COMMERCE CLAUSE
The provision of the U.S. Constitution that gives Congress exclusive power over trade activities among the states and with foreign countries and Indian tribes.
Article 1, Section 8, Clause 3, of the Constitution empowers Congress “to regulate Commerce with foreign Nations, and among several States, and with the Indian Tribes.” The term commerce as used in the Constitution means
business or commercial exchanges in any and
all of its forms between citizens of different
states, including purely social communications
between citizens of different states by telegraph,
telephone, or radio, and the mere passage of
persons from one state to another for either
business or pleasure.
Intrastate, or domestic, commerce is trade
that occurs solely within the geographic borders
of one state. As it does not move across state
lines, intrastate commerce is subject to the
exclusive control of the state.
Interstate commerce, or commerce among
the several states, is the free exchange of com-
modities between citizens of different states
across state lines. Commerce with foreign
nations occurs between citizens of the United
States and citizens or subjects of foreign govern-
ments and, either immediately or at some stage
of its progress, is extraterritorial. Commerce
with Indian tribes refers to traffic or commercial
exchanges involving both the United States and
American Indians.
The Commerce Clause was designed to
eliminate an intense rivalry between the groups
of those states that had tremendous commercial
advantage as a result of their proximity to a
major harbor, and those states that were not
near a harbor. That disparity was the source of
constant economic battles among the states. The
exercise by Congress of its regulatory power has
increased steadily with the growth and expan-
sion of industry and means of transportation.
Power to Regulate
The Commerce Clause authorizes Congress
to regulate commerce in order to ensure that the
flow of interstate commerce is free from local
restraints imposed by various states.When Con-
gress deems an aspect of interstate commerce to
be in need of supervision, it will enact legislation
that must have some real and rational relation to
the subject of regulation. Congress may consti-
tutionally provide for the point at which sub-
jects of interstate commerce become subjects of
state law and, therefore, state regulation.
Although the U.S. Constitution places some
limits on state power, the states enjoy guaran-
teed rights by virtue of their reserved powers
pursuant to the TENTH AMENDMENT. A state has
the inherent and reserved right to regulate its
domestic commerce. However, that right must
be exercised in a manner that does not interfere
with, or place a burden on, interstate commerce,
or else Congress may regulate that area of
domestic commerce in order to protect inter-
state commerce from the unreasonable burden.
Although a state may not directly regulate, pro-
hibit, or burden interstate or foreign commerce,
it may incidentally and indirectly affect it by a
bona fide, legitimate, and reasonable exercise of
its POLICE POWERS. States are powerless to regu-
late commerce with Indian tribes.
Although Congress has the exclusive power
to regulate foreign and interstate commerce, the
presence or absence of congressional action
determines whether a state may act in a particu-
lar field. The nature of the subject of commerce
must be examined in order to decide whether
Congress has exclusive control over it. If the
subject is national in character and importance,
thereby requiring uniform regulation, the
power of Congress to regulate it is plenary, or
exclusive.
It is for the courts to decide the national or
local character of the subject of regulation, by
BALANCING the national interest against the
STATE INTEREST in the subject. If the state inter-
est is slight compared with the national interest,
the courts will declare the state statute unconsti-
tutional as an unreasonable burden on interstate
commerce.
The U.S. Supreme Court, in the case of
Southern Pacific Co. v. Arizona, 325 U.S. 761, 65
S. Ct. 1515, 89 L. Ed. 1915 (1945), held that an
Arizona statute that prohibited railroads within
the state from having more than 70 cars in a
freight train, or 14 cars in a passenger train, was
unconstitutional. The purpose of the legislation,
deemed a safety measure, was to minimize acci-
dents by reducing the lengths of trains passing
through the state. Practically speaking, however,
the statute created an unreasonable burden on
interstate commerce, as trains entering and leav-
ing the state had to stop at the borders to break
up a 100-car freight train into two trains and to
put on additional crews, thus increasing their
operating costs. The Court held that the means
used to achieve safety was unrealistic and that
the increase in the number of trains and train
operators actually enhanced the likelihood of
accidents. It balanced the national interest in the
free flow of interstate commerce by a national
railway system, against the state interest of a
dubious safety measure. It decided that the value
of the operation of a uniform, efficient railway
system significantly outweighed that of a state
law that has minimal effect.
However, where there is an obvious com-
pelling state interest to protect, state regulations
are constitutional. Restrictions on the width and
weight of trucks passing through a state on its
highways are valid, because the state, pursuant
to its police power, has a legitimate interest in
protecting its roads.
Where the subject is one in which Congress
or the state may act, a state may legislate unless
Congress does so. Thereafter, a valid federal reg-
ulation of the subject supersedes conflicting
state legislative enactments and decisions and
actions of state judicial or administrative bodies.
If Congress has clearly demonstrated its
intent to regulate the entire field, then the state
is powerless to enact subsequent legislation even
if no conflict exists between state and federal
law. This type of congressional action is known
as federal PREEMPTION of the field. Extensive
federal regulation in a particular area does not
necessarily result in federal preemption of the
field. In determining whether a state may regu-
late a given field, a court evaluates the purpose
of the federal regulations and the obligations
imposed, the history of state regulation in the
field, and the LEGISLATIVE HISTORY of the state
statute. If Congress has not preempted the field,
then state law is valid, provided that it is consis-
tent with, or supplements, the federal law.
State health, sanitary, and quarantine laws
that interfere with foreign and interstate commerce no more than is necessary in the proper exercise of the state’s police power are also valid as long as they do not conflict with federal regulations on the subject. Such laws must have some real relation to the objects named in them, in order to be upheld as valid exercises of the police power of the state. A state may not go beyond what is essential for self-protection by interfering with interstate transportation into or through its territory.
A state may not burden interstate commerce
by discriminating against it or persons engaged
in it or the citizens or property originating in
another state. However, the regulation of interstate
commerce need not be uniform throughout
the United States. Congress may devise a
national policy with due regard for varying and
fluctuating interests of different regions.
Acts Constituting Commerce
Whether any transaction constitutes interstate
or intrastate commerce depends on the
essential character of what is done and the surrounding
circumstances. The courts take a
commonsense approach in examining the
established course of business in order to distinguish
where interstate commerce ends and
local commerce begins. If activities that are
intrastate in character have such a substantial
effect on interstate commerce that their control
is essential to protect commerce from being
burdened, Congress may not be denied the
power to exercise that control.
In 1995, for the first time in nearly 60 years,
the U.S. Supreme Court held that Congress had
exceeded its power to regulate interstate commerce.
In United States v. Lopez, 514 U.S. 549,
115 S. Ct. 1624, 131 L. Ed. 2d 626 (1995), the
Court ruled 5–4 that Congress had exceeded
its Commerce Clause power in enacting the
Gun-Free School Zones Act of 1990 (18 U.S.C.A.
§ 921), which prohibited the possession of
firearms within 1,000 feet of a school.
In reaching its decision, the Court took the
various tests used throughout the history of the
Commerce Clause to determine whether a federal
statute is constitutional, and incorporated them
into a new standard that specifies three categories
of activity that Congress may regulate under the
clause: (1) the channels of interstate commerce,
(2) persons or things in interstate commerce or
instrumentalities of interstate commerce, and
(3) activities that have “a substantial relation to
interstate commerce . . . i.e., those activities that
substantially affect interstate commerce.” The
Court then applied this new standard to the
1990 Gun-Free School Zones Act and found
that the statute could be evaluated under the
third category of legislation allowed by the
Commerce Clause. But the Court noted that
the act was a criminal statute that had nothing
to do with commerce and that it did not establish
any jurisdictional authority to distinguish
it from similar state regulations. Because the
statute did not “substantially affect interstate
commerce,” according to the Court, it went
beyond the scope of the Commerce Clause and
was an unconstitutional exercise of Congress’s
legislative power.
The Court stressed that federal authority to
regulate interstate commerce cannot be
extended to the point that it obliterates the distinction
between what is national and what is
local and creates a completely centralized government.
Although recognizing the great
breadth of congressional regulatory authority,
the Court in Lopez attempted to create a special
protection for the states by providing for heightened
scrutiny of federal legislation that regulates
areas of traditional concern to the states.
In a novel application of the Commerce
Clause, a federal court decided in United States v.
Bishop Processing Co., 287 F. Supp. 624 (D.C.Md.
1968), that the movement of AIR POLLUTION
across state lines from Maryland to Delaware
constituted interstate commerce that is subject
to congressional regulation. The plaintiff, the
United States, sought an INJUNCTION under the
federal Clean Air Act (42 U.S.C.A. §§ 7401 et
seq. [1955]) to prevent the operation of the
Maryland Bishop Processing Company, a fatrendering
plant, until it installed devices to
eliminate its emission of noxious odors. The
defendant plant owners argued, among other
contentions, that Congress was powerless to regulate
their business because it was clearly an
intrastate activity. The court disagreed. Foulsmelling
air POLLUTION adversely affects business
conditions, depresses property values, and
impedes industrial development. These factors
interfere with interstate commerce, thereby
bringing the plant within the scope of the provisions
of the federal air-pollution law.
The power of Congress to regulate commerce
also extends to contracts that substantially
relate to interstate commerce. For example,
Congress may regulate the rights and liabilities
of employers and employees, as labor disputes
adversely affect the free flow of commerce.
Otherwise, contracts that do not involve any
property or activities that move in interstate
commerce are not ordinarily part of interstate
commerce.
Congress acts within its power when it regulates
transportation across state lines. The essential
nature of the transportation determines its
character. Transportation that begins and ends
within a single state is intrastate commerce and
is generally not within the scope of the Commerce Clause. If part of the journey passes
through an adjoining state, then the transportation
is interstate commerce, as long as the travel
across state lines is not done solely to avoid state
regulation. Commerce begins with the physical
transport of the product or person and ends
when either reaches the destination. Every
aspect of a continuous passage from a point in
one state to a point in another state is a transaction
of interstate commerce. A temporary pause
in transportation does not automatically
deprive a shipment of its interstate character.
For a sale of goods to constitute interstate commerce,
interstate transportation must be
involved. Once goods have arrived in one state
from another state, their local sale is not interstate
commerce.
Interstate commerce also includes the transmission
of intelligence and information—
whether by telephone, telegraph, radio, television,
or mail—across state lines. The transmission
of a message between points within the
same state is subject to state regulation.
Agencies and Instrumentalities
of Commerce
Congress, acting pursuant to the Commerce
Clause, has the exclusive power to regulate the
agencies and instrumentalities of interstate and
foreign commerce, such as private and common
carriers. A bridge is an instrumentality of interstate
commerce when it spans NAVIGABLE
WATERS or is used by travelers and merchandise
passing across state lines. Navigable waters are
instrumentalities of commerce that are subject
to the control of federal and state legislation. A
bridge over a navigable stream located in a single
state is also subject to concurrent control by
the state.
An office used in an interstate business is an
instrumentality of interstate commerce. Railroads
and tracks, terminals, switches, cars,
engines, appliances, equipment used as components
of a system engaged in interstate traffic,
and vessels (including ferries and tugs) are also
subject to federal regulation. Warehouses, grain
elevators, and other storage facilities also might
be considered instrumentalities of interstate
commerce. Although local in nature, wharves
are related to commerce and are subject to control
by Congress, or by the state if Congress has
not acted.
The INTERSTATE COMMERCE ACT of 1887,
which Congress enacted to promote and facilitate
commerce by ensuring equitable interaction
between carriers and the public, provided for the
creation of the INTERSTATE COMMERCE COMMISSION.
As designated by statute, the commission
had jurisdiction and supervision of such
carriers and modes of transportation as railroads,
express-delivery companies, and sleepingcar
companies. Concerning the transportation of
persons and property, the commission had the
power to enforce the statutory requirement that
a certificate of public convenience and necessity
be obtained before commencing or terminating
a particular transportation service. The commission
adopted reasonable and lawful rules and
regulations to implement the policies of the law
that it administered. The ICC was abolished by
Congress in 1995 after Congress deregulated the
trucking industry.
Business Affecting Commerce
Not every private enterprise that is carried
on chiefly or in part by means of interstate shipments
is necessarily so related to the interstate
commerce as to come within the regulating
power of Congress. The original construction of
a factory building does not constitute interstate
commerce, even though the factory is used after
its construction for the manufacture of goods
that are to be shipped in interstate commerce
and even though a substantial part of the material
used in the building was purchased in different
states and transported in interstate
commerce to the location of the plant.
Under some circumstances, however, businesses—
such as advertising firms, hotels, restaurants,
companies that engage in the leasing of
PERSONAL PROPERTY, and companies in the
entertainment and sports industries—may be
regulated by the federal government. A business
that operates primarily intrastate activities, such
as local sporting or theatrical exhibits, but
makes a substantial use of the channels of interstate
trade, develops an interstate character,
thereby bringing itself within the ambit of the
Commerce Clause.
Discrimination as a Burden
on Commerce
A state has the power to regulate intrastate
commerce in a field where Congress has not
chosen to legislate, as long as there is no injustice
or unreasonable discrimination in favor of
intrastate commerce as against interstate commerce.
In a Colorado case, out-of-state students
at the University of Colorado sued the state
BOARD OF REGENTS to recover the higher costs of the tuition paid by them as compared to
tuition paid by in-state residents. They contended
that their classification as out-of-state
students—which violated, among other things,
the Commerce Clause—constituted unreasonable
discrimination in favor of in-state students.
The court held that the statutes that classified
students who apply for admission to the state
university into in-state and out-of-state students
did not violate the Commerce Clause because
the classification was reasonable. A state statute
affecting interstate commerce is not upheld
merely because it applies equally to, and does
not discriminate between, residents and nonresidents
of the state, as it can otherwise unduly
burden interstate commerce.
Discrimination must be more than merely
burdensome; it must be unduly or unreasonably
burdensome. One state required a licensed foreign
corporation with retail stores in the state to
collect a state sales tax on the sales it made from
its mail-order houses located outside the state to
customers within the state. The corporation
contended that this statute discriminated
against its operations in interstate commerce.
Other out-of-state mail-order houses that were
not licensed as foreign corporations in the state
did not have to collect tax on their sales within
the state. The court decided that the state could
impose this burden of tax collection on the corporation
because the corporation was licensed
to do business in the state and it enjoyed the
benefits flowing from its state business. Such a
measure was not an unreasonable burden on
interstate commerce.
A state may not prohibit the entry of a foreign
corporation into its territory for the purpose
of engaging in foreign or interstate
commerce, nor can it impose conditions or
restrictions on the conduct of foreign or interstate
business by such corporations. When
intrastate business is involved, it may do so.
Similarly, a private person who conducts a
business that has a significant effect on interstate
commerce in a discriminatory manner is not
beyond the reach of lawful congressional regulation.
RACIAL DISCRIMINATION in the operation of
public accommodations, such as restaurants and
lodgings, affects interstate commerce by impeding
interstate travel and is prohibited by the
CIVIL RIGHTS ACT OF 1964 (codified in scattered
sections of 42 U.S.C.A.). In Heart of Atlanta
Motel v. United States, 379 U.S. 241, 85 S. Ct. 348,
13 L. Ed. 2d 258 (1964), a local motel owner had
refused to accept black guests. He argued that
since his motel was a purely local operation,
Congress exceeded its authority in legislating as
to whom he should accept as guests. The U.S.
Supreme Court held that the authority of Congress
to promote interstate commerce encompasses
the power to regulate local activities of
interstate commerce, in both the state of origin
and the state of destination, when those activities
would otherwise have a substantial and
harmful effect upon the interstate commerce.
The Court concluded that in this case, the federal
prohibition of racial discrimination by
motels serving travelers was valid, as interstate
travel by blacks was unduly burdened by the
established discriminatory conduct.
State Taxation of
Nondomiciliary Corporations
In February 2000, the U.S. Supreme Court
added another layer to its sometimes complicated
Commerce Clause JURISPRUDENCE when
it held that the Commerce Clause forbids states
from taxing income received by nondomiciliary
corporations for unrelated business activities
that constitute a discrete business enterprise.
Hunt-Wesson, Inc. v. Franchise Tax Bd. of Cal.,
528 U.S. 458, 120 S.Ct. 1022, 145 L. Ed. 2d 974
(2000)
Hunt-Wesson Inc., a California-based corporation,
was the successor in interest to the
Beatrice Companies Inc., the original taxpayer
in the case. During the years in question, Beatrice
was domiciled in Illinois but was engaged
in the food business in California and throughout
the world. For the purposes of this lawsuit,
Beatrice’s unitary operations consisted only of
those corporate family business units engaged in
its global food business. From 1980 to 1982,
Beatrice also owned foreign subsidiaries that
were not part of its food operations, but that
formed a discrete business enterprise. For the
purposes of this lawsuit, the parties stipulated
that these foreign subsidiaries were part of the
company’s non-unitary business operations.
These non-unitary foreign subsidiaries paid
dividends to Beatrice of $27 million for 1980,
$29 million for 1981, and $19 million for 1982,
income that both parties agree was not subject
to California tax under the Commerce Clause.
In the operation of its unitary business, Beatrice
took out loans and incurred interest expenses of
$80 million for 1980, $55 million for 1981, and
$137 million for 1982. None of those loans was related to borrowings of Beatrice’s non-unitary
subsidiaries that made the dividend payments to
Beatrice.
On its franchise tax returns, Beatrice
claimed deductions for its non-unitary interest
expenses in calculating its net income apportioned
to California. Following an audit, the
California Franchise Tax Board applied the
“interest offset” provision in California Revenue
and Taxation Code Section 24344. Under that
section, multistate corporations may take a
deduction for interest expenses, but only to the
extent that the expenses exceed their out-ofstate
income arising from the unrelated business
activity of a discrete business enterprise; that is,
the non-unitary income that the parties agree
that California could not otherwise tax. The Section
24344 interest offset resulted in the tax
board reducing Beatrice’s interest-expenses
deduction on a dollar-for-dollar basis by the
amount of the constitutionally exempt dividend
income that Beatrice received from its non-unitary
subsidiaries.
Beatrice responded by filing suit in California
state court to challenge the constitutionality
of the law. The trial court struck down Section
24344 on the ground that it allowed the state to
indirectly tax non-unitary business income that
the Commerce Clause prohibits from being
taxed directly. The California Court of Appeals
reversed, and Hunt-Wesson, having intervened
in the lawsuit as Beatrice’s successor-in-interest,
appealed.
In a unanimous opinion written by Justice
STEPHEN BREYER, the U.S. Supreme Court struck
down California Revenue and Taxation Code
Section 24344. In reducing an out-of-state company’s
tax deduction for interest expenses by an
amount that is equal to the interest and dividends
that the company receives from the unrelated
business activities of its foreign subsidiaries,
Breyer wrote, Section 24344 enables California to
circumvent the federal Constitution.
States may tax a proportionate share of the
income of a nondomiciliary corporation that
carries out a particular business both inside and
outside the state, Breyer observed. But states
may not, without violating the Commerce
Clause, tax nondomiciliary corporations for
income earned from unrelated business activities
that constitute a discrete business enterprise.
Thus, what California called a deduction limitation
would amount to an impermissible tax
under the Commerce Clause.
License and Privilege Tax
A state may not impose a tax for the privilege
of engaging in, and carrying on, interstate
commerce, but it might be permitted to require
a license if doing so does not impose a burden
on interstate commerce. A state tax on the use of
an instrumentality of commerce is invalid, but a
tax may be imposed on the use of goods that
have traveled in interstate commerce, such as
cigarettes. A state may not levy a direct tax on
the gross receipts and earnings derived from
interstate or foreign commerce, but it may tax
receipts from intrastate business or use the gross
receipts as the measurement of a legitimate tax
that is within the state’s authority to levy.
A state may tax the sale of gasoline or other
motor fuels that were originally shipped from
another state, after the interstate transaction has
ceased. As long as the sale is made within the
state, it is immaterial that the gasoline to fulfill
the contract is subsequently acquired by the
seller outside the state and shipped to the buyer.
The state may tax the sale of this fuel to one who
uses it in interstate commerce, as well as the
storage or withdrawal from storage of imported
motor fuel, even though it is to be used in interstate
commerce.
Although radio and television broadcasting
may not be burdened by state-privilege taxes as
far as they involve interstate commerce, broadcasting
involving intrastate activity may be subject
to local taxation.
A state may impose a nondiscriminatory tax
for the use of its highways by motor vehicles in
interstate commerce if the charge bears a fair
relation to the cost of the construction, maintenance,
and regulation of its highways.
The Commerce Clause does not prohibit a
state from imposing a tax on a natural resource
that is produced within its borders and that is
sold primarily to residents of other states. In
Commonwealth Edison Co. v. Montana, 453 U.S.
609, 101 S. Ct. 2946, 69 L. Ed. 2d 884 (1981), the
U.S. Supreme Court upheld a 30 percent severance
tax levied by Montana on the production
of coal, the bulk of which was exported for sale
to other states. The amount of the tax was challenged
as an unconstitutional burden on interstate
commerce. The Court reasoned that the
Commerce Clause does not give the residents of
one state the right to obtain resources from
another state at what they consider a reasonable
price, for that right would enable one state to
control the development and depletion of natural resources in another state. If that right were
recognized, state and federal courts would be
forced to formulate and to apply a test for determining
what is a reasonable rate of taxation on
legitimate subjects of taxation, tasks that rightfully
belong to the legislature.
Crimes Involving Commerce
Congress may punish any conduct that
interferes with, obstructs, or prevents interstate
and foreign commerce, whether it occurs within
one state or involves a number of states. The
MANN ACT—which outlaws the transportation
any woman or girl in interstate or foreign commerce
for the purpose of prostitution, debauchery,
or other immoral acts—is a constitutional
exercise of the power of Congress to regulate
commerce (18 U.S.C.A. §§ 2421–2424 [1910]).
The counterfeiting of notes of foreign corporations
and bills of lading is a crime against interstate
commerce. Under federal statutes, the
knowing use of a common carrier for the transportation
of obscene matter in interstate or foreign
commerce for the purpose of its sale or
distribution is illegal. This prohibition applies to
the importation of obscene matter even though
it is for the importer’s private, personal use and
possession and not for commercial purposes.
The Anti-Racketeering Act (18 U.S.C.A.
§ 1951 [2000]) makes RACKETEERING by ROBBERY
or personal violence that interferes with
interstate commerce a federal offense. The provisions
of the CONSUMER CREDIT PROTECTION
ACT (15 U.S.C.A. § 1601 et seq. [2000]) prohibiting
EXTORTION have been upheld, as extortion is
deemed to impose an undue burden on interstate
commerce. Anyone who transports stolen
goods of the value of $5,000 or more in interstate
or foreign commerce is subject to criminal prosecution
pursuant to the National Stolen Property
Act (18 U.S.C.A. § 2311 et seq. [2000]).
FURTHER READINGS
Cauthorn, Kim. 1995. “Supreme Court Interprets Scope of
Congressional Authority under Interstate Commerce
Clause.” Houston Lawyer 33 (July–August).
McJohn, Stephen M. 1995. “The Impact of United States v.
Lopez: The New Hybrid Commerce Clause.” Duquesne
Law Review 34.
Prentice, E. Parmalee and John G. Egan. 1981. The Commerce
Clause of the Federal Constitution. Littleton, Colo.: F.B.
Rothman.
Ramaswamy, M. 1948. The Commerce Clause in the Constitution
of the United States. New York: Longmans, Green.
CROSS-REFERENCES
Civil Rights; Federalism; States’Rights; Telecommunications.
