A New York statute imposing a transfer tax on securities
transactions, if part of the transaction occurs in New York, was
amended in 1968 so that transactions involving an out-of-state sale
are taxed more heavily than most transactions involving a sale
within the State. The amendment provides for two deviations from
the prior uniform application of the statute under which a
transaction involving a sale and transfer of shares in New York was
taxed the same as a transaction involving an in-state transfer but
an out-of-state sale: (1) transactions by nonresidents of New York
are afforded a 50% reduction in the tax rate when the transaction
involves an in-state sale; and (2) the total tax liability of any
taxpayer (resident or nonresident) is limited to $350 for a single
transaction when it involves a New York sale. The purpose of the
amendment was to provide relief from the competitive disadvantage
thought to be created by the transfer tax for New York stock
exchanges, as against out-of-state exchanges. Appellant "regional"
stock exchanges brought action in state court against appellee
State Tax Commission and its members challenging the
constitutionality of the 1968 amendment under the Commerce Clause.
The trial court denied the Commission's motion to dismiss, but on
appeal the amendment was declared to be constitutional.
The amendment discriminates against interstate
commerce in violation of the Commerce Clause. Pp. 429 U. S.
(a) No State, consistent with the Commerce Clause, may "impose a
tax which discriminates against interstate commerce . . . by
providing a direct commercial advantage to local business,"
Northwestern Cement Co. v. Minnesota, 358 U.
, 358 U. S. 458
P. 429 U.S. 329
(b) Because it imposes a greater tax liability on out-of-state
sales than on in-state sales, the transfer tax, as amended, falls
short of the substantially evenhanded treatment demanded by the
Commerce Clause, the extra tax burden on out-of-state sales neither
compensating for a like burden on in-state sales nor neutralizing
an economic advantage previously enjoyed by appellant exchanges as
a result of the unamended statute. Pp. 429 U.S. 329
(c) The diversion of interstate commerce and diminution of
Page 429 U. S. 319
competition in securities, sales created by the 1968 amendment
are wholly inconsistent with the free trade purpose of the Commerce
Clause. With respect to residents, the discriminatory burden of the
maximum tax on out-of-state sales promotes intrastate transactions
at the expense of interstate commerce to out-of-state exchanges.
With respect to nonresidents, both the maximum tax and the rate
reduction provisions discriminate against out-of-state sales, and
the fact that this discrimination is in favor of nonresident,
in-state sales which may also be considered as interstate commerce,
does not save the amendment from Commerce Clause restrictions. Pp.
429 U. S.
37 N.Y.2d 535, 337 N.E.2d 758, reversed and remanded.
WHITE, J., delivered the opinion for a unanimous Court.
MR. JUSTICE WHITE delivered the opinion of the Court.
In this case, we are asked to decide the constitutionality of a
recent amendment to New York State's longstanding tax on securities
transactions. Since 1905, New York has imposed a tax (transfer tax)
on securities transactions, if part of the transaction occurs
within the State. In 1968, the state legislature amended the
transfer tax statute so that transactions involving an out-of-state
sale are now taxed more heavily than most transactions involving a
sale within the State. In 1972, appellants, six "regional" stock
exchanges located outside New York, [Footnote 1
] filed an action in state court
Page 429 U. S. 320
against the State Tax Commission of New York and its members.
The Exchanges' complaint alleged that the 1968 amendment
unconstitutionally discriminates against interstate commerce by
imposing a greater tax burden on securities transactions involving
out-of-state sales than on transactions of the same magnitude
involving in-state sales. [Footnote
] The State Supreme Court denied the Commission's motion to
dismiss the action, and the Commission appealed. The Appellate
Division reversed and ordered that the Commission's motion be
granted to the extent of entering a judgment declaring the 1968
amendment to be constitutional. [Footnote 3
] 45 App.Div.2d
Page 429 U. S. 321
365, 357 N. .Y. S.2d 116 (1974). The New York Court of Appeals
affirmed the order, 37 N.Y.2d 535, 337 N.E.2d 758 (1975), and we
noted probable jurisdiction of the Exchanges' appeal, 424 U.S. 964
New York Tax Law § 270.1 (McKinney 1966) provides that "all
sales, or agreements to sell, or memoranda of sales and all
deliveries or transfers of shares or certificates of stock" in any
foreign or domestic corporation are subject to the transfer tax.
regulations promulgated with respect to
Page 429 U. S. 322
the transfer tax provide that the tax applies if any one of the
five taxable events occurs within New York, regardless of where the
rest of the transaction takes place, and that, if more than one
taxable event occurs in the State, only one tax is payable on the
entire transaction. 20 N.Y.C.R.R. 940.2 (1976). For transactions
involving sales, the rate of tax depends on the selling price per
share and the total tax liability is determined by the number of
shares sold. [Footnote 5
N.Y.Tax Law § 270.2 (McKinney 1966). Thus, under the unamended
version of § 270, a transaction involving a sale and a transfer of
shares in New York was taxed the same as a transaction involving an
in-state transfer but an out-of-state sale. In both instances, the
occasion for the tax was the occurrence of at least one taxable
event in the State, the rate of tax was
Page 429 U. S. 323
based solely the. price of the securities, and the total tax was
determined by the number of shares sold. The Exchanges do not
challenge the constitutionality of § 270. [Footnote 6
None of the States in which the appellant Exchanges are located
taxes the sale or transfer of securities. During the 1960's, the
New York Stock Exchange became concerned that the New York transfer
tax created a competitive disadvantage for New York trading, and
was thus responsible for the growth of out-of-state exchanges.
] In response to
Page 429 U. S. 324
this concern and fearful that the New York Stock Exchange would
relocate outside New York, the legislature, in 1968, enacted §
270-a to amend the transfer tax by providing for two deviations
from the uniform application of § 270 when one of the taxable
events, a sale, takes place in New York. First, transactions by
nonresidents of New York are afforded a 50% reduction ("nonresident
reduction") in the rate of tax when the transaction involves an
in-state sale. Taxable transactions by residents (regardless of
where the sale is made) [Footnote
] and by nonresidents selling outside the State do not benefit
from the rate decrease. Second, § 270-a limits the total tax
liability of any taxpayer (resident or nonresident) to $350
(maximum tax) for a single transaction when it involves a New York
sale. If a sale is made out-of-State,
Page 429 U. S. 325
the § 270 tax rate applies to an in-state transfer (or other
taxable event) without limitation. [Footnote 9
The reason for the enactment of § 270-a and the intended
Page 429 U. S. 326
effect of the amendment are clear from the legislative history.
With respect to the amendment, the legislature found:
"The securities industry, and particularly the stock exchanges
located within the state, have contributed importantly to the
economy of the state and its recognition as the financial center of
the world. The growth of exchanges in other regions of the country,
and the diversion of business to those exchanges of individuals who
are nonresidents of the state of New York, require recognition that
the tax on transfers of stock imposed by article twelve of the tax
law is an important contributing element to the diversion of sales
to other areas to the detriment of the economy of the state.
Furthermore, in the case of transactions involving large blocks of
stock, recognition must be given to the ease of completion
Page 429 U. S. 327
of such sales outside the state of New York without the payment
of any tax. In order to encourage the effecting by nonresidents of
the state of New York of their sales within the state of New York
and the retention within the state of New York of sales involving
large blocks of stock, a separate classification of the tax on
sales by nonresidents of the state of New York and a maximum tax
for certain large block sales are desirable."
1968 N.Y.Laws, c. 827, § 1. In granting executive approval to §
27a, then Governor Nelson Rockefeller confirmed that the purpose of
the new law was to "provide long-term relief from some of the
competitive pressures from outside the State." [Footnote 10
] The Governor
Page 429 U. S. 328
announced that, as a result of the transfer tax amendment, the
New York Stock Exchange intended to remain in New York.
Appellant Exchanges contend that the legislative history states
explicitly what is implicit in the operation of § 270-a: the
amendment imposes an unequal tax burden on out-of-state sales in
order to protect an in-state business. They argue that this
discrimination is impermissible under the Commerce Clause.
Appellees do not dispute the statements of the legislature and the
Governor that § 270-a is a measure to reduce out-of-state
competition with an in-state business. They agree, however, with
the holding of the Court of Appeals that the legislature has chosen
a nondiscriminatory, and therefore constitutionally permissible,
means of "encouraging" sales on the New York Stock Exchange. We
hold that § 270-a discriminates against interstate commerce in
violation of the Commerce Clause.
As in Great A&P Tea Co. v. Cottrell, 424 U.
(1976), we begin with the principle that "[t]he
very purpose of the Commerce Clause was to create an area of free
trade among the several States." McLeod v. J. E. Dilworth
Co., 322 U. S. 327
322 U. S. 330
(1944). It is now established beyond dispute that
"the Commerce Clause was not merely an authorization to Congress
to enact laws for the protection and encouragement of commerce
among the States, but, by its own force, created an area of trade
free from interference by the States. . . . [T]he Commerce Clause,
even without implementing legislation by Congress, is a limitation
upon the power of the States."
Freeman v. Hewit, 329 U. S. 249
329 U. S. 252
(1946). The Commerce Clause does not, however, eclipse the reserved
"power of the States to tax for the support of their own
Page 429 U. S. 329
9 Wheat. 1, 22 U. S. 199
(1824), or for other purposes, cf. United States v.
Sanchez, 340 U. S. 42
340 U. S. 44
(1950); rather, the Clause is a limit on state power. Defining that
limit has been the continuing task of this Court.
On various occasions when called upon to make the delicate
adjustment between the national interest in free and open trade and
the legitimate interest of the individual States in exercising
their taxing powers, the Court has counseled that the result turns
on the unique characteristics of the statute at issue and the
particular circumstances in each case. E.g., Freeman v. Hewit,
at 329 U. S. 252
This case-by-case approach has left
"much room for controversy and confusion and little in the way
of precise guides to the States in the exercise of their
indispensable power of taxation."
Northwestern States Portland Cement Co. v. Minnesota,
358 U. S. 450
358 U. S. 457
(1959). Nevertheless, as observed by Mr. Justice Clark in the case
just cited: "[F]rom the quagmire there emerge . . . some firm peaks
of decision which remain unquestioned." Id.
358 U. S. 458
Among these is the fundamental principle that we find dispositive
of the case now before us: no State, consistent with the Commerce
Clause, may "impose a tax which discriminates against interstate
commerce . . . by providing a direct commercial advantage to local
business." Ibid. See also Halliburton Oil Well Co. v.
Reily, 373 U. S. 64
(1963); Nippert v. Richmond, 327 U.
(1946); I. M. Darnell & Son v.
Memphis, 208 U. S. 113
(1908); Guy v. Baltimore, 100 U.
, 100 U. S. 443
(1880); Welton v. Missouri, 91 U. S.
(1876). The prohibition against discriminatory
treatment of interstate commerce follows inexorably from the basic
purpose of the Clause. Permitting the individual States to enact
laws that favor local enterprises at the expense of out-of-state
businesses "would invite a multiplication of preferential trade
areas destructive" of the free trade which the Clause protects.
Dean Milk Co. v. Madison, 340 U.
, 340 U. S. 356
Although apparently accepting the teaching of the prior
Page 429 U. S. 330
cases, the Court Appeals seemed to view § 270-a as "compensatory
legislation" enacted to "neutralize" the competitive advantage §
270 conferred on stock exchanges outside New York. Thus, it
analogized the New York statute to state use taxes which have
survived Commerce Clause challenges. 37 N.Y.2d at 542, 337 N.E.2d
at 762. The statute will not support this characterization.
Prior to the 1968 amendment, the New York transfer tax was
neutral as to in-state and out-of-state sales. An in-state transfer
or delivery of securities triggered the tax, and the burden fell
equally on all transactions, regardless of the situs of sale. Thus,
the choice of an exchange for the sale of securities that would be
transferred or delivered in New York was not influenced by the
transfer tax; wherever the sale was made, tax liability would
arise. The flow of interstate commerce in securities was channeled
neither into nor out of New York by the state tax. [Footnote 11
Section 270-a upset this equilibrium. After the amendment took
effect, a nonresident contemplating the sale of securities that
would be delivered or transferred in New York faced two possible
tax burdens. If he elected to sell on an out-of-state exchange, the
higher rates of § 270 applied without limitation on the total tax
liability; if he sold the securities on a New York exchange, the
one-half rate of § 270-a
Page 429 U. S. 331
applied and then only up to a $350 tax liability. Similarly,
residents engaging in large block transactions on the New York
exchanges were subject to a maximum tax levy of $350; but if they
sold out-of-State, their tax bill would be limited only by the
number of shares sold. Thus, under § 270-a, the choice of exchange
by all nonresidents and by residents engaging in large transactions
is not made solely on the basis of nontax criteria. Because of the
delivery or transfer in New York, the seller cannot escape tax
liability by selling out of State, but he can substantially reduce
his liability by selling in State. The obvious effect of the tax is
to extend a financial advantage to sales on the New York exchanges
at the expense of the regional exchanges. Rather than
"compensating" New York for a supposed competitive disadvantage
resulting from § 270, the amendment forecloses tax-neutral
decisions and creates both an advantage for the exchanges in New
York and a discriminatory burden on commerce to its sister
Equal treatment of interstate commerce, lacking in § 270-a, has
been the common theme running through the cases in which this Court
has sustained "compensating," state use taxes. In Henneford v.
Silas Mason Co., 300 U. S. 577
(1937), Washington imposed a 2% sales tax on all goods sold at
retail in the State. Since the sales tax would have the effect of
encouraging residents to purchase at out-of-state stores,
Washington also imposed a 2% "compensating tax" on the use of goods
within the State. The use tax did not apply, however, when the
article had already been subjected to a tax equal to or greater
than 2%. The effect of this constitutional tax system was
nondiscriminatory treatment of in-state and out-of-state
"Equality exists when the chattel subjected to the use tax is
bought in another state and then carried into Washington. It exists
when the imported chattel is shipped from the state of origin under
an order received
Page 429 U. S. 332
directly from the state of destination. In each situation, the
burden borne by the owner is balanced by an equal burden where the
sale is strictly local."
at 300 U. S. 584
A similar use-sales-tax structure was sustained in General
Trading Co. v. Tax Comm'n, 322 U. S. 335
(1944), because the "tax [was] what it professes to be -- a
nondiscriminatory excise laid on all personal property" regardless
of where the sale was made. Id.
at 322 U. S. 338
See also International Harvester Co. v. Department of
Treasury, 322 U. S. 340
(1944); Alaska v. Arctic Maid, 366 U.
, 366 U. S. 204
(1961). In all the use tax cases, an individual faced with the
choice of an in-state or out-of-state purchase could make that
choice without regard to the tax consequences. If he purchased in
State, he paid a sales tax; if he purchased out of State but
carried the article back for use in State, he paid a use tax of the
same amount. The taxes treated both transactions in the same
Because it imposes a greater tax liability on out-of-state sales
than on in-state sales, the New York transfer tax, as amended by §
270-a, falls short of the substantially evenhanded treatment
demanded by the Commerce Clause. The extra tax burden on
out-of-state sales created by § 270-a is not what the New York
Court of Appeals holds it out to be; it neither compensates for a
like burden on in-state sales nor neutralizes an economic advantage
previously enjoyed by the appellant Exchanges because of § 270.
Page 429 U. S. 333
The court below further attempted to save § 27a from
invalidation under the Commerce Clause by finding that the effect
the amendment might have on sales by residents and nonresidents did
not amount to unconstitutional discrimination. As to New York
residents, the court found that the higher tax on large
out-of-state sales would have no "practical" effect, since "it is
more than likely . . . that the sale would be made on a New York
exchange in any event." 37 N.Y.2d at 543, 337 N.E.2d at 762. As to
the discriminatory tax burden on all out-of-state sales by
nonresidents, the court observed that, because New York sales by
nonresidents also involve interstate commerce, § 27a does not
discriminate against interstate commerce in favor of intrastate
commerce; rather, it discriminates between two kinds of interstate
Although it did not so state, the
Court of Appeals apparently believed that such discrimination was
permissible under the Commerce Clause. We disagree with the Court
of Appeals with respect to both residents and nonresidents.
The maximum tax discrimination against out-of-state sales by
residents is not triggered until the taxed transaction involves a
substantial number of shares. Investors, institutional and
individual, engaging in such large-block transactions can be
expected to choose an exchange on the basis of services, prices,
and other market conditions, rather than geographical proximity.
Even a small difference in price (of either the securities or the
sales services) can, in a large sale, provide a substantial enough
additional profit to outweigh whatever additional transaction costs
might be incurred from trading on an out-of-state exchange. The New
Page 429 U. S. 334
in its legislative findings in connection with § 270-a,
recognized that securities transactions by residents were not being
conducted only on the New York exchanges; it therefore considered
the amendment necessary to "[retain] within the state of New York .
. . sales involving large blocks of stock." If, as the Court of
Appeals assumed, it were "more than likely" that residents would
sell in New York, there would have been no reason for the
legislature to reduce the tax burden on in-state sales by residents
in order to retain their sales in New York. Nor is the
discriminatory burden of the maximum tax insubstantial. On a
transaction of 30,000 shares selling at $20 or more, for example,
the tax on an in-state sale is the maximum $350, while an
out-of-state sale is taxed $1,500. The disparity between the two
taxes increases with the number of shares sold. Such a large tax
penalty for trading on out-of-state markets cannot be deemed to
have no practical effect on interstate commerce. [Footnote 13
Both the maximum tax and the rate reduction provisions of § 27a
discriminate against out-of-state sales by nonresidents. The fact
that this discrimination is in favor of nonresident, in-state sales
which may also be considered as interstate commerce, see
Freeman v. Hewit,
329 U.S. at 329 U. S.
-259, does not save § 27a from the restrictions of
the Commerce Clause. A State may no more use discriminatory taxes
to assure that nonresidents direct their commerce to businesses
Page 429 U. S. 335
within the State than to assure that residents trade only in
intrastate commerce. As we stated at the outset, the fundamental
purpose of the Clause is to assure that there be free trade among
the several States. This free trade purpose is not confined to the
freedom to trade with only one State; it is a freedom to trade with
any State, to engage in commerce across all state boundaries.
There has been no prior occasion expressly to address the
question whether a State may tax in a manner that discriminates
between two types of interstate transactions in order to favor
local commercial interests over out-of-state businesses, but the
clear import of our Commerce Clause cases is that such
discrimination is constitutionally impermissible. Guy v.
100 U.S. at 100 U. S. 443
held that no State, consistent with the Commerce Clause, may "build
up its domestic commerce by means of unequal and oppressive burdens
upon the industry and business of other States"; and in Baldwin
v. G. A. F. Seelig, Inc., 294 U. S. 511
(1935), New York was prohibited from regulating the price of
out-of-state milk purchases because the effect of that regulation
would be "to suppress or mitigate the consequences of competition
between the states." Id.
at 294 U. S. 522
] More recently,
we noted that
Page 429 U. S. 336
"Court has viewed with particular suspicion state statutes
requiring business operations to be performed in the home State
that could more efficiently be performed elsewhere. Even where the
State is pursuing a clearly legitimate local interest, this
particular burden on commerce has been declared to be virtually
Pike v. Bruce Church, Inc., 397 U.
, 397 U. S. 145
(1970). Cf. Halliburton Oil Well Co. v. Reily,
373 U.S. at
373 U. S.
Although the statutes at issue in those cases had the primary
effect of prohibiting or discriminatorily burdening a resident's
purchase of out-of-state goods and services, the constitutional
policy of free trade and competition that led to their demise is
equally fatal to the New York transfer tax. New York's
discriminatory treatment of out-of-state sales is made possible
only because some other taxable event (transfer, delivery, or
agreement to sell) takes place in the State. Thus, the State is
using its power to tax an in-state operation as a means of
"requiring [other] business operations to be performed in the home
State." As a consequence, the flow of securities sales is diverted
from the most economically efficient channels and directed to New
York. This diversion of interstate commerce and diminution of free
competition in securities sales are wholly inconsistent with the
free trade purpose of the Commerce Clause.
Our decision today does not prevent the States from structuring
their tax systems to encourage the growth and development of
intrastate commerce and industry. Nor do we hold that a State may
not compete with other States for a share
Page 429 U. S. 337
of interstate commerce; such competition lies at the heart of a
free trade policy. We hold only that in the process of competition
no State may discriminatorily tax the products manufactured or the
business operations performed in any other State.
The judgment of the New York Court of Appeals is reversed, and
the case remanded for further proceedings not inconsistent with
this opinion. [Footnote
It is so ordered.
Appellants are the Boston Stock Exchange, Detroit Stock
Exchange, Pacific Coast Stock Exchange, Cincinnati Stock Exchange,
Midwest Stock Exchange, and the PBW
(Philadelphia-Baltimore-Washington) Stock Exchange. The Exchanges
provide facilities for their members to effect the purchase and
sale of securities for their own accounts and the accounts of their
In the courts below, the Exchanges also contended that the
amendment to the transfer tax was unconstitutional under the
Privileges and Immunities Clause of Art. IV, § 2, and the Equal
Protection Clause of the Fourteenth Amendment. They have not
brought those claims to this Court, and we do not address them.
The Commission's motion to dismiss was based on three grounds:
(1) the state court lacked subject matter jurisdiction, (2) the
Exchanges did not have standing to question the constitutionality
of the statute, and (3) the complaint failed to state a cause of
action. All three state courts agreed that there was jurisdiction
and standing, but the Appellate Division and the Court of Appeals
dismissed the complaint on the merits because the statute was
We agree, of course, that state courts of general jurisdiction
have the power to decide cases involving federal constitutional
rights where, as here, neither the Constitution nor statute
withdraws such jurisdiction. We also agree that the Exchanges have
standing under the two-part test of Data Processing Service v.
Camp, 397 U. S. 150
(1970). Appellants' complaint alleged that a substantial portion of
the transactions on their exchanges involved securities that are
subject to the New York transfer tax, and that the higher tax on
out-of-state sales of such securities diverted business, from their
facilities to exchanges in New York. This diversion was the express
purpose of the challenged statute. See infra
429 U. S.
-328, and nn. 7, 10. The allegation establishes that
the statute has caused them "injury in fact," and that a case or
controversy exists. 397 U.S. at 397 U. S.
-152. The Exchanges are asserting their right under
the Commerce Clause to engage in interstate commerce free of
discriminatory taxes on their business, and they allege that the
transfer tax indirectly infringes on that right. Thus, they are
"arguably within the zone of interests to be protected . . . by the
. . . constitutional guarantee in question." Id.
397 U. S. 153
Moreover, the Exchanges brought this action also on behalf of their
"[A]n association may have standing solely as the representative
of its members . . . [if it] allege[s] that its members, or any one
of them, are suffering immediate or threatened injury as a result
of the challenged action of the sort that would make out a
justiciable case had the members themselves brought suit."
Warth v. Seldin, 422 U. S. 490
422 U. S. 511
(1975). See also National Motor Freight Assn. v. United
States, 372 U. S. 246
(1963); NAACP v. Alabama, 357 U.
, 357 U. S.
-460 (1958). The Exchanges' complaint alleged that
their members traded on their own accounts in securities subject to
the New York transfer tax. The members therefore suffer an actual
injury within the zone of interests protected by the Commerce
Clause, and the Exchanges satisfy the requirements for
After the decision by the New York Court of Appeals in this
case, § 21(2)(d) of the Federal Securities Acts Amendments of 175
became effective. This amendment provides that no State may tax a
change in beneficial or record ownership of securities if the
change is effected through the facilities of a registered clearing
house or registered transfer agent unless the change would
otherwise be taxable if the facilities were not physically located
in the taxing State. § 21(2)(d), 89 Stat. 161, amending § 28 of the
Securities Exchange Act of 1934, 15 U.S.C. § 78bb(d) (1970 ed.,
Supp. V). A transfer agent is defined in § 3(6) of the 1975
amendments, 89 Stat. 100, amending § 3(a) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78c(a)(25) (1970 ed., Supp. V).
Although the Senate Committee was unclear as to whether the New
York transfer tax reached such changes in ownership, the Senate
Report on the 1975 amendments indicates that § 21(2)(d) was
directed to New York's transfer tax in particular, and in general
to similar taxes being considered by other States. S.Rep. No.
94-75, p. 60 (1975). See
N.Y.Tax Law § 270.5(i)-(1)
(McKinney Supp. 1976). On December 1, 1975, counsel for the New
York State Department of Taxation and Finance issued an opinion
that the 1975 amendments limited the types of taxable events
covered by § 270:
"[W]here the sole event in New York State is the delivery or
transfer to or by a 'registered clearing agency' or a 'registered
transfer agent,' as those terms are defined under the Securities
Exchange Act of 1934, there is no stock transfer tax due and owing
on and after December 1, 1975. However, where a sale, agreement to
sell, memorandum of sale or any other delivery or transfer takes
place in New York State, the stock transfer tax due and owing
thereon must be paid."
2 CCH N.Y. Tax Rep. � 57-101.605 (1976).
Although the new federal law may eliminate many transactions as
taxable events under § 270, the constitutional questions raised by
the Exchanges on this appeal still apply to the transactions that
are taxable under § 270 after the 1975 amendments.
The rates provided for in § 270.2 range from 1.25 cents per
share when the sale price of the security is less than $5 to the
highest rate of 5 cents per share when the price is $20 or more.
When no sale is involved, e.g.,
a gift, the rate is a
constant 2.5 cents per share. In recent years, a 25% surcharge has
been added to all transfer taxes. N.Y.Tax Law § 270-d (McKinney
Shortly after it was first enacted, the New York transfer tax
was upheld against a challenge under the Fourteenth Amendment in
New York ex rel. Hatch v. Reardon, 204 U.
(1907). The writ of error in Hatch
not challenge the constitutionality of the statute under the
Commerce Clause, but both parties argued that issue before the
at 204 U. S. 157
In response to those arguments, Mr. Justice Holmes observed only
that the particular transaction involved was intrastate, and that
therefore the tax as applied to the party before the Court did not
implicate the Commerce Clause. Id.
at 204 U. S.
-162. As to the question of whether the statute
should fall because it would also be applied to interstate
transactions, the Court found that the seller lacked standing to
raise that claim. The Commerce Clause question was thus left
204 U. S. 160
Thirty-three years later, the New York Court of Appeals held, in
a 4-3 decision, that the transfer tax did not violate the Commerce
Clause. O'Kane v. State,
283 N.Y. 439, 28 N.E.2d 905
(1940). The challenge there was to a tax levy "upon an agreement
for the sale of shares of stock which are to be sold and delivered
across State lines." Id.
at 442, 28 N.E.2d at 906. The
state court expressly noted that the tax, as then applied, was "a
nondiscriminatory State tax," and that "no discrimination was
practiced on interstate commerce." Id.
at 444, 447, 28
N.E.2d at 907, 909. In the absence of discrimination, the tax was
held not to be an undue burden on commerce.
In a public statement on the proposed amendment to § 270, the
president of the New York Stock Exchange explained the competitive
problems of his organization, and urged that the transfer tax be
amended to help solve them:
"[T]he stock transfer tax has been the subject of extensive
study by the City, State and the securities industry. These studies
indicate that the New York securities markets have experienced
increasing competitive problems in recent years from regional stock
exchanges located in San Francisco, Los Angeles, Chicago, Detroit,
Philadelphia and Boston. Some 88% of share trading on these
exchanges is in New York Stock Exchange listed securities."
"From 1965 through 1967, the volume of trading on the regional
exchanges increased by 73.2%. Regional 'cross' volume (a
transaction on a regional exchange in which the broker finds both
the buyer and seller) has increased by 202% in 1965-67. This
indicates the loss of business by the New York markets to the
regionals. As their volume continues to grow, a snowball effect
develops. They become more competitive, and are able to take more
and more business away from New York. A loss of business to New
York securities markets also means a loss of stock transfer tax
revenue to New York City."
". . . However, the existing law can be amended in such a way as
to ease the competitive disadvantage of the tax on New York
securities markets and still preserve the revenue from the
"Competitive problems are particularly acute in two areas --
nonresident investors and large block transactions."
Statement of Robert W. Haack, Mar. 4, 198.
The Exchanges do not challenge New York's authority to tax
residents in a greater amount than nonresidents as long as the
extent of the tax burden does not depend on an out-of-state
The nonresident reduction and the maximum tax of § 270-a
initially involved a smaller disparity between in-state and
out-of-state sales. The gap was gradually increased until the
current rates took effect on July 1, 1973.
The relevant provisions of N.Y.Tax Law § 270-a (McKinney Supp.
1976) are as follows:
"1. Notwithstanding the provisions of section two hundred
seventy of this chapter on and after July first, nineteen hundred
sixty-nine, the rates of tax set forth in paragraph (a) of this
subdivision and the maximum amounts of tax set forth in subdivision
two of this section shall apply, in the case of those sales made
within this state subject to tax under section two hundred seventy
and described in paragraph (a) of this subdivision and subdivision
two of this section."
"(a) On such sales by a nonresident during the periods set forth
in the following table, the rates of tax shall be the percentages,
set forth in such table, of the rates of tax provided in section
two hundred seventy of this article:"
"Percentage of Rates of"
"Tax Provided in Section"
"two hundred seventy"
"Period of this article"
"July 1, 1969 to June 30, 1970. . . . . . 95%"
"July 1, 1970 to June 30, 1971. . . . . . 90% "
"July 1, 1971 to June 30, 1972. . . . . . 80%"
"July 1, 1972 to June 30, 1973. . . . . . 65%"
"July 1, 1973 and thereafter . . . . . . . 50%"
"2 Where any sale made within the state and subject to the tax
imposed by this chapter relates to shares or certificates of the
same class and issued by the same issuer the amount of tax upon any
such single taxable sale shall not exceed, during the period
beginning on July first, nineteen hundred sixty-nine and ending on
June thirtieth, nineteen hundred seventy, the sum of two thousand
five hundred dollars; during the period beginning on July first,
nineteen hundred seventy and ending on June thirtieth, nineteen
hundred seventy-one, the sum of one thousand two hundred fifty
dollars; during the period beginning on July first, nineteen
hundred seventy-one and ending on June thirtieth, nineteen hundred
seventy-two, the sum of seven hundred fifty dollars; during the
period beginning on July first, nineteen hundred seventy-two and
ending on June thirtieth, nineteen hundred seventy-three, the sum
of five hundred dollars; and on and after July first, nineteen
hundred seventy-three, the sum of three hundred fifty dollars;
provided, however, that sales made within this state by any member
of a securities exchange or by any registered dealer, who is
permitted or required pursuant to any rule and regulations
promulgated by the tax commission pursuant to the provisions of
section two hundred eighty-one-a of this chapter to pay the taxes
imposed by this article without the use of the stamps prescribed by
this article, pursuant to one or more orders placed with the same
member of a securities exchange or the same registered dealer on
one day, by the same person, each relating to share or certificates
of the same class and issued by the same issuer, all of which sales
are executed on the same day (regardless of whether it be the day
of the placing of the orders), shall, for the purposes of this
subdivision two, be considered to constitute a single taxable
In his memorandum of approval of the transfer tax amendment,
Governor Rockefeller explained the changing competitive patterns in
the securities industry and acknowledged that § 270-a was a
response to these changes:
"Since the stock transfer tax was enacted in 1905, there have
been far-reaching changes in the securities industry, but the stock
transfer tax has not been revised to keep pace with those changes.
The securities industry has grown from an essentially New York
industry to one of national and international scope. While the bulk
of stock transfers still funnels through New York, only twelve
percent of the Nation's investors are located in the State. At the
same time, competition for the New York markets has been heightened
by the rise of regional stock exchanges located outside the State
where more than 90 percent of trading is in securities listed on
the New York Stock Exchange. The development of modern
telecommunications and electronic computer systems has, of course,
greatly expanded the capacity of the regional exchanges to
challenge the New York exchanges for business."
"The bill recognizes the changing character of the securities
industry and the importance of its continued presence and strength
for the future economic prosperity of the State, and will provide
long-term relief from some of the competitive pressures from
outside the State."
"As a result of adoption of the revisions of the stock transfer
tax contained in this bill, the New York Stock Exchange has
announced that it intends to remain and expand in New York, and is
now studying sites for a new exchange building in downtown
Public Papers of Governor Nelson A. Rockefeller 553 (1968).
Of course, the unamended § 270 did discourage sales in New York
when no other taxable event would occur in that State, since
out-of-state sales would not be taxed at all, while in-state sales
would be taxed at the full rate. Section 270-a, however, does not
neutralize this competitive disadvantage of the New York exchanges.
Although the reduced tax of the amendment decreases the
disincentive to trade out of State, to the extent that any tax is
imposed on transactions involving only an in-state sale, sales in
New York are discouraged. Had New York sought to eliminate the only
competitive edge enjoyed by the regional exchanges as a result of §
270, it could have done so without burdening commerce to its sister
States by simply declaring that sales would not be a taxable event.
Under that system, sellers who would not otherwise be liable for
the tax would not incur liability by electing to sell on a New York
Because of the discrimination inherent in § 27a, we also reject
the Commission's argument that the tax should be sustained because
it is imposed on a local event at the end of interstate commerce.
While it is true that, absent an undue burden on interstate
commerce, the Commerce Clause does not prohibit the States from
taxing the transfer of property within the State, the tax may not
discriminate between transactions on the basis of some interstate
element. International Harvester Co. v. Department of
Treasury, 322 U. S. 340
322 U. S.
-348 (1944). As was held in Welton v. Missouri,
91 U. S. 275,
91 U. S. 282
"[T]he commercial power [of the Federal Government] continues
until the commodity has ceased to be the subject of discriminating
legislation by reason of its foreign character. That power protects
it, even after it has entered the State, from any burdens imposed
by reason of its foreign origin."
Even if we did not conclude that large-block sellers are likely
to rely on economic, rather than geographical, factors in choosing
an exchange, § 27a would fall before the Commerce Clause. Whatever
the current inclinations of New York investors, the Clause protects
out-of-state businesses from any discriminatory burden on their
interstate commercial activities. Even if the tax is not now the
sole cause of New York residents' refusal to trade on out-of-state
exchanges, at the very least it reinforces their choice of an
in-state exchange and is an inhibiting force to selling out of
State; that inhibition is an unconstitutional barrier to the free
flow of commerce.
is particularly relevant to this case. After
holding that the Commerce Clause prohibits obstructions to
competition between the States, Mr. Justice Cardozo expressly
rejected the proposition that such obstructions may be justified as
measures to assure the economic health of local industry:
"If New York, in order to promote the economic welfare of her
farmers, may guard them against competition with the cheaper prices
of Vermont, the door has been opened to rivalries and reprisals
that were meant to be averted by subjecting commerce between the
states to the power of the nation."
"* * * *"
"The Constitution was framed under the dominion of a political
philosophy less parochial in range. It was framed upon the theory
that the peoples of the several states must sink or swim together,
and that, in the long run, prosperity and salvation are in union,
and not division."
294 U.S. at 294 U. S.
-523. For the same reasons that Baldwin
rejected New York's attempts to protect its dairy industry from
competition from without, we now reject a similar attempt to
protect New York's securities industry.
When it enacted § 270-a, the New York Legislature also enacted a
saving provision such that the invalidity of any part of the
amendment should not affect the enforcement of any other part. It
is not clear from the saving provision whether the legislature
intended that the distinction between residents and nonresidents
should survive the invalidation of the discrimination between
in-state and out-of-state sales. Compare
1968 N.Y.Laws, c.
827, § 10 with
§ 11. Construction of the saving clause is,
of course, a question of state law appropriately decided by the