Client Alert

Colorado Court Side-Steps Commerce Clause

7/13/2006

On April 7, 2006, McLane Western, Inc. filed its petition for certiorari in the United States Supreme Court challenging the constitutionality of a Colorado excise tax imposed on the distribution of certain tobacco products in the State. As the Petition makes clear, and the Colorado Court of Appeals effectively conceded, there is little doubt that the tax imposes a higher burden on, and therefore discriminates against, interstate commerce. The question, of course, is whether the Court will take the case.

The workings of the tax are readily described: The tax is imposed on the initial distribution activity occurring within the State, on a tax base equal to the price paid by the first instate distributor. Because the price of the product increases as it moves through the distribution network, the tax base (and therefore the tax) is always at its lowest when all distribution activity occurs within the State and at its highest when the upstream distribution network is located outside the State (because the price paid by the distributor that first receives the product in Colorado now includes the mark-up of the distributor(s) outside the State). The Colorado court acknowledged this result and further conceded that the mechanics for setting the tax base could place McLane "at a competitive disadvantage in the market place" because the higher tax is added to the price of the product. However, the Colorado court then concluded that the tax did not discriminate against interstate commerce because, in its view, the statute treated all taxpayers alike and no United States Supreme Court case "involves a determination that a state tax violates the Commerce Clause based on the inequities of a shifting tax base."

McLane’s petition stresses that the Colorado court’s decision has widespread implications by effectively authorizing a discriminatory tax as long as that discrimination arises from a tax that appears to be neutral on the face of the statute and is implemented through the base, rather than through disparate exemptions or deductions. In this regard, McLane points out that the court’s decision is also directly contrary to the Supreme Court’s decision in Halliburton Oil Well Cementing Co.v.Reily,373 U.S. 64 (1963),which struck down a shifting tax base that increased the tax where fabrication or manufacturing occurred outside the state prior to the product’s entry into Louisiana but not where that activity occurred after the product entered the state. McLane also maintains that the Colorado court’s decision violates bedrock Commerce Clause principles that look to the practical effect of the tax, not its form, in deciding whether discrimination exists.

Because of the potentially far-reaching impact of the case, various national organizations filed or joined amicus briefs supporting McLane’s Petition, i.e., the Council on State Taxation, the National Association of Manufacturers, the National Association of Wholesaler Distributors, the American Trucking Association, the Chamber of Commerce of the United States of America, the Colorado Association of Distributors, the Institute for Professionals in Taxation, and the Washington Legal Foundation.

The Court is expected to rule on the Petition in late September.

Morrison & Foerster lawyers who represented McLane in this effort included: Thomas H. Steele,
Drew S. Days, Beth S. Brinkman, Andres Vallejo, and Mark E. Medina.  Professor Walter Hellerstein of the
University of Georgia also assisted in drafting the petition.

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