GOLDBERG v. SWEET
Legal provision: Article 1, Section 8, Paragraph 3: Interstate Commerce Clause
ORAL ARGUMENT OF WALTER A. SMITH, JR. ON BEHALF OF THE APPELLANTS
Chief Justice William H. Rehnquist: We'll hear argument next in No. 87-826, Goldberg v. Sweet.
Mr. Smith, we'll wait just a moment--
Mr. Smith: All right.
Chief Justice William H. Rehnquist: --until some of the people clear out or stop talking.
You may proceed whenever you're ready, Mr. Smith.
Mr. Smith: Thank you.
Mr. Chief Justice, may it please the Court:
This case involves a State tax on the act or privilege of engaging in interstate phone calls, a form of interstate commerce that by its very nature occurs in more than one State at once, simultaneously, that introduces into two States at once substantial economic activities and involves the delivery of services in two States at once, and in fact can become the subject of a tax in at least two States at once.
Nevertheless, in this case, Illinois has levied a tax on the whole of all interstate phone calls that originate or terminate in Illinois and that are charged to an Illinois service address.
The question these circumstances raise, we believe, is whether or not this violates the interstate Commerce Clause.
And in our view it does.
In fact, it violates all three of the elements of this Court's Complete Auto decision.
And what I--
Unidentified Justice: Why... why is it you say that they levy it on the whole of the... of the service?
The initial obstacle I confront is I don't see how this is different from any sales tax, let's say, on a piece of tangible goods that... that is manufactured in a number of other States.
The raw materials come from... from Iowa.
The manufacturing is done is Ohio, and whatnot.
Yet, the whole value that has been added to that item that's sold is taxed by the State that imposes a sales tax.
Why can't you say that... that that also taxes activities in other States?
Mr. Smith: --No, Your Honor, because the State courts have held already that the tax is, in fact, levied on the entirety of the call.
It is true that the taxable event is the origination or the receipt, but both lower courts have construed the statute to levy the tax on the entirety of the phone call.
And unlike a sales tax, which this Court has often reviewed, where it can be isolated in a single taxing jurisdiction, in this particular circumstance, it... the interstate phone call cannot be isolated in a single taxing jurisdiction because economic activity by definition is occurring in two different States at once.
Moreover, unlike a sales tax situation, here the delivery of goods occurs partly outside the State, and by the definition of its own statute whether or not the call is billed for or paid for in Illinois, Illinois nevertheless taxes the call.
And the result is we risk multiple taxation.
In our view, the tax violates all three of the Complete Auto requirements for slightly different reasons.
But at bottom, there's one reason why all three elements are violated, and that is because this tax reaches outside Illinois' borders to tax the whole of the call as both lower courts found when they rejected the proposition that what was being taxed was only in state in commerce.
Unidentified Justice: Well, Mr. Smith, to get back to Justice Scalia's question, do you think Illinois could have imposed a gross receipts tax on all of the charges charged in Illinois on the call--
Mr. Smith: Well, this--
Unidentified Justice: --the totality of the charge?
Mr. Smith: --If it had been apportioned, Your Honor.
This is not--
Unidentified Justice: Don't you think under our precedents, under sales tax generally, that a tax imposed by Illinois on the totality of the charge would be upheld?
Mr. Smith: --Not whereas here, Your Honor, part of the commerce by definition occurs outside the taxing State.
It is true that in a case like Moorman, the Court upheld a gross receipts tax, but that's because an apportionment formula was used.
Some methodology was adopted to measure that part of the commerce that had occurred within the taxing State.
Here that has not been done.
Illinois has elected to tax the entirety of the call even though by definition, a portion of the call necessarily occurs outside the taxing State.
Unidentified Justice: It seems to me that everything you have said so far, if you transfer it to our case in D. H. Holmes that we had last year involving the catalogs, means that we were wrong in reaching the decision we reached in the catalog case.
Mr. Smith: No, Your Honor, I would say not because--
Unidentified Justice: The transaction takes place in part out of state.
There is very significant economic activity that's outside the state.
And yet, we sustained a tax based wholly on the sales price in the State of, I believe, Mississippi.
Mr. Smith: --No, Your Honor.
The distinction between Holmes and this case is that in Holmes the tax had been apportioned, as the Court pointed out in its opinion.
The tax was limited to the in-state distribution of the catalogs, and it very carefully had been done so.
In addition, in--
Unidentified Justice: Well, but it... it was a use tax based on the value of the catalogs.
Mr. Smith: --And the use tax, Your Honor, was levied only upon the in-state distribution of the catalogs.
No catalogs that had been distributed outside of the State were subject to the use tax.
Unidentified Justice: Well, here no call that's not billed to Illinois is taxed.
Mr.... is... doesn't the... Illinois taxes any call that's billed there.
Mr. Smith: Illinois--
Unidentified Justice: But it... but it... but... but... and it... and it taxes it even though it happens to be paid in another State.
Mr. Smith: --That's right, Your Honor.
Under the language--
Unidentified Justice: So, a gross receipts tax would not cover a call that is billed to an Illinois number but sent to Washington and is paid there.
Is that right?
Mr. Smith: --Your Honor, the construction of this statute is that the tax is levied only upon calls that are charged to an Illinois service address--
Unidentified Justice: But it may not--
Mr. Smith: --irrespective of... right... irrespective of where it's--
Unidentified Justice: --Of where it's paid.
Mr. Smith: --of where it's paid for or where it's billed, which means that another state could also tax the same interstate phone call.
For example, Illinois elects to tax the origination of a call, on the whole of the call, because it happens to be charged to an Illinois service address.
But another State may choose to tax the termination of the call because it's billed and paid for in that State.
Unidentified Justice: Has any State, in fact, done that in this case?
Mr. Smith: The Washington State tax, as it reads, Your Honor, suggests that any call that originates or terminates in Washington and is billed and paid there will, in fact, be taxed by the State of Washington.
Unidentified Justice: Has that... has that been applied to some taxpayer in Illinois?
Mr. Smith: We're unaware that any particular taxpayer in Illinois has had that tax applied to him, Your Honor, but under this Court's Armco and Container Corporation and Scheiner decisions, it is not our burden to prove that the tax is actually being imposed on an Illinois taxpayer today because, as the Court pointed out, to have such a rule would require the Court to be monitoring what all the other States are doing.
And I might add that today the State's taxing of interstate telecommunications is in a state of flux and changing.
Unidentified Justice: Well, certainly the States are going to be entitled to tax this sort of activity in some way.
I mean, there isn't any doubt about that, is there?
Mr. Smith: No doubt about that.
Unidentified Justice: And so, why isn't the Illinois way a relatively reasonable way to approach it?
Mr. Smith: Well because, Your Honor, it violates three of the important Complete Auto requirements.
Unidentified Justice: Don't forget that Illinois would allow the credit for the Washington tax.
Mr. Smith: Well, that isn't altogether clear, Your Honor, how the credit provision would work.
And let me just address that because that's one of the major arguments that the State is making here, that even though we have a completely unapportioned tax, that the credit provision that's in the statute will be effective to set it right and cure it.
In our view it will not.
Indeed, in our view this Court has never approved a credit provision on the ground that it will say they wholly unapportioned the tax.
And in the Holmes case mentioned by Your Honor, that was not the case because the tax was already apportioned when the credit provision was looked to.
Unidentified Justice: Well, why shouldn't we approve it now if it accomplishes the same result as apportionment?
Mr. Smith: Well, in our view, Your Honor, it couldn't accomplish apportionment for two reasons.
One is that it would do so only fortuitously.
To tack on a credit provision on a wholly unapportioned tax and hope that the States and the participants... interstate commerce will be able to sort it out, there's no guarantee that the sorting out will ever occur.
And certainly it will not under this credit provision, and let me explain why that's true.
In our view there are approximately... in fact, not approximately... there are only three circumstances that could occur under this credit provision.
One is that no other State will tax the call.
Another is that the other State will tax the other end of the call.
And the third is that the State will, at the other end of the call, will attempt to tax the Illinois taxpayer.
In our view, though, in none of these circumstances will fair apportionment be brought about, and let me explain why that's true.
If no other State taxes the call, fair apportionment will not be brought about.
Illinois will still have taken more than its fair share of the commerce.
And at the same time, it will have subverted and preempted the choice of the State at the other end of the call not to tax the interstate commerce.
The second possibility is that the State at the other end of the call will tax its own taxpayer.
But by the terms of this statute, its credit provision, no credit will be permitted in that circumstance because this credit provision grants a credit only where Illinois' own taxpayer is taxed twice.
So, those are the two... two of the circumstances, and in neither of those will fair apportionment be brought about.
Now, the third circumstance is where the other State attempts to tax the Illinois taxpayer.
But in our view, even in that circumstance, fair apportionment will still not be brought about, and there are two reasons for that.
First of all, the credit provision by its own terms grants a credit to the Illinois taxpayer only where the other State taxes the same event that Illinois has already taxed.
But by the terms of the statute, as construed by the lower court, the event that is taxed is the origination or termination of the call that is charged to an Illinois service address.
So that if the other state taxes termination where a call is billed or paid, while Illinois has taxed origination where the call is charged, two different events will be taxed and no credit will be permitted.
Unidentified Justice: Mr. Smith, I... I don't understand the whole need for apportionment.
We've required apportionment where... where what you're taxing is the net income of a... of a unitary business because there if you... if... there's only 100 percent of the net income, and if you allow every... every State to assume a different percentage attributable to that State, you end up taxing more than the whole.
But I'm not aware that we've required apportionment where what is being taxed is not a... a single event, but two separate events.
For example, we allow one State to impose a sales tax and another State to impose a use tax.
We don't... we don't... they're taxing two separate things.
One is taxing the sale; the other is taxing the use.
And there's no constitutional requirement that... that one give a credit for the other.
We've explicitly said that there's no such requirement.
Mr. Smith: --That may be true for the sale-use tax situation, Your Honor.
Unidentified Justice: Why is that different from this?
Mr. Smith: But here what we have is a... what you've just called a unitary event.
We have an... a tax being laid on the act or privilege of participating in an interstate phone call.
There is simply no doubt that two different States can tax that event.
And since that is true, this Court's decisions require that the tax be apportioned so that each State tax that part of the event that's occurring within in its borders because otherwise, if each State says we will tax 100 percent, the result will be... and I think this is the basis of the apportionment requirement... multiple taxation on interstate commerce.
Unidentified Justice: Why do we have to regard it that way?
Why can't we regard the tax as a tax on the placing or receiving of a phone call in... in Illinois, and another State can place a tax on the... on the placing or receiving of a phone call in that State?
Mr. Smith: Well, you could, Your Honor, but if each tax said... if each State says we will tax the placing of the call in our State, and then taxes the entirety of the call--
Unidentified Justice: That's how they measure the tax.
Mr. Smith: --as the measure of the tax... as the measure of the tax, it is inevitable that the call will be taxed at least twice, and if there's a third State participating, could be taxed all over again--
Unidentified Justice: Just as in the sales and use tax situation.
You tax the value of the thing once when it's sold and another time when it's used.
Mr. Smith: --That is right, Your Honor, and in each case the Court held that only one jurisdiction could levy the sales or the use tax.
Unidentified Justice: And... and here only one jurisdiction is taxing the receipt, and only one jurisdiction will be taxing the placement.
Mr. Smith: True.
True, Your Honor, but it's measuring the tax by the entirety of the call, including the portion of the call that does not occur within the taxing State's borders which... let me just add... which is not the case in a sales-use tax situation.
This Court has always held that sales taxes are permitted as an unapportioned tax only where only one jurisdiction could tax the sale.
And in Holmes, the Court upheld that use tax because only one jurisdiction could have taxed the unapportioned... the apportioned amount of the use occurring within Louisiana.
Unidentified Justice: Mr. Smith, may... may I interrupt you and ask you a question?
Mr. Smith: Sure.
Unidentified Justice: Supposing Illinois charges 5 percent on calls within the State of Illinois, and then it charged 2 and a half percent on all calls going across the State line.
The 2 and a half percent would apply to every call received whether or not billed within the State and every call originating within the State.
Would that be constitutional in your view?
Mr. Smith: That would come, in our view, a lot closer to a constitutional--
Unidentified Justice: Many of your arguments would apply to that situation too because the 2 and half percent would be on the entire transaction.
Mr. Smith: --But it would be apportioned.
The result, Your Honor, would not be that, in fact, Illinois was taxing commerce outside its borders.
The apportionment would have been a way to measure that part of the commerce you've just described that's occurring only within Illinois' borders.
Illinois would still not be taxing outside its borders--
Unidentified Justice: Let me be sure I... is your view that that tax would be permissible or not?
Mr. Smith: --Two and a half percent on all interstate phone calls and 5 percent on intrastate phone calls... if, Your Honor, the apportionment formulas of the kind we have suggested may be permissible in our brief--
Unidentified Justice: Because the reason I ask is that your opponent argues this is the functional equivalent of that tax because although it's 100 percent taxed, they really only tax half the calls because they tax those that are billed in Illinois and those that are not billed in Illinois are just not taxed at all.
So, what's the difference between 50 percent of 100 percent of the calls and 100 percent of 50 percent?
Mr. Smith: --Because that isn't what the State chose to do.
Illinois... the Illinois legislature did not decide to tax all calls within its borders, as your hypothetical just put it.
It decided only to tax 100 percent of certain calls, those calls that were charged to an Illinois service address.
The legislature never decided to use the apportionment formula you just described.
Unidentified Justice: No, but if they could demonstrate... I don't know whether they could or not... that this resulted in a functional equivalent because the same number of tax dollars would be collected, what's wrong with it in terms of burdening interstate commerce?
Mr. Smith: Because, as I think the Scheiner decision illustrates, Your Honor, that would require the netting of taxpayers.
The fact that the State might receive the right amount of revenue when all was totaled up, would not mean that individual participants in interstate commerce had been fairly treated.
You would have to net transactions.
Indeed, you have to net taxpayers in order for that to be the right result.
And we submit under the Scheiner decision, that isn't permissible.
Let me talk about the fair relation requirement because you've let me touch on some of the other elements that... that I wanted to talk about.
And I... the reason I was going to start with fair relation is because I think it is simpler than the other matters we've been talking about.
The fair relation requirement requires a State to measure its tax according to the contact of the commerce with the taxing State.
But, in fact, Illinois has not done that.
Indeed, as we've tried to point it out in our brief, Illinois has, in fact, done the reverse of that.
It has levied a tax that is inversely proportional to the contact with the taxing State.
And that's easy enough to see.
You take a single interstate phone call, and the longer is the call, the further away from Illinois it gets and, therefore, the higher is the price of the call and, therefore, the higher is the tax.
Unidentified Justice: That therefore does not follow.
It's simply not true that the price of an interstate phone call always varies according to its distance, is it?
That's just not--
Mr. Smith: You're right.
It is not always true, Your Honor, but in the vast majority of cases--
Unidentified Justice: --[inaudible] true it would be automatically discriminatory.
You could say you're discriminating on the basis of distance.
But it's not always true.
Sometimes a shorter call may cost more than--
Mr. Smith: --You're right, Your Honor.
It is not always true, but in the vast majority of cases, it is true as the data before this Court show and as Mr. Wiley's affidavit before this Court shows.
And this Court has held in Maryland v. Louisiana that we don't have to decide how unconstitutional a tax is.
The fact that it may be unconstitutional in a majority of the instances before the Court is enough to strike... to strike the tax down.
Illinois had an obligation to draft a tax that would be constitutional in all circumstances, and it has not so.
It has not attempted to apportion this tax.
It has not attempted to measure it in a way that limits it to the contact within Illinois.
Unidentified Justice: --Mr. Smith, are you suggesting that any State other than, say, Illinois and Washington could tax a call that originates in Illinois, in Chicago, to somebody in Seattle?
Mr. Smith: Your Honor, our argument does not depend on that being so, and the State has misconstrued our position.
It is not our view that the State is required on a call-by-call basis to measure how much of each call occurs in each intervening State.
Indeed, if you believe the State's position, none of the intervening States, in fact, have nexus to tax the call.
But it's enough to sustain our argument that unquestionably in every interstate call, at least two States have nexus and have the constitutional right to tax the call.
And if Illinois can tax the whole of the call, as both lower courts have held that it has done, so can the State at the other end of the line, and the inevitable result, we submit to the Court, is multiple taxation.
Unidentified Justice: It's taxing the whole of the call by taxing the whole of half of the calls... roughly half.
You have to mix up your callers, but isn't that true, because it doesn't impose any tax on those calls that originate in Illinois and are collect to somebody in Seattle?
Mr. Smith: That's right, Your Honor.
The statute expressly exempts those calls.
So, our view is that Illinois could choose not to tax certain interstate commerce.
Unidentified Justice: That's right.
Mr. Smith: And that is what it did.
Unidentified Justice: If you look at it call by call, it taxes the whole of the call.
If you look at the universe of calls, it roughly taxes half of the calls.
Mr. Smith: If that had been what this legislature wanted to do, Your Honor--
Unidentified Justice: Well, that's what it did.
Mr. Smith: --Well, I would submit, Your Honor, that it did not.
Indeed, if you read the State's own brief, you'll find that it did not.
The Illinois legislature made a judgment not to tax certain calls in part because it thought it didn't have nexus to do so.
And we would submit this Court should not now rewrite the statute and say what the Illinois legislature really wanted to do was tax every call and apportion it by saying if we tax 100 percent of these calls and none of these calls over here, it will all come in the wash.
A, that is not what the Illinois legislature did; and B, even if it had, Your Honor, it is still--
Unidentified Justice: I don't understand why you say it's not what they did.
It seems to me that's exactly what the statute does.
I mean, there's probably a problem with respect to calls from Chicago to Seattle that are billed to somebody in Atlanta.
I understand there's a problem there, but leaving that to one side, isn't that exactly what it did?
It taxed just those calls that are paid for... or charged to the number in Illinois, and that's... we can I think make a reasonable assumption that is roughly half the calls.
And you say they didn't do that.
Now, explain to me why they didn't do that.
Mr. Smith: --I would say on the face of the statute, Section 4 of this Act, the Illinois legislature determined to tax only one set of interstate commerce, calls that were charged to an Illinois service address, and by the statute it decided to exempt from taxation altogether the other kinds of calls you're describing.
I'm saying that was a judgment the Illinois legislature was entitled to make.
If it had wanted to do what you have just said, it would have passed a statute saying we tax all calls that originate and terminate in Illinois irrespective of whether they are charged to an Illinois service address, and we will apportion the tax by levying 100 percent on some calls and zero on others.
But that is not the statute the Illinois legislature passed, Your Honor.
And further, even if it had, I would submit to you that the fact that the right amount of revenues that are received by the State of Illinois doesn't begin to offer any assurance that individual taxpayers will be fairly treated.
Unidentified Justice: Well, unless you make the further assumption that the average individual phone user originates about the same number of calls he receives.
Mr. Smith: Exactly, Your Honor.
And there's no evidence whatever--
Unidentified Justice: But it's not a... it's not a ridiculous assumption.
Mr. Smith: --[inaudible] support that proposition.
Unidentified Justice: In our tax cases, we've talked about a rough approximation being sufficient.
Mr. Smith: And we agree a rough approximation would be sufficient, Your Honor, but we would submit that using a service address as a proxy for measuring what part of economic activity occurred in the State is arbitrary.
It is not a rough approximation.
Unidentified Justice: I... I don't even think we require a rough approximation.
We... we have... we have cases that... that... that measure the validity of a tax on the basis of whether the thing would be overtaxed if other States adopted the same kind of tax, a reciprocity requirement imagining would the thing be fairly taxed if another State had the same kind of law.
But we have never required the other States to have the same kind of law so that in theory, other States could adopt quite different laws and tax the thing quite unfairly.
We've never required anything resembling actual equity or even approximate equity in taxation.
Mr. Smith: Well, I guess I would suggest, Your Honor, what you have required is fair apportionment.
And it's true, as the Chief Justice points out, that fair apportionment can be a rough approximation.
But at the very least in drawing a fair apportionment formula, albeit a rough approximation, the Court has always required that whatever formula is used, both on its face and in practice, can be expected to measure the part of interstate commerce that occurs within the taxing State's borders.
And this apportionment formula... and I still beg to differ, Justice Stevens... a formula not adopted by the State of Illinois, but even if it had, there is nothing to suggest that it will in practice effect an apportionment both for the reason Justice Stevens says that you can't... I think you cannot assume without some data base to suppose it... that each caller within Illinois is going to have half of his calls charged to his serve address... service address and the other half not.
Furthermore, there is no reason to suppose that the service address to begin with is going to be some fair method for measuring the economic activity within the State.
I think I'll save the rest for rebuttal.
Unidentified Justice: Thank you, Mr. Smith.
Mr. Frey, we'll hear now from you.
ORAL ARGUMENT OF ANDREW L. FREY ON BEHALF OF THE APPELLEES
Mr. Frey: Thank you, Mr. Chief Justice, and may it please the Court:
I just want to be sure that the Court understands the operation of the tax.
And I think from hearing my adversary's argument, I think the Court does, but just to be absolutely certain.
First of all, I think it's important that the tax is not facially discriminatory between interstate and intrastate transactions; that is, the same tax rate is applied to either kind of call.
The question here is whether it is somehow discriminatory or unlawful in its operation.
Now, while Section 4 of the statute says a tax is imposed on the act or privilege of originating in this State or receiving in this State interstate telecommunications... and it's measured by 5 percent of the gross charge for such a communication.
Gross charge is defined as the amount paid for a call charged to an Illinois service address.
So, in other words, of the universe of calls... let's take the typical two-party call... it could be charged either to the non-Illinois party or to the Illinois party.
Illinois taxes it only if it is charged to the Illinois party.
It does not tax it if it's charged to the non-Illinois party.
Unidentified Justice: Mr. Frey, what about a call from Chicago to Seattle that someone in Florida puts on his Florida credit card... on his Florida--
Mr. Frey: You mean charges to his Florida number?
Unidentified Justice: --Charges to the Florida number, but it's--
Mr. Frey: It's clearly not taxed by Illinois.
Unidentified Justice: --It's definitely not taxed.
Mr. Frey: Definitely not taxed.
On the other hand, if an Illinois purchaser, while he's in Florida, calls somebody in Illinois, charges it to his Illinois number, that would be taxed even though the call was placed if the purchaser was outside Illinois when he placed the call.
Unidentified Justice: If an Illinois subscriber makes a call from Florida to Seattle, charges it to his Illinois number.
Mr. Frey: That is not taxed.
There have to be two things.
There has to be an Illinois party to the call, and it has to be charged to the service address of an Illinois purchaser.
Unidentified Justice: But it doesn't have to be paid by anybody by that address.
It could be paid from someplace out of state.
Mr. Frey: The statute expressly says that it's irrelevant where it's billed or paid.
Unidentified Justice: Right.
Mr. Frey: And GTE makes a lot of the fact that it can be billed or paid someplace else, and that that means it's not an Illinois sale, which is obviously I think not the case.
If you walk into Garfinkel's and buy a suit and you're a resident of the District of Columbia and you say send the bill to my father in Chicago, that doesn't mean the District of Columbia can't impose a sales tax on it.
Now, there's no challenge here to Illinois' nexus.
So, I will pass on from that to the question of apportionment.
And I think that the Appellants forget conveniently what the purpose is of requiring apportionment.
The purpose is that when the State taxes an activity that occurs in more than one State, some measure is needed to ensure that the State is taking only its fair share of the pie.
And this is required by due process type nexus requirements because if the State taxes something that is occurring in another State, there may be a nexus problem.
Now, the classical situations where apportionment has been required are, for example, in the case of a net income tax on the operations of a unitary multistate business or a property tax on movable property, such as railroad cars, which is used in a number of different States.
In those circumstances, the pie that is being taxed... that is, the tax base to which the tax is being applied... is activity occurring in multiple States.
That pie has to be sliced so that the taxing State gets only its fair share, and normally apportionment is the method that is used to do that.
Now, this tax fully satisfies that objective because the pie that is being sliced here at all interstate calls between a party in Illinois and a party outside Illinois.
And the way Illinois has sliced this pie... and I do not understand my friend's suggestion that the legislature didn't make clear what it was doing because I think Justice Stevens is completely right.
The statute does what it does, and what it does is to slice the pie by taxing calls charged to an Illinois number and not taxing calls charged to a non-Illinois number.
Now, I don't know whether you call this apportionment or you don't call it apportionment.
But what you do call it is something that fully satisfies the Commerce Clause purpose of apportionment.
So, it seems to me that there is that fundamental fallacy.
Now, let me come back to a point that was involved in Justice Scalia's first question because there are sort of two different ways you can look at this tax.
We argue that, first of all, you can look at it as being like a sales tax on the purchase of an interstate telephone service in Illinois or like a gross receipts tax on the revenues from interstate carriers doing business in Illinois.
Now, I am told, of course, that that is not what this tax is because the Illinois court said it's actually a tax on the interstate phone call.
But this Court has made crystal clear in numerous cases that if the tax is exactly equal in its operation to some other kind of clearly lawful tax... and that's exactly what was involved in Moorman... it will be upheld; that is, you will look at the economic substance of the tax.
Now, what is the economic substance of this tax?
The substance is that the Illinois purchaser who purchases a phone call pays a tax of 5 percent of the cost of that purchase charged to his Illinois service address.
It sounds a lot like a sales tax for me... to me, and I think it is quite clear that the fact that it is not technically a sales tax is an effort to throw this Court back to the era of hyper-technical formalism that existed before Complete Auto.
In economic substance it is something that happens... what is being taxed is exactly like a sales tax.
It is also exactly like a gross receipts tax; that is, the amount of tax that Illinois collects is exactly the same as if Illinois said we will tax interstate carriers on their gross receipts from interstate phone calls and we will measure that tax by the unapportioned gross receipts that they receive in Illinois.
Unapportioned gross receipts taxes have been repeatedly upheld by this Court.
They were upheld in Standard Pressed Steel.
Moorman said they were good.
Tyler Pipe two years ago said they were good.
I know that in Moorman, Justice Brennan in his dissent questioned the propriety of unapportioned gross receipts taxes, but in Moorman, the unapportioned gross receipts tax presented a problem of Iowa taking too big a share of the pie, which I hope to demonstrate momentarily does not exist in this case.
So, I think even if you didn't approve of unapportioned gross receipts taxes on most interstate sales, they're perfectly all right in the telephone context.
Now, the Appellants have argued that a gross receipts tax is different from a tax on the phone call because the incidence of this tax falls on the retail customer rather than on the carrier.
But in economic substance, I think it's generally recognized and I think it's obvious that a gross receipts tax has the same economic effect as a sales tax.
It's different in form, but not in substance.
It has the same economic effect because the cost to the purchaser of purchasing the taxed service will be the same.
In the case of a gross receipts tax, the tax will not be separately stated, but it will obviously be incorporated in the price of the good or service that is sold.
Now, even if you view it as a tax on the interstate phone call themselves, which we agree one or more States... other States would have nexus to tax depending on where the other parties, the non-Illinois parties are located... the Illinois scheme fully satisfies apportionment objectives.
And... and I think I would agree that in the absence of a credit, if Illinois tried to tax 100 percent of all calls to which an Illinois party is a party, there would be a serious problem under the Commerce Clause.
Unidentified Justice: Why?
Mr. Frey: There would be a serious problem because that tax would not pass the internal consistency test because--
Unidentified Justice: You mean... you mean the other... if another State... it would just be... what you're saying is it would be double taxation of the same call.
Is that it?
Mr. Frey: --There would be the... at least the potential for double taxation, and there would be actual double taxation with many other States.
That is, it seems to me it is critically different... critical to this case that Illinois is not attempting to tax every call on the full amount of the call.
If it did that, I believe there would be a problem.
Unidentified Justice: So, as a... so, with respect to the Washington statute, for example, you think the... if there's a problem, the credit cures it, or is there a problem at all?
Mr. Frey: Well, I don't think... I don't think there's a problem, and I will get in a moment to why I don't think there is any problem at all even though you could hypothesize a particular phone call that might be taxed twice.
I don't think that causes a problem.
Unidentified Justice: Well, let's say... let's... let's suppose... just suppose a phone call like that.
You think the credit would cure it anyway.
Mr. Frey: The credit would cure it anyway.
The credit cures several problems although I have to say that... that I am confident that this tax is valid even if it did not have a credit provision.
I do not think we depend at all on the credit provision.
But to the extent there is any residual argument left that some individual taxpayer might find itself in the position of paying double taxes somewhere, the credit provision does take care of it.
So, I think the credit provision is a kind of insurance that is not needed, but that is present.
Unidentified Justice: I'm told the credit provision only applies if the same taxpayer is asked to pay twice.
So, it can... it can result in calls being taxed in full by the receiving State and the State of origin if paid by different people.
Mr. Frey: --It could, and I don't think that would be a problem for reasons I'll get to.
But the credit provision in that respect is the same as the Louisiana credit provision involved in Holmes, which I believe also applied only if the taxpayer had paid a tax outside the State.
Yet, the Court found it satisfactory to deal with apportionment requirements.
I don't find it as intellectually satisfying as our other arguments, but I think the precedent clearly suggests that it's there.
And it does serve a purpose of guarding against multiple taxation by... to the individual, particular taxpayer.
I think the Court should appreciate how inconsistent the Appellants' arguments are because they start off by saying you can't treat this like a sales tax; that is, you can't look only at the transactions that are sold in Illinois because the Illinois Supreme Court said it's a tax on the interstate phone calls, not a tax on the sales.
So, you have... and the interstate phone call, after all, consists of calls that could be taxed by either State.
So, you have to look at the universe of calls that could be taxed by either State.
And we say, fine, look at the universe of calls that could be taxed by either State.
Observe that only half of those calls are taxed by Illinois.
So, where's the problem?
And they say, oh, no, you can't do that.
When you look at the calls that are... the interstate calls that are taxed, you must look only at the ones that are sold in Illinois.
And then you find that those are taxed 100 percent, to which I say, well, then what's wrong with treating this as a sales tax.
They have really tried to pull a little shell game on the Court I believe.
Unidentified Justice: Before you leave that, Mr. Frey, they... they... as I understand your opponent, he said, well, but in order to take that position, you have to mix up your taxpayers and lump them all together in a way that Scheiner prohibits.
Mr. Frey: --I'm... Scheiner is one of my very favorite cases.
Unidentified Justice: Well, I would think it would be.
Mr. Frey: But I can't say that I'm... that I understand what it is that he is referring to in Scheiner.
In Scheiner, the problem was that the structure of the tax inherently and in empirical experience as well discriminated by causing the out-of-state business to pay more tax... and remember, Scheiner was a use tax for the use of the State's roads... than the in-state operator had to pay.
I'll note parenthetically that the objection in this tax is... and this is a little... perhaps a little bit complicated to understand, but the objection is that the Illinois caller is being discriminated against.
It's the Illinois caller who's paying the tax on the full call.
The person in Nevada who makes a call to Illinois and charges it to his Nevada number is getting the benefit of the fact that Illinois is not trying to tax that call.
So, this is a rather odd Commerce Clause claim because the in-state people are the victims of this discrimination and the out-of-state people are the beneficiaries of this discrimination.
I'm not sure that the Commerce Clause reaches that situation.
But when you're talking about apportionment--
Unidentified Justice: Well, your opponents don't represent callers.
They represent... at least they're people who are operating telephone lines.
Mr. Frey: --They represent residents of Illinois.
Unidentified Justice: Well--
Mr. Frey: Well, GTE is a carrier.
Unidentified Justice: --Yes.
Mr. Frey: But the incidence of the tax we are told... we are told we can't look at this as a gross receipts tax on GTE.
It's sort of standing in for its customers because it paid their tax.
Now, the customers are all Illinois residents, Illinois businesses, and they're saying they paid to Illinois--
Unidentified Justice: Well, I suppose part of the argument is that the... is that it doesn't make any difference how... what distance the interstate call covers, and the longer it is, the less connection really that Illinois has for it.
And the in-state people--
Mr. Frey: --Let me... let me say--
Unidentified Justice: --You can only call in-state between the borders of the State.
Mr. Frey: --I mean, that is true, but I guess there are several things to be said about that.
Unidentified Justice: And the carrier says I'm carrying this call from China.
Mr. Frey: Yes, all right.
And there are several things to be said about that.
One is it has nothing to do with apportionment.
If you apportioned the tax by taxing only half of the call, this objection would still exist exactly the same.
So, it doesn't have anything to do with the apportionment issue.
It's a totally separate issue.
Now, it is, it seems to me, completely indistinguishable from a sales tax; that is, what they are suggesting... well, first they suggest that it's unrelated to the services that Illinois provides to the telephone caller.
And Commonwealth Edison, if it made one thing clear, was that the relationship didn't have to be to the services but to the in-state activity of the taxpayer.
Now, what is a better way to measure the in-state activity of making an interstate phone call than the value... than the price that the taxpayer is willing to pay for the phone call?
It seems to me that that is a completely fair way and that the Court should not set foot upon the path of suggesting that you could not measure the tax that a State can impose on a transaction by the amount that the taxpayer paid for the tax transaction.
I think you will find yourselves quickly in a quagmire if you start out in that direction.
Unidentified Justice: You're saying it's the same price as the ordinary sales tax because a certain portion of the price of any tangible goods has to be attributable to--
Mr. Frey: It's the point you made in your--
Unidentified Justice: --to the transportation of those goods from elsewhere.
Mr. Frey: --Right.
Unidentified Justice: So, every sales tax has that effect.
Mr. Frey: Yes.
I mean, as we said in our brief I believe, if... if... if there are two cars manufactured in Michigan and brought into Illinois to the same showroom and sold, and one is a Cadillac and one is a Chevrolet, and the Cadillac costs twice as much, the State of Illinois has done exactly the same thing with respect to both of those cars.
Yet, it unquestioned that it can tax twice as much for the more expensive one.
I don't... I would rather... although if there are more questions about fair relation, I'll be happy to talk about them, but I think the main thrust of the Appellants' argument is in the apportionment area.
I think there's a fundamental point about apportionment, and the Court made this point in the Container Corp. case quite clearly.
There are two requirements to satisfy yourself that the State is getting a fair share of the total taxes.
The first is what's known as internal consistency.
Now, internal consistency is a logical requirement that you determine by looking at the structure of the tax, and what you ask yourself is whether... if this formula were applied by every jurisdiction, would it result in more than all of the interstate transactions being taxed.
It is crystal clear that the Illinois tax passes internal consistency.
The only argument I've seen to suggest otherwise is GTE's argument that if other States had different taxes and you put them together with the Illinois tax, there might be a possibility of multiple taxation.
But, of course, that would make no tax pass internal consistency.
That is, it totally defeats the purpose of the internal consistency inquiry.
Now, the internal consistency inquiry is very important because it means that the tax looked at on its own terms does not carry with it any inherent risk of multiple taxation of interstate transactions.
Scheiner of course, was totally different in that regard.
Now, there is a second requirement, and that has been called external consistency.
And what external consistency means... and I'm quoting from Container Corp. where it was called the more difficult requirement... is that
"the factor or factors used in the apportionment formula must actually reflect a reasonable sense of how income is generated. "
That is, when you look at the way the pie has been sliced, you must ask yourself whether the State has taken a slice that reasonably reflects the in-state component of the interstate activity being taxed.
But the Court is very hands-off in applying external consistency; that is, the Court has made clear that what you need is a method of allocation or attribution to the State that is... and I quote...
"out of all appropriate proportion, or that leads to grossly distorted results, or that is outrageous in its application. "
Now, I defy anybody to say that taxing 50 percent of the interstate two-party calls, to take our simple hypothetical, could possibly fit that.
There's another important point about Container Corp. and it--
Unidentified Justice: Have we ever applied that... that requirement to a sales tax?
Mr. Frey: --You've never... a sales tax is an unapportioned tax.
Now, in other words, you... you would not... you would not apply it to a sales tax.
Unidentified Justice: If we regarded this as a sales tax, we wouldn't even have to confront that problem.
Mr. Frey: I think you would not have to confront that problem.
But... but I am taking the Appellants on their own terms for the purposes of this argument and suggesting that you might choose to regard it, as they insist you must, as a tax on the interstate telephone call itself which I agree to.
Two States have nexus to tax.
Now, but I wanted to make another point about Container Corp. which is overlooked I think by Mr. Smith in his argument.
He... he says, well, we don't... how do we know whether half of the calls are likely to be charged to the Illinois caller and half to the non-Illinois party.
Well, first of all, I think we know that from common sense it's probably generally going to be the case.
But in any event, what is clear is that this factual question... this is a question about whether external consistency is satisfied, not internal consistency.
And in Container Corp., the Court said unequivocally the Appellant has the burden of proof.
And there is not one iota of evidence in the record in this case... there's no attempt to prove that the tax doesn't pass internal consistency.
There is only an attempt to force the Court to take this narrow focus and look only at the calls that are actually taxed, but at the same time not treat it as a sales tax or a gross receipts tax.
Now, let me turn to something else because the Scheiner case I think is quite helpful to us in a number of respects, and one of the respects in which it's helpful is that it recognizes that where it is administratively difficult or impossible to tax a transaction appropriately by a non-discriminatory tax, maybe a discriminatory tax would be permissible.
Now, I don't for a minute agree that this is in the least a discriminatory tax, but any scheme of call-by-call apportionment of the kind that the Appellants suggest is either unconstitutional or wholly unworkable.
Now, let me quickly run through the possibilities.
If you're going to apportion an individual call, you can apportion it, it seems to me, either... let's take, first, the possibility that you look on the basis of mileage, which has been suggested in their briefs, and each State gets to tax the share that represents the miles through that State that a straight-line signal between the two points would pass.
I think it's clear from MCI's brief and from what anybody knows about the telephone business, that this is impossible.
There is no record of the signals.
There is no way to determine which intervening States are involved.
I question whether an intervening State would have nexus simply because the signal passed through its borders or even touched a microwave relay tower that's within its borders, which the State ought to tax through a property tax it seems to me.
But even if you could determine this, it would be a nightmare to administer on a call-by-call basis that kind of apportionment.
And I... and I think the Appellants have essentially receded from the suggestion that that should be done.
Now, there is a second possibility which is that you can impose... and this is the... the only thing that they have alleged they have the technological capacity to do.
If I'm in Illinois and I call someone in California, they have suggested that when they send me the bill, they... they have the capacity to tax half of that call... to impose the Illinois tax on half of that call, the California tax on half of that call.
So, they would... I'm in Illinois.
They would bill me for the California tax and the Illinois tax.
They have the technological capacity to do that, but I have two observations.
First of all, that's unconstitutional unless you're going to overrule National Bellas Hess.
That is, I do not have nexus with California.
California cannot tax me simply because I make a phone call from outside California into California.
Indeed, it can't tax me if I conduct a mail order business with extensive advertising and so on as long as I don't have a physical presence in California.
And the second observation is to what end are we going through this exercise when it is essentially going to end up in the State's getting the same amount of tax dollars and the generality of taxpayers paying the same amount of tax dollars.
And I might mention that neither Mr. Goldberg nor Mr. McTigue has suggested that they have paid a penny more in tax than they would pay under any one of their apportionment schemes except--
Unidentified Justice: Assuming what you have just said is true, assuming everybody adopts the same scheme, right, as Illinois?
Is... is that... is that a likelihood?
Mr. Frey: --No, I don't... I don't care... let me... let me get to that because that is a point that has come up several times.
First of all, essentially nobody has inconsistent schemes.
This Wheat Ridge, Colorado scheme that was mentioned in the Illinois Supreme Court is itself not internally consistent and, therefore, probably unconstitutional.
And certainly the Illinois tax can't fall because some other tax is... is unconstitutional.
But beyond that, let's postulate the situation in which a State takes into its head for some reason to tax the party who... who doesn't pay for the call.
So, California says we're going to tax the party who doesn't.
If somebody in California doesn't pay for the call, we'll tax them.
I wanted to make the point that that is administratively impossible because there's no way of identifying who such a person is.
Even if... even if that were possible and California did it, the result would be that... that it would be an advantage... an advantage... to interstate commerce, not a disadvantage because if the call was billed in California, nobody would pay any tax.
The tax would be zero.
If the call was billed in Illinois, the tax would be on 200 percent.
That would still even out so that the generality of taxpayers would be paying a tax on 100 percent.
But people who are in interstate commerce... if I am calling my branch office in California, I have the choice to charge the call in a way that reduces my tax down to zero in that situation.
So, I don't see how the Commerce Clause can be violated when these various schemes actually provide an advantage to interstate callers who... who would want to arrange their affairs to avoid the tax and for the generality a caller would wash out in the end.
Now... now, suppose some person came along and said, you know, the only long distance calls I make are to my grandchildren and I charge them all to my phone and the result is that I'm paying more than my fair share of tax.
I guess I have several observations about that, and I know my time is running out.
So, I... I... I want to remind the Court of something that it said in Moorman.
And maybe this is back on this... on this question of different tax schemes producing multiple burdens.
In footnote 12 in Moorman, the Court was concerned with whether the Iowa scheme created multiple tax burdens when it was juxtaposed with the Illinois scheme.
And the Court said the simple answer is that whatever disparity may have existed by these inconsistent statutes is not attributable to the Iowa statute which treats both local and foreign concerns with even hand.
The disparity can only be the consequence of the combined effect of the Iowa and Illinois statutes, and Iowa is not responsible for the latter.
Thus, appellant's discrimination claim is simply a way of describing the potential consequences of the use of different formulas by two States.
Now, what could be more apt to the situation that is being postulated here?
Now, let me come back to the person who says I only call my grandchildren.
First of all, it's not clear that at the joints... the play at the joints doesn't just subject him to the tax consequences.
You don't declare a statute unconstitutional for that.
Secondly, there's no showing that anybody has ever paid actual multiple taxes.
And with respect to the possibility that potentially such a person would pay tax on more than 100 percent of the calls to his grandchildren, there is the credit provision available if that should happen, if he should be so foolish as to arrange his calls in a way that he does get double-taxed.
So, I think the risk of multiple tax burdens is a sham in this case as well.
Let... let me close with... with an example on the discrimination point.
Maybe this point is already clear, but I'm thinking about the case... I thought of... if you had two toll bridges, one between Manhattan and Brooklyn and one between Manhattan and New Jersey, and you charged a dollar when you got on the bridge.
That was the toll.
No toll when you got off the bridge.
The result is that the person traveling between Manhattan and Brooklyn, no matter which direction he went in, would have to pay a $1 toll.
A person traveling between Manhattan and New Jersey would pay a $1 toll when he's going to New Jersey, but returning from New Jersey, New York would collect no toll.
Now, if I understand the burden of my opponent's argument, it is that that system is unfair and discriminatory against interstate commerce, that you must apportion the toll that is paid on the trip between New York and New Jersey.
You must disregard the fact that the trip in the other direction is not taxed at all.
Now, this seems to me the height of formalism, and I think the Court should stay far away from it.
If there are no further questions, I thank you.
Unidentified Justice: Thank you, Mr. Frey.
Mr. Smith, you have four minutes remaining.
REBUTTAL ARGUMENT OF WALTER A. SMITH, JR.
Mr. Smith: Thank you, Mr. Chief Justice.
Our... our primary answer to I think most of what counsel has been saying is that he's trying to litigate a statute other than the one that's before this Court.
The statute that is before this Court has levied a tax on the act or privilege of engaging in an interstate phone call, either the origination or the termination of the phone call.
That is the tax, and it has been measured by taxing the Illinois taxpayer on the whole of the gross charge for the call.
We would submit there is no question but what the other participating State in such an interstate phone call has nexus and constitutional authority also to tax the call.
And if Illinois can tax the whole of the call, so too can the State at the other end of the line.
The only explanation, as we understand counsel, that he gives for justifying this risk of multiple taxation is that there is this apportionment formula that I say to you he has created and the State has not written.
And even if the legislature had written it, there's absolutely no evidence to show that the netting effect that he talks about is going to produce the correct amount of revenues either as a whole and certainly not in the case of individual taxpayers, including the two plaintiffs before this Court.
The other rewriting of the statute that counsel wants to do is to call this a sales-tax because he likes the tests for a sales tax much better than he likes the tests for the particular tax before the Court.
But this Court has made clear in case after case that an unapportioned sales tax is illegitimate only when the particular event being taxed cannot be taxed by any other jurisdiction.
And it is for that reason an unapportioned tax is permitted.
But not only is this not a sales tax as written and as construed by the lower courts, but in substance it is not a sales tax.
The delivery of all of the goods here being taxed were not delivered in the State of Illinois.
Part of the economic activity by definition... and this underlies our whole argument... occurred outside the State of Illinois.
And Illinois did not attempt to tax the purchase here.
It taxed only calls that were charged to Illinois irrespective of where the particular call was billed or paid for.
So, neither in form nor in substance is this a sales tax.
And the final rewriting of the statute he's interested in is to call this a gross receipts tax.
And he has told this Court that you have approved unapportioned gross receipts tax on interstate commerce.
It is not so.
This Court has always required apportionment of any tax that is laid on the entire volume of interstate commerce that occurs in a particular taxing jurisdiction.
That is what Illinois has done here.
There is no apportionment formula being used here like Moorman or any other formula that this Court has approved.
And we urge this Court not to rewrite the statute for the legislature, create an apportionment formula the legislature did not choose to use, make assumptions that every taxpayer in Illinois has 50 percent of his calls charged to his service address and 50 percent outside.
This Court held in the McCloud case and in the Henneford case both you judge the statutes as they come before you.
You adjudicate the constitutionality of the tax that the legislature wrote.
Unidentified Justice: What's the case that holds that the gross receipts tax must be apportioned?
Mr. Smith: Moorman.
And the formula used in Moorman was... as the Court knows, it was a sales formula.
The sales in state was the numerator and the sales out of state was the denominator, and that's multiplied by the gross receipts.
Whenever this Court has reviewed a gross receipts tax on interstate commerce, only part of which occurred in a particular State, apportionment is required because in the absence of apportionment, the State not only taxes commerce outside its borders, which it cannot do, but it also subjects that... the particular event in question to multiple taxation.
Chief Justice William H. Rehnquist: Thank you, Mr. Smith.
The case is submitted.
Argument of Justice Marshall
Mr. Marshall: The other case, Goldberg versus Sweet, No. 87-1101, is appealed from the Supreme Court of Illinois.
This case, we hold that the Illinois Telecommunications Excise Tax does not violate the Dormant Commerce Clause and challenge tax on interstate telecommunications is falsely apportioned.
It does not discriminate against interstate commerce.
It is fairly related to services and benefits produced by the State of Illinois.
The judgment of the Supreme Court of Illinois is, thereby, affirmed.
Justice Stevens and Justice O’Connor have each filed separate concurring opinions, and Justice Scalia has filed an opinion concurring in the judgment.