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Law School Case Brief

Dep't of Revenue v. Davis - 553 U.S. 328, 128 S. Ct. 1801 (2008)


Under the protocol for dormant Commerce Clause analysis, a court asks whether a challenged law discriminates against interstate commerce. A discriminatory law is virtually per se invalid and will survive only if it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives. Absent discrimination for the forbidden purpose, however, the law will be upheld unless the burden imposed on interstate commerce is clearly excessive in relation to the putative local benefits. 


The Commonwealth of Kentucky exempted from commonwealth income taxes the interest earned on bonds issued by it or its political subdivisions; interest earned on bonds issued by other states and their subdivisions was not exempted. After paying commonwealth income tax on out-of-state municipal bonds, respondents George W. Davis and Catherine V. Davis (collectively, "Taxpayers") filed a class action declaratory judgment complaint in Kentucky circuit court against petitioners Department of Revenue of Kentucky ("Department") and other state officials. The Taxpayers alleged that the Department's practice of taxing the income earned on out-of-state bonds violated the Commerce Clause of the United States Constitution and the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution. Before the Taxpayers had filed a motion for class certification, the Department filed a motion for summary judgment arguing, inter alia, that the tax system was constitutional. The circuit court granted the Department's motion for summary, relying in part on a "market-participation" exception to the dormant Commerce Clause limit on state regulation. The Court of Appeals of Kentucky reversed the circuit court's judgment, finding that tax scheme ran afoul of the Commerce Clause. The Department was granted a writ of certiorari.


Did Ky. Rev. Stat. Ann. § 141.010(10)(c) (Supp. 2007) violate the Commerce Clause, U.S. Const. art. I, § 8, cl. 3, by including in taxable income the interest earned from out-of-state municipal bonds and excluding interest from bonds issued by the Commonwealth and its subdivisions?




The Supreme Court of the United States reverse the judgment of the Court of Appeals of Kentucky and remanded the case for further proceedings. The Court ruled that Kentucky's taxation of only extraterritorial bond interest did not violate the dormant Commerce Clause, which precluded regulatory measures benefiting in-state economic interests while burdening out-of-state competitors. The tax exemption for in-state municipal bond interest favored a traditional government function without any differential treatment favoring local entities over substantially similar out-of-state interests. Further, in addition to exercising its regulatory taxation authority, the Commonwealth also participated in the market for public bonds to finance public projects and services, and the Commonwealth was not prohibited from favoring its own bonds in the competitive market. There was no forbidden discrimination since the Commonwealth, as a public entity pursuing public interests, was not required to treat itself as being substantially similar to other bond issuers in the market.

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