive Director) challenging the constitutionality of the Compact on the grounds, inter alia, that (1) it is invalid under the Compact Clause of the Constitution (which provides: "No State shall, without the Consent of Congress, . . . enter into any Agreement or Compact with another State"); (2) it unreasonably burdens interstate commerce; and (3) it violates the rights of multistate taxpayers under the Fourteenth Amendment. A three-judge court granted summary judgment for appellees.

Held:

1. The Multistate Tax Compact is not invalid under the rule of Virginia v. Tennessee,148 U. S. 503, 148 U. S. 519, that the application of the Compact Clause is limited to agreements that are

"directed to the formation of any combination tending to the increase of political power in the States, which may encroach upon or interfere with the just supremacy of the United States."

Pp. 434 U. S. 459-478.

(a) The Compact's multilateral nature and its establishment of

Page 434 U. S. 453

an ongoing administrative body do not, standing alone, present significant potential for conflict with the principles underlying the Compact Clause. The number of parties to an agreement is irrelevant if it does not impermissibly enhance state power at the expense of federal supremacy, and the powers delegated to the administrative body must also be judged in terms of such enhancement. P. 434 U. S. 472.

(b) Under the test of whether the particular compact enhances state power quoad the Federal Government, this Compact does not purport to authorize member States to exercise any powers they could not exercise in its absence, nor is there any delegation of sovereign power to the Commission, each State being free to adopt or reject the Commission's rules and regulations and to withdraw from the Compact at any time. Pp. 434 U. S. 472-473.

(c) Appellants' various contentions that certain procedures and requirements of the Commission encroach upon federal supremacy with respect to interstate commerce and foreign relations and impair the sovereign rights of nonmember States, are without merit, primarily because each member State could adopt similar procedures and requirements individually without regard to the Compact. Even if state power is enhanced to some degree, it is not at the expense of federal supremacy. Pp. 434 U. S. 473-478.

2. Appellants' allegations that the Commission has abused its powers by harassing members of the plaintiff class in that it induced several States to issue burdensome requests for production of documents and to deviate from state law by issuing arbitrary assessments against taxpayers who refuse to comply with such orders, do not establish that the Compact violates the Commerce Clause or the Fourteenth Amendment. But even if such allegations were supported by the record, they are irrelevant to the facial validity of the Compact, it being only the individual State, not the Commission, that has the power to issue an assessment, whether arbitrary or not. Pp. 434 U. S. 478-479.

417 F.Supp. 795, affirmed.

POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, STEWART, MARSHALL, REHNQUIST, and STEVENS, JJ., joined. WHITE, J., filed a dissenting opinion, in which BLACKMUN, J., joined, post, p. 434 U. S. 479.

Page 434 U. S. 454

MR. JUSTICE POWELL delivered the opinion of the Court.

The Compact Clause of Art. I, § 10, cl. 3, of the Constitution provides: "No State shall, without the Consent of Congress, . . . enter into any Agreement or Compact with another State, or with a foreign Power. . . ." The Multistate Tax Compact, which established the Multistate Tax Commission, has not received congressional approval. This appeal requires us to decide whether the Compact is invalid for that reason. We also are required to decide whether it impermissibly encroaches on congressional power under the Commerce Clause and whether it operates in violation of the Fourteenth Amendment.

I

The Multistate Tax Compact was drafted in 1966 and became effective, according to its own terms, on August 4, 1967, after seven States had adopted it. By the inception of this litigation in 1972, 21 States had become members. [Footnote 1] Its

Page 434 U. S. 455

formation was a response to this Court's decision in Northwestern States Portland Cement Co. v. Minnesota,358 U. S. 450 (1959), and the congressional activity that followed in its wake.

In Northwestern States, this Court held that net income from the interstate operations of a foreign corporation may be subjected to state taxation, provided that the levy is nondiscriminatory and is fairly apportioned to local activities that form a sufficient nexus to support the exercise of the taxing power. This prompted Congress to enact a statute, Act of Sept. 14, 1959, Pub.L. 8272, 73 Stat. 555, which sets forth certain minimum standards for the exercise of that power. [Footnote 2] It also authorized a study for the purpose of recommending legislation establishing uniform standards to be observed by the States in taxing income of interstate businesses. Although

Page 434 U. S. 456

the results of the study were published in 1964 and 1965, [Footnote 3] Congress has not enacted any legislation dealing with the subject. [Footnote 4]

While Congress was wrestling with the problem, the Multistate Tax Compact was drafted. [Footnote 5] It symbolized the recognition that, as applied to multistate businesses, traditional state tax administration was inefficient and costly to both State and taxpayer. In accord with that recognition, Art. I of the Compact states four purposes: (1) facilitating proper determination of state and local tax liability of multistate taxpayers, including the equitable apportionment of tax bases and settlement of apportionment disputes; (2) promoting uniformity and compatibility in state tax systems; (3) facilitating taxpayer convenience and compliance in the filing of tax returns and in other phases of tax administration; and (4) avoiding duplicative taxation.

To these ends, Art. VI creates the Multistate Tax Commission, composed of the tax administrators from all the member States. Section 3 of Art. VI authorizes the Commission (i) to study state and local tax systems; (ii) to develop and recommend proposals for an increase in uniformity and compatibility of state and local tax laws in order to encourage simplicity and improvement in state and local tax law and administration; (iii) to compile and publish information that may assist member States in implementing the Compact and taxpayers in complying with the tax laws; and

Page 434 U. S. 457

(iv) to do all things necessary and incidental to the administration of its functions pursuant to the Compact.

Articles VII and VIII detail more specific powers of the Commission. Under Art. VII, the Commission may adopt uniform administrative regulations in the event that two or more States have uniform provisions relating to specified types of taxes. These regulations are advisory only. Each member State has the power to reject, disregard, amend, or modify any rules or regulations promulgated by the Commission. They have no force in any member State until adopted by that State in accordance with its own law.

Article VIII applies only in those States that specifically adopt it by statute. It authorizes any member State or its subdivision to request that the Commission perform an audit on its behalf. The Commission, as the State's auditing agent, may seek compulsory process in aid of its auditing power in the courts of any State that has adopted Art. VIII. Information obtained by the audit may be disclosed only in accordance with the laws of the requesting State. Moreover, individual member States retain complete control over all legislation and administrative action affecting the rate of tax, the composition of the tax base (including the determination of the components of taxable income), and the means and methods of determining tax liability and collecting any taxes determined to be due.

Article X permits any party to withdraw from the Compact by enacting a repealing statute. The Compact's other provisions are of less relevance to the matter before us. [Footnote 6]

Page 434 U. S. 458

In 1972, appellants brought this action on behalf of themselves [Footnote 7] and all other multistate taxpayers threatened with audits by the Commission. They named the commission, its individual Commissioners, and its Executive Director as defendants. Their complaint challenged the constitutionality of the Compact on four grounds: (1) the Compact, never having received the consent of Congress, [Footnote 8] is invalid under the Compact Clause; (2) it unreasonably burdens interstate commerce; (3) it violates the rights of multistate taxpayers under the Fourteenth Amendment; and (4) its audit provisions violate the Fourth and Fourteenth Amendments. Appellants sought a declaratory judgment that the Compact is invalid and a permanent injunction barring its operation.

The complaint survived a motion to dismiss. 367 F.Supp. 107 (SDNY 1973). After extensive discovery, appellees moved for summary judgment. A three-judge District Court,

Page 434 U. S. 459

convened pursuant to 28 U.S.C. § 2281, rejected appellants' claim that the record would not support summary judgment. 417 F.Supp. 795, 798 (SDNY 1976). Turning to the merits, the District Court first rejected the contention that the Compact Clause requires congressional consent to every agreement between two or more States. The court cited Virginia v. Tennessee,148 U. S. 503 (1893), and New Hampshire v. Maine,426 U. S. 363 (1976), in support of its holding that consent is necessary only in the case of a compact that enhances the political power of the member States in relation to the Federal Government. The District Court found neither enhancement of state political power nor encroachment upon federal supremacy. Concluding that appellants' Commerce Clause, Fourth Amendment, and Fourteenth Amendment claims also lacked merit, the District Court granted summary judgment for appellees.

Before this Court, appellants have abandoned their search and seizure claim. Although they preserved their claim relating to the propriety of summary judgment, we find no reason to disturb the conclusion of the court below on that point. We have before us, therefore, appellant's contentions under the Compact Clause, the Commerce Clause, and the Fourteenth Amendment. We consider first the Compact Clause contention.

II

Read literally, the Compact Clause would require the States to obtain congressional approval before entering into any agreement among themselves, irrespective of form, subject, duration, or interest to the United States. The difficulties with such an interpretation were identified by Mr. Justice Field in his opinion for the Court in Virginia v. Tennessee, supra. His conclusion that the Clause could not be read literally was approved in subsequent dicta, [Footnote 9] but this Court did not have

Page 434 U. S. 460

occasion expressly to apply it in a holding until our recent decision in New Hampshire v. Maine, supra.

Appellants urge us to abandon Virginia v. Tennessee and New Hampshire v. Maine, but provide no effective alternative other than a literal reading of the Compact Clause. At this late date, we are reluctant to accept this invitation to circumscribe modes of interstate cooperation that do not enhance state power to the detriment of federal supremacy. We have examined, nevertheless, the origin and development of the Clause, to determine whether history lends controlling support to appellants' position.

Article I, § 10, cl. 1, of the Constitution -- the Treaty Clause -- declares: "No State, shall enter into Any Treaty, Alliance or Confederation. . . ." Yet Art. I, § 10, cl. 3 -- the Compact Clause permits the States to enter into "agreements" or "compacts," so long as congressional consent is obtained. The Framers clearly perceived compacts and agreements as differing from treaties. [Footnote 10] The records of the Constitutional

Page 434 U. S. 461

Convention, however, are barren of any clue as to the precise contours of the agreements and compacts governed by the Compact Clause. [Footnote 11] This suggests that the Framers used

Page 434 U. S. 462

the words "treaty," "compact," and "agreement" as terms of art, for which no explanation was required [Footnote 12] and with which we are unfamiliar. Further evidence that the Framers ascribed

Page 434 U. S. 463

precise meanings to these words appears in contemporary commentary. [Footnote 13]

Whatever distinct meanings the Framers attributed to the terms in Art. I, § 10, those meanings were soon lost. In 1833, Mr. Justice Story perceived no clear distinction among any of the terms. [Footnote 14] Lacking any clue as to the categorical definitions

Page 434 U. S. 464

the Framers had ascribed to them, Mr. Justice Story developed his own theory. Treaties, alliances, and confederations, he wrote, generally connote military and political accords and are forbidden to the States. Compacts and agreements, on the other hand, embrace

"mere private rights of sovereignty; such as questions of boundary; interests in land situate in the territory of each other; and other internal regulations for the mutual comfort and convenience of States bordering on each other."

2 J. Story, Commentaries on the Constitution of the United States § 1403, p. 264 (T. Cooley ed. 1873). In the latter situations, congressional consent was required, Story felt, "in order to check any infringement of the rights of the national government." Ibid.

The Court's first opportunity to comment on the scope of the Compact Clause, Holmes v. Jennison, 14 Pet. 540 (1840), proved inconclusive. Holmes had been arrested in Vermont on a warrant issued by Jennison, the Governor. The warrant apparently reflected an informal agreement by Jennison to deliver Holmes to authorities in Canada, where he had been indicted for murder. On a petition for habeas corpus, the Supreme Court of Vermont held Holmes' detention lawful. Although this Court divided evenly on the question of its jurisdiction to review the decision, Mr. Chief Justice Taney, in an opinion joined by Mr. Justice Story and two others, addressed the merits of Holmes' claim that Jennison's informal agreement to surrender him fell within the scope of the Compact

Page 434 U. S. 465

Clause. Mr. Chief Justice Taney focused on the fact that the agreement in question was between a State and a foreign government. Since the clear intention of the Framers had been to cut off all communication between the States and foreign powers, id. at 39 U. S. 568-579, he concluded that the Compact Clause would permit an arrangement such as the one at issue only if "made under the supervision of the United States . . . ," id. at 39 U. S. 578. In his separate opinion, Mr. Justice Catron expressed disquiet over what he viewed as Mr. Chief Justice Taney's literal reading of the Compact Clause, noting that it might threaten agreements between States theretofore considered lawful. [Footnote 15]

Despite Mr. Justice Catron's fears, courts faced with the task of applying the Compact Clause appeared reluctant to strike down newly emerging forms of interstate cooperation. [Footnote 16] For example, in Union Branch R. Co. v. East Tennessee & G. R. Co., 14 Ga. 327 (1853), the Supreme Court of Georgia rejected a Compact Clause challenge to an agreement between Tennessee and Georgia concerning the construction of an interstate railroad. Omitting any mention of Holmes v. Jennison, the Georgia court seized upon Story's observation that the words "treaty, alliance, and confederation" generally were known to

Page 434 U. S. 466

apply to treaties of a political character. Without explanation, the court transferred this description of the Treaty Clause to the Compact Clause, which it perceived as restraining the power of the States only with respect to agreements

"which might limit, or infringe upon a full and complete execution by the General Government, of the powers intended to be delegated by the Federal Constitution. . . ."

14 Ga. at 339. [Footnote 17] A broader prohibition could not have been intended, since it was unnecessary to protect the Federal Government. [Footnote 18] Unless this view was taken, said the court:

"We must hold that a State, without the consent of

Page 434 U. S. 467

Congress, can make no sort of contract, whatever, with another State. That it cannot sell to another state, any portion of public property, . . . though it may so sell to individuals. . . ."

"We can see no advantage to be gained by, or benefit in such a provision; and hence, we think it was not intended."

Id. at 340.

It was precisely this approach that formed the basis in 1893 for Mr. Justice Field's interpretation of the Compact Clause in Virginia v. Tennessee. In that case, the Court held that Congress tacitly had assented to the running of a boundary between the two States. In an extended dictum, however, Mr. Justice Field took the Court's first opportunity to comment upon the Compact Clause since the neglected essay in Holmes v. Jennison. Mr. Justice Field, echoing the puzzlement expressed by Story 60 years earlier, observed:

"The terms 'agreement' or 'compact' taken by themselves are sufficiently comprehensive to embrace all forms of stipulation, written or verbal, and relating to all kinds of subjects; to those to which the United States can have no possible objection or have any interest in interfering with, as well as to those which may tend to increase and build up the political influence of the contracting States, so as to encroach upon or impair the supremacy of the United States or interfere with their rightful management of particular subjects placed under their entire control."

148 U.S. at 148 U. S. 517-518.

Page 434 U. S. 468

Mr. Justice Field followed with four examples of interstate agreements that could in "no respect concern the United States": (1) an agreement by one State to purchase land within its borders owned by another State; (2) an agreement by one State to ship merchandise over a canal owned by another; (3) an agreement to drain a malarial district on the border between two States; and (4) an agreement to combat an immediate threat, such as invasion or epidemic. As the Compact Clause could not have been intended to reach every possible interstate agreement, it was necessary to construe the terms of the Compact Clause by reference to the object of the entire section in which it appears: [Footnote 19]

"Looking at the clause in which the terms 'compact' or 'agreement' appear, it is evident that the prohibition is directed to the formation of any combination tending to the increase of political power in the States, which may encroach upon or interfere with the just supremacy of the United States."

Id. at 519. Mr. Justice Field reiterated this functional view of the Compact Clause a year later in Wharton v. Wise,153 U. S. 155, 153 U. S. 168-170 (1894).

Although this Court did not have occasion to apply Mr. Justice Field's test for many years, it has been cited with approval on several occasions. Louisiana v. Texas,176 U. S. 1, 176 U. S. 17 (1900); Stearns v. Minnesota,179 U. S. 223, 179 U. S. 246-248 (1900); North Carolina v. Tennessee,235 U. S. 1, 235 U. S. 16 (1914). [Footnote 20]

Page 434 U. S. 469

Moreover, several decisions of this Court have upheld a variety of interstate agreements effected through reciprocal legislation without congressional consent. E.g., St. Louis & S F. R. Co. v. James,161 U. S. 545 (186); Hendrick v. Maryland,235 U. S. 610 (115); Bode v. Barrett,344 U. S. 583 (1953); New York v. O'Neill,359 U. S. 1 (1959). While none of these cases explicitly applied the Virginia v. Tennessee test, they reaffirmed its underlying assumption: not all agreements between States are subject to the strictures of the Compact Clause. [Footnote 21] In O'Neill, for example, this Court upheld the Uniform Law to Secure the Attendance of Witnesses from Within or Without

Page 434 U. S. 470

the State in Criminal Proceedings, which had been enacted in 41 States and Puerto Rico. That statute permitted the judge of a court of any enacting State to invoke the process of the courts of a sister State for the purpose of compelling the attendance of witnesses at criminal proceedings in the requesting State. Although no Compact Clause question was directly presented, the Court's opinion touched upon similar concerns:

"The Constitution did not purport to exhaust imagination and resourcefulness in devising fruitful interstate relationships. It is not to be construed to limit the variety of arrangements which are possible through the voluntary and cooperative actions of individual States with a view to increasing harmony within the federalism created by the Constitution. Far from being divisive, this legislation is a catalyst of cohesion. It is within the unrestricted area of action left to the States by the Constitution."

359 U.S. at 359 U. S. 6.

The reciprocal legislation cases support the soundness of the Virginia v. Tennessee rule, since the mere form of the interstate agreement cannot be dispositive. Agreements effected through reciprocal legislation [Footnote 22] may present opportunities for enhancement of state power at the expense of the federal supremacy similar to the threats inherent in a more formalized "compact." Mr. Chief Justice Taney considered this point in Holmes v. Jennison, 14 Pet. at 39 U. S. 573:

"Can it be supposed, that the constitutionality of the act depends on the mere form of the agreement? We think not. The Constitution looked to the essence and substance of things, and not to mere form. It would be but an evasion of the constitution to place the question upon the formality with which the agreement is made."

The Clause reaches both "agreements" and "compacts," the

Page 434 U. S. 471

formal as well as the informal. [Footnote 23] The relevant inquiry must be one of impact on our federal structure.

This was the status of the Virginia v. Tennessee test until two Terms ago, when we decided New Hampshire v. Maine,426 U. S. 363 (1976). In that case, we specifically applied the test and held that an interstate agreement locating an ancient boundary did not require congressional consent. We reaffirmed Mr. Justice Field's view that the

"application of the Compact Clause is limited to agreements that are 'directed to the formation of any combination tending to the increase of political power in the States, which may encroach upon or interfere with the just supremacy of the United States.'"

Id. at 426 U. S. 369, quoting Virginia v. Tennessee, 148 U.S. at 148 U. S. 519. This rule states the proper balance between federal and state power with respect to compacts and agreements among States.

Appellants maintain that history constrains us to limit application of this rule to bilateral agreements involving no independent administrative body. They argue that this Court never has upheld a multilateral agreement creating an active administrative body with extensive powers delegated to it by the States, but lacking congressional consent. It is true that most multilateral compacts have been submitted for congressional approval. But this historical practice, which may simply reflect considerations of caution and convenience on the part of the submitting States, is not controlling. [Footnote 24] It

Page 434 U. S. 472

is also true that the precise interstate mechanism involved in this case has not been presented to this Court before. New York v. O'Neill, supra, however, involving analogous multilateral arrangements, stands as an implicit rejection of appellants' proposed limitation of the Virginia v. Tennessee rule.

Appellants further urge that the pertinent inquiry is one of potential, rather than actual, impact upon federal supremacy. We agree. But the multilateral nature of the agreement and its establishment of an ongoing administrative body do not, standing alone, present significant potential for conflict with the principles underlying the Compact Clause. The number of parties to an agreement is irrelevant if it does not impermissibly enhance state power at the expense of federal supremacy. As to the powers delegated to the administrative body, we think these also must be judged in terms of enhancement of state power in relation to the Federal Government. See Virginia v. Tennessee, supra at 148 U. S. 520 (establishment of commission to run boundary not a "compact"). We turn, therefore, to the application of the Virginia v. Tennessee rule to the Compact before us.

III

On its face, the Multistate Tax Compact contains no provisions that would enhance the political power of the member States in a way that encroaches upon the supremacy of the United States. There well may be some incremental

Page 434 U. S. 473

increase in the bargaining power of the member States quoad the corporations subject to their respective taxing jurisdictions. Group action, in itself, may be more influential than independent actions by the States. But the test is whether the Compact enhances state power quoad the National Government. This pact does not purport to authorize the member States to exercise any powers they could not exercise in its absence. Nor is there any delegation of sovereign power to the Commission; each State retains complete freedom to adopt or reject the rules and regulations of the Commission. Moreover, as noted above, each State is free to withdraw at any time. Despite this apparent compatibility of the Compact with the interpretation of the Clause established by our cases, appellants argue that the Compact's effect is to threaten federal supremacy.

A

Appellants contend initially that the Compact encroaches upon federal supremacy with respect to interstate commerce. This argument, as we understand it, has four principal components. It is claimed, first, that the Commission's use in its audits of "unitary business" and "combination of income" methods [Footnote 25] for determining a corporate taxpayer's income creates a risk of multiple taxation for multistate businesses. Whether or not this risk is a real one, it cannot be attributed to the existence of the Multistate Tax Commission. When the Commission conducts an audit at the request of a member

Page 434 U. S. 474

State, it uses the methods adopted by that State. Since appellants do not contest the right of each State to adopt these procedures if it conducted the audits separately, [Footnote 26] they cannot be heard to complain that a threat to federal supremacy arises from the Commission's adoption of the unitary business standard in accord with the wishes of the member States. Indeed, to the extent that the Commission succeeds in promoting uniformity in the application of state taxing principles, the risks of multiple taxation should be diminished. Appellants' second contention as to enhancement of state power over interstate commerce is that the Commission's regulations provide for apportionment of nonbusiness income. This allegedly creates a substantial risk of multiple taxation, since other States are said to allocate this income to the place of commercial domicile. [Footnote 27] We note first that the regulations of the Commission do not require the apportionment of nonbusiness income. They do define business income, which is apportionable under the regulations, to include elements that

Page 434 U. S. 475

might be regarded as nonbusiness income in some States. P-H State & Local Tax Serv.

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