Where a sovereign enacting a law has power to impose both tax and penalty the difference between revenue production and mere regulation may be immaterial, but not so when one sovereign can impose a tax only, and the power of regulation rests in another. Taxes are occasionally imposed in the discretion of the legislature on proper subjects with the primary motive of obtaining revenue from them and with the incidental motive of discouraging them by making their continuance onerous. They do not lose their character as taxes because of the incidental motive. There comes a time in the extension of the penalizing features of the so-called tax when it loses its character as such and becomes a mere penalty with the characteristics of regulation and punishment.
Plaintiff incurred tax liability under the Child Labor Tax Law (Law), 40 Stat. 1057, 1138 (1919), by permitting a child to work in its factory. After paying the tax bill under protest, plaintiff brought suit challenging the constitutionality of the Law and sought a tax refund. It is contended that the Law regulates employment of child labor which is an exclusively state function. The District Court struck the Child Labor Tax Law for being an invalid exercise of state function. Defendant appealed from the lower court's entry of judgment in favor of plaintiff.
Was the Child Labor Tax Law unconstitutional for being an invalid exercise of state power?
The Court on appeal affirmed, holding that the Law was an impermissible attempt to regulate employment of child labor, an exclusive state function reserved under U.S. Const. amend. X. The Court held that the Law was not an allowable federal government excise tax but rather a penalty enacted to coerce state citizens to act in accordance with Congress' views on child labor. The Law was not naturally and reasonably adapted to collection of a tax but an impermissible attempt to achieve a purpose solely within state power.