Armco, Inc. v. Hardesty, 467 U.S. 638 (1984)

JUSTICE REHNQUIST, dissenting.

The Court today strikes down West Virginia’s wholesale gross receipts tax, finding that the wholesale tax unconstitutionally discriminates against interstate commerce, because local manufacturers are granted an exemption from the wholesale tax if they pay a manufacturing tax on their gross manufacturing receipts. Appellant’s arguments, however, effectively rest on the hypothetical burden it might face if another State levied a corresponding tax on its manufacturers. Because appellant has not shown that the taxes paid by out-of-state wholesalers on the same goods are higher than the taxes paid by in-state manufacturer-wholesalers, I would affirm the decision below. It is plain that West Virginia’s tax would be unconstitutionally discriminatory if it levied no tax on manufacturing or taxed manufacturing at a lower rate than wholesaling, for then the out-of-state wholesaler would be paying a higher tax than the in-state manufacturer-wholesaler. But that is not the case here. Instead, a manufacturer selling his products at wholesale in West Virginia pays a much higher overall tax rate than the out-of-state wholesaler. The Court dismisses that fact, asserting that, because in-state manufacturers formally pay no wholesale tax, the taxing scheme is facially discriminatory. The Court also rejects the possibility that West Virginia’s manufacturing tax incorporates the tax otherwise levied on wholesale sales.

Neither of these reasons, in my view, supports invalidating the State’s wholesale tax scheme. Our prior decisions indicate that, when considering whether a tax is discriminatory,

Halliburton Oil Well Co. v. Reily, 373 U.S. 64, 70 (1963) (footnote omitted). See also Maryland v. Louisiana, 451 U.S. 725, 756 (1981) (state tax must be examined for practical effect). Examining the State’s tax structure as a whole, see Washington v. United States, 460 U.S. 536, 545-546 (1983), it is plain that West Virginia has not created a tax granting a direct commercial advantage to local businesses. See Boston Stock Exchange v. State Tax Comm’n, 429 U.S. 318, 329 (1977) (transfer tax on local stock sales one-half the rate imposed on out-of-state sales). Under West Virginia’s taxing scheme, in-state manufacturer-wholesalers pay a tax rate of 0.88% on the value of the manufactured product, while out-of-state wholesalers pay only a 0.27% tax on the wholesale value. Thus, at the wholesale level at which appellant competes with in-state manufactured goods, it is quite likely that appellant pays much less in state taxes than any in-state manufacturer-wholesaler. This fact, in my view, suffices to rebut appellant’s argument that the State’s wholesale tax discriminates against interstate trade. Cf. Washington v. United States, supra, at 541-542 (Federal Government and federal contractors pay less tax than local contractors); Alaska v. Arctic Maid, 366 U.S. 199, 204 (1961) (local fish processors paid higher tax).*

The Court also justifies its decision on the ground that, if Ohio, or any State where appellant may manufacture products sold in West Virginia, imposed a manufacturing tax, appellant might possibly pay more taxes on its goods sold in West Virginia than a local manufacturer. But appellant has not demonstrated that it, in fact, has a higher tax burden in West Virginia solely by reason of interstate commerce. The Court sidesteps that fact, however, by borrowing a concept employed in our net income tax cases. Under that line of cases, a state tax must have an internal consistency that takes into consideration the impact on interstate commerce if other jurisdictions employed the same tax. See Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 169 (1983). It is perfectly proper to examine a State’s net income tax system for hypothetical burdens on interstate commerce. Nevertheless, that form of analysis is irrelevant to examining the validity of a gross receipts tax system based on manufacturing or wholesale transactions. Where a State’s taxes are linked exactly to the activities taxed, it should be unnecessary to examine a hypothetical taxing scheme to see if interstate commerce would be unduly burdened. See Standard Pressed Steel Co. v. Washington Revenue Dept., 419 U.S. 560, 564 (1975); cf. Commonwealth Edison Co. v. Montana, 453 U.S. 609, 617 (1981).

The Court’s analysis also employs a formalism I thought we had generally abandoned in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 288-289, n. 15 (1977), where we rejected the per se rule and the administrative convenience that attended our former holding in Spector Motor Service, Inc. v. O’Connor, 340 U.S. 602 (1951). I would apply a similarly realistic approach to this case, and uphold West Virginia’s wholesale tax scheme.

* Admittedly, because the tax paid by manufacturers is imposed on the manufactured value, while wholesalers pay a tax on the wholesale value, it is theoretically possible for appellant to pay a higher amount of tax than an in-state manufacturer. For this to happen, however, the wholesale value would have to be more than three and one-quarter times the manufactured value. In normal practice, this price differential would seem unlikely. In any event, appellant has failed to show that it in fact pays a higher tax than an in-state manufacturer. Cf. General Motors Corp. v. Washington, 377 U.S. 436, 448-449 (1964).