Limits on Taxation

Congress has power over taxation under the Constitution. However, the Constitution has placed limits on that power. For example, direct taxes (taxes that must be paid directly to the government by an individual or business, i.e. income taxes) must be apportioned based on population. Articles exported from an individual state may not be taxed at all.

Article I, Section 9, Clauses 4-5:

No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken...No Tax or Duty shall be laid on Articles exported from any State.

What Are Direct Taxes?

United States Library of Congress, The Constitution of the United States of America: Analysis and Interpretation

The crucial problem under Clause 4 is to distinguish "direct" from other taxes. In its opinion in Pollock v. Farmers' Loan & Trust Co., the Court declared: "It is apparent . . . that the distinction between direct and indirect taxation was well understood by the framers of the Constitution and those who adopted it."¹ Against this confident dictum may be set the following brief excerpt from Madison's Notes on the Convention: "Mr. King asked what was the precise meaning of direct taxation? No one answered."²

The first case to come before the Court on this issue was Hylton v. United States,³ which was decided early in 1796. Congress has levied, according to the rule of uniformity, a specific tax upon all carriages, for the conveyance of persons, which were to be kept by, or for any person, for his own use, or to be let out for hire, or for the conveying of passengers. In a fictitious statement of facts, it was stipulated that the carriages involved in the case were kept exclusively for the personal use of the owner and not for hire. The principal argument for the constitutionality of the measure was made by Hamilton, who treated it as an "excise tax,"⁴ whereas Madison, both on the floor of Congress and in correspondence, attacked it as "direct" and therefore void, because it was levied without apportionment.⁵ The Court, taking the position that the direct tax clause constituted in practical operation an exception to the general taxing powers of Congress, held that no tax ought to be classified as "direct" that could not be conveniently apportioned, and on this basis sustained the tax on carriages as one on their "use" and therefore an "excise." Moreover, each of the judges advanced the opinion that the direct tax clause should be restricted to capitation taxes and taxes on land, or that, at most, it might cover a general tax on the aggregate or mass of things that generally pervade all the states, especially if an assessment should intervene, while Justice Paterson, who had been a member of the Federal Convention, testified to his recollection that the principal purpose of the provision had been to allay the fear of the Southern states that their slaves and land should be subjected to a specific tax.⁶

The result of the Hylton case was not challenged until after the Civil War. A number of the taxes imposed to meet the demands of that war were assailed during the postwar period as direct taxes, but without result. The Court sustained successively, as "excises" or "duties," a tax on an insurance company's receipts for premiums and assessments,⁷ a tax on the circulating notes of state banks,⁸ an inheritance tax on real estate,⁹ and finally a general tax on incomes.¹⁰ In the last case, the Court took pains to state that it regarded the term "direct taxes" as having acquired a definite and fixed meaning, to wit, capitation taxes, and taxes on land.¹¹ Then, almost one hundred years after the Hylton case, the famous case of Pollock v. Farmers' Loan & Trust Co.¹² arose under the Income Tax Act of 1894.¹³ Undertaking to correct "a century of error," the Court held, by a vote of five-to-four, that a tax on income from property was a direct tax within the meaning of the Constitution and hence void because not apportioned according to the census.

The Pollock decision encouraged taxpayers to challenge the right of Congress to levy by the rule of uniformity numerous taxes that had always been reckoned to be excises. But the Court evinced a strong reluctance to extend the doctrine to such exactions. Purporting to distinguish taxes levied "because of ownership" or "upon property as such" from those laid upon "privileges,"¹⁴ it sustained as "excises" a tax on sales on business exchanges,¹⁵ a succession tax which was construed to fall on the recipients of the property transmitted rather than on the estate of the decedent,¹⁶ and a tax on manufactured tobacco in the hands of a dealer, after an excise tax had been paid by the manufacturer.¹⁷ Again, in Thomas v. United States,¹⁸ the validity of a stamp tax on sales of stock certificates was sustained on the basis of a definition of "duties, imposts and excises." These terms, according to the Chief Justice, "were used comprehensively to cover customs and excise duties imposed on importation, consumption, manufacture and sale of certain commodities, privileges, particular business transactions, vocations, occupations and the like."¹⁹ On the same day, in Spreckels Sugar Refining Co. v. McClain,²⁰ it ruled that an exaction, denominated a special excise tax, that was imposed on the business of refining sugar and measured by the gross receipts thereof, was in truth an excise and hence properly levied by the rule of uniformity. The lesson of Flint v. Stone Tracy Co.²¹ was the same. In Flint, what was in form an income tax was sustained as a tax on the privilege of doing business as a corporation, the value of the privilege being measured by the income, including income from investments. Similarly, in Stanton v. Baltic Mining Co.,²² a tax on the annual production of mines was held to be "independently of the effect of the operation of the Sixteenth Amendment . . . not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations."²³

A convincing demonstration of the extent to which the Pollock decision had been whittled down by the time the Sixteenth Amendment was adopted is found in Billings v. United States.²⁴ In challenging an annual tax assessed for the year 1909 on the use of foreign built yachts—a levy not distinguishable in substance from the carriage tax involved in the Hylton case as construed by the Supreme Court—counsel did not even suggest that the tax should be classed as a direct tax. Instead, he based his argument that the exaction constituted a taking of property without due process of law upon the premise that it was an excise, and the Supreme Court disposed of the case upon the same assumption.

In 1921, the Court cast aside the distinction drawn in Knowlton v. Moore between the right to transmit property on the one hand and the privilege of receiving it on the other, and sustained an estate tax as an excise. "Upon this point," wrote Justice Holmes for a unanimous Court, "a page of history is worth a volume of logic."²⁵ Having established this proposition, the Court had no difficulty in deciding that the inclusion in the computation of the estate tax of property held as joint tenants,²⁶ or as tenants by the entirety^,27 or the entire value of community property owned by husband and wife,²⁸ or the proceeds of insurance upon the life of the decedent,²⁹ did not amount to direct taxation of such property. Similarly, it upheld a graduated tax on gifts as an excise, saying that it was "a tax laid only upon the exercise of a single one of those powers incident to ownership, the power to give the property owned to another."³⁰ Justice Sutherland, speaking for himself and two associates, urged that "the right to give away one's property is as fundamental as the right to sell it or, indeed, to possess it."³¹

Taxes on Exports

The prohibition on excise taxes applies only to the imposition of duties on goods by reason of exportation.³² The word "export" signifies goods exported to a foreign country, not to an unincorporated territory of the United States.³³ A general tax laid on all property alike, including that intended for export, is not within the prohibition, if it is not levied on goods in course of exportation nor because of their intended exportation.³⁴

Continuing its refusal to modify its export clause jurisprudence,³⁵ the Court held unconstitutional the Harbor Maintenance Tax (HMT) under the export clause insofar as the tax was applied to goods loaded at United States ports for export. The HMT required shippers to pay a uniform charge on commercial cargo shipped through the Nation's ports. The clause, said the Court, "categorically bars Congress from imposing any tax on exports."³⁶ However, the clause does not interdict a "user fee," which is a charge that lacks the attributes of a generally applicable tax or duty and is designed to compensate for government supplied services, facilities, or benefits; and it was that defense to which the government repaired once it failed to obtain a modification of the rules under the clause. But the HMT bore the indicia of a tax. It was titled as a tax, described as a tax in the law, and codified in the Internal Revenue Code. Aside from labels, however, courts must look to how things operate, and the HMT did not qualify as a user fee. It did not represent compensation for services rendered. The value of export cargo did not correspond reliably with the federal harbor services used or usable by the exporter. Instead, the extent and manner of port use depended on such factors as size and tonnage of a vessel and the length of time it spent in port.³⁷ The HMT was thus a tax, and therefore invalid.

Where the sale to a commission merchant for a foreign consignee was consummated by delivery of the goods to an exporting carrier, the sale was held to be a step in the exportation and hence exempt from a general tax on sales of such commodity.³⁸ The giving of a bond for exportation of distilled liquor was not the commencement of exportation so as to exempt from an excise tax spirits that were not exported pursuant to such bond.³⁹ A tax on the income of a corporation derived from its export trade was not a tax on "articles exported" within the meaning of the Constitution.⁴⁰

In United States v. IBM Corp.,⁴¹ the Court rejected the government's argument that it should refine its export-tax-clause jurisprudence. Rather than read the clause as a bar on any tax that applies to a good in the export stream, the government contended that the Court should bring this clause in line with the Import-Export Clause⁴² and with dormant-commerce-clause doctrine. In that view, the Court should distinguish between discriminatory and nondiscriminatory taxes on exports. But the Court held that sufficient differences existed between the export clause and the other two clauses, so that its bar should continue to apply to any and all taxes on goods in the course of exportation.

Stamp Taxes

A stamp tax imposed on foreign bills of lading,⁴³ charter parties,⁴⁴ or marine insurance policies,⁴⁵ was in effect a tax or duty upon exports, and so void; but an act requiring the stamping of all packages of tobacco intended for export in order to prevent fraud was held not to be forbidden as a tax on exports.⁴⁶

Footnotes

1. 157 U.S. 429, 573 (1895).
2. J. Madison, The Debates in the Federal Convention of 1787 435 (G. Hunt & J. Scott eds., Greenwood Press ed. 1970).
3. 3 U.S. (3 Dall.) 171 (1796).
4. The Works of Alexander Hamilton 845 (J. Hamilton ed., 1851). "If the meaning of the word excise is to be sought in the British statutes, it will be found to include the duty on carriages, which is there considered as an excise, and then must necessarily be uniform and liable to apportionment; consequently, not a direct tax."
5. 4 Annals of Cong. 730 (1794); 2 Letters and Other Writings of James Madison 14 (1865).
6. Hylton v. United States, 3 U.S. (3 Dall.) 171, 177 (1796) (Paterson, J., concurring).
7. Pacific Ins. Co. v. Soule, 74 U.S. (7 Wall.) 433 (1869).
8. Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869).
9. Scholey v. Rew, 90 U.S. (23 Wall.) 331 (1875).
10. Springer v. United States, 102 U.S. 586 (1881).
11. 102 U.S. at 602.
12. 157 U.S. 429 (1895); 158 U.S. 601 (1895).
13. 28 Stat. 509, 553 (1894).
14. Stanton v. Baltic Mining Co., 240 U.S. 103 (1916); Knowlton v. Moore, 178 U.S. 41, 80 (1900).
15. Nicol v. Ames, 173 U.S. 509 (1899).
16. Knowlton v. Moore, 178 U.S. 41 (1900).
17. Patton v. Brady, 184 U.S. 608 (1902).
18. 192 U.S. 363 (1904).
19. 192 U.S. at 370.
20. 192 U.S. 397 (1904).
21. 220 U.S. 107 (1911).
22. 240 U.S. 103 (1916).
23. 240 U.S. at 114.
24. 232 U.S. 261 (1914).
25. New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921).
26. Phillips v. Dime Trust & S.D. Co., 284 U.S. 160 (1931).
27. Tyler v. United States, 281 U.S. 497 (1930).
28. Fernandez v. Wiener, 326 U.S. 340 (1945).
29. Chase Nat'l Bank v. United States, 278 U.S. 327 (1929); United States v. Manufacturers Nat'l Bank, 363 U.S. 194, 198–201 (1960).
30. Bromley v. McCaughn, 280 U.S. 124, 136 (1929). See also Helvering v. Bullard, 303 U.S. 297 (1938).
31. Bromley v. McCaughn, 280 U.S. 124, 140 (1929).
32. Turpin v. Burgess, 117 U.S. 504, 507 (1886). Cf. Almy v. California, 65 U.S. (24 How.) 169, 174 (1861).
33. Dooley v. United States, 183 U.S. 151, 154 (1901).
34. Cornell v. Coyne, 192 U.S. 418, 428 (1904); Turpin v. Burgess, 117 U.S. 504, 507 (1886).
35. See United States v. IBM, 517 U.S. 843, 850–61 (1996).
36. United States v. United States Shoe Corp., 523 U.S. 360, 363 (1998).
37. 523 U.S. at 367–69.
38. Spalding & Bros. v. Edwards, 262 U.S. 66 (1923).
39. Thompson v. United States, 142 U.S. 471 (1892).
40. Peck & Co. v. Lowe, 247 U.S. 165 (1918); National Paper Co. v. Bowers, 266 U.S. 373 (1924).
41. 517 U.S. 843 (1996).
42. Article I, § 10, cl. 2, applying to the states.
43. Fairbank v. United States, 181 U.S. 283 (1901).
44. United States v. Hvoslef, 237 U.S. 1 (1915).
45. Thames & Mersey Inc. v. United States, 237 U.S. 19 (1915). In United States v. IBM Corp., 517 U.S. 843 (1996), the Court adhered to Thames & Mersey, and held unconstitutional a federal excise tax upon insurance policies issued by foreign countries as applied to coverage for exported products. The Court admitted that one could question the earlier case's equating of a tax on the insurance of exported goods with a tax on the goods themselves, but it observed that the government had chosen not to present that argument. Principles of stare decisis thus cautioned observance of the earlier case. Id. at 854–55. The dissenters argued that the issue had been presented and should be decided by overruling the earlier case. Id. at 863 (Justices Kennedy and Ginsburg dissenting).
46. Pace v. Burgess, 92 U.S. 372 (1876); Turpin v. Burgess, 117 U.S. 504, 505 (1886).