Brief Fact Summary. A Massachusetts statute required all milk “dealers” in the state to pay a monthly “premium payment” into the MA Dairy Equalization Fund. Every month the fund was distributed to MA milk producers (dairy farmers) so they could compete with lower cost dairy farmers from other states.
Synopsis of Rule of Law. State taxation of interstate commerce is allowed so long as the tax does not discriminate against or cause an undue burden on interstate commerce. The Dormant Commerce Clause prohibits economic protectionism.
Between 1980 and 1990, Massachusetts dairy farmers began to lose market share to lower cost dairy farmers in neighboring States. In response, Massachusetts passed a statute that required milk dealers to pay a monthly “premium payment” based on the amount of fluid milk products sold into a fund. Then the State distributed money from that fund to in-state dairy farmers (producers) to help them compete against out of state farmers. West Lynn Creamery is a milk dealer licensed to do business in Massachusetts. It purchased raw milk and then processed, packaged and sold it to wholesalers, retailers and other milk dealers. About 97% of the raw milk it purchased is produced by out-of-state farmers. As a result the tax on Massachusetts farmers is returned to them, but the tax on the milk from out-of-state farmers is not. The net effect was to raise the after-tax price paid by the dealers such that Massachusetts farmers who produce at a higher cost can sell at or below the price charged
by lower cost out of state producers. The goal of the statute is met because local goods would constitute a larger share and goods with an out of state source would lose their market share. The out-of-state producers cannot lower their price further because the government sets minimum milk prices. The Creamery sued in Massachusetts state court and lost.
Issue. Does the pricing order unconstitutionally discriminate against interstate commerce?
Held. Justice Stevens. Yes. Massachusetts state court judgment reversed.
The Massachusetts pricing order is clearly unconstitutional because its purpose and its undisputed effect are to enable higher cost Massachusetts dairy farmers to compete with lower cost dairy farmers in other States. This neutralizes advantages belonging to the place of origin.
The pricing order benefited an in-state economic interest by burdening out of state competitors. Most of the tax collected came from taxes on milk from other states. This caused out-of-state milk production costs to rise. The tax on the in-state milk did not impose any burden on in-state producers since it would be returned to them via the Dairy Stabilization Fund.
The imposition of a differential burden on any part of the stream of commerce is invalid because a burden placed at any point will result in a disadvantage to the out of state producer.
The local benefit that Massachusetts was trying to achieve, preserving the Massachusetts dairy industry, did not outweigh the incidental burdens on interstate commerce. This justification is not enough to discriminate against out of state dairy farmers.
The subsidy distorts the political process because a tax on milk would normally have three major opponents, consumers, farmers, and processors. Because of the subsidy farmers are not going to object (instead they will support), consumers will hardly fight a two cent increase, and so only the processing plants are left to fight the legislation. This distorts the political process that normally would check legislatures and make sure they do not run afoul of the Dormant Commerce Clause.
The Court did not squarely confront the constitutionality of subsidies. Direct subsidization of a domestic industry does not ordinarily run afoul of the negative Commerce Clause. In addition, it is undisputed that States may try to attract business by creating an environment conducive to economic activity, e.g., by maintaining good roads and public education or low taxes.
Dissent. Points of Law - for Law School Success
It has long been the law that States may not build up their domestic commerce by means of unequal and oppressive burdens upon the industry and business of other States. View Full Point of Law
Chief Justice Rehnquist and Justice Blackmun dissenting.
The method of imposing a tax and subsidy distorts the state’s political process because, as the Court pointed out, there were two strong interest groups opposed to the milk order – consumers and milk dealers. Analysis of interest group participation in the political process may serve many useful purposes, but serving as a basis for interpreting the dormant Commerce Clause is not one of them.
Milk dealers had the same incentive to purchase lower priced milk from out-of-state farmers because dealers of milk were taxed equally regardless of where the milk came from.
Concurrence. Justice Scalia and Justice Thomas.
The Court’s guiding principle would call into question a wide variety of state laws that were thought permissible. Many state programs are designed to neutralize advantages possessed by out of state enterprises. They make it more profitable to conduct business in-state than elsewhere by distorting normal market incentives.
J. Scalia and Thomas agree that they will enforce the Commerce Clause only against a state law that facially discriminates against interstate commerce and against a state law that is indistinguishable from a type of law previously held unconstitutional by this Court.
J. Scalia would allow a State to subsidize its domestic industry so long as it uses funds from nondiscriminatory taxes that go into the State’s general revenue fund. He would allow this because it is removed from what the Court has held to be unconstitutional in previous cases. If the Court were to prohibit all subsidies it would extend the Dormant Commerce Clause to unacceptable limits. Discussion.
J. Rehnquist, J. Blackmun, J. Thomas, and J. Scalia were all concerned about regular subsidies that are given from a general fund. The majority of the court addressed the regular subsidy problem and said it was not considering it. Many would argue that this case has a very narrow holding, namely, that a tax that primarily effects out-of-state producers and is redistributed directly to in-state producers of the same product is unconstitutional under the Dormant Commerce Clause.