Case Brief – Department of Revenue of Kentucky V. Davis

Bridget Galloway

Case Brief – Department of Revenue of Kentucky v. Davis

W 6pm

Facts

Davis, a resident of Kentucky, paid state income tax on out-of-state municipal bonds. Kentucky does not tax municipal bonds that originate in their state, but they do tax bonds from every other state on personal income tax returns. Davis believed that Kentucky’s tax on out-of-state bonds discriminates against interstate commerce. In trial court, the ruling was in favor of Kentucky stating that they had the power to tax other bonds under the Commerce Clause. At the appellate court level, the original ruling was overturned. The rationale was Kentucky did not follow the Commerce Clause, and the ruling was in favor of Davis.

Issues

The issue in this case is whether or not Kentucky did violate the Commerce Clause. Davis appealed that the clause was not properly followed in the trial court, where the ruling was in favor of the Kentucky Department of Revenue on the basis of the “market-participation” exception to the Commerce Clause. The appellate court overturned the trial court’s ruling on the basis that Kentucky’s tax did violated the Commerce Clause. The Supreme Court is deciding whether or not Kentucky did violate the Commerce Clause.

Holding

        The Supreme Court ruled in favor of the Department of Revenue of Kentucky, saying that they did not violate the Commerce Clause. Kentucky ended up winning the case. They decided this based on a few prior cases. They stated that the Commerce Clause has been a law of “economic protectionism,” meaning states use different laws in order to protect themselves economically by “burdening out-of-state competitors.” The court cited this from the case of New Energy Co. of Ind. v. Limbach. They also cited United Haulers Assn., Inc. v. Onieda-Herkimer Solid Waste Management Authority, stating that this case “provides a firm basis for reversal.” The laws of states are created for legitimate issues, especially those that favor their own state municipal bonds so they are not subject to the “standard dormant Commerce Clause.” The court also looked into the laws of other states and found similar laws as Kentucky’s, and that they were held up in their state courts. Finally, they applied the case of Pike v. Bruce Church, Inc. which set the standards that certain laws are allowed “on a showing that they clearly out-weigh the benefits of a state or local practice.”