* Professor of Law, Seton Hall University School of Law. B.S., University of
Illinois; M.S.T., DePaul University; J.D., Georgetown University Law Center. Earlier
versions of this article were presented at the American Tax Policy Institute Roundtable,
the 2004 Critical Tax Conference at Rutgers School of Law-Newark, Seton Hall
University School of Law, the 2005 Critical Tax Conference at Seattle University
School of Law, the Tax Research Network Conference 2005 at Edinburgh University
and the Comparative Fiscal Federalism Conference at the University of Michigan Law
School. The author received many useful observations and comments from the
participants at these conferences and separately from William Nelson, Angela Carmella,
Daniel Shaviro, Bertil Wiman, Charles McLure, Jr., Neil Buchanan, Mark Alexander,
Joseph Guttentag, Michael McIntyre, Mel Marquis, Lee Sheppard, Steven Shay,
Michael Lang and Albert Rädler. The author also benefitted greatly from a U.S.
Fulbright Scholar Program grant and visiting professorship with Dr. Wolfgang Kessler
at the University of Freiburg in Germany. The author is grateful to the American Tax
Policy Institute and the Seton Hall University School of Law Dean�s Research
Fellowship program, which provided financial support for this article. The author would
also like to thank her research assistants Deirdre Bussom, Carolyn Conway, Andrew
Farrelly, Wayne Jentis, Monica Kraft, Alison Lam, Victor Macam, Anneke Niemira,
Aliza Sherman and Lynn Tatum.

47

FLORIDA TAX REVIEW
VOLUME 7 2005 NUMBER 2

TAX DISCRIMINATION: A COMPARATIVE ANALYSIS OF 
U.S. AND EU APPROACHES

by

Tracy A. Kaye*



48 Florida Tax Review [Vol.7:2

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
II. EU VS. U.S. FEDERALISM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

A. The Legislative Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
B. The Judicial Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

III. PRINCIPLES OF INTERNATIONAL AND INTERSTATE TAXATION . . . . 75
IV. JUDICIAL LIMITATIONS ON TAX SOVEREIGNTY . . . . . . . . . . . . . . . . 77

A. Judicial Limitations on State Tax Sovereignty in the 
                 United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

1. The Privileges and Immunities Clause . . . . . . . . . . . . . 79
2. The Equal Protection Clause . . . . . . . . . . . . . . . . . . . . 84
3. The Dormant Commerce Clause . . . . . . . . . . . . . . . . . 86

B. Judicial Limitations on Member State Tax Sovereignty in the          
                 European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

1. The Free Movement of Goods . . . . . . . . . . . . . . . . . . . 95
2. The Free Movement of Persons . . . . . . . . . . . . . . . . . . 96
3. The Freedom to Provide Services . . . . . . . . . . . . . . . . 98
4. The Free Movement of Capital . . . . . . . . . . . . . . . . . . 99
5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

V. COMPARATIVE CASE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
A. Corporate Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

1. The U.S. Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
2. The EU Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
3. Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

B. Individual Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
1. The U.S. Supreme Court�s Approach . . . . . . . . . . . . . 111
2. The European Court of Justice�s Approach . . . . . . . . 114
3. Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

VI. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131



2005] Tax Discrimination 49

1. On October 29, 2004, leaders from the 25 EU Member States officially
signed the new European Constitution. Graham Bowley, Heads of State Sign the
European Union�s First Constitution, N.Y. Times, October 30, 2004, at A3. The Treaty
Establishing a Constitution for Europe integrates the Treaty Establishing the European
Community and the Treaty on the European Union and replaces the �co-decision
procedure,� among other procedural changes. Jacques Ziller, The New European
Constitution 17, 148 (Mel Marquis trans., 2004); see also Treaty Establishing a
Constitution for Europe, 2004, O.J. (C 310), at http://europa.eu.int/constitution/en/
lstoc1_en.htm. As of July 2005, 13 Member States had ratified the Constitution. The
Constitution, which must be ratified by all 25 Member States to enter into effect, was
rejected in referendums in France and the Netherlands. Sarah Laitner & George Parker,
Germany Steps Up Pressure to Save EU Treaty, Fin. Times, July 12, 2005, at 8.
Although the ratification process has continued beyond the French and Dutch �no�
votes, several countries, including the United Kingdom, have indefinitely postponed
their referendums. Id. The lack of a Constitution, however, does not greatly affect this
article because �from a strictly normative viewpoint it has made little difference that the
Community was established by a network of treaties rather than by a formal
constitution.� Eric Stein, Treaty-Based Federalism, A.D. 1979: A Gloss on Covey T.
Oliver at the Hughes Academy, 127 U. Pa. L. Rev. 897, 901 (1979).

2. Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511, 522 (1935) (citations omitted).
See generally, 2 The Records of the Federal Convention of 1787 at 308 (Max Farrand
ed., 1911); 3 id. at 547, 548; The Federalist No. 42 (James Madison).

3. See 1 Paul J. Hartman & Charles A. Trost, Federal Limitations on State and
Local Taxation § 1:1, at 4 (2d ed. 2003) (�[T]he Court has repeated . . . that the power
to impose and collect taxes for the support of state government shall not be unduly
curtailed.�).

4. See Treaty Establishing the European Economic Community, Mar. 25, 1957,
Art. 2, 298 U.N.T.S. 11 [hereinafter EEC Treaty]. The EEC Treaty established the
European Economic Community as of January 1, 1958. Id. The objective of the EEC

TAX DISCRIMINATION: A COMPARATIVE ANALYSIS OF 
U.S. AND EU APPROACHES

I. INTRODUCTION

Both the United States of America and the European Union were
founded in part because of the need for economic unity.1 The United States
was formed in 1787 in hopes of a solution to �the mutual jealousies and
aggressions of the States, taking form in customs barriers and other economic
retaliation.�2 The U.S. Constitution, however, establishes the dual
sovereignty of the states and the federal government and reserves to the
states the power to define their own tax systems.3

More than one hundred and fifty years later, the founding countries
of the European Economic Community strove to establish a common market
in 1958.4 The Single European Act5 incorporated the objective of an internal



50 Florida Tax Review [Vol.7:2

Treaty was to create a single common market that would increase the volume and gain
from trade between the Member States. Id. The original Member States were Belgium,
France, Federal Republic of Germany, Italy, Luxembourg, and the Netherlands. The
United Kingdom, Ireland, and Denmark joined in 1973, Greece in 1981, and Spain and
Portugal in 1986. Emile Noel, Working Together: The Institutions of the European
Community 5 (1993). Austria, Sweden, and Finland acceded to the EU on January 1,
1995. P.S.R.F. Mathijsen, A Guide to European Union Law 21 (8th ed. 2004). The
Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia
and Slovenia joined on May 1, 2004. Roger J. Goebel, Joining the European Union: The
Accession Procedure for the Central European and Mediterranean States, 1 Loy. U. Chi.
Int�l L. Rev. 15 (2003-04).

5. Single European Act, 1987 O.J. (L 169) amending EEC Treaty, supra note
4 [hereinafter SEA]. The then twelve Member States signed the Single European Act
in 1986. Id.

6. SEA, supra note 5, Art. 13. The internal market is defined as �an area
without internal frontiers in which the free movement of goods, persons, services and
capital is ensured . . . . � EEC Treaty, supra note 4, Art. 7a (now Art. 14.2).

7. The 1992 amendment of the SEA by the Treaty of Maastricht established the
European Union and became effective on November 1, 1993. Treaty on European
Union, 1992 O.J. (C 191) 1 [hereinafter TEU]. The Treaty of Amsterdam, effective May
1, 1999, amended and renumbered the EEC Treaty and the TEU. Treaty of Amsterdam,
amending the Treaty on European Union, the Treaties Establishing the European
Communities and Certain Related Acts, 1997 O.J. (C 340) 1. The most recent revisions
of the Treaty entered into force on February 1, 2003. Treaty of Nice, amending the
Treaty on European Union, the Treaties Establishing the European Communities and
Certain Related Acts, 2001 O.J. (C 80) 1 [hereinafter Treaty of Nice]. For a detailed
analysis of the Treaty of Nice see Roger J. Goebel, The European Union in Transition:
The Treaty of Nice in Effect, Enlargement in Sight, a Constitution in Doubt, 27
Fordham Int�l L.J. 455 (2004).

8. EEC Treaty, supra note 4, Art. 3(c) (now Art. 3(1)(c)).
9. The freedom of establishment is the freedom of a business established in one

Member State to establish itself in another Member State. See infra notes 331-35 and
accompanying text for a discussion of the freedom of establishment.

10. George Bermann et al., Cases and Materials on European Community Law
451 (2d ed. 2002). See also infra notes 291-98 and accompanying text. �The Court
refers to the four freedoms as �fundamental principles of Community law� whose
substance must be interpreted widely and exceptions narrowly.� Servaas van Thiel, Free
Movement of Persons and Income Tax Law: The European Court in Search of
Principles 5 n.17 (2002) [hereinafter van Thiel, Free Movement of Persons].

market into the founding Treaty (known as the EEC Treaty).6 Thus, the
European Union (EU) also has evolved into a project for economic union.7

To create such an economic union, the EEC Treaty contemplated the removal
of obstacles to the free movement of goods, persons, services, and capital
between the Member States.8 These Treaty provisions are known as the �four
freedoms� and, together with the freedom of establishment,9 they constitute
the fundamental rules of the European Community�s internal market.10



2005] Tax Discrimination 51

11. van Thiel, Free Movement of Persons, supra note 10, at 12.
12. Michel De Wolf, The Power of Taxation in the European Union and in the

United States, 3 EC Tax Rev. 124 (1995). One exception is that Community civil
servants pay income tax on their Community salaries to the Community instead of their
Member States. Mathijsen, supra note 4, at 104. See also Council Regulation 260/68,
1968 O.J. (L 056) (EEC, Euratom, ECSC).

13. �The sanctity of the Member States� power to levy direct taxes . . . is
illustrated by the EC Treaty�s almost complete silence on this subject.� Jan Wouters,
The Case-Law of the European Court of Justice on Direct Taxes: Variations upon a
Theme, 1 Maastricht J. Eur. & Comp. L. 179, 180 (1994). 

14. van Thiel, Free Movement of Persons, supra note 10, at 12. The drafters of
the Maastricht Treaty on European Union (TEU) made the subsidiarity principle a
central tenet of the Community�s 1992 constitutional reform. George A. Bermann,
Taking Subsidiarity Seriously: Federalism in the European Community and the United
States, 94 Colum. L. Rev. 332, 333-34 (1994).

15. Consolidated Version of the Treaty Establishing the European Community,
Art. 5, O.J. (C 325) 33 (2002) [hereinafter EC Treaty], incorporating changes made by
Treaty of Nice, supra note 7. The Community�s activities are furthermore subject to the
principle of proportionality, according to which �[a]ny action by the Community shall
not go beyond what is necessary to achieve the objectives of this Treaty.� Id.

16. van Thiel, Free Movement of Persons, supra note 10, at 13. See infra notes
108-13 and accompanying text for a discussion of the various EC directives that have
been implemented in the direct tax area.

Just as the U.S. Constitution established the dual sovereignty of the
states and the federal government, the EEC Treaty also divided competencies
between the Member States and the Community.11 As a general matter, the
Treaty provides no legal basis for the imposition of taxes by the Community
itself.12 The power to tax has been reserved to the Member States.13 However,
it is understood that the Community and the Member States share
competencies in the income tax area such that both have the right to legislate,
although Community measures in this respect are subject to the principle of
subsidiarity.14 The principle of subsidiarity requires that the Community only
take action if the objectives cannot be sufficiently achieved by the Member
States individually and can be better achieved (e.g., due to economies of
scale) by the Community.15 This criterion, however, can be satisfied where
differences in national rules tend to distort the internal market. Therefore, the
Community can exercise its legislative powers to eliminate any income tax
obstacles to the intra-Community flow of goods, persons, services and
capital.16 

This article focuses on these two �federalist� systems and their
respective approaches to thwarting tax discrimination. Like Congress, the
Council of Ministers (comprised of representatives of the Member States at
the ministerial level) has the power to regulate commerce between the



52 Florida Tax Review [Vol.7:2

17. James Hanlon, European Community Law 36 (3d ed. 2003). See also infra
notes 70-73 and accompanying text.

18. See, e.g., Commission of the European Communities, Report of the
Committee of Independent Experts on Company Taxation (1992).

19. See infra notes 109-13 and accompanying text.
20. Servaas van Thiel, EU Case Law on Income Tax Part I 425 (2001). �Due

to the unanimity requirement it has been difficult in recent years to make progress in a
number of areas in which action is urgently required to ensure the proper functioning
of the internal market and the unfettered exercise of the Treaty freedoms.�
Communication from the Commission on Supplementary Contribution of the
Commission to the Intergovernmental Conference on Institutional Reforms, Qualified
Majority Voting for Single Market Aspects in the Taxation and Social Security Fields,
COM (2000) 114 final at 5 [hereinafter Qualified Majority Voting Position Paper].

21. van Thiel, supra note 20, at 425-26.
22. Servaas van Thiel, Removal of Income Tax Barriers to Market Integration

in the European Union: Litigation by the Community Citizen Instead of Harmonization
by the Community Legislature, 12 EC Tax Rev. 4, 4-5 (2003).

23. van Thiel, Free Movement of Persons, supra note 10, at 5 n.16. The
relevant tax cases referred by their name only are �Humblet, Commission v. France,
Daily Mail, Krantz, Biehl, Bachmann, Commission v. Belgium, Werner, Commerzbank,
Halliburton, Schumacker, Wielockx, Commission v. Luxembourg, Svensson, Asscher,
Futura, Safir, Gilly, ICI, Terhoeve, Royal Bank of Scotland, Baxter, Gschwind, St
Gobain, Eurowings, Vestergaard, XAB-YAB, Baars, Zurstrassen, Verkooijen, AMID,
Metallgesellschaft/Hoechst.� Id. Additional cases involving the free movement of
persons are: Wallentin, De Baeck, Commission v. Federal Republic of Germany;
Weigel, Mertens, Schilling, and de Groot.

24. See infra notes 291-98 and accompanying text.

Member States.17 Nevertheless, despite several studies outlining the
distortions to the internal market caused by tax differences,18 the scope of EC
direct tax legislation is currently very limited when compared to progress
made in the value added tax area.19 Many commentators blame the
�continuous legislative vacuum in the income tax area� on the continued
unanimity requirement for tax legislation.20

The European Court of Justice (ECJ) began filling this void by using
directly applicable Community law to eliminate income tax barriers to the
internal market.21 As Community law has evolved, the Court has gradually
expanded its role in the integration process and has begun rigorously to
enforce a �constitutionally guaranteed minimum of economic integration in
the form of directly applicable private sector rights to equal treatment and
free movement.�22 Since 1986, more than thirty cases have come before the
European Court of Justice testing the compatibility of various national tax
provisions with the EC Treaty provisions on free movement of persons.23

Taking into account all of the four freedoms,24 there have been approximately



2005] Tax Discrimination 53

25. See, e.g., 2 Materials on International & EC Tax Law (Kees van Raad ed.,
5th ed. 2005). See generally Court Cases in the Field of, or of Particular Interest for,
Direct Taxation, at http://europa.eu.int/comm/taxation_customs/resources/documents/
taxation/gen_info/tax_law/legal_proceedings/court_cases_direct_taxation_en.pdf.

26. See Cordia Scott, Europe�s Changing View of Nondiscrimination May
Color Future Tax Treaty Talks, 33 Tax Notes Int�l 851, 852 (2004); see, e.g., Case
81/87, The Queen v. H. M. Treasury and Comm�rs of Inland Revenue ex parte Daily
Mail and General Trust plc, 1988 E.C.R. 5483; Case C-204/90, Bachmann v. Belgium,
1992 E.C.R. I-249; Case C-112/91, Werner v. Finanzamt Aachen, 1993 E.C.R. I-429;
Case C-336/96, Gilly v. Directeur des services fiscaux du Bas-Rhin, 1998 E.C.R. I-
2793; Case C-391/97, Gschwind v. Finanzamt Aachen-Au$enstadt, 1999 E.C.R. I-5451;
Case C-403/03, Schempp v. Finanzamt Munchen V, http://europa.eu.int/index_en.htm
(Select Documents tab; follow case law hyperlink; then follow case law since 1997
(CURIA) hyperlink); Case C-376/03, D. v. Inspecteur van de Belastingdienst,
http://europa.eu.int/index_en.htm (Select Documents tab; follow case law hyperlink;
then follow case law since 1997 (CURIA) hyperlink).

27. Taxing Judgments, The Economist, Aug. 28, 2004, at 67. Since 2000, the
ECJ has taken on national tax laws addressing thin capitalization (see, e.g., Case C-
324/00, Lankhorst-Hohorst GmbH v. Finanzamt Steinfurt, 2002 E.C.R. I-11779),
interest deductibility (see, e.g., Case C-168/01, Bosal Holding BV v. Staatssecretaris
van Financiën, 2003 E.C.R. I-9409), and exit taxes (see, e.g., Case C-9/02, de Lasteyrie
du Saillant v. Ministère de l�Économie, des Finances et de l�Industrie, 2004 E.C.R. I-
2409). Id. at 67-68. See also Lee A. Sheppard, Dowdy U.K. Retailer Set to Destroy
European Corporate Tax, 35 Tax Notes Int�l 132 (2004).

28. U.S. Const. art. I, § 8, cl. 3 [hereinafter Commerce Clause]. See infra note
187.

29. See Congressional Power to Proscribe Certain State Taxes, State Taxation
of Nonresidents� Pension Income: Hearings Before the Subcomm. on Economic and
Commercial Law of the House Comm. on the Judiciary, 103d Cong. 99, 100 (1993)
(legal memorandum by Johnny Killian, Senior Specialist, American constitutional law,
Cong. Res. Serv., Lib. of Cong.) (citing Champion v. Ames, 188 U.S. 321 (1903)). This
memorandum [hereinafter CRS Memo I] provides a brief but comprehensive discussion
of federal preemption in the area of state taxation. See also Kathryn Moore, State and
Local Taxation: When Will Congress Intervene, 23 J. Legis. 171 (1997) (reviewing the

one hundred direct tax cases.25 What is fascinating is that in all but about
seven of these cases, the ECJ has struck down the national tax provision
concerned, stating that it violated one of these Treaty freedoms.26 �While
European Union governments do their best to avoid harmonising taxation,
the EU�s court of justice is busy doing it for them.�27

Although the United States has no such unanimity requirement for its
tax legislation, there had been a similar legislative vacuum in the state tax
area. Congress clearly has the authority to regulate commerce among the
states under the Commerce Clause.28 This authority includes the power to
regulate cross-border transactions, even to the extent of prohibiting certain
state taxes.29 State tax laws enjoy no immunity from Congress�s Commerce



54 Florida Tax Review [Vol.7:2

legislative history of various bills prohibiting state taxation); Charles E. McLure, Jr. &
Walter Hellerstein, Congressional Intervention in State Taxation: A Normative Analysis
of Three Proposals, 31 St. Tax Notes 721 (2004) (providing an overview of
congressional intervention in state tax matters and analyzing congressional proposals
regarding Internet access taxes, sales tax streamlining, and business activity taxes).

30. CRS Memo I, supra note 29, at 100.
31. See Moore, supra note 29, at 182. One notable exercise of its power

occurred in 1959, when Congress passed a law preventing states from taxing
corporations when the corporation�s only nexus with the state was personal property
sales solicitations conducted in the state. See Act of Sept. 14, 1959, Pub. L. No. 86-272,
73 Stat. 555-56 (codified as amended at 15 U.S.C. §§ 381-384 (1976)). Congress was
responding to business concerns that mere solicitation within a state would establish a
tax nexus following the Supreme Court�s decision in Northwestern States Portland
Cement Co. v. Minnesota, 358 U.S. 450 (1959) (holding that net income from interstate
operations of a foreign corporation is properly subject to state taxation if apportioned
to local activities forming a sufficient nexus with that state). See CRS Memo I, supra
note 29, at 103-04. For more recent activity in Congress, see infra Part II.

32. Ward v. Maryland, 79 U.S. (12 Wall.) 418, 430 (1871) (holding that a
Maryland statute requiring nonresident traders pay a higher licensing fee than resident
traders was in violation of the Privileges and Immunities and Commerce Clauses).

33. See generally Walter Hellerstein, State Taxation of International Business:
Perspectives on Two Centuries of Constitutional Adjudication, 41 Tax Law. 37 (1987)
[hereinafter Hellerstein, State Taxation].

34. Walter Hellerstein, Federal Limitations on State Taxation of Interstate
Commerce, in Courts and Free Markets 431 (Terrence Sandalow & Eric Stein eds.,
1982) [hereinafter Hellerstein, Federal Limitations].

35. Id.

Clause powers.30 However, Congress historically had used these powers
sparingly.31

Given this historic reluctance of Congress to intervene in state
taxation, the United States Supreme Court has been forced to examine issues
similar to those now confronting the European Union. In 1871, the Court
recognized the right of a citizen of one state to �be exempt from any higher
taxes or excises than are imposed by the [other] State upon its own citizen.�32

For more than two centuries, there has been a stream of cases involving state
taxation of interstate commerce.33 The Supreme Court has had to interpret
�constitutional provisions directed to concerns far broader than taxation
alone,�34 thus creating virtually all of the federal restraints that exist on the
states� taxing power.35

In this article, I examine whether the ECJ has been able to handle tax
discrimination more effectively than the U.S. Supreme Court. I thought this
research might prove fertile because the time span of consideration of these
issues was so compressed in the European Union. It has only been



2005] Tax Discrimination 55

36. Hellerstein, State Taxation, supra note 33, at 40.
37. EC Treaty, supra note 15, Art. 234.
38. Id. Lower courts and tribunals may also refer such questions to the ECJ.

The interpretation of Article 234 determines which questions must be subject to a
preliminary ruling and those questions for which a preliminary ruling by the ECJ may
be requested by a national court or tribunal. P.J.G. Kapteyn & P. VerLoren van
Themaat, Introduction to the Law of the European Communities: From Maastricht to
Amsterdam 517 (3d ed. 1998).

39. Case 26/62, Van Gend en Loos v. Nederlandse Administratie Der
Belastingen, 1963 E.C.R. 1, ¶ 10.

40. EC Treaty, supra note 15, Art. 220: �The Court of Justice shall ensure that
in the interpretation and application of this Treaty the law is observed.� Id. The
Commission formulates Community policy, makes proposals to the Council, and drafts
the detailed measures needed for their implementation. Trevor C. Hartley, The
Foundations of European Community Law 16-18 (5th ed. 2003).

41. Communication from the Commission to the Council, the European
Parliament and the Economic and Social Committee: Tax Policy in the European Union
- Priorities for the Years Ahead, Position Paper for the Commission, COM (2001) 260
final at 23 [hereinafter Tax Policy in the EU]. In 2005, the Commission introduced four
times as many cases to the ECJ than it had just two years prior. Michael Aujean,
Conference at the University of Michigan School of Law: Comparing Fiscal Federalism:
Comparing the European Court of Justice and the U.S. Supreme Court�s Tax
Jurisprudence (Oct. 21-22, 2005) (on file with author).

42. The Tax Injunction Act holds that �the district courts shall not enjoin,
suspend or restrain the assessment, levy or collection of any tax under State law where
a plain, speedy and efficient remedy may be had in the courts of such State.� 28 U.S.C.
§ 1341 (2004). By tempering the power of the federal courts over certain state actions,
the Tax Injunction Act protects an inherent aspect of state sovereignty, the power to

approximately 20 years since the first EU tax case as compared to over 200
years of U.S. jurisprudence.36

Unlike the U.S. Supreme Court, the European Court of Justice is
obligated under the Treaty to take every case that is referred to it under
Article 234 of the EC Treaty.37 Although EU nationals in general must
litigate before their respective domestic courts, the highest courts or tribunals
must refer questions regarding the incompatibility of Member States�
domestic law or tax treaties with the EC Treaty to the ECJ if such questions
arise in the national proceedings.38 The goal is to secure uniform
interpretation of the Treaty by the national courts and tribunals.39 Along with
these referrals, the ECJ must also hear cases brought by the Commission
pursuant to its obligation to enforce the Treaty.40 The Commission has stated
that it intends to pursue a more proactive strategy in the field of tax
infringements and is more willing to initiate action before the Court upon
finding incompatible tax provisions.41

In the U.S. judicial system, taxpayers normally have to challenge a
state tax in state court.42 The state courts review federal law in the course of



56 Florida Tax Review [Vol.7:2

assess and levy state and local taxes. 17 Charles Alan Wright et al., Federal Practice and
Procedure § 4237 (2d ed. 1988).

43. R. Rotunda & J. Nowak, Treatise on Constitutional Law: Substance and
Procedure § 1.6, at 70 (3d ed. 1999). �When reviewing federal laws these courts must
follow the rulings of the Supreme Court and enforce federal laws over inconsistent state
acts.� Id.

44. Id. States are free to interpret their own state�s law or constitution in ways
that do not violate the principles of federal law. This includes granting greater rights
than the federal constitution provides. Id. The Supreme Court was granted the appellate
jurisdiction over state court decisions with respect to federal questions in the Judiciary
Act of 1789. 1 Laurence H. Tribe, American Constitutional Law § 3-4, at 255 (3d ed.
2000).

45. Robert L. Stern et al., Supreme Court Practice § 1.19, at 54 (8th ed. 2002).
�[T]he Supreme Court cannot possibly hear arguments in and decide more than a small
proportion of the cases in which parties would like to bring before it. The consequence
is that every type of case . . . goes through a preliminary sifting process.� Id. Only those
cases deemed �sufficiently important or meritorious to warrant further review� are
granted the writ of certiorari. Id.

46. �Review on writ of certiorari is not a matter of right, but of judicial
discretion. A petition for a writ of certiorari will be granted only for compelling
reasons.� Sup. Ct. R. 10.

47. Bob Woodward & Scott Armstrong, The Brethren 362 (1979) (stating that
Justice Brennan hated tax cases, and that his normal reaction to a certiorari request in
a tax case was: �This is a tax case. Deny.�).

48. See infra Part II.
49. See infra Part III.

deciding these cases, but are not required to get a ruling from the Supreme
Court prior to issuing a decision.43 A state court must �follow the Supreme
Court�s rulings on the meaning of the Constitution of the United States or
federal law,�44 but the state court is doing the actual interpreting. After a loss
in the state�s highest court, either party has the right to petition the U.S.
Supreme Court to grant certiorari to hear the case.45 However, it is at the
Supreme Court�s discretion as to whether it should hear the case.46 Thus, the
U.S. Supreme Court does not proportionally rule on the same amount of tax
cases as the ECJ because the U.S. Supreme Court declines to hear many tax
cases.47

For all these reasons, I was hopeful that a more coherent theory
might have developed in the European Union. Unfortunately, as described in
Part IV, the jurisprudence is confused on both sides of the Atlantic. In Part II,
I provide background for the reader unfamiliar with the European Union and
outline the EU�s distinctive institutional arrangements.48 In Part III, I set forth
the principles of international and interstate taxation that underlie the tax
legislation that has been promulgated by the respective Member States and
the U.S. states.49



2005] Tax Discrimination 57

50. See infra Part IV.
51. Ben J.M. Terra & Peter J. Wattel, European Tax Law 45-46 (3d ed. 2001).
52. Peter J. Wattel, The EC Court�s Attempts to Reconcile the Treaty Freedoms

with International Tax Law, 33 C.M. L. Rev. 223, 224-26 (1996).
53. See infra notes 394-587 and accompanying text.
54. Bermann, supra note 10, at 3. In 1955, the Benelux countries proposed a

path to political integration through economic integration. Id. at 6. Robert Schuman and
Jean Monnet were the driving forces behind the establishment of the European Coal and
Steel Community (ECSC) in 1950. Richard Mayne & John Pinder, Federal Union: The
Pioneers: A History of Federal Union 123-27 (1990). The ECSC�s founding Member
States, including France, Italy, and Germany, intended the Community to be much more
than an economic union. The intention was for a political union to ensure peace on the

In Part IV, I outline how the Supreme Court and the European Court
of Justice have struggled with the conflict between these generally accepted
tax principles and the effective prevention of discriminatory treatment of
foreign source income.50 For example, it has been accepted under
international tax law that nonresident taxpayers are in a different situation
than resident taxpayers and the taxation of nonresidents can be different than
that of resident taxpayers.51 This creates a conflict between these generally
accepted tax principles and the effective prevention of discriminatory
treatment of foreign source income.52

In Part V, I choose the most recent Supreme Court case that deals
with individual tax discrimination and then examine the ECJ jurisprudence to
determine how the European Court of Justice would decide the issue.53

Although the ECJ approach yields much certainty (the national tax provision
is generally found to violate the Treaty), it does not appear to solve the
discrimination problem. Because great strides have been made towards an
internal market, I believe that the EU would be better served by
harmonization at the legislative level. At a minimum, the ECJ should, at this
point, give more deference to Member State tax systems. On the other hand,
given the recent U.S. experience with federal intervention in state tax
legislation and the current anti-tax rhetoric, the United States is better served
by judicial oversight instead of the congressional interference that has
restricted the ability of the states to levy necessary taxes. I conclude with a
recommendation that the Supreme Court should give more priority to state
tax conflicts and additional restraints should be placed on the ability of
Congress to tamper with state tax laws.

II. EU VS. U.S. FEDERALISM

Although the European Economic Community was principally
designed for economic purposes, the idea of a political union was in the
minds of many of its founders.54 France�s foreign minister Robert Schuman



58 Florida Tax Review [Vol.7:2

continent. Id.
55. The Schuman Declaration 1950-1990. Luxembourg: Office for Official

Publications of the European Communities (1990), citing the Schuman Declaration of
May 9, 1950. Schuman proposed:

[T]hat Franco-German production of coal and steel as a
whole be placed under a common High Authority, within the
framework of an organization open to the participation of the other
countries of Europe. The pooling of coal and steel production should
immediately provide for the setting up of common foundations for
economic development as a first step in the federation of Europe, and
will change the destinies of those regions which have long been
devoted to the manufacture of munitions of war, of which they have
been the most constant victims.

The solidarity in production thus established will make it
plain that any war between France and Germany becomes not merely
unthinkable, but materially impossible. The setting up of this
powerful productive unit, open to all countries willing to take part
and bound ultimately to provide all the member countries with the
basic elements of industrial production on the same terms, will lay a
true foundation for their economic unification.

EUROPA, The EU at a Glance, Declaration of 9 May 1950, at http://europa.eu.int/abc/
symbols/9-may/decl_en.htm.

56. EEC Treaty, supra note 4, at Preamble.
57. Bermann, supra note 10, at 17.
58. Id. at 27.
59. �It was loyalty to one�s country that moved men, whether radical or

conservative, and one�s country was the state in which one lived, not the thirteen more
or less united states along the Atlantic Coast.� Merrill Jensen, The Articles of
Confederation: An Interpretation of the Social-Constitutional History of the American
Revolution 1774-1781, at 163 (1970).

believed that economic unity would be the �leaven from which may grow a
wider and deeper community between countries.�55 The Preamble to the 1957
Treaty Establishing the European Economic Community aspires to the
achievement of �an ever closer Union among the peoples of Europe.�56 The
European Economic Community has evolved from a �common market� to an
�internal market� to an �Economic and Monetary Union� to a �European
Union.�57 It �represents the most ambitious example of deliberate political
and economic integration in recent times,� having created a �fully-developed
form of federation in a matter of three to four decades.�58

The United States�s form of federalism has also evolved but over the
last two hundred years. Some have forgotten how powerful the individual
states were before the founding of the United States.59 The states printed their



2005] Tax Discrimination 59

60. Jeffrey C. Cohen, Politics and Economic Policy in the United States 36
(1997).

61. See Ira Mickenberg, Abusing the Exceptions and Regulations Clause:
Legislative Attempts to Divest the Supreme Court of Appellate Jurisdiction, 32 Am. U.
L. Rev. 497, 511 (1983).

62. Lawrence D. Cress, Citizens in Arms 63 (1982).
63. Joseph M. Lynch, Negotiating the Constitution: The Earliest Debates Over

Original Intent 1 (1999) (citing The Federalist No. 45, at 308, 313 (James Madison)).
64. Klaus-Dieter Borchardt, European Integration: The Origins and Growth of

the European Union 26 (1995) [hereinafter European Integration]. Community law
either has direct internal effect as law in the Member States or requires the Member
States to implement the legislation domestically. EEC Treaty, supra note 4, Arts. 5, 189
(now Arts. 10, 249).

65. Case 26/62, Van Gend en Loos v. Nederlandse Administratie Der
Belastingen, 1963 E.C.R. 1. The doctrines of direct applicability, direct effect, and
supremacy not only describe legal relationships, but actually demand Member State
action. These doctrines �essentially require, respectively, that national institutions
recognize Community measures as law, effectuate those measures at the request of
private parties wherever appropriate, and prefer claims based on Community law to
those based on Member State law whenever a choice must be made.� Bermann, supra
note 14, at 349.

66. Case 26/62, Van Gend en Loos v. Nederlandse Administratie Der
Belastingen, 1963 E.C.R. 1, ¶ 9.

67. Id. ¶ 10.

own currency,60 had their own courts,61 and formed their own militia.62 James
Madison�s basic thesis in The Federalist was that �the powers delegated by
the proposed Constitution to the Federal Government, are few and defined.
Those which are to remain in the State Governments are numerous and
indefinite.�63 Admittedly, these individual states did not have the duration of
independent history that the Member States possessed at the formation of the
European Economic Community.

A. The Legislative Branch

The EEC Treaty established an institutional system that enables the
Community to enact legislation that is equally binding on all its members.64

After the European Court of Justice�s landmark decision on direct
applicability, it is understood that the Treaty grants rights and imposes
obligations on individuals, Member States, and Community institutions.65

�[T]his Treaty is more than an agreement which merely creates mutual
obligations between the contracting States.�66 Instead, �the Community
constitutes a new legal order of international law for . . . which the states
have limited their sovereign rights . . . .�67 Community law is comprised of
basic legislation, including the treaties and their protocols, and secondary



60 Florida Tax Review [Vol.7:2

68. Tracy A. Kaye, European Tax Harmonization and the Implications for U.S.
Tax Policy, 19 B.C. Int�l & Comp. L. Rev. 109, 122 (1996) [hereinafter Kaye, European
Tax Harmonization]. Secondary Community legislation consists of regulations,
directives, decisions, recommendations, and opinions. EC Treaty, supra note 15, Art.
249.

69. Bermann, supra note 10, at 34; Hartley, supra note 40, at 41; see also EC
Treaty, supra note 15, Art. 7. Most regulations are made by the Commission and are
binding on all Member States without any further action by the individual states. Id.
(expressly providing that regulations are directly applicable). Directives create
obligations on the governments of the Member States to transpose the provisions
adopted by the Community into national legislation. Directives are binding upon the
Member States as to the result to be achieved but leave the national authorities free to
choose the form and methods of compliance. Id. Decisions are binding on the specific
entities to whom they are addressed. Id. See also Noel, supra note 4, at 9.
Recommendations and opinions are not legally binding but are issued by the
Commission and Council to advise on specific topics. EC Treaty, supra note 15, Art.
249.

70. EC Treaty, supra note 15, Art. 203; see European Integration, supra note
64, at 26; Hartley, supra note 40, at 19.

71. Bermann, supra note 10, at 35.
72. See Bermann, supra note 14, at 395.
73. Bermann, supra note 10, at 35-36. �The framers of the EC Treaty had

entrusted the Community�s legislative powers chiefly to a Council of Ministers in which
representatives of the Member States could unapologetically express and vote the
political interests of the States they represented.� Bermann, supra note 14, at 353 (citing
EC Treaty, supra note 15, Art. 146).

74. EC Treaty, supra note 15, Arts. 213, 214.

legislation that is the legislative product of the Community institutions.68 The
three Community institutions most involved in the legislative process are the
Council of Ministers, the Commission, and the European Parliament.69

The Council of Ministers is comprised of representatives of the
Member States, usually the ministers responsible for the subject matter under
discussion.70 For example, the Member States� Finance Ministers meet with
respect to tax and other economic matters and are known as the Economy
and Finance Council (ECOFIN).71 Thus, the Council is set up in a manner
that should enable it to safeguard the economic interests of the Member
States because the minister�s acknowledged responsibility is to look after the
Member State�s interests in the matter before the Council.72 In tax matters,
the Council is the principal lawmaking body of the Community, but it can
only act on a proposal from the Commission.73

The Commission consists of members appointed by mutual
agreement between member governments for five-year terms.74 These
Commissioners are required to act in complete independence from their own



2005] Tax Discrimination 61

75. EC Treaty, supra note 15, Art. 213; Treaty Establishing a Single Council
and a Single Commission of the European Communities (Merger Treaty), Apr. 8, 1965,
1967 O.J. (L 152), Art. 10(2); Bermann, supra note 10, at 44; Hartley, supra note 40, at
11-12. See also European Integration, supra note 64, at 26.

76. EC Treaty, supra note 15, Art. 211. In 2002, the Commission proposed
drafts for 54 directives, 193 regulations and 239 decisions, and in 2003 drafts for 491
legislative proposals and decisions. George Bermann, European Union Law 2 (Roger
J. Goebel ed., 2d ed. Supp. 2004) [hereinafter Goebel Supplement, European Union
Law] (Professor Goebel�s electronic Developments Update on file with author).

77. EC Treaty, supra note 15, Art. 226.
78. EC Treaty, supra note 15, Arts. 189, 190. The most recent election was held

in June 2004. Lizette Alvarez, �Enthusiasm� is Not a Candidate in Elections for
European Union, N.Y. Times, June 10, 2004, at A11.

79. EEC Treaty, supra note 4, Art. 137; Bermann, supra note 10, at 51.
80. Bermann, supra note 10, at 51; EC Treaty, supra note 15, Art. 192.
81. See Klaus-Dieter Borchardt, The ABC of Community Law 72 (5th ed.

1999) [hereinafter Community Law]. See also Hartley, supra note 40, at 41.
82. EC Treaty, supra note 15, Art. 250; see also Community Law, supra note

81, at 72; Hartley, supra note 40, at 38.
83. EC Treaty, supra note 15, Art. 252; see also Hartley, supra note 40, at 40.
84. EC Treaty, supra note 15, Art. 251; see also Hartley, supra note 40, at 40.
85. Community Law, supra note 81, at 81-82; see, e.g., EC Treaty, supra note

15, Arts. 49, 105(6), 107(5), 214(2).
86. Community Law, supra note 81, at 82; see also EC Treaty, supra note 15,

Art. 211.
87. Community Law, supra note 81, at 82; see also EC Treaty, supra note 15,

Art. 202.
88. Paul Craig & Grainne de Burca, EU Law Text, Cases and Materials 139 (3d

ed. 2003).

governments and the Council, and for the good of the Community.75 The
Commission formulates Community policy, makes proposals to the Council,
and drafts the detailed measures needed for policy implementation. The
Commission must also ensure that the Treaties and Community law are
respected and applied, and must act on any infringements.76 This includes
referring matters to the Court of Justice, if necessary.77

The European Parliament consists of no more than 732 members
directly elected in their Member States every five years.78 Although the EEC
Treaty originally defined the role of the European Parliament as advisory and
supervisory,79 the legislative role of the Parliament has been consistently
increasing.80 Depending on the subject matter, current legislation is adopted
pursuant to one of six different legislative procedures spelled out under the
EC Treaty.81 The consultation procedure,82 the co-operation procedure,83 the
co-decision procedure,84 the approval procedure,85 the simplified procedure,86

and the procedure for implementing measures87 differ principally with respect
to the degree of power afforded the Parliament.88



62 Florida Tax Review [Vol.7:2

89. Id. at 144-46. See EC Treaty, supra note 15, Art. 251.
90. Bermann, supra note 10, at 83.
91. Directives do not directly amend national law; rather they obligate the

governments of the Member States to take implementing action to incorporate the
directives� provisions into their national legislation. Directives are the legislative
instruments most commonly used to harmonize the Member States� legislation. See
Bermann, supra note 10, at 253. Nearly all of the steps taken to harmonize the tax laws
to date have been achieved through the use of directives. See generally Kaye, European
Tax Harmonization, supra note 68, at 124. When a Member State does not implement
the directive into national law, the question arises as to whether the directive has direct
effect, i.e., whether it is effective without such enactment. The European Court of
Justice has observed that �a Member State which has not adopted the implementing
measures required by [a] directive within the prescribed period may not plead, as against
individuals, its own failure to perform the obligations which the directive entails.� Case
8/81, Becker v. Finanzamt Munster Innenstadt, 1982 E.C.R. 53, ¶ 24 (holding that
although Germany had not yet implemented the Sixth VAT Directive, the directive was
directly effective). The test is whether the provisions of the directive are unconditional
and sufficiently precise to be relied upon in a conflict with an incompatible national
provision. Id. ¶ 25.

92. EC Treaty, supra note 15, Art. 94.
93. EC Treaty, supra note 15, Art. 257; see also Hanlon, supra note 17, at 56-

57.
94. Bermann, supra note 10, at 71-72. Articles 198a-198c of the TEU

established the Committee of the Regions to provide non-binding advisory opinions on
matters having a particular affect on regions of the EU. Hanlon, supra note 17, at 57; see
also EC Treaty, supra note 15, Arts. 263-65.

95. EC Treaty, supra note 15, Art. 250; see also Hartley, supra note 40, at 41;
Bermann, supra note 10, at 83.

Most Community legislation is made pursuant to the co-decision
procedure, which emphasizes reaching a text approved by both the
Parliament and the Council.89 However, the consultation procedure applies to
taxation.90 Under this procedure, the Commission delivers a proposal, such as
a proposed directive, to the Council.91 The European Parliament is consulted
and publishes an opinion accepting, rejecting, or suggesting amendments to
the proposal. The Economic and Social Committee must also be consulted
for any legislation that directly affects �the establishment or functioning of
the common market.�92 This Committee consists of representatives of various
economic and social interests such as trade unions, employers� groups,
consumer groups and the professions.93 The Committee of the Regions,
composed of representatives of regional and local entities within the Member
States, may also be consulted.94

The Commission may amend the proposal to incorporate any
changes and the Council then examines and votes upon the proposed
directive.95 The Treaty provides three different voting formulas: unanimity,



2005] Tax Discrimination 63

96. Craig & de Burca, supra note 88, at 153.
97. Id. at 154. 
98. EC Treaty, supra note 15, Art. 94 (ex Art. 100). Article 94 states: 
The Council shall, acting unanimously on a proposal from the
Commission and after consulting the European Parliament and the
Economic and Social Committee, issue directives for the
approximation of such laws, regulations or administrative provisions
of the Members States as directly affect the establishment or
functioning of the common market.

Id. It is understood that Article 94 of the Treaty in the chapter on �Approximation of
Laws� provides a legal basis for direct taxation harmonization measures. van Thiel, Free
Movement of Persons, supra note 10, at 112.

99. Qualified Majority Voting Position Paper, supra note 20, at 5, 11. �[I]t
remains the Commission�s view that a move to qualified majority voting at least for
certain tax issues is indispensable.� Tax Policy in the EU, supra note 41, at 9.

100. See Bermann, supra note 10, at 24 (citing TEU, supra note 7, Art. 48).
101. Id. at 31.
102. Tax Policy in the EU, supra note 41, at 5. 
103. Charlemagne: The Tyranny of the Majority, The Economist, May 29,

2004, at 55.

simple majority, and qualified majority.96 The Treaty article under which the
legislation is enacted specifies the appropriate voting rule to be used.97

Although the EEC Treaty has been amended on multiple occasions to
provide for the adoption of various harmonization measures by only a
qualified majority vote of the Council, a unanimous vote is still required by
the EC Treaty for tax legislation.98 In fact, the Commission has proposed
qualified majority voting for the introduction of minimum requirements in
the tax area and the adoption of coordinating provisions to remove direct
obstacles to the exercise of the four freedoms but has so far been
unsuccessful.99

The European Council convened an intergovernmental conference
(IGC) in Nice to discuss, among other issues, extension of qualified majority
voting to various legislative areas.100 An IGC is a meeting of representatives
of each Member State for the purpose of negotiating new amendments to the
treaties.101 The Commission was disappointed in the outcome of the treaty
negotiations with respect to decision-making for tax issues at the 2000 IGC
as no changes were made for tax legislation.102

The draft European Union Constitution briefly contained a provision
that would have moved certain areas of legislation that affect the single
market, such as corporate taxes, to majority voting.103 However, this
provision did not survive the final negotiations because the United Kingdom



64 Florida Tax Review [Vol.7:2

104. Goebel Supplement, European Union Law, supra note 76, at 445-522. See
also Chuck Gnaedinger, EU Convention Adopts Draft Constitution, 31 Tax Notes Int�l
206, 206 (2003) (�[qualified majority voting] for all tax legislation is not included in the
draft text because of opposition from the United Kingdom and Ireland.�).

105. Tax Policy in the EU, supra note 41, at 22. �Since the legal basis will, for
the present, remain unanimity it will, after enlargement, be much more difficult to have
any new Community legislation agreed.� Id. at 5. The most recent accession on May 1,
2004 enlarged the EU from 15 to 25 Member States. Goebel, supra note 4, at 15.

106. For example, Article 90 states that Member States may not use internal
taxes to discriminate against products coming from other Member States. EC Treaty,
supra note 15, Art. 90.

107. EC Treaty, supra note 15, Art. 293. This Article was the legal basis for
Convention 90/436 on the Elimination of Double Taxation in Connection with the
Adjustments of Transfers of Profits Between Associated Undertakings, July 23, 1990,
1990 O.J. (L 225) 10 [hereinafter Arbitration Convention]. See infra note 113 and
accompanying text.

108. EC Treaty, supra note 15, Art. 94.
109. Council Directive 90/435, 1990 O.J. (L 225) 6 (EEC) [hereinafter Parent-

Subsidiary Directive], amended by Council Directive 2003/123, 2004 O.J. (L 7) 41
(EC); Council Directive 90/434, 1990 O.J. (L 225) 1 (EEC) [hereinafter Mergers
Directive], amended by Council Directive 2005/19, 2005 O.J. (L 58) 19 (EC); Council
Directive 2003/49, 2003 O.J. (L 157) 49 (EC) (Interest and Royalty Directive). �Unlike
VAT, direct taxation is at a purely embryonic stage of harmonization.� Case C-279/93,
Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-225, Op. ¶ 19.

110. Council Directive 2003/48, 2003 O.J. (L 157) 38 (EC) (Savings
Directive).

and Ireland vetoed it.104 The Commission remains committed to a move to
qualified majority voting for certain tax issues, pointing out that EU
enlargement will only exacerbate the inability to have agreement on any new
Community tax legislation.105

Although the Treaty specifically covers indirect taxes,106 Article 293
contains the only explicit reference to direct taxes and provides that Member
States shall enter into negotiations to eliminate double taxation.107 It is
understood, however, that Article 94 of the Treaty, in the chapter on
�Approximation of Laws,� also provides a legal basis for direct taxation
harmonization measures. This Article authorizes the Council, acting
unanimously on a proposal from the Commission, to issue directives for the
approximation of laws that �directly affect the establishment or functioning
of the common market.�108 Thus, the Council has the power to regulate
commerce between the Member States to the extent consistent with the
Treaty.

Unfortunately, the scope of EC direct tax legislation is currently
limited to a few corporate tax directives,109 a savings directive,110 and a



2005] Tax Discrimination 65

111. Council Directive 77/799, 1977 O.J. (L 336) 15 (EEC) (Mutual
Administrative Assistance and Exchange of Information Directive), amended by
Council Directive 79/1070, 1979 O.J. (L 331) 8 (EEC).

112. Council Directive 76/308, 1976 O.J. (L 73) 18 (EEC) (Mutal Assistance
for the Recovery of Claims Directive), amended by Council Directive 2001/44, 2001
O.J. (L 175) 17 (EC). See also Jan de Goede, European Integration and Tax Law, 43
Eur. Tax�n 203 (2003).

113. Arbitration Convention, supra note 107, at 10. Unlike the Parent-
Subsidiary Directive and the Mergers Directive, the Arbitration Convention is actually
a multilateral treaty. A.P. Lier et al., Tax and Legal Aspects of EC Harmonization 167
(A.P. Lier ed., 1993). When the original Arbitration Convention expired at the end of
1999, the 1999 Protocol was signed by most of the Member States to extend its
applicability. Pietro Antonini & Maurizio Di Bernardo, Italy Ratifies Protocol to EU
Arbitration Convention, 34 Tax Notes Int�l 912 (2004). As of November 1, 2004, the
Arbitration Convention re-entered into force, having been ratified by all Member States.
European Commission, EU Joint Transfer Pricing Forum: Secretariat Discussion Paper
on the Re-Entry into Force of the Arbitration Convention, August 25, 2004,
JTPF/019/2004/EN. The Arbitration Convention will apply retroactively to January 1,
2000, with some limitations. Id.

114. See Koen Lenaerts, Constitutionalism and the Many Faces of Federalism,
38 Am. J. Comp. L. 205 (1990) (�the political reality that decision-making within the
American Union is organically independent from the States, whereas in the European
Community the Member States themselves play the double role of participants in the
Community decision-making and of antipodes to the legal order of the Community as
such.�) Id. at 262.

115. Vikram Amar, Indirect Effects of Direct Election: A Structural
Examination of the Seventeenth Amendment, 49 Vand. L. Rev. 1347, 1352 (1996).

116. Id. at 1349. See generally Robert C. Byrd, The Senate 1789-1989 (1988);
C.H. Hoebeke, The Road to Mass Democracy, Original Intent and the Seventeenth
Amendment (1995).

mutual assistance directive.111 There is an additional mutual assistance
directive that enables tax authorities to assist each other in the collection of
tax claims.112 On July 23, 1990, the Member States also concluded the
Arbitration Convention to provide for binding arbitration of transfer pricing
disputes when the respective tax authorities have been unable to resolve the
issues within two years.113

Unlike the EU, where the Member States play a double role,
decision-making in the U.S. Congress is currently independent from that of
the fifty states.114 Originally, the U.S. Constitution required that two Senators
were to be chosen by the legislatures of each respective state because the
Framers wanted to safeguard the interests of the state governments.115 In
1787, the state legislative election of Senators was seen as a �central device
for the protection of States� rights and interests.�116 However, in 1913, the
states ratified and added the Seventeenth Amendment to the Constitution



66 Florida Tax Review [Vol.7:2

117. U.S. Const. amend. XVII, cl. 1. �The Senate of the United States shall be
composed of two Senators from each State, elected by the people thereof, for six years;
and each Senator shall have one vote.� Id. Proposals to amend the process had been
around since the 1820�s. Laura E. Little, An Excursion into the Uncharted Waters of the
Seventeenth Amendment, 64 Temple L. Rev. 629, 636 (1991).

118. Amar, supra note 115, at 1353. He also cites �(3) the dissatisfaction with
deadlocks in state legislatures that delayed the filling of vacant senatorial seats; and (4)
the feeling that state legislatures were spending too much time on the �national� matter
of senatorial selection, thus leaving local matters unattended.� Id.

119. Id. at 1349.
120. Hellerstein, Federal Limitations, supra note 34, at 431; see also McLure

& Hellerstein, supra note 29, at 722 (providing another listing of examples of legislation
restricting states� power).

121. See generally Moore, supra note 29; 2 Hartman & Trost, supra note 3, §
14:1, at 575 n.1. For an example of an exception to this rule, see The Internet Tax
Freedom Act (ITFA), which was enacted on October 21, 1998, as part of Public Law
105-277. The original ITFA imposed a three-year moratorium on taxation of Internet
access. William J. Quirk & R. Rhett Shaver, Does Congress Put Federalism at Risk
When It Limits the States� Power to Tax?, 21 St. Tax Notes 649, 653-54 (2001).

122. See, e.g., Soldiers� and Sailors� Civil Relief Amendments of 1942, ch. 581
§ 17, 56 Stat. 777 (codified at 50 U.S.C. App. § 574 (1942)) (providing that members
of the armed forces are subject to tax only in their respective states of residence, and not
necessarily in the states in which they are stationed).

123. See, e.g., Airport Development Acceleration Act of 1973 § 7(a), Pub. L.
No. 93-44, 87 Stat. 88 (codified in 49 U.S.C. App. § 1513 (1973)) (preempting state and
local gross receipts taxes on the sale of commercial air transportation). This law was
passed after the Supreme Court validated airline passenger head taxes in Evansville-
Vanderburgh Airport Auth. Dist. v. Delta Airlines, Inc., 405 U.S. 707 (1972). See also
Congressional Power to Proscribe Certain State Taxes, Miscellaneous Tax Bills � 1991:
Hearings on S. 90, S. 150, S. 267, S. 284, S. 649 and S. 913 Before the Subcomm. on

calling for the direct election of Senators.117 There were a number of reasons
for the adoption of the Seventeenth Amendment and the move to direct
elections including: �(1) the perception that bribery and corruption had
tainted the state legislatures� choice of Senators;� and �(2) the related belief
that private interest groups dominated state legislatures to the point where
senatorial choices did not adequately represent ordinary citizens.�118 Now,
however, special interests in Washington are overshadowing the needs of the
state government. Professor Vikram Amar observes that unfunded federal
mandates and federal conscription of the states are a result of removing the
state legislatures from the electoral loop.119

Generally, Congress has refrained from exercising its authority under
the U.S. Constitution �to enact legislation impinging on state tax power�120

except in the following three categories:121 (1) state taxation of federal
employees;122 (2) state taxation of interstate transportation and their
employees;123 and (3) state taxation of natural resources.124 However, in the



2005] Tax Discrimination 67

Taxation of the Senate Comm. on Finance, 102d Cong. 289, 291 (1991) (legal
memorandum by Johnny Killian, Senior Specialist, American constitutional law, Cong.
Res. Serv., Lib. of Cong.) [hereinafter CRS Memo II].

124. Tax Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1520 (codified as
amended at 15 U.S.C. § 391 (1976)) (forbidding states from imposing taxes on or with
respect to the generation or transmission of electricity when such a tax would
discriminate against out-of-state manufacturers, producers, wholesalers, retailers and
consumers of that electricity). Congress�s increased restriction on state taxation was
engineered by Arizona senators because of a conflict with New Mexico and Arizona
concerning New Mexico�s tax on electricity generated within the state. CRS Memo II,
supra note 123.

125. See Multistate Tax Commission, Federalism at Risk, app. c. (2003). For
two examples of legislation currently pending before Congress that would interfere with
a state�s ability to tax see the Telecommuter Tax Fairness Act of 2005, S. 1097, 109th
Cong. (2005) (only allowing a state to tax income earned while physically within the
state) and the Economic Development Act of 2005, S. 1066, 109th Cong. (2005) (in
certain circumstances allowing tax incentives that would otherwise be barred by the
Commerce Clause). See generally McLure & Hellerstein, supra note 29, for an analysis
of three congressional proposals. To avoid such interference, states can coordinate with
each other. For example, currently, 42 states and the District of Columbia are involved
in the creation of a Streamlined Sales and Use Tax Agreement that went into effect
October 1, 2005. This project includes uniform definitions for key items, state level
administration and collection of local taxes, and rules designed to make the sourcing of
transactions both uniform and simplified. Streamlined Sales Tax Governing Board, Inc.,
http://www.streamlinedsalestax.org (last visited Feb. 21, 2006). As of October, 19 states
are deemed in compliance with the agreement as either full or associate members. Emily
Dagostino, Streamlining System in Place with Inception of Governing Board, 38 St. Tax
Notes 165, 165 (2005).

126. Act of Jan. 10, 1996, Pub. L. No. 104-95, 109 Stat. 979 (codified at 4
U.S.C. § 114 (1996)). The law became effective for retirement income payments
received after December 31, 1995. See also Tracy A. Kaye, Show Me the Money:
Congressional Limitations on State Tax Sovereignty, 35 Harv. J. on Legis. 149, 167
(1998). 

127. The statute protects all distributions from qualified plans, including, but
not limited to: individual retirement accounts, simplified employee pensions, annuity
plans or contracts, eligible deferred compensation plans, and governmental plans. See
Douglas L. Lindholm et al., State Source Taxation of Retirement Benefits � What�s
Barred, What�s Left, 84 J. Tax�n 299, 299 (1996). See also Brian J. Kopp, New Federal

last decade, there has been an increase in interference with state tax
systems.125

The State Taxation of Pension Income Act of 1995 (Source Tax Act)
is an example of congressional intrusion on state tax sovereignty with respect
to the income taxation of individuals.126 The Source Tax Act prohibits states
from taxing the retirement income and pension distributions of their former
residents (i.e., those individuals who moved from the state where they earned
the income).127 The most vociferous proponents of the Source Tax Act were



68 Florida Tax Review [Vol.7:2

Statute Bars States from Taxing Pension Income of Nonresidents, 6 J. Multistate Tax�n
68 (1996). California and fifteen other states were attempting to collect income taxes
from their absentee retirees, nonresidents who had earned pensions in their states but
were collecting these benefits in different states. Quirk & Shaver, supra note 121, at
654.

128. State Taxation of Nonresidents� Pension Income: Hearings on H.R. 371,
H.R. 394 and H.R. 744 Before the Subcomm. on Commercial and Admin. Law of the
House Comm. on the Judiciary, 104th Cong. 24, 40 (1995) [hereinafter 1995 Pension
Hearings] (prepared statement of William C. Hoffman, President, Retirees to Eliminate
State Income Source Tax (RESIST)).

How can a nation that was formed over the issue of �Taxation
without representation� allow this to happen? Because it was the best
kept secret in America! No one was told about this unfair tax that
interferes with our right to travel across our country and live where
we choose without suffering a financial penalty. It is unthinkable for
an individual in the United States of America to be controlled by a
taxing agency without recourse. More important, how can our great
Nation allow Senior Citizens to be treated in this terrible manner.

Id. at 41.
129. See H.R. Rep. No. 104-389, at 3-4 (1995), reprinted in 1995

U.S.C.C.A.N. 1006 [hereinafter Source Tax Report].
130. Professor James Smith testified that the �taxation without representation�

argument must focus on the time during which the income was earned, the time when
the state provided the taxpayer with ample benefits. See 1995 Pension Hearings, supra
note at 128 (prepared statement of James C. Smith, Professor of Law, Georgia
University School of Law).

131. Quirk & Shaver, supra note 121, at 654. 
132. See Source Tax Report, supra note 129, at 9. The CBO�s estimate of the

Source Tax Act clarified that:
Revenue losses could be higher, however, because of the bill�s
impact on the taxation of certain types of deferred compensation.
 . . . States that offer their residents credit for taxes paid to other states
on retirement income would realize an increase in tax revenue. . . .
The extent to which one state�s revenue gain would offset another
state�s revenue loss depends on whether the taxed nonresident
currently lives in a state that offers a tax credit. . . . The net overall
cost of the bill to state governments would stem primarily from
affected retirees who live in states that do not tax personal income or

retirees who had moved to states that do not impose an income tax.128 In their
view, nonresidents should not be taxed if they do not currently receive
benefits from their tax payments.129 Of course benefits were received when
the income was earned130 but Congress determined that the same income
might be �taxed by multiple jurisdictions if the employee had worked in a
number of states.�131 Congress�s solution was simple, no taxation of the
absent retirees by their former states of residence. The Congressional Budget
Office estimated the revenue loss to the states at $70 million annually.132



2005] Tax Discrimination 69

offer such tax credits. Many of these nontaxing states tend to be
popular retirement destinations.

Source Tax Report, supra note 129, at 9-10. Note that this CBO estimate is for the bill
as reported. The legislation that actually passed would be costlier. See Telephone
Interview with Theresa A. Gulo, Chief, State & Local Government Cost Unit,
Congressional Budget Office (C.O.) (Aug. 12, 1997).

133. Act of Oct. 21, 1998, 105 P.L. 277, 112 Stat. 2681 (1998).
134. See Quirk & Shaver, supra note 121, at 653.
The original ITFA imposed a three-year moratorium on taxation of
Internet access. The moratorium generally prevented: (1) the taxation
of Internet access, (2) multiple and discriminatory taxes on electronic
commerce, and (3) the application of federal excise taxes on Internet
access.

Id.
135. Donald Bruce et al., Has Internet Access Taxation Affected Internet Use?,

32 St. Tax Notes 519, 520 (2004).
136. Internet Tax Nondiscrimination Act, H.R. 1522, 107th Cong. (1st Sess.

2001).
137. Act of Dec. 3, 2004, 108 P.L. 435, 118 Stat. 2615 (2004). [hereinafter

ITNA]. See also Emily Dagostino, President Signs Internet Tax Moratorium Extension,
34 St. Tax Notes 708 (2004).

138. ITNA, supra note 137. See Bruce et. al., supra note 135 (detailing
economic study); see also McLure & Hellerstein, supra note 29, at 730 (describing the
case for exempting Internet access by households as weak).

139. Cox Internet Tax Moratorium Bill Signed into Law at White House, St.
News Serv., Dec. 6, 2004. The new law allows states that enacted taxes on Internet
access prior to October 1998, to continue to have such authority, except for Wisconsin�s

Another congressional intrusion on state tax sovereignty has been
with respect to taxation of Internet access. The Internet Tax Freedom Act
(ITFA) was originally enacted in 1998.133 Congress�s exercise of its
Commerce Clause powers in legislating against state and local government
interference with interstate commerce on the Internet or related services has
cost the states billions in foregone revenues.134 The ITFA only grandfathered
the ten states that were already imposing a tax on Internet access at the time
of initial passage.135 The Act also imposed a three-year moratorium on new or
discriminatory state and local taxes on electronic commerce that was
extended for two years in November 2001 and expired in 2003.136 

On December 3, 2004, the President signed the Internet Tax
Nondiscrimination Act (ITNA). This Act broadens the definition of Internet
access and retroactively extends the moratorium through November 2007.137

ITNA also redefines �tax on Internet access� to include any tax on Internet
access, �regardless of whether such tax is imposed on a provider of Internet
access or a buyer of Internet access and regardless of the terminology used to
describe the tax.�138 This broader definition prevents states from taxing DSL,
Cable, satellite, or wireless Internet access.139 The states are asserting that this



70 Florida Tax Review [Vol.7:2

tax on the Internet. Telephone Interview with Thad Bingle, Majority Counsel, House
Judiciary Committee (Dec. 13, 2004). Wisconsin�s tax, which was enacted in 1991, will
not be grandfathered after Nov. 1, 2006. Press Release, Congressman F. James
Sensenbrenner, Jr. Sensenbrenner Provision Eliminates Internet Taxes for Wisconsin
(Nov. 19, 2004) [hereinafter Sensenbrenner Release].

140. Karen Setze, U.S. House Votes to Extend Moratorium on Internet Access
Taxes Until 2007, 34 St. Tax Notes 564, 564 (2004). Wisconsin alone collected an
estimated $24.3 million in revenue from its Internet Access tax in 2002. Sensenbrenner
Release, supra note 139.

141. CBO Rep. S.150 Internet Tax Nondiscrimination Act (Sept. 9, 2003).
142. Passage of Internet Tax Bill Hailed as Victory for Broadband,

Telecommunications Reporter, Dec. 15, 2004.
143. Mark C. Alexander, Campaign Finance Reform: Central Meaning and a

New Approach, 60 Wash. & Lee L. Rev. 767, 811 (2003).
144. Id. at 812.
145. I have previously recommended eliminating the $50 million threshold of

the Unfunded Mandates Reform Act (UMRA) for legislation that prohibits states from
raising revenue. My hope was that this new procedural hurdle would ensure that the
states receive heightened protection in the federal legislative process from congressional
intrusion on state tax sovereignty. The threat of a recorded vote on whether to impose

legislation will cost state and local government billions in lost revenues.140

The Congressional Budget Office estimates that repealing the grandfather
clause could cost states at least $80 million to $120 million per year.141 This
estimate, however, does not consider the amount of revenue lost to the other
states that are unable to currently tax the Internet.

The ITNA is the result of fierce lobbying by the telecommunications
industry. Verizon Communications, Inc., the U.S. Telecom Association, and
the CTIA (former Congressman Largent�s company) touted the bill as a
victory for the industry.142 Additionally, Senator George Allen (R-VA), who
was the lead sponsor of the bill, represents many Internet and technology
companies including America Online.

The recent experience of congressional intervention in state tax
sovereignty as demonstrated by the Source Tax Act and the Internet Tax
Nondiscrimination Act lead me to prefer judicial oversight rather than
legislative intervention with respect to the United States when protection
from tax discrimination is required. Unfortunately, at this point in American
history �the few maintain a disproportionate sway over elected
representatives . . . .�143 Professor Alexander goes on to point out that �[t]he
will of the people is not done because of the influence of lobbyists, PACs,
and others who control large sums of campaign cash.�144 Unlike the Council
of Ministers, Congress does not represent the states and there is increasing
temptation to enact legislation that benefits a select constituency at a revenue
cost to the states.145 Congress is causing more harm than good in the name of



2005] Tax Discrimination 71

an unfunded mandate would provide a meaningful deterrent to such legislation. Kaye,
supra note 126, at 188.

146. See Amar, supra note 115, at 1352.
147. The Nice Treaty amended EC Treaty Article 221 to create a Grand

Chamber of Judges that could customarily be used to avoid the burden of plenary
sessions. Goebel Supplement, European Union Law, supra note 76, at 32-33. The Grand
Chamber will initially be composed of thirteen Judges with eleven usually sitting in a
proceeding. Id.

148. EC Treaty, supra note 15, Arts. 221-23.
149. Anthony Arnull, The European Union and its Court of Justice 7-8 (1999).

The Opinion of the Advocate General outlines relevant facts and legislation, further
analyzes the issues raised and relevant case law, and concludes with a recommendation
to the Judges. While it is difficult to determine the influence of the Advocate General
on the judgments of the Court, most legal scholars believe that the Advocate General�s
Opinion is helpful in the Judges� decision-making. Id. at 8.

avoiding tax discrimination and should exercise the legislative restraint it
historically had shown to the taxing powers of the states. Direct election of
Senators has increased their susceptibility to private interest group pressures
and has rendered them unable to play their designated role as guardian of the
states� rights and interests.146

I am not willing to advocate repeal of the Seventeenth Amendment,
however, I do recommend an additional procedural constraint on Congress to
ensure less congressional interference with state tax laws. Modeling two of
the advisory bodies of the European Union, I recommend the formation of a
Committee (like the Economic and Social Committee and the Committee of
the Regions) that must be consulted prior to the passage of any legislation
impacting state tax laws. In this case, the Committee would be composed of
the Treasurers of the fifty states. A vote on the tax measure would not be
allowed until the Committee of Treasurers had the opportunity to study the
legislation, opine on the consequences to the states and give its
recommendations. Although this proposal is no guarantee that the State
Taxation of Pension Income Act of 1995 or the Internet Tax
Nondiscrimination Act would not have been enacted anyway, a substantive
report from the Committee of Treasurers might have provided cover for those
Senators and Representatives who desired to vote against the legislation.

B. The Judicial Branch

The European Court of Justice is comprised of twenty-five judges,147

each appointed for a renewable six-year term, and is assisted by eight
Advocates General.148 The Advocate General�s role is to �present an
independent and impartial Opinion after the parties have concluded their
submission and before the Judges begin their deliberations.�149 The Court�s
duties are multi-faceted, although its fundamental task is to �ensure that in



72 Florida Tax Review [Vol.7:2

150. EC Treaty, supra note 15, Art. 220.
151. EC Treaty, supra note 15, Art. 230; see also Art. 249.
152. EC Treaty, supra note 15, Art. 230; see also Lier et al., supra note 113, at

19.
153. Arnull, supra note 149, at 8. See also Laurence R. Helfer & Anne-Marie

Slaughter, Toward a Theory of Effective Supranational Adjudication, 107 Yale L.J. 273,
326 (1997). �[T]he treaty does not prohibit individual opinions; it is the Court itself that
has imposed a rule of unanimity.� Id. at 326 n.230 (citing Rules of Procedure of the
Court of Justice, Rule 27.5, 1974 O.J. (L 350) 1, reprinted in Encyclopedia of European
Community Law at B8108 (1992)). See generally David Edward, How the Court of
Justice Works, 20 Eur. L. Rev. 539, 557 (1995) (discussing the advantages and
disadvantages of the collegiate approach of the ECJ).

154. EC Treaty, supra note 15, Art. 234. Article 234 provides:
The Court of Justice shall have jurisdiction to give preliminary
rulings concerning: 
a. the interpretation of this Treaty; 
b. the validity and interpretation of acts of the institutions of the Community
and of the ECB;
c. the interpretation of the statutes of bodies established by an act of the
Council, where those statutes so provide.

Where such a question is raised before any court or tribunal
of a Member State, that court or tribunal may, if it considers that a
decision on the question is necessary to enable it to give judgment,
request the Court of Justice to give a ruling thereon.

Where any such question is raised in a case pending before
a court or tribunal of a Member State against whose decisions there
is no judicial remedy under national law, that court or tribunal shall
bring the matter before the Court of Justice.

Id.

the interpretation and application of this Treaty the law is observed.�150 The
Court has jurisdiction to examine the validity of all acts adopted by the
Council and the Commission, including regulations, directives, and
decisions.151 Appeals can be brought on the grounds of: lack of competence;
misuse of powers; or infringement of an essential procedural requirement, the
Treaty of Rome, or any rule of law relating to its application.152 �[T]he Court
gives a single collective judgment signed by all the Judges who took part in
the deliberations.�153

To ensure the uniform interpretation of Community Law, the
European Court of Justice will render, at the request of any court or tribunal
of a Member State, a legally binding preliminary ruling in a case where any
question of Community law arises.154 These preliminary rulings concern such
matters as the interpretation of provisions of the Treaties or of acts of the
Community institutions and the examination of the validity of Community
legal acts. The Court will not formally rule on the merits of the pending case
but rather limits the judgment to the interpretation or validity of the relevant



2005] Tax Discrimination 73

155. Lier et al., supra note 113, at 20.
156. Stephen Weatherill & Paul Beaumont, EC Law 157-58 (1993). Since

October 31, 1989, the Court of First Instance (CFI) has resolved disputes between the
EC and its employees as well as appeals against an EC institution concerning
competition matters (i.e., antitrust and merger control). The Treaty of Nice has expanded
the CFI�s jurisdiction, which is now competent to rule on matters covering a wide range
of matters arising under the EC Treaty and in connection with the Community�s
secondary law. See Goebel Supplement, European Union Law, supra note 76, at 10.

157. Arnull, supra note 149, at 50-51. Article 234 does not give the Court
jurisdiction �to decide upon the validity of a provision of domestic law in relation to the
Treaty . . . .� Id. (citing Case 6/64, Costa v. ENEL, 1964 E.C.R. 585, 592-93). �Rather
the proceedings take the form of a dialogue in which the two courts seek a solution to
the case in hand which is in harmony with the requirements of Community Law.� Id.
at 51.

158. Bermann, supra note 14, at 355.
159. EC Treaty, supra note 15, Art. 220. Article 220 states �[t]he Court of

Justice shall ensure that in the interpretation and application of this Treaty the law is
observed.� Id.

160. Tax Policy in the EU, supra note 41, at 23. In the direct tax field, progress
towards Community objectives cannot be left to chance that a taxpayer will bring a case
to the ECJ. Id. For example, in 2004, the Commission sent a reasoned opinion, the
second stage of infringement proceedings, to Germany because of a �discriminatory�
tax on school fees paid to non-German schools. Press Release, European Commission,
Commission Requests Germany to End Discrimination Concerning Housing Grants and
Tax Deductions (Jan. 7, 2004), at http://europa.eu.int/rapid/pressReleasesAction.do?
reference=IP/04/20. In 2005, the Commission referred Portugal to the ECJ, the final
state of infringement proceedings, because of a �discriminatory� tax on capital gains
reinvested in another Member State. Press Release, European Commission, Commission
Takes Portugal to Court over Discriminatory Rules on Tax Relief for Capital Gains from
Home Sales (Jan. 13, 2005), at http://europa.eu.int/rapid/pressReleasesAction.do?
reference=IP/05/36.

question of Community law.155 Other national courts can rely on these Article
234 rulings as authoritative interpretations of Community law or may
resubmit the question to the Court for a preliminary ruling in the hope that
the Court of Justice departs from its previous decision.156 Thus, unlike the
U.S. Supreme Court, the ECJ does not normally rule directly on the validity
of Member State laws.157 However, it often clearly indicates as a matter of
law that a Member State�s legislation violates the EC Treaty.158

Along with referrals under Article 234, the ECJ must also hear cases
brought by the Commission pursuant to its obligation to enforce the Treaty.159

The Commission has stated that it intends to pursue a more proactive strategy
in the field of tax infringements and is more willing to initiate action before
the Court upon finding incompatible tax provisions.160 Indeed on February 5,
2003, the Commission started infringement proceedings against Belgium,
France, Italy, Portugal, and Spain with respect to the non-deductibility of



74 Florida Tax Review [Vol.7:2

161. JCG, Six Member States Rapped for Discrimination Against Pension
Funds, Eur. Rep., Feb. 8, 2003, at 2003 WL 10439196.

162. Commission on Structural Alternatives for the Federal Courts of Appeals,
Final Report 73 (Dec. 18, 1998), at http://www.library.unt.edu/gpo/csafca/final/
appstruc.pdf. Two examples of state tax cases that were denied certiorari are White v.
Reynolds Metals Co., 558 So. 2d 373 (Ala. 1989), cert denied, GMC v. Dep�t of
Revenue of Ala., 496 U.S. 912 (1990) (out-of-state corporation claimed disparate
treatment between in-state and out-of-state corporations; court held that the Alabama
code violated neither the Equal Protection nor the Commerce Clauses) and Colo.
Interstate Gas Co. v. Okla. Tax Comm�n, 774 P.2d 468 (Okla. 1989), cert. denied, 493
U.S. 854 (1989) (pipeline companies purchasing gas for sale out-of-state objected to
Oklahoma�s severance tax on the gas, arguing unsuccessfully that it violated the
Supremacy, Due Process and Equal Protection Clauses).

163. See, e.g., Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995
E.C.R. I-225, ¶ 21; see infra Part V(B).

164. See infra Part IV(B).
165. See infra Part III.
166. See, e.g., Case 270/83, Comm�n v. France, 1986 E.C.R. 273 (holding that

the failure of French law to extend a tax credit granted to French companies for French-
source dividends to the permanent establishments of foreign companies constituted a
restriction on their freedom of establishment); Case C-330/91, The Queen v. ex parte
Commerzbank, 1993 E.C.R. I-4017 (holding that a UK law prohibiting nonresident
companies from obtaining interest on tax repayments was incompatible with Articles
52 and 58 of the EC Treaty); Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker,
1995 E.C.R. I-225 (holding that a German law denying nonresident taxpayers special
tax deductions allowed residents for family circumstances was incompatible with Article

contributions to pension funds resident in other Member States.161 All this
leads to a far greater proportion of tax cases being heard by the ECJ when
compared to the U.S. Supreme Court, which decides very few tax cases.162

The ECJ�s judgments in the direct tax area have been increasing in
number and the implications of these decisions are far-reaching. It is clear
that national income tax regimes must be exercised consistently with the
Treaty provisions establishing the fundamental freedoms of the
Community.163 The fundamental freedoms encompass a prohibition of
discrimination on the grounds of nationality specifically found in the
following Articles: Article 39 for the free movement of workers, Article 43
for the freedom of establishment, Article 49 for the freedom of provision of
services, and Article 56 for the free movement of capital.164 Because tax law
often distinguishes between resident and nonresident taxpayers and between
permanent establishments and subsidiaries, the application of this
nondiscrimination principle may result in the incompatibility of national tax
provisions with EC law.165 The Court of Justice has ruled that when such
distinctions result in the unequal treatment of individuals or companies from
other Member States, the tax law must be struck down unless the Member
State can justify a derogation.166



2005] Tax Discrimination 75

48 when the nonresident worker receives almost all his income from that Member
State). See also De Wolf, supra note 12, at 127-28.

167. For a more thorough discussion of the difference between residence-based
and source-based taxation, see Hugh J. Ault & Brian J. Arnold, Comparative Income
Taxation: A Structural Analysis 347-49, 395-97 (2d ed. 2004). See also Brian Arnold
& Michael McIntyre, International Tax Primer 15-26 (2d ed. 2002). �As to residents [a
state may], and does, exert its taxing power over their income from all sources, whether
within or without the State . . . .� Shaffer v. Carter, 252 U.S. 37, 57 (1920).

168. See Ault & Arnold, supra note 167, at 357-60. Generally, the amount of
creditable foreign income taxes is limited to the amount of home country tax otherwise
due on the taxpayer�s foreign source income. Id. at 362-65.

169. See id. at 357-60.
170. Jerome R. Hellerstein & Walter Hellerstein, State and Local Taxation,

Cases and Materials 898 (7th ed. 2001). As of April 2005, 41 states had broad-based
personal income taxes. See 1 Research Institute of America, All States Tax Guide ¶ 228
(2005). See infra notes 403-07 and accompanying text for a discussion of how business
income is allocated in the United States.

171. �[I]nternational tax law, and in particular the Model Double Taxation
Treaty of the Organization for Economic Cooperation and Development (OECD),
recognizes that in principle the overall taxation of taxpayers, taking account of their
personal and family circumstances, is a matter for the State of residence.� Case C-
279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-225, ¶ 32.

172. Michael J. McIntyre & Richard D. Pomp, State Income Tax Treatment of
Residents and Nonresidents Under the Privileges and Immunities Clause, 13 St. Tax
Notes 245, 248 (1997). Professor van Raad points out that the Member States could
verify the data required for computing personal deductions and the amount of income
derived from sources abroad by using the EC 1977 Directive Concerning Mutual
Assistance by the Competent Authorities but acknowledges that the administrative
burden would be relatively great. Kees van Raad, Fractional Taxation of Multi-State

III. PRINCIPLES OF INTERNATIONAL AND INTERSTATE TAXATION

Most national governments as well as most state governments in the
United States employ a set of jurisdictional rules based on the principle of
residence-based taxation of residents and source-based taxation of
nonresidents.167 For example, some EU Member States tax residents on their
worldwide income but allow them to claim a credit for any foreign taxes paid
on their foreign source income in order to prevent double taxation.168 Other
Member States grant an exemption for the foreign source income.169 All of
the states that employ broad-based personal income taxes allow a credit for
taxes paid by their residents to other states.170 Taxpayers� personal and family
circumstances are taken into account in the State of residence, because
residence-based taxation often taxes taxpayers in accordance with their
ability to pay.171 Administratively, this is also logical because the State of
residence has all the information necessary to assess the taxpayer�s overall
ability to pay tax.172



76 Florida Tax Review [Vol.7:2

Income of EU Resident Individuals � A Proposal, in 27 Series on International Taxation,
Liber Amicorum Sven-Olof Lodin, 211, 220 (Krister Andersson et al. eds., 2001).

173. See Ault & Arnold, supra note 167, at 357-60. However, some Member
States using an �exemption with progression� approach, apply a tax rate based on
worldwide income but only with respect to the includible income. Id. at 372-74.

174. Shaffer v. Carter, 25 U.S. 37, 57 (1920); see also Hellerstein &
Hellerstein, supra note 170, at 368-69.

175. McIntyre & Pomp, supra note 172, at 248; see also J.S. Phillips & M.H.
Collins, The General Report, LXXa Cahiers De Droit Fiscal International 15, 52-53
(1985).

176. Terra & Wattel, supra note 51, at 45-46; see also Roy Rohatgi, Basic
International Taxation 132-33 (2002).

177. Wattel, supra note 52, at 224-26.
178. As of April 2005, nine states had no broad-based personal income taxes.

See Research Institute of America, supra note 170, ¶ 228.
179. As of 2004, the top statutory personal income tax rate in the EU is 56%.

Press Release, European Commission, Taxation in the EU from 1995 to 2002, tbl., (July
1, 2004), at http://europa.eu.int/rapid/ pressReleasesAction.do?reference=STAT/04/85.

In contrast, most EU Member States tax nonresidents on any income
derived from sources within the country�s borders (subject to treaty
restrictions) but do not attempt to tax nonresidents on income derived from
sources outside the country�s borders.173 Similarly, a state�s power to tax
nonresidents �extends only to their property owned within the State and their
business, trade, or profession carried on therein, and the tax is only on such
income as is derived from those sources.�174 Traditionally, source countries
do not allow personal deductions to nonresidents because they are only
taxing nonresidents on a portion of their income.175

It has been accepted under international tax principles that
nonresident taxpayers are in a different situation than resident taxpayers and
thus, the taxation of nonresidents can be different than that of resident
taxpayers.176 This creates a conflict between these generally accepted tax
principles and the effective prevention of discriminatory treatment of foreign
source income.177 As the top statutory personal income tax rates in U.S. states
range from zero178 to 11% as compared to the lowest top rate in the EU of
25%,179 it is obvious that the stakes are quite high in the EU. In Part IV, I
outline how the Supreme Court and the European Court of Justice each have
struggled with this problem.



2005] Tax Discrimination 77

180. Daniel Shaviro, Federalism in Taxation: The Case for Greater Uniformity
6 (1993).

181. Id. (citing The Federalist No. 7 (Alexander Hamilton), No. 42 (James
Madison)).

182. Art. of Conf. art. IV. Article IV states:
The better to secure and perpetuate mutual friendship and intercourse
among the people of the different States in this Union, the free
inhabitants of each of these States, paupers, vagabonds, and fugitives
from justice excepted, shall be entitled to all privileges and
immunities of free citizens in the several States; and the people of
each State shall have free ingress and regress to and from any other
State, and shall enjoy therein all the privileges of trade and
commerce, subject to the same duties, impositions, and restrictions
as the inhabitants thereof respectively, provided that such restrictions
shall not extend so far as to prevent the removal of property imported
into any State, to any other State, of which the owner is an inhabitant;
provided also that no imposition, duties or restrictions shall be laid by
any State, on the property of the United States, or either of them.

Id.
183. See Tribe, supra note 44, § 6-36, at 1251 n.4. �Article IV, § 2, is a

shortened version of the Privileges and Immunities Clause of Art. IV of the Articles of
Confederation. Persuaded that Art. IV, § 2 of the proposed Constitution was �formed
exactly upon the principles of the 4th Article of the present Confederation . . . ,� the
Constitutional Convention adopted the Privileges and Immunities Clause with little
discussion.� Id. (citing 3 The Records of the Federal Convention at 112 (Max Farrand
ed., 1911); 2 id. at 173, 187, 443). The Commerce Clause and Privileges and Immunities
Clause both have their sources in the fourth Article of the Articles of Confederation.
Baldwin v. Fish & Game Comm�n. of Mont., 436 U.S. 371, 379 (1977).

184. The Fourteenth Amendment to the Constitution also contains a Privileges
and Immunities Clause which provides that �[n]o State shall make or enforce any law
which shall abridge the privileges or immunities of citizens of the United States.� U.S.
Const. amend. XIV, § 1. The framers of the Fourteenth Amendment used the Article IV
clause as a model for the amendment. Tribe, supra note 44, § 7-2, at 1299. Their

IV. JUDICIAL LIMITATIONS ON TAX SOVEREIGNTY

A. Judicial Limitations on State Tax Sovereignty in the United States

The �capacity of state and local taxation to burden national markets
has long been recognized� in the United States.180 The protectionist tariffs
that the states were levying upon each other were �one of the chief motives
for the Constitutional Convention in 1787.�181 The Constitution incorporated
the fourth of the Articles of Confederation,182 albeit in a briefer form, and its
goal of eradicating state sponsored discrimination against nonresidents.183 In
fact, there are three provisions of the U.S. Constitution that an individual
taxpayer may utilize to challenge an allegedly discriminatory state tax:184 the



78 Florida Tax Review [Vol.7:2

intention was to �nationalize individual rights� by incorporating �not only those rights
specifically secured by the first eight amendments, but also those declared in the
original Constitution . . . . � Id. at 1301-02. However, five years after the Amendment
was adopted, the Supreme Court held in the Slaughter House Cases, 83 U.S. (16 Wall.)
36 (1873) that the provision created no new rights of national citizenship, but merely
furnished an additional guarantee of rights, which citizens of the United States already
possessed. Id. Justice Miller�s narrow construction of the Clause reduced it to �a vain
and idle enactment, which accomplished nothing, and most unnecessarily excited
Congress and the people on its passage.� Id. at 96 (Field, J., dissenting). It is therefore
�viewed by many commentators as a �dead letter for tax purposes.�� 1 Richard D. Pomp
& Oliver Oldman, State and Local Taxation 4-2 (4th ed. 2001) (citing Paul J. Hartman,
Federal Limitations on State and Local Taxation 162, 165 (1st ed. 1981)).

185. U.S. Const. art. IV, § 2, cl. 1 [hereinafter Privileges and Immunities
Clause]. See, e.g., Toomer v. Witsell, 334 U.S. 385 (1948) (striking down a licensing
fee on nonresident shrimp boat owners at a rate 100 times greater than resident owners
because the state failed to demonstrate a unique link between the state�s conservation
interests and the discriminatory fee measures and thus violated the Privileges and
Immunities Clause).

186. U.S. Const. amend. XIV, § 1 [hereinafter Equal Protection Clause]. The
Equal Protection Clause of the Fourteenth Amendment states �[n]o State shall . . . deny
to any person within its jurisdiction the equal protection of the laws.� Id.

187. Commerce Clause, supra note 28. The Commerce Clause of the United
States Constitution grants Congress the power �to regulate Commerce with foreign
Nations, and among the several States, and with the Indian Tribes.� Id.

188. See Bank of Augusta v. Earle, 38 U.S. (13 Pet.) 519, 586 (1839) (holding
that the protections of the Privileges and Immunities Clause do not extend to
corporations). See also W. & S. Life Ins. Co. v. State Bd. of Equalization, 451 U.S. 648,
656 (1981) (citing Hemphill v. Orloff, 277 U.S. 537, 548-50 (1928)) (noting that the
Privileges and Immunities Clause does not protect corporations); Blake v. McClung,
172 U.S. 239 (1898); Paul v. Virginia, 75 U.S. (8 Wall.) 168, 177-78 (1868).

189. See, e.g., Wheeling Steel Corp. v. Glander, 337 U.S. 562 (1949) (holding
Ohio�s ad valorem tax against intangible property of foreign corporations, whom the
state chose to domesticate, constituted unequal treatment of corporations in violation of
the Equal Protection Clause). See infra notes 226-40 and accompanying text.

190. See, e.g., Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 278 (1977)
(upholding a Mississippi tax on the �privilege of doing business� thus unanimously
rejecting the rule that this type of state tax is per se unconstitutional). See infra notes
264-83 and accompanying text.

Privileges and Immunities Clause of Article IV;185 the Equal Protection
Clause;186 and the Commerce Clause.187 The Privileges and Immunities
Clause is inapplicable to corporations,188 but they may assert either the Equal
Protection Clause189 or the Commerce Clause.190



2005] Tax Discrimination 79

191. When analyzing a state�s statutory scheme under this Clause, the Supreme
Court has held that the terms �citizen� and �resident� are basically interchangeable. See
Travis v. Yale & Towne Mfg. Co., 252 U.S. 60, 78-79 (1920). The Court discussed the
terms �citizen� and �resident� stating:

[A] general taxing scheme . . . if it discriminates against all non-
residents, has the necessary effect of including in the discrimination
those who are citizens of other States; and, if there be no reasonable
ground for the diversity of treatment, it abridges the privileges and
immunities to which such citizens are entitled.

Id. at 79. �The Court has held that in determining whether a person is a citizen of a state,
residency in the state is synonymous with state citizenship.� Erwin Chemerinsky,
Constitutional Law: Principles and Policies 446 (2d ed. 2002) (citing United Bldg. &
Constr. Trades Council v. Mayor of Camden, 465 U.S. 208, 216 (1984)).

192. Privileges and Immunities Clause, supra note 185. See generally Douglas
Laycock, Equal Citizens of Equal and Territorial States: The Constitutional Foundations
of Choice of Law, 92 Colum. L. Rev. 249, 261-66 (1992).

193. Camden, 465 U.S. at 230 (Blackmun, J., dissenting). �Citizens of sister
states are outsiders, subject to in-group/out-group bias, denied the right to vote, which
is the key to power in the political process, and thus dependent on judicial protection.�
Laycock, supra note 192, at 267.

194. Camden, 465 U.S. at 230-31 (Blackman, J., dissenting) (citing J. Ely,
Democracy and Distrust 83 (1983)).

1. The Privileges and Immunities Clause

The U.S. Constitution explicitly limits a state�s power to discriminate
against residents of the other states through the Privileges and Immunities
Clause.191 Article IV bans state discrimination against citizens of other states
by providing that �[t]he Citizens of each State shall be entitled to all
Privileges and Immunities of Citizens in the several States.�192 Justice
Blackmun wrote, 

[t]he [Privileges and Immunities] Clause has been a
necessary limitation on state autonomy not simply because
of the self-interest of individual states, but because state
parochialism is likely to go unchecked by state political
processes when those who are disadvantaged are by
definition disenfranchised as well.193

The Clause remedies this breakdown in the representative process by
requiring state residents to bear the same burdens that they choose to place
on outsiders �by constitutionally tying the fate of nonresidents to those
possessing political power, the framers insured that their interests would be
well looked after.�194



80 Florida Tax Review [Vol.7:2

195. Shaffer v. Carter, 252 U.S. 37, 49 (1920).
196. Id. at 52-53.
197. Id. at 57.
198. Id.
199. Travis v. Yale & Towne Mfg. Co., 252 U.S. 60, 80-81 (1920).
200. Id. at 81.
201. See Walter Hellerstein, Some Reflections on the State Taxation of a

Nonresident�s Personal Income, 72 Mich. L. Rev. 1309, 1342 (1974).

In 1920, the Supreme Court had to decide whether a state had the
right to tax any part of a nonresident�s income when an Illinois resident
challenged Oklahoma�s power to tax him on more than a million and a half
dollars from his Oklahoma oil business holdings.195 As long as the taxes on
nonresidents were not �more onerous in effect� than the taxes imposed on
similarly situated residents, the Court held that Oklahoma could tax
nonresidents on income earned within the state.196 The appellant claimed a
further violation of the Privileges and Immunities and Equal Protection
Clauses because the Oklahoma statute denied nonresidents a deduction for
losses except those incurred within the state.197 The Court held that there was
no obligation to allow a deduction for losses elsewhere incurred as the tax on
nonresidents was only on income derived from sources within the state.198

The Travis case, decided the same day, held that the Privileges and
Immunities Clause prohibited the complete denial of personal exemptions to
nonresidents even though New York law provided a corresponding credit
against New York taxes if they paid resident income taxes in a State that
allowed such a credit to New York residents.199 The denial of the exemption
was also not justified by 

the theory that nonresidents have untaxed income derived
from sources in their home States or elsewhere . . .
corresponding to the amount upon which residents of that
State are exempt from taxation . . . [because] the
discrimination is not conditioned upon the existence of such
untaxed income; and it would be rash to assume that
nonresidents taxable in New York under this law, as a class,
are receiving additional income from outside sources
equivalent to the amount of the exemptions that are accorded
to citizens of New York and denied to them.200

Unfortunately, the Travis case left many unanswered questions regarding the
implementation of this rule.201

Subsequent courts have had difficulties interpreting both the Shaffer
and Travis decisions, resulting in confused and inconsistent decisions
regarding the allowance of exemptions, deductions, and credits to



2005] Tax Discrimination 81

202. Id. See, e.g., Goodwin v. State Tax Comm�r, 146 N.Y.S.2d 172 (N.Y.
App. Div. 1955), aff�d, 133 N.E.2d 711 (N.Y. 1956), cert. denied, 352 U.S. 805 (1956)
(holding as constitutional a New York statute that denied a New Jersey resident, who
derived all of his income from New York, any deductions such as real estate taxes and
mortgage interest paid in connection with his residence in New Jersey); Berry v. State
Tax Comm�n, 397 P.2d 780 (Or. 1964) (holding that a statute that restricted deductions
unless connected to income arising from sources within Oregon was not a denial of the
privileges and immunities of citizenship because the clause did not preclude disparity
of treatment when there are independent reasons for it). But see Spencer v. S.C. Tax
Comm�n, 316 S.E.2d 386 (S.C. 1985), aff�d, 471 U.S. 82 (1985) (holding that a statute
that denied personal deductions to nonresidents violated the Privileges and Immunities
Clause); Wood v. Dep�t of Revenue, 749 P.2d 1169 (Or. 1988) (holding that an Oregon
statute that denied a deduction for alimony to nonresidents violated the Privileges and
Immunities Clause). See also James Michael Dailey, Case Note and Comment, The Thin
Line Between Acceptable Disparate Tax Treatment of Nonresidents and
Unconstitutional Discrimination Under the Article IV Privileges and Immunities Clause:
Lunding v. New York Tax Appeals Tribunal, 118 S. Ct. 766 (1998), 21 Hamline L. Rev.
563, 580-86 (1998).

203. Lunding v. N.Y. Tax App. Trib., 522 U.S. 287 (1998) (holding that New
York State�s denial of a tax deduction for alimony payments made by nonresidents
while allowing such deduction for residents violated the Privileges and Immunities
Clause). See also infra notes 430-59.

204. Marcia Coyle, Justices Eye Deductibility of Alimony: At Issue is a State�s
Power to Tax Nonresidents Differently, Nat�l L.J., Nov. 17, 1997, at B1.

205. 334 U.S. 385 (1948).
206. Tribe, supra note 44, § 6-36, at 1250.
207. Id. § 6-37, at 1256.
208. 436 U.S. 371 (1978).
209. Id. at 387. See also Tribe, supra note 44, § 6-37, at 1257. The dissent,

Justice Brennan joined by Justices Marshall and White, argued that it is irrelevant
whether a given right is deemed fundamental. [T]he time has come to confirm explicitly

nonresidents.202 Thus, when the Lunding case203 presented itself,
commentators noted that the �high court�s prior income tax rulings . . . offer
no clear standards to apply to constitutional challenges to state taxes and
have generally been closely decided.�204

Toomer v. Witsell205 marks the beginning of our modern
understanding of the Privileges and Immunities Clause.206 The Supreme
Court shifted its focus of review from categorizing fundamental rights of
citizenship to analyzing the state�s justifications for the discrimination.207

Thirty years later, the Supreme Court muddied the waters with their decision
in Baldwin v. Fish and Game Commission of Montana.208 Although the
Toomer Court had invalidated a commercial licensing fee that was 100%
greater for nonresidents, the Baldwin Court upheld an elk-hunting fee that
was 25% greater for nonresidents holding that the Privileges and Immunities
Clause protects only �basic and essential activities.�209 Thus, the Baldwin



82 Florida Tax Review [Vol.7:2

that which has been implicit in our modern . . . decisions, namely that an inquiry into
whether a given right is �fundamental� has no place in our analysis of whether a State�s
discrimination against nonresidents . . . violates the Clause. Rather, our primary concern
is the State�s justificaton for its discrimination.� Baldwin v. Fish & Game Comm�n of
Montana, 436 U.S. 371, 402 (1977) (Brennan, J., dissenting). See also Rotunda &
Nowak, supra note 43, § 12.7, at 255 (3d ed. 1999).

210. Tribe, supra note 44, § 6-37, at 1257.
211. Laycock, supra note 192, at 265.
212. Gary J. Simson, Discrimination Against Nonresidents and the Privileges

and Immunities Clause of Article IV, 128 U. Pa. L. Rev. 379 (1979) (citing Corfield v.
Coryell, 6 F. Cas. 546, 551 (C.C.E.D. Pa. 1823) (No. 3230)).

213. Tribe, supra note 44, § 6-37, at 1256. The substantial reason test replaced
the reasonableness exception that the Supreme Court had carved out in the late
nineteenth and early twentieth century. Id. at 1254 (citing Blake v. McClung, 172 U.S.
239, 256 (1898)).

214. Toomer v. Witsell, 334 U.S. 385, 396 (1948) (emphasis added). �The
State is not without power . . . to restrict the type of equipment used . . . to graduate
license fees according to the size of the boats, or even to charge nonresidents a
differential which would merely compensate the State for any added enforcement
burden . . . .� Id. at 398-99 (citations omitted). See, e.g., Carlson v. State, 798 P.2d 1269
(Alaska 1990) (fee differentials between residents and nonresidents for commercial
fishing licenses did not violate the Privileges and Immunities Clause if the differential
equalized the financial burden of fisheries management between residents and
nonresidents). See also Sarah H. Davis, Carlson v. State and the Privileges and
Immunities Clause: The Alaska Wrinkle in Nonresident Fishing Fee Differentials, 21
Alaska L. Rev. 91 (2004) (discussing Carlson�s three trips to the Alaska Supreme
Court).

Court did not feel compelled to apply the �substantial reason test� of
Toomer.210 This limitation of the Privileges and Immunities Clause to
�fundamental� rights is rarely invoked211 and the freedom from
discriminatory taxation had previously been named as a fundamental right.212

The Toomer case had established the �substantial reason� test when
the Supreme Court decided that the Privileges and Immunities Clause would
not preclude nonresident discrimination where there were valid independent
reasons for such treatment.213 Thus, 

[l]ike many other constitutional provisions, the privileges
and immunities clause is not an absolute. It does bar
discrimination against citizens of other States where there is
no substantial reason for the discrimination beyond the mere
fact that they are citizens of other States. But it does not
preclude disparity of treatment in the many situations where
there are perfectly valid independent reasons for it.214



2005] Tax Discrimination 83

215. Toomer, 334 U.S. at 398.
216. Tribe, supra note 44, § 6-37, at 1256.
217. Id. �Nothing in the record indicates that nonresidents use larger boats or

different fishing methods than residents . . . , or that any substantial amount of the
State�s general funds is devoted to shrimp conservation.� Toomer, 334 U.S. at 398.

218. Tribe, supra note 44, § 6-37, at 1256.
219. 420 U.S. 656 (1975).
220. Id. at 657-58.
221. Id. at 658. In such a case, the New Hampshire tax would be reduced to the

amount of the tax that the State of residence would have imposed. Id.
222. Id. at 658-59. As the Court explained: 
The Commuters Income Tax initially imposes a tax of 4% as well on
the income earned by New Hampshire residents outside the State. It
then exempts such income from the tax, however: (1) if it is taxed by
the State from which it is derived; (2) if it is exempted from taxation
by the State from which it is derived; or (3) if the State from which
it is derived does not tax such income.

Id. at 658.
223. Id. at 665. Note, however, that the Supreme Court has thus far refused to

answer whether �telecommuting� is similarly unconstitutional. Huckaby v. N.Y. State
Div. of Tax App., 829 N.E.2d 276 (N.Y. 2005), cert. denied, 126 S. Ct. 546 (2005). In
Huckaby, the high court of New York ruled that a tax on a Tennessee resident working
for a New York company form his home in Tennessee does not violate the Constitution.
Id. at 284.

224. Austin, 420 U.S. at 665-66.

Because South Carolina was unable to prove that �non-citizens constitute a
peculiar source of the evil at which the statute is aimed,�215 the state�s
discriminatory licensing fee was struck down.216 The state also failed to
demonstrate a sufficient link between �the legitimate interests served and the
discrimination practiced�217 and that less restrictive alternatives were
impractical.218

The Supreme Court applied this test in Austin v. New Hampshire.219

New Hampshire imposed a commuter income tax on nonresidents� �New
Hampshire-derived income in excess of $2,000.�220 The tax rate was 4%
unless the nonresident taxpayer�s State of residence imposed a lesser rate of
tax had the income been earned in that State.221 Although New Hampshire
residents were also taxed on their out-of state income, the statute excluded
various categories of income such that no resident was actually taxed on his
out-of-state income.222 Given the �rule of substantial equality of treatment�
for resident and nonresident taxpayers, the Supreme Court found the
commuter tax unconstitutional because the tax fell exclusively on the income
of nonresidents.223 New Hampshire argued that the tax was not more
burdensome once the tax credit the commuters received from their State of
residence was taken into account.224 The majority replied that �the



84 Florida Tax Review [Vol.7:2

225. Id. at 668.
226. See Bank of Augusta v. Earle, 38 U.S. (13 Pet.) 519, 586 (1839) (holding

that the protections of the Privileges and Immunities Clause do not extend to
corporations). See also W. & S. Life Ins. Co. v. State Bd. of Equalization, 451 U.S. 648,
656 (1981) (citing Hemphill v. Orloff, 277 U.S. 537, 548-50 (1928)) (noting that the
Privileges and Immunities Clause does not protect corporations); Blake v. McClung,
172 U.S. 239, 259 (1898) (determining that a corporation may not invoke the protection
of the Privileges and Immunities clause); Paul v. Virginia, 75 U.S. (8 Wall.) 168, 177-78
(1868) (stating that a corporation is not a citizen within the meaning of the Privileges
and Immunities clause).

227. Hellerstein, supra note 201, at 1332 n.104. See also SHYY, Inc. v.
Borough of Glassboro, 393 U.S. 117 (1968) (holding that a state cannot deny a tax
exemption to a foreign corporation, allowed to enter that state to do business, that a
domestic corporation would receive); Wheeling Steel Corp. v. Glander, 337 U.S. 562
(1949) (holding that where a state has permitted a foreign corporation to enter and
transact business equal protection must be accorded at least to the extent that their
property is entitled to an equally favorable ad valorem tax basis).

228. U.S. Const. amend. XIV, § 1. The Supreme Court ruled that a corporation
is a �person� within the meaning of the Fourteenth Amendment in Santa Clara County
v. South Pacific Railroad, 118 U.S. 394 (1886).

229. See Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 359-60
(1973) (holding that an Illinois constitutional amendment authorizing ad valorem taxes
on personal property of corporations and similar entities, but not with respect to personal
property of individuals, did not violate the Equal Protection Clause because it was not
the result of invidious discrimination and was within the state�s discretion to make
classifications for tax purposes). See also Allied Stores of Ohio Inc. v. Bowers, 358 U.S.
522, 526-27 (1959) (holding that an Ohio statute imposing an ad valorem tax on
property stored by local companies while exempting out-of-state owners of warehouses
did not deny domestic corporations the equal protection of the law).

230. Nordlinger v. Hahn, 505 U.S. 1, 11 (1992) (citing U.S. R.R. Ret. Bd. v.
Fritz, 449 U.S. 166, 174, 179 (1980)).

constitutionality of one State�s statutes affecting nonresidents [cannot]
depend upon the present configuration of the statutes of another State.�225

2. The Equal Protection Clause

Although the Privileges and Immunities Clause is inapplicable to
corporations,226 the Equal Protection Clause, which also forbids states to
discriminate against outsiders in favor of locals, has been used to prohibit
discrimination against corporations.227 The Fourteenth Amendment, ratified
in 1868, decrees �[n]o State shall . . . deny to any person within its
jurisdiction the equal protection of the laws.�228 The Clause does not,
however, prohibit the states from making reasonable classifications among
such persons.229 The statute will be upheld as long as there is a plausible
policy reason for the classification,230 plausible legislative facts on which a



2005] Tax Discrimination 85

231. Id. (citing Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 464
(1981)).

232. Id. (citing Cleburne v. Cleburne Living Ctr., Inc., 473 U.S. 432, 446
(1985)).

233. Id. at 12-13. The Court found California�s property tax scheme to be
constitutional even though it created dramatic disparities. Id. See also Leo P. Martinez,
The Trouble with Taxes: Fairness, Tax Policy, and the Constitution, 34 Hastings Const.
L. Q. 413 (2005). Ms. Nordlinger, for example, paid approximately the same taxes on
a $170,000 home as her neighbor paid on a Malibu beach front home worth $2.1
million. Nordlinger, 505 U.S. at 6-7.

234. Nordlinger, 505 U.S. at 10.
235. Matthew J. Zinn & Steve Reed, Equal Protection and State Taxation of

Interstate Business, 41 Tax Law. 83, 92 (1987).
236. Regan v. Taxation with Representation, 461 U.S. 540, 547 (1983). See

also Madden v. Kentucky, 309 U.S. 83, 88 (1940) (noting that legislatures have the
greatest freedom with respect to classifications in the tax area).

237. Zinn & Reed, supra note 235, at 92.
238. S. R.R. Co. v. Greene, 216 U.S. 400, 417-18 (1910).

rational legislator could rely,231 and �the relationship of the classification to
its goal is not so attenuated as to render the distinction arbitrary or
irrational.�232 Specifically, the Court found in Nordlinger that California
could differentiate between existing landowners and new owners with respect
to the property tax. The state�s interest in preserving neighborhoods by
allowing existing owners to rely on certain tax rates to discourage constant
turnover of land was legitimate.233 �[U]nless a classification warrants some
form of heightened review because it jeopardizes exercise of a fundamental
right or categorizes on the basis of an inherently suspect characteristic, the
Equal Protection Clause requires only that the classification rationally further
a legitimate state interest.�234

The Supreme Court has rarely invalidated state tax laws on the sole
basis that they are in violation of the Equal Protection Clause.235 Legislatures
have been given broad latitude to create classifications and distinctions in tax
statutes.236 One exception to this deference exists with respect to interstate
business and classifications involving residency, usually taking the form of a
�domestic preference tax.�237 In Southern Railway, the Supreme Court
invalidated an Alabama statute that imposed a higher ad valorem property tax
on railroads not chartered in the state on the grounds that no legitimate
reason was proffered for favoring local companies over nonresidents.238

Legitimate state interest did not include a state favoring �its own residents by
taxing foreign corporations at a higher rate solely because of their residence



86 Florida Tax Review [Vol.7:2

239. Metro. Life Ins. Co. v. Ward, 470 U.S. 869, 878 (1985) (invalidating
Alabama statute that taxed out-of-state insurance companies at a higher rate than
domestic companies because the state�s purposes were not legitimate to pass the equal
protection rational basis test). Insurance corporations in particular utilize the Equal
Protection Clause because the McCarran-Ferguson Act exempts insurance corporations
from Commerce Clause restraints. Hellerstein & Hellerstein, note 171, at 64-65.
However, this use of the Equal Protection Clause has been characterized as
disingenuous: �This newly unveiled power of the Equal Protection Clause would come
as a surprise to the Congress that passed the McCarran-Ferguson Act . . . . In the
McCarran-Ferguson Act, Congress expressly sanctioned such economic parochialism
in the context of state regulation and taxation of insurance.� Ward, 470 U.S. at 900-01
(O�Connor, J., dissenting).

240. Ward, 470 U.S. at 878.
241. David Schmudde, Constitutional Limitations on State Taxation of

Nonresident Citizens, 1999 Mich. St. L. Rev. 95, 119. See also Christopher R. Drahozal,
Preserving the American Common Market: State and Local Governments in the United
States Supreme Court, 7 Sup. Ct. Econ. Rev. 233 (1999).

242. See Mark Tushnet, Rethinking the Dormant Commerce Clause, 1979
Wisc. L. Rev. 125, 130-31.

243. Id. (quoting H.P. Hood & Sons v. DuMond, 336 U.S. 525, 539 (1949))
(�Our system, fostered by the Commerce Clause, is that every farmer and every
craftsman shall be encouraged to produce by the certainty that he will have free access
to every market in the Nation . . . .�).

244. Hellerstein, Federal Limitations, supra note 34, at 433 n.24. The evolution
of the early Commerce Clause doctrine has been outlined numerous times. See, e.g.,
Justice Felix Frankfurter, The Commerce Clause Under Marshall, Taney and Waite 18-
19 (Chicago Quadrangle Books 1968) (1928); F.D.G. Ribble, State and National Power
over Commerce (Edwin W. Patterson ed., Columbia J. Press, 1937); John B. Sholley,
The Negative Implications of the Commerce Clause, 3 U. Chi. L. Rev. 556 (1936).

. . . .�239 This �constitutes the very sort of parochial discrimination that the
Equal Protection Clause was intended to prevent.�240

3. The Dormant Commerce Clause

Discrimination against sister-state corporations has most often been
analyzed using the dormant Commerce Clause.241 Implicitly, the Commerce
Clause prohibits state discrimination of interstate commerce as well as undue
burdens on commerce.242 The Commerce Clause embodies the �principle that
our economic unit is the Nation . . . .�243 Although the principal source of
judicial doctrine limiting state taxation of interstate commerce, the Court did
not espouse this proposition until the late nineteenth century.244 In 1827,
Justice Marshall indicated in dictum that a state tax measure could interfere
with interstate commerce and would be treated like state regulatory measures



2005] Tax Discrimination 87

245. Hellerstein, Federal Limitations, supra note 34, at 434 (quoting Brown v.
Maryland, 25 U.S. (12 Wheat.) 419, 448-49 (1827)). Justice Marshall wrote:

[T]he taxing power of the States must have some limits. . . . It cannot
interfere with any regulation of commerce. If the States may tax all
persons and property found on their territory, what shall restrain them
from taxing goods in their transit through the State from one port to
another . . . or from taxing the transportation of articles passing from
the State itself to another State, for commercial purposes? These
cases are all within the sovereign power of taxation, but would
obviously derange the measures of Congress to regulate commerce,
and affect materially the purpose for which it [sic] was given.

Id.
246. Reading R.R. Co. v. Pennsylvania, 82 U.S. (15 Wall.) 232 (1873). Two

companion cases were decided in 1873 that bore the same name. They were
distinguished in the reports as Case of the State Freight Tax and State Tax on Railway
Gross Receipts, 82 U.S. (15 Wall.) 284 (1873). Both cases were cited for the proposition
that �a state tax on any activity or process of interstate commerce was an invalid
�regulation of commerce.�� William B. Lockhart, A Revolution in State Taxation of
Commerce?, 65 Minn. L. Rev. 1025, 1027 (1981).

247. Hellerstein, Federal Limitations, supra note 34, at 435.
248. Reading R.R. Co., 82 U.S. (15 Wall.) at 279.
249. See Chemerinsky, supra note 191, at 434. �The thrust of the Formal Rule

was that a state may not impose a tax on any activity or process viewed by the Court as
a part of interstate commerce.� Howard O. Hunter, Federalism and State Taxation of
Multistate Enterprises, 32 Emory L. J. 89, 95 (1983).

250. Lockhart, supra note 246, at 1029.
251. Chemerinsky, supra note 191, at 434 (citing Freeman v. Hewit, 329 U.S.

249 (1946); McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944); Mills v. Portland, 268
U.S. 325 (1925), respectively).

found to infringe upon the national commerce power.245 It was not until the
Case of the State Freight Tax246 that the Supreme Court explicitly established
�the doctrine that the Commerce Clause by its own force limits  state tax
power over interstate commerce.�247 The U.S. Supreme Court held that a
Pennsylvania levy on all freight transported in the state was unconstitutional
because it was �in effect a regulation of interstate commerce.�248 This rule,
that a state may not directly tax interstate commerce, became known as the
�Formal Rule.�249

From its origin in 1873 until 1977, this �Formal Rule� was one of the
primary bases for invalidating state taxes that affected commerce.250 Using
this rule, the Supreme Court found unconstitutional state taxes such as a
gross receipts tax, a sales tax, and a license tax on interstate sales.251 Other
grounds for invalidation included discrimination against interstate commerce,
the risk of multiple taxation, unfair apportionment, and the absence of due



88 Florida Tax Review [Vol.7:2

252. Lockhart, supra note 246, at 1029. This Article will only focus on
discrimination of interstate commerce as the basis for invalidating a state tax.

253. Chemerinsky, supra note 191, at 434 (citing U.S. Glue Co. v. Oak Creek,
247 U.S. 321 (1918); McGoldrick v. Berwind-White Coal Min. Co., 309 U.S. 33
(1940)).

254. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) (upholding a
Mississippi tax on the �privilege of doing business� thus unanimously rejecting the rule
that this type of state tax is per se unconstitutional). See Lockhart, supra note 246, at
1026.

255. Chemerinsky, supra note 191, at 435. See infra notes 264-26 and
accompanying text.

256. Laycock, supra note 192, at 269. See also Schmudde, supra note 241, at
119.

257. Fulton Corp. v. Faulkner, 516 U.S. 325, 331 (1996) (quoting Or. Waste
Sys., Inc. v. Dep�t of Envtl. Quality of Or., 511 U.S. 93, 99 (1994)) (holding that the
North Carolina intangibles tax was unconstitutional because the amount of the tax was
inversely proportionate to the corporation�s liability for North Carolina income tax). See
Chemerinsky, supra note 191, at 440.

258. See Chem. Waste Mgmt., Inc. v. Hunt, 504 U.S. 334, 342-43 (1992)
(quoting Hughes v. Oklahoma, 441 U.S. 322, 337 (1979)) (noting that �facial
discrimination invokes the strictest scrutiny of any purported legitimate local purpose
. . . .�).

259. Boston Stock Exch. v. State Tax Comm�n, 429 U.S. 318, 329 (1977)
(citing Nw. States Portland Cement Co. V. Minnesota, 358 U.S. 450 (1959)). See also
Chemerinsky, supra note 191, at 440.

260. Tribe, supra note 44, § 6-16, at 1113.

process jurisdiction.252 However, the �Formal Rule� was severely criticized
because taxes found to have only an indirect burden on interstate commerce
were upheld even though the distinction was arbitrary and unpredictable.253 In
Complete Auto,254 the Supreme Court abandoned this historical approach and
replaced it with a more functional four-part test that focused on the purpose
and effect of the tax to determine whether the Commerce Clause had been
violated.255

Modern Commerce Clause doctrine forbids nearly all discrimination
based on economic factors from sister-states.256 Discrimination against
interstate commerce is �virtually per se invalid�257 or has been subject to the
�strictest scrutiny.�258 In Boston Stock Exchange, the Supreme Court stated:
�No State, consistent with the Commerce Clause, may �impose a tax which
discriminates against interstate commerce . . . by providing a direct
commercial advantage to local business.��259 Professor Lawrence H. Tribe has
said that �[t]he states may still serve as laboratories for democracy, but their
fiscal experiments are subject to rigorous judicial scrutiny, designed to
smoke out measures that discriminate.�260



2005] Tax Discrimination 89

261. Laurence H. Tribe, American Constitutional Law § 6-15, at 442 (2d ed.
1988).

262. See id. See also Edmund W. Kitch, Regulation and the American
Common Market, in Regulation, Federalism, and Interstate Commerce 9, 31 (A. Dan
Tarlock ed., 1981).

263. Daniel Shaviro, An Economic and Political Look at Federalism in
Taxation, 90 Mich. L. Rev. 895, 942 (1992) (citing Richard Briffault and Henry
Monaghan, respectively).

264. 430 U.S. 274 (1977). In a unanimous decision, the Supreme Court upheld
the constitutionality of a Mississippi tax on gross revenues for the privilege of doing
business in that state. The Court stated that the taxpayer �did not allege that its activity
which Mississippi taxes does not have a sufficient nexus with the State; or that the tax
discriminates against interstate commerce; or that the tax is unfairly apportioned; or that
it is unrelated to services provided by the State.� Id. at 277-78 (citations omitted). See
also Chemerinsky, supra note 191, at 435.

265. See Pomp & Oldman, supra note 184, at 1-21.
266. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).
267. Tribe, supra note 44, § 6-16, at 1107.

However, the Supreme Court on occasion exercises �an extra dose of
judicial sympathy for state taxing power.�261 The Court grants greater
deference to state and local taxation autonomy than to Commerce Clause
cases involving regulation.262 Professor Daniel Shaviro notes:

The Supreme Court may treat tax cases as meriting greater
deference to state and local governments than regulation
cases because it regards the power to tax as at the heart of a
government�s sovereignty. Another explanation is that the
Court simply lacks confidence in its ability to understand tax
cases and resolve them intelligently, and thus prefers to let
most challenged taxes stand.263

Under the test spelled out in dicta in Complete Auto,264 a tax on
interstate commerce must meet four requirements if seeking to survive
constitutionality under the Commerce Clause:265 1) the tax must be fairly
apportioned, 2) the tax must be fairly related to benefits provided to the
taxpayer, 3) the tax must not discriminate against interstate commerce, and 4)
the activity must be sufficiently connected to the state to justify a tax.266 The
third prong of this test, the ban on discrimination against interstate
commerce, is the predominant basis upon which the Supreme Court has
struck down state taxes in recent years.267

A tax law is discriminatory if it �tax[es] a transaction or incident
more heavily when it crosses state lines than when it occurs entirely within



90 Florida Tax Review [Vol.7:2

268. Chem. Waste Mgmt., Inc. v. Hunt, 504 U.S. 334, 342 (1992) (quoting
Armco Inc. v. Hardesty, 467 U.S. 638, 642 (1984)).

269. Chemerinsky, supra note 191, at 442.
270. Id. (citing 512 U.S. 186 (1994)).
271. Id.
272. Am. Trucking Ass�ns, Inc. v. Scheiner, 483 U.S. 266 (1987). See also

Walter Hellerstein, Is �Internal Consistency� Foolish?: Reflections on an Emerging
Commerce Clause Restraint on State Taxation, 87 Mich. L. Rev. 138, 164 (1988)
(noting that such flat taxes effectively discriminate against interstate commerce in that
they �bear more heavily on the interstate than the intrastate enterprise merely because
the former does business across state lines.�).

273. Am. Trucking Ass�ns, Inc., 483 U.S. at 284.
274. See generally Jon David Pheils, Defining the Scope of the Article Four

Privileges and Immunities Clause, 54 U. Cin. L. Rev. 883 (1986); David Schultz, State
Taxation of Interstate Commuters: Constitutional Doctrine in Search of Empirical
Analysis, 16 Touro L. Rev. 435 (2000).

275. See Zinn & Reed, supra note 235, at 99-102 (arguing the Court applies
two different standards in tax cases); George F. Carpinello, State Protective Legislation
and Nonresident Corporations: The Privileges and Immunities Clause as a Treaty of
Nondiscrimination, 73 Iowa L. Rev. 351, 408 (1988) (arguing that the Court refuses to
invalidate state protectionist measures under a test greater than rational basis).

276. See generally David F. Shores, State Taxation of Interstate Commerce �
Quiet Revolution or Much Ado About Nothing?, 38 Tax L. Rev. 127, 129 (1982);
Edward A. Zelinsky, Restoring Politics to the Commerce Clause: The Case for
Abandoning the Dormant Commerce Clause Prohibition on Discriminatory Taxation,
29 Ohio N. U. L. Rev. 29 (2002).

277. See Hellerstein, State Taxation, supra note 33, at 44; see also Dailey,
supra note 202, at 563.

the State.�268 The Supreme Court will also strike down state taxes that are
facially neutral, but have a disproportionate impact on nonresidents.269 For
example, in West Lynn Creamery, Inc. v. Healy, a Massachusetts tax on all
milk dealers was held unconstitutional.270 The impact of this tax was identical
to that of a discriminatory tax because the revenues from the tax were used to
subsidize in-state dairy farmers.271 In American Trucking Associations, Inc., a
flat tax on trucks for Pennsylvania road use violated the Commerce Clause
because the effect was to impose a higher burden on a multistate company
than on an in-state company.272 �If each State imposed flat taxes for the
privilege of making commercial entrances into its territory, there is no
conceivable doubt that commerce among the States would be deterred.�273

Unfortunately, commentators are unanimous in their criticism of
Privileges and Immunities,274 Equal Protection,275 and Commerce Clause276

jurisprudence as it relates to constitutional scrutiny of state tax laws.277 In
1977, the Supreme Court itself observed again that its judicial application of
constitutional principles to the multitude of state tax cases �left much room
for controversy and confusion and little in the way of precise guides to the



2005] Tax Discrimination 91

278. Boston Stock Exch. v. State Tax Comm�n, 429 U.S. 318, 329 (1977)
(quoting Nw. States Portland Cement Co. v. Minn., 358 U.S. 450, 457 (1959)). See also
Hellerstein, Federal Limitations, supra note 34, at 441. �Supreme Court decisions
concerning commerce clause limitations on state taxing power have long been
characterized by meaningless distinctions, encrusted rules, and a lack of principled
analysis.� Shores, supra note 276, at 128.

279. As Professor Stark explains: 
The �problem� here (if one considers it that) is that the only
institutional regulator is the U.S. Supreme Court, which only
periodically hears state tax cases. And when it does hear such cases,
it is pulled in too many directions to regulate this field effectively. It
wants to prevent states from �overreaching� while also preventing
taxpayer abuses while also respecting state [sovereignty] while also
not prescribing rules that are too detailed (since the Constitution, after
all, says CONGRESS gets to regulate interstate commerce, not the
Supreme Court). As a result, this whole field has a sort of wild west
quality to it. 

Posting of Professor Kirk Stark, stark@law.ucla.edu to Taxprof@listserv.uc.edu (June
23, 2002) (on file with author).

280. See Laurence H. Tribe, American Constitutional Law § 6-15, at 442 (2d
ed. 1988); Lockhart, supra note 246, at 1026-27.

281. For a pessimistic analysis of the Complete Auto decision, see generally
Shores, supra note 276, at 129 (suggesting that �the Court has failed to lay the
groundwork for a coherent method of analysis.�).

282. Jesse H. Choper & Tung Yin, State Taxation and the Dormant Commerce
Clause: The Object-Measure Approach, 1998 Sup. Ct. Rev. 193.

283. Hunter, supra note 249, at 97.
284. The Supreme Court has failed to develop a bright line test or guiding

interpretation for the Privileges and Immunities Clause but instead applies a narrow
analysis on a case-by-case basis. Dailey, supra note 202, at 565. See also Christopher
H. Lunding, U.S. Supreme Court Finds New York�s Resident-Only Alimony Deduction
Unconstitutional, 8 J. Multistate Tax�n 52 (1998); Phiels, supra note 274.

States in the exercise of their indispensable power of taxation.�278 Professor
Kirk Stark has described the whole field as having �a sort of wild west
quality to it.�279 Although the Complete Auto decision has generally received
favorable comments from scholars,280 there are doubts about the ability of
judges to undertake the complex inquiries seemingly compelled by the
case.281 Some scholars believe that the test is more complicated than
necessary �primarily because several of its parts are functionally
redundant.�282 There is also the fear that the Supreme Court will apply the
Complete Auto test as mechanically as it applied the Formal Rule. 283

With respect to the Privileges and Immunities Clause, the Supreme
Court has consistently refused to develop bright-line rules, preferring instead
to analyze each case on an ad hoc factual basis.284 In tracing the evolution of
equal protection in cases involving the taxation of nonresident corporations,



92 Florida Tax Review [Vol.7:2

285. Zinn & Reed, supra note 235, at 92.
286. See Pomp & Oldman, supra note 184, at 2-35.
287. EEC Treaty, supra note 4, Art. 2.
288. EEC Treaty, supra note 4, Art. 3(c) (now Art. 3(1)(c)).
289. See Paul Farmer & Richard Lyal, EC Tax Law 310 (1994); see also Eileen

O�Grady, World Tax Conference Comes to London, 26 Tax Notes Int�l 1058 (2002).
290. EC Treaty, supra note 15, Art. 12.
291. EC Treaty, supra note 15, Arts. 28, 29.
292. EC Treaty, supra note 15, Art. 39.
293. EC Treaty, supra note 15, Art. 49.
294. EC Treaty, supra note 15, Art. 56.
295. Terra & Wattel, supra note 51, at 23. The only situations where Article

12 has been applied independently are those in which there is no specific prohibition of
discrimination in the EC Treaty. Id. (citing Case 305/87, Comm�n v. Hellenic Republic,
1989 E.C.R. 1461; Case C-1/93, Halliburton Services BV v. Staatssecretaris van
Financiën, 1994 E.C.R. I-1137; Case C-311/97, Royal Bank of Scotland plc v. Elliniko
Dimosio (Greek State), 1999 E.C.R. I-2651).

296. Case 26/62, NV Algemene Transport - en Expedite Onderneming van
Gend & Loos v. Nederlandse Administratie Der Belastingen, 1963 E.C.R. 1, ¶ 12.

commentators have noted that the Court has vacillated between �rigorous and
virtually nonexistent review.�285 Scholars have also noted that an inherent
weakness in equal protection analysis is choosing the proper level of
generality to examine.286

B. Judicial Limitations on Member State Tax Sovereignty in the European     
    Union

The objective of the Treaty of Rome was to create a single common
market that would increase the volume and gain from trade between the
Member States.287 To create such a market, the EEC Treaty contemplated the
removal of obstacles to the free movement of goods, persons, services, and
capital between the Member States.288 Primarily, the removal of obstacles to
free movement is based on the principle of equal treatment similar to the
Equal Protection Clause of the U.S. Constitution. This principle is enshrined
in the general prohibition of discrimination on the grounds of nationality
found in Article 12 of the EC Treaty.289 Article 12 provides: �Within the
scope of application of this Treaty, and without prejudice to any special
provisions contained therein, any discrimination on grounds of nationality
shall be prohibited.�290

However, because of the �special provisions� governing the free
movement of goods,291 workers,292 services,293 and capital,294 Article 12 has
rarely been applied independently.295 Instead, the ECJ has interpreted the
�Four Freedoms� as having direct applicability,296 meaning that economic
operators can invoke these rights before national courts and challenge the



2005] Tax Discrimination 93

297. van Thiel, supra note 20, at 5; see also Terra & Wattel, supra note 51, at
30.

298. van Thiel, Free Movement of Persons, supra note 10, at 22. Professor van
Thiel concludes that �there is no convincing theoretical or jurisprudence-based argument
to support either the strict or the moderate sovereignty exception� for the income tax
laws and treaties of the Member States. Id. He points out that the Court has rejected the
strict sovereignty exception in its income tax case law either implicitly or explicitly. Id.
at 23-24.

299. Id. at 21.
300. Deloitte EU Tax Group, Deloitte & Touche, LLP, Study on Analysis of

Potential Competition and Discrimination Issues Relating to a Pilot Project for an EU
Tax Consolidation Scheme for the European Company Statute (Societas Europaea) 13
n. 36, at http://europa.eu.int/comm/taxation_customs/resources/documents/report_
deloitte.pdf  [hereinafter Deloitte EU Study].

301. van Thiel, Free Movement of Persons, supra note 10, at 19.
302. The Commission may bring an action against a Member State for failing

to fulfill its obligations under the Treaty. EC Treaty, supra note 15, Art. 226. See also
supra notes 41 and 159 and accompanying text.

303. Case 18/84, Comm�n v. French Republic, 1985 E.C.R. I-1339 [hereinafter
Newspaper Publishers case] (holding that a French tax law that denied certain tax
benefits to newspaper publishers for publications printed in other Member States
violated Article 30 of the EEC Treaty).

304. van Thiel, Free Movement of Persons, supra note 10, at 20. See also Stein,
supra note 1, at 901. �From its inception, the Court of Justice has construed the
European Economic Community Treaty in a constitutional mode rather than employing
the international law methodology of treaty interpretation.� Id.

validity of domestic legislation.297 Thus, it is now clear that Treaty
provisions, because they have been adopted by the Member States as part of
their basic constitutional charter, take precedence over all forms of domestic
law, including tax law.298 This distinguishes the EC Treaty from international
treaties such as NAFTA and GATS, where income taxation has been
excluded from their coverage.299 Although, in the absence of harmonization,
competence for direct taxation falls to the Member States, well-established
case law holds these Treaty provisions applicable in the field of direct
taxation.300 Member States must apply Community law and refrain from
applying those provisions of their national law that are incompatible with the
EC Treaty.301

The Commission began challenging Member States� tax laws by
instituting infringement proceedings pursuant to Article 226,302 starting with
the Newspaper Publishers case of 1985.303 It was only a matter of time before
private parties decided to test the compatibility of national income tax
provisions against their �constitutional rights.�304 The first case regarding the
individual income tax concerned a Luxembourg law that denied any



94 Florida Tax Review [Vol.7:2

305. Case C-175/88, Biehl v. Admin. des Contributions du grand-Duche de
Luxembourg, 1990 E.C.R. I-1779, ¶ 5.

306. Id. ¶ 3.
307. Id. ¶¶ 4-6.
308. Id. ¶ 7. The ECJ held that the Luxembourg law violated Article 48 (now

Art. 39) with respect to the free movement of workers. Id. ¶ 19.
309. See, e.g., Case C-330/91, The Queen v. Inland Revenue Comm�rs, ex

parte Commerzbank AG, 1993 E.C.R. I-4017.
310. Case C-175/88, Biehl v. Admin. des Contributions du Grand-Duche de

Luxembourg, 1990 E.C.R. I-1779, ¶ 13 (citing Case 152/73, Sotgiu v. Deutsche
Bundespost, 1974 E.C.R. 153, ¶ 11). See also Armand de Mestral & Jan Winter,
Mobility Rights in the European Union and Canada, 46 McGill L. J. 979, 999 (2001)
(citing Case 15/69, Wurttembergische Milchverwertung-Sudmilch-AG v. Ugliola, 1969
E.C.R. 363).

311. Case 152/73, Sotgiu v. Deutsche Bundespost, 1974 E.C.R. 153, ¶ 11.
312. Paul Farmer, The Court�s Case Law on Taxation: A Castle Built on

Shifting Sands?, 12 EC Tax Rev. 75, 76 (2003).
313. Id. See, e.g., Case C-237/94, O�Flynn v. Adjudication Officer, 1996

E.C.R. I-2617.
314. �Although, as Community law stands at present, direct taxation does not

as such fall within the purview of the Community, the powers retained by the Member
States must nevertheless be exercised consistently with Community law . . . .� Case C-
279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-225, ¶ 21 (citing Case
C-246/89, Comm�n v. United Kingdom, 1991 E.C.R. I-4585, ¶ 12). See also Case C-
80/94, Wielockx v. Inspecteur der Directe Belastingen, 1995 E.C.R. I-2493, ¶ 16; Case

repayment of tax to a part-year resident.305 Mr. Biehl, a German national,
resided and worked in the Grand Duchy of Luxembourg until October
1983.306 His employer over withheld income tax, but when Mr. Biehl filed for
a repayment, the tax office denied his request.307 Mr. Biehl successfully
argued that the law was covertly discriminatory because it mainly applied to
taxpayers who were not Luxembourg nationals.308

Settled case law requires equal treatment under the EC Treaty and
prohibits not only overt discrimination based on nationality,309 but also all
covert forms of discrimination that lead to the same result.310 �[C]riteria such
as . . . residence of a worker may, according to circumstances, be tantamount,
as regards their practical effect, to discrimination on grounds of nationality
. . . .�311 Covert discrimination is defined broadly enough by the Court to
include a wide range of restrictive rules such as residence, language and
qualification requirements.312 These restrictive rules are considered
discriminatory unless they serve a legitimate purpose and are
proportionate.313 In its judgments, the Court has continually explained that
although direct taxation falls within the competence of the Member States,
they must nonetheless exercise that competence consistently with
Community law and avoid any discrimination on grounds of nationality.314



2005] Tax Discrimination 95

C-311/97, Royal Bank of Scotland plc v. Elliniko Dimosio (Greek State), 1999 E.C.R.
I-2651, ¶ 19.

315. Case C-251/98, Baars v. Inspecteur der Belastingen
Particulieren/Ondernemingen Gorinchem, 2000 E.C.R. I-2787, ¶ 30.

316. Id. ¶ 31.
317. �The relevant Treaty provisions (Articles 30 through 37) basically require

the Member States to refrain from enacting or maintaining unjustifiable trade-impeding
restrictions. By attributing direct effect to these provisions, the Court enabled � in fact
directed � national courts to deny legal effect to Member State measures containing such
restrictions.� Bermann, supra note 14, at 355.

318. Newspaper Publishers case, supra note 303.
319. EC Treaty, supra note 15, Arts. 23-27.
320. EC Treaty, supra note 15, Arts. 28-31.
321. Case 8/74, Procureur du Roi v. Dassonville, 1974 E.C.R. 837, ¶ 5.
322. Bermann, supra note 14, at 355.
323. Newspaper Publishers case, supra note 303, ¶ 2.
324. Id. ¶ 3.

Furthermore, the Four Freedoms also prohibit restrictions in the
country of origin. In Baars, the Netherlands refused to grant the same tax
exemption from the wealth tax to residents who manage a company resident
in a Member State other than the Netherlands, while granting that advantage
to residents with a substantial holding in a company resident in the
Netherlands.315 The ECJ found that this difference in the treatment of
taxpayers was contrary to Article 52 (now Art. 43) of the Treaty.316

1. The Free Movement of Goods

The free movement of goods, the most important Treaty Freedom for
achieving a customs union,317 provided the legal basis for one of the earliest
tax cases, the Newspaper Publishers case.318 The free movement of goods
articles provide for a total prohibition of customs duties or their equivalent,319

as well as a prohibition of quantitative restrictions on imports and all
measures having equivalent effect.320 The second prohibition forbids any
trading rules enacted by Member States that �are capable of hindering,
directly or indirectly, actually or potentially, intra-Community trade.�321 This
�negation of impermissible restraints on interstate trade of course powerfully
echoes the Supreme Court�s dormant commerce clause jurisprudence.�322

In the Newspaper Publishers case, French tax law provided for
special reserves or deductions for the acquisition of equipment or buildings
used in the publication of newspapers devoted to politics.323 However,
publishing houses could not benefit from these special tax provisions if the
printing was done outside of France.324 The Court held that because this tax
provision caused French publishing houses to print in France rather than



96 Florida Tax Review [Vol.7:2

325. Id. ¶ 16.
326. Id. ¶¶ 15-16. See infra notes 381-91 and accompanying text regarding

justifications.
327. Although not explicitly referred to in the U.S. Constitution, it is

understood that the Constitution guarantees a right to travel. United States v. Guest, 383
U.S. 745, 757 (1966). Justice Jackson stated that it �is a privilege of citizenship of the
United States, protected from state abridgment, to enter any state of the Union, either
for temporary sojourn or for the establishment of permanent residence therein . . . .�
Edwards v. California, 314 U.S. 160, 183 (1941) (Jackson, J., concurring). See also A.P.
van der Mei, Freedom of Movement for Indigents: A Comparative Analysis of
American Constitutional Law and European Community Law, 19 Ariz. J. Int�l & Comp.
L. 803, 810 (2002).

328. de Mestral & Winter, supra note 310, at 1003; EC Treaty, supra note 15,
Art. 18. Article 18 provides:

1. Every citizen of the Union shall have the right to move
and reside freely within the territory of the Member States, subject to
the limitations and conditions laid down in this Treaty and by the
measures adopted to give it effect.

2. If action by the Community should prove necessary to
attain this objective and this Treaty has not provided the necessary
powers, the Council may adopt provisions with a view to facilitating
the exercise of the rights referred to in paragraph 1. The Council shall
act in accordance with the procedure referred to in Article 251.

Id.
329. van der Mei, supra note 327, at 830 n.129; EC Treaty, supra note 15, Art.

39. Article 39 states: �1. Freedom of movement for workers shall be secured within the
Community. 2. Such freedom of movement shall entail the abolition of any
discrimination based on nationality between workers of the Member States as regards
employment, remuneration and other conditions of work and employment.� Id.

abroad, this tax measure obstructed intra-Community trade.325 As the French
Government provided no reasonable justification for the tax provision, it was
prohibited for having an equivalent effect to that of a quantitative import
restriction.326

2. The Free Movement of Persons

Although the citizens of the European Union do not have a general
right of residence across the Union comparable to that of U.S. citizens with
respect to the states,327 they may move and reside freely within the EU
subject to limitations and conditions set forth in Article 18 of the EC
Treaty.328 Article 39 protects the free movement of workers.329 As early as
1968, the Council laid down the requirement in Article 7 of Regulation No.
1612/68 that workers who are nationals of a Member State are to enjoy, in



2005] Tax Discrimination 97

330. Council Regulation 1612/68, Art. 7, 1968 O.J. (L 257) 2, ¶¶ 1, 2. Article
7 of Regulation 1612/68 provides: �1. A worker who is a national of a Member State
may not, in the territory of another Member State, be treated differently from national
workers by reason of his nationality . . . ; 2. He shall enjoy the same social and tax
advantages as national workers.� Id.

331. EC Treaty, supra note 15, Art. 43. �Freedom of establishment shall
include the right to take up and pursue activities as self-employed persons and to set up
and manage undertakings . . . .� Id.

332. Deloitte EU Study, supra note 300, at 14 n.38.
333. Paul Farmer, EC Law and Direct Taxation � Some Thoughts on Recent

Issues, 1 EC Tax J. 91, 92-93 (1997) [hereinafter Farmer, Direct Taxation].
334. The Privileges and Immunities Clause provides no protection for

corporations, because corporations are not �citizens.� Hellerstein & Hellerstein, supra
note 170, at 85. See also supra notes 226, 241-67 and accompanying text.

335. EC Treaty, supra note 15, Art. 48. Although individual citizens are not
required to live in a Member State in order to receive these protections, corporations
must have a primary establishment within the EU. Deloitte EU Study, supra note 300,
at 15.

336. See, e.g., Case C-141/99, Algemene Maatschappij voor Investering en
Dienstverlening NV (AMID) v. Belgische Staat, 2000 E.C.R. I-11619; Case C-330/91,
The Queen v. Inland Revenue Commissioners, ex parte Commerzbank AG, 1993 E.C.R.
I-4017; Case C-264/96, Imperial Chemical Industries plc (ICI) v. Colmer (Her
Majesty�s Inspector of Taxes), 1998 E.C.R. I-4695.

337. Case C-107/94, Asscher v. Staatssecretaris van Financien, 1996 E.C.R.
I-3089, ¶ 29 (citing Case C-106/91, Ramrath v. Ministre de la Justice, 1992 E.C.R. I-
3351, ¶ 17) (stating that articles 48 and 52 (now arts. 39 and 48) are based on the same
principles with respect to the prohibition of all discrimination on the grounds of
nationality).

the territory of another Member State, the same tax benefits as nationals
working in the state.330

This nondiscrimination principle is also embodied in Article 43 of
the EC Treaty that deals with discriminatory restrictions on the free
movement of self-employed persons and the freedom of establishment.331 The
concept of the right of establishment is very broad and allows a Community
national to participate in the economic life of another Member State.332 The
prohibition on restrictions on establishment applies to permanent
establishments of foreign enterprises as well as subsidiaries of foreign
corporations.333 Unlike the U.S. Constitution,334 the EC Treaty dictates that
companies or firms formed in accordance with the laws of a Member State
and that have their registered office, central administration or principal place
of business within the Community must be treated in the same way as natural
persons who are nationals of Member States.335 Thus, foreign branches or
subsidiaries have brought many direct tax cases before the ECJ.336 The same
analysis that applies to workers has been used to decide cases involving
foreign branches and subsidiaries.337



98 Florida Tax Review [Vol.7:2

338. Case 270/83, Comm�n v. French Republic, 1986 E.C.R. 273 (Avoir Fiscal
case).

339. Id. ¶¶ 4-6.
340. Id. ¶ 10.
341. Id. ¶ 22.
342. Id.
343. Richard Lyal, Non-discrimination and Direct Tax in Community Law, 12

EC Tax Rev. 68, 69 (2003).
344. EC Treaty, supra note 15, Art. 49.
345. Farmer, Direct Taxation, supra note 333, at 92-93.
346. Deloitte EU Study, supra note 300, at 18 n.66.
347. Id. at 18 n.65.

The ECJ has struck down numerous discriminatory tax regimes that
affect residents and nonresidents relying on both Articles 39 and 43 of the
EC Treaty. In one of the earliest direct taxation cases to reach the Court
(known as the Avoir Fiscal case), the Commission instituted infringement
proceedings against France pursuant to Article 169 (now Art. 226).338 France
had an imputation system for the taxation of distributed company profits.
Because French tax law granted imputation credits (avoir fiscal) only to
resident shareholders, the French branches of German insurers were denied
the credit.339 If the German insurers had invested by locally incorporating
subsidiaries in France, these local subsidiaries, as French residents, would
have been eligible for avoir fiscal.340 The Court held that this was not a
legitimate reason to justify denial of the credit to the branches because such a
holding would coerce foreign investors into incorporating subsidiaries.341

Article 52 (now Art. 43) expressly allows foreign investors the right to
choose the legal form they deem appropriate for operating in another
Member State.342 France was discriminating on the grounds of nationality, as
it is understood that the location of the registered office of a company is
equivalent to its nationality.343

3. The Freedom to Provide Services

Article 49 provides that �restrictions on freedom to provide services
within the Community shall be prohibited.�344 This nondiscrimination rule
applies to the taxation of the service provider as well as to the taxation of
foreign investors.345 Furthermore, the ECJ has acknowledged that an investor
may invoke Article 49 when a tax law restricts a nonresident company
seeking capital346 as well as a service recipient may invoke Article 49 on
behalf of a service provider.347

For example, in a dispute between a Finnish national and the
Taxation Verification Committtee, Ms. Lindman had won 1,000,000 SEK in



2005] Tax Discrimination 99

348. Case C-42/02, Lindman v. Skatterattelsnamnden, 2003 E.C.R. I-13519,
¶ 7.

349. Id. ¶ 8.
350. Id. ¶ 5.
351. Id. ¶ 9.
352. Id. ¶ 12.
353. Id. ¶ 21.
354. Id. ¶ 27.
355. Id. ¶ 23.
356. Id. ¶ 26.
357. EC Treaty, supra note 15, Art. 56(1). Note that this article is drafted as a

restriction prohibition rather than solely being aimed at discriminatory measures. See
Kristina Stahl, Free Movement of Capital Between Member States and Third Countries,
13 EC Tax Rev. 47, 47 (2004).

a Swedish lottery.348 The winning amount was taxable income according to
the Finnish government,349 whereas an exemption would have applied if the
lottery had been organized in Finland.350 After losing her administrative
appeals, Ms. Lindman finally appealed to the Administrative Court of the
Åland Islands in Finland.351 This Finnish Court referred the following
question to the ECJ for a preliminary ruling: �Does Article 49 EC preclude a
Member State from applying rules under which winnings from lotteries held
in other Member States are regarded as taxable income of the winner
chargeable to income tax, whereas winnings from lotteries held in the
Member State in question are exempt from tax?�352

The ECJ held the Finnish tax law was discriminatory because it was
clear that foreign lotteries were treated differently for tax purposes than, and
are in a disadvantageous position compared to, Finnish lotteries.353 Thus, the
ECJ ruled that Article 49 forbids one Member State from charging a different
tax rate on lotteries conducted in a foreign state because the difference in
taxation entails discrimination.354 The Finnish Government attempted to
justify the discriminatory national legislation by citing �overriding reasons in
the public interest such as the prevention of wrongdoing and fraud, the
reduction of social damage caused by gaming, the financing of activities in
the public interest and ensuring legal certainty.�355 The Court found that there
was no evidence �of a particular causal relationship between such risks and
participation by nationals of the Member State concerned in lotteries
organized in other Member States.�356

4. The Free Movement of Capital

Article 56 provides that �all restrictions on the movement of capital
between Member States . . . shall be prohibited.�357 Article 58 allows Member
States to apply national tax law provisions that �distinguish between



100 Florida Tax Review [Vol.7:2

358. EC Treaty, supra note 15, Art. 58(1)(a).
359. Deloitte EU Study, supra note 300, at 16. See also Declaration on Article

73d of the Treaty establishing the European Community, annexed to EC Treaty, supra
note 15, Art. 58(1)(a) (Art. 73d) (�The Conference affirms that the right of Member
States to apply the relevant provisions of their tax law as referred to in Article 73d(1)(d)
of this Treaty will apply only with respect to the relevant provisions which exist at the
end of 1993.�).

360. EC Treaty, supra note 15, Art. 58(1)(b).
361. EC Treaty, supra note 15, Art. 58(3).
362. Case C-319/02, Manninen v. Keskusrerolautakunta, 2004 E.C.R. I-7477,

¶ 12.
363. Id. ¶¶ 6-8.
364. Id. ¶¶ 8-9.
365. Id. ¶¶ 10, 13.
366. Id. ¶ 15.
367. Id. ¶ 16.
368. Id. ¶¶ 17-18.

taxpayers who are not in the same situation with regard to their place of
residence or with regard to the place where their capital is invested.�358

However, this exception applies only to laws that were in force on December
31, 1993.359 Member States also are allowed to take measures to prevent the
violation of tax laws in particular,360 but not as �a means of arbitrary
discrimination or a disguised restriction on the free movement of capital and
payments.�361

In Manninen, a Finnish national held shares of a Swedish company
quoted on the Stockholm Stock Exchange.362 Under Finnish tax law,
dividends were taxed at the rate of 29%, as were the corporate profits of
companies established in Finland.363 Finnish shareholders of Finnish
companies were entitled to a tax credit that effectively reduced the income
tax on dividends from Finnish companies to zero in order to avoid the double
taxation of corporate profits.364 Mr. Manninen was taxed at 29% on the
distributions received from the Swedish company and was denied use of the
tax credit that would have been available had the dividends been received
from a Finnish company.365

After the Central Tax Commission held that Mr. Manninen was not
entitled to any tax credits with respect to dividends from a Swedish
Company,366 he appealed the decision to the Supreme Administrative Court
of Finland.367 The national court asked the ECJ for a preliminary ruling as to
whether Articles 56 and 58, with respect to the free movement of capital,
preclude a corporate tax credit system that only allows credits for dividends
received from domestic companies.368

There is a risk of double taxation of company profits regardless of
whether the company distributes the dividend to a shareholder residing in the



2005] Tax Discrimination 101

369. Id. ¶ 35; see also Case C-319/02, Manninen, 2004 E.C.R. I-7477, Op. ¶
44.

370. Case C-319/02, Manninen, 2004 E.C.R. I-7477, ¶¶ 22-23 (citing Case C-
35/98, Verkooijen, 2000 E.C.R. I-4071, ¶ 35; Case C-334/02 Comm�n v. France, 2004
E.C.R. I-2229, ¶ 24).

371. Id. ¶¶ 48-49, 54.
372. Id. ¶ 55.
373. Farmer, supra note 312, at 75.
374. �[T]he Court has long subjected taxation to other limits and has long

treated taxation differently from other kinds of regulation.� Tribe, supra note 44, § 6-15,
at 1105. See also Chemerinsky, supra note 191, at 434 (�[T]he topic of state taxation of
interstate commerce requires separate consideration because the Court, both historically
and currently, has formulated distinct tests for evaluating state taxes that burden
interstate commerce.�).

375. �[T]he Court of Justice has declined to erect a barrier around tax law, and
vigorously maintains its insistence that here, as elsewhere, Member States must exercise
their powers consistently with the fundamental principles of Community law.� Paul
Stanley, Annotation, Case C-107/94, Asscher v. Staatssecretaris van Financiën, 34
C.M.L. Rev. 713 (1997).

376. Lyal, supra note 343, at 68.
377. Id.

same Member State or to a shareholder in another Member State.369 Thus, the
ECJ reasoned that the Finnish law effectively deterred residents of Finland
from investing in foreign companies and constituted an obstacle to the raising
of capital in Finland for companies established in other Member States.370

Finding no justification,371 the ECJ ultimately ruled that the law amounted to
a restriction on the free movement of capital within the meaning of Article
56. 372

5. Conclusion 

The European Court of Justice�s case law on direct taxation is part of
a much larger body of case law that has evolved over the last twenty years on
nondiscrimination and the fundamental freedoms.373 Unlike U.S.
constitutional jurisprudence,374 the constitutional analysis in ECJ direct tax
cases does not differ from other areas of the law.375 A tax disadvantage is just
another obstacle that can confront individuals and businesses that seek to
exercise the freedoms that are guaranteed by the Treaty.376 Due to the
political sensitivity of taxation, however, �there was initially a tentative
approach� that ended around 1993.377

In the beginning, allegations of violations of the free movement of
goods were the most prevalent, and thus the case law in this area was the
most developed. The case law on goods has gone beyond a strict
discrimination-based approach and includes examining nondiscriminatory



102 Florida Tax Review [Vol.7:2

378. Farmer & Lyal, supra note 289, at 310.
379. Id. at 310-11, 325-26.
380. See, e.g., Eric Hinton, European Security on the Threshold of the 21st

Century: Current Development and Future Challenge: Balancing Justice, Expedience,
and Legal Certainty: The Free Movement of Goods in the European Union, 5
Willamette J. Int�l L. & Dispute Res. 1, 20-21 (1997) (citing Case C-23/89, Quietlynn
Ltd. v. Southend Bor. Council, 1990 E.C.R. I-3059, 3 C.M.L.R. 55 (1990); Case 155/80,
Summary Proceedings Against Oebel, 1982 E.C.R. 1993, 1 C.M.L.R. 390 (1981); Case
C-169/91, Stoke-on-Trent City Council v. B & Q Plc., 1992 E.C.R. I-6635, 1 C.M.L.R.
426 (1992); Case 145/88, Torfaen Borough Council v. B & Q Plc., 1989 E.C.R. 3851,
1 C.M.L.R. 337 (1989)).

381. EC Treaty, supra note 15, Art. 39 (ex Art. 48).
382. EC Treaty, supra note 15, Art. 49 (ex Art. 59).
383. EC Treaty, supra note 15, Art. 56 (ex Art. 73b).
384. Lyal, supra note 343, at 74.
385. EC Treaty, supra note 15, Art. 30 (ex Art. 36). Article 30 also allows

restrictions on intra-Community trade if justified on the grounds of �public security,
protection of health and life of humans, animals or plants; the protection of national
treasures possessing artistic, historic or archaeological value; or the protection of
industrial and commercial property.� Id. Discriminatory measures falling within the
scope of Arts. 39, 49 or 56 may be justified on the grounds of public policy, public
security or public health. Farmer & Lyal, supra note 289, at 310. See also EC Treaty,
supra note 15, Arts. 39(3), 46(1), 58(1)(b).

386. Case 120/78, Rewe-Zentral AG v. Bundesmonopolverwaltung für
Branntwein, 1979 E.C.R. 649 (Cassis de Dijon Case).

387. Case C-204/90, Hanhs Martin Bachmann v. Belgian, 1992 E.C.R. I-249.
See also Terra & Wattel, supra note 51, at 71-76. Professor Wattel notes that this is
inconsistent with nontax case law where the ECJ sometimes allows rule of reason
justifications even though the �national measure at issue clearly makes a distinction

restrictions on the free movement of goods.378 This broader interpretation has
also been followed in cases reviewing violations of the free movement of
persons, services and capital.379 The language used by the ECJ is often
inconsistent, in some cases because the wording of the actual Treaty
provisions differs.380 Note that Article 39 speaks in terms of �the abolition of
any discrimination�381 whereas Articles 49 and 56 prohibit restrictions on the
freedom to provide services382 and the movement of capital383 respectively.
However, in many cases, while the ECJ speaks in terms of restrictions, it in
fact applies a nondiscrimination test by focusing on the difference of
treatment between the situations.384

The only exemptions from the prohibitions in the free movement of
goods articles are justifications such as public morality and public policy that
are listed in Article 30.385 There are also justifications recognized under the
rule of reason developed by the ECJ in the Cassis de Dijon case.386 Applying
the rule of reason in the tax area, the Court has only accepted the need to
maintain the integrity of the tax system as such a justification387 and the scope



2005] Tax Discrimination 103

between residents and non-residents or between the domestic situation and the cross
border situation.� Peter Wattel, Red Herrings in Direct Tax Cases Before the ECJ, 31(2)
Legal Issues of Economic Integration 81, 83 (2004).

388. See, e.g., Case C-80/94, Wielockx v. Inspecteur der Directe Belastingen,
1995 E.C.R. I-2493; Case C-484/93, Svensson v. Ministre du Logement, 1995 E.C.R.
I-3955; Case C-251/98, Baars v. Inspecteur der Belastingen Particulieren/
Ondernemingen Gorinchem, 2000 E.C.R. I-2787; Case C-35/98, Staatssecretaris van
Financien v. B.G.M. Verkooijen, 2000 E.C.R. I-4071; see also Terra & Wattel, supra
note 51, at 71-76.

389. See, e.g., Case C-136/00, Danner, 2002 E.C.R. I-8147, ¶ 48. But see Case
C-250/95, Futura Participations SA v. Administration des contributions, 1997 E.C.R.
I-2471, ¶ 31.

390. See, e.g., Case C-136/00, Danner, 2002 E.C.R. I-8147, ¶ 54; Terra &
Wattel, supra note 51, at 32-33, 77-80.

391. See, e.g., Case C-141/99, Algemene Maatschappij voor Investering en
Dienstverlening NV (AMID) v. Belgische Staat, 2000 E.C.R. I-11619; Case C-264/96,
Imperial Chemical Industries plc (ICI) v. Colmer (Her Majesty�s Inspector of Taxes),
1998 E.C.R. I-4695.

392. See, e.g., Case 270/83, Comm�n v. French Republic, 1986 E.C.R. 273
(Avoir Fiscal Case).

393. See, e.g., Case C-107/94, Asscher v. Staatsecretaris van Financien, 1996
E.C.R. I-3089.

394. See, e.g., Case C-330/91, The Queen v. Inland Revenue Comm�rs, ex
parte Commerzbank AG, 1993 E.C.R. I-4017; Case C-294/97, Eurowings Luftverkehrs
AG v. Finanzamt Dortmund-Unna, 1999 E.C.R. I-7447.

395. Terra & Wattel, supra note 51, at 33.
396. Paul Farmer, European Court and Corporate Tax, 2002 Tax J. 9, 11.

of this �fiscal cohesion� justification has been limited by the ECJ in
subsequent cases.388 The Court has rejected arguments based on the
effectiveness of fiscal supervision,389 the need to prevent the abuse of EC
law,390 the loss of tax revenue,391 the absence of tax harmonization,392 the need
to compensate for lower rates of tax in another Member State,393 and the
counterbalancing of disadvantage with other advantages.394 Furthermore,
even if a justification is accepted, the principle of proportionality must be
applied. The tax law must be proportionate in its restrictive effect with
respect to the legitimate aim pursued meaning that there is no less restrictive
yet equally effective way to attain the same goal.395 This appears to be a more
difficult test to meet than the substantial reason test.

The case law has evolved such that all four freedoms prohibit
discrimination as well as nondiscriminatory restrictions.396 Any national law
that restricts one of the fundamental freedoms must meet four requirements
in order to withstand ECJ scrutiny: 1) the law must be applied in a
nondiscriminatory manner; 2) the law must be justified and required by the



104 Florida Tax Review [Vol.7:2

397. Case C-55/94, Gebhard v. Consiglio dell�Ordine degli Avvocati e
Procuratori di Milano, 1995 E.C.R. I-4165, ¶ 37.

398. See generally Walter Hellerstein & Charles E. McLure, Jr., Lost in
Translation: Contextual Considerations in Evaluating the Relevance of U.S. Experience
for the European Commission�s Company Taxation Proposal, 58 Bull. Int�l Fisc. Doc.
86 (2004). The individual income tax is also more appropriate to analyze because it is
a significantly greater share of the total tax revenue collected by both the U.S. and the
EU Member States. Most countries raise significantly more revenue from the personal
income tax than from the corporate income tax. OECD, Revenue Statistics 1965-2003
103-89 tbls. 42-71 (2005). For example, in 2002 the U.S. received 38% from the
personal income tax while only 7% from the corporate tax, while Germany, France, the
UK and Poland received 25%, 17%, 30% and 23%, respectively, from individuals; and
3%, 7%, 8% and 6% respectively, from corporations. Id. at 119 tbl. 49, 125 tbl. 50, 158
tbl 63, 175 tbl. 70, 178 tbl. 71 (percentages calculated by author).

399. Roberta Romano, The Genius of American Corporate Law 6, 8 (1993).
Delaware has been the leading state for incorporation since the 1920�s, and more
corporations listed on national exchanges are incorporated in Delaware than in any other
state. Id. �Over 40 percent of the companies listed on the New York Stock Exchange are
incorporated in Delaware.� Leo Herzel & Laura D. Richman, Foreword to R. Franklin
Balotti & Jesse A. Finkelstein, 1 The Delaware Law of Corporations & Business
Organizations (3d ed. 1998) (citing N.Y.S.E. Guide (CCH) N725-800). �Moreover, the
vast majority of reincorporating firms move to Delaware.� Romano, supra, at 6.

400. Romano, supra note 399, at 1. �Firms choose their state of incorporation,
a statutory domicile that is independent of physical presence and that can be changed
with shareholder approval.� Id.

general interest; 3) the law must be appropriate for securing its objective; and
4) the law must not go beyond what is necessary to attain its objective.397

V. COMPARATIVE CASE LAW

In this section, I chose the most recent Supreme Court case that deals
with tax discrimination and then examined the ECJ jurisprudence to
determine how the European Court of Justice would decide the issue. I
selected an individual income tax case because the state corporate tax issues
raised in the United States are very different than the issues addressed in the
EU.398 Generally, there is not the kind of tax discrimination that is found in
the EU because a majority of publicly traded corporations are incorporated in
Delaware or in states other than the states in which they operate.399 Thus, any
state in the United States attempting to write a corporate income tax law that
discriminates against nonresident corporations could find itself affecting
corporations headquartered in its own state. In other words, the concept of
corporate �residency� (place of incorporation) does not necessarily match the
reality of where the corporate entity is �resident.�400



2005] Tax Discrimination 105

401. 2 Pomp & Oldman, supra note 184, at 10-1. Only Nevada, South Dakota,
Washington and Wyoming have no corporate income tax. Hellerstein & Hellerstein,
supra note 170, at 413. Texas�s franchise tax resembles a net income tax in many ways.
Id.

402. Hellerstein & Hellerstein, supra note 170, at 418. Congress enacted a
corporate tax law as part of the Payne-Aldrich Tariff Act of 1909, which marked the
beginning of the federal government�s practice of taxing corporate income. Boris I.
Bittker & James A. Eustice, Federal Income Taxation of Corporations and Shareholders
1-3 (7th ed. 2000).

403. See 1 Research Institute of America, supra note 170, ¶ 221 (2004);
Hellerstein & Hellerstein, supra note 170, at 418.

404. Hellerstein & Hellerstein, supra note 170, at 418.
405. Michael Mazerov, The Single-Sales-Factor Formula: A Boon to Economic

Development or a Costly Giveaway?, 20 St. Tax Notes 1775 (2001). Most states�
corporate income tax laws have substantially incorporated the provisions of the Uniform
Division of Income for Tax Purposes Act (UDITPA), a model law written by the
National Conference of Commissioners on Uniform State Laws in 1957. UDITPA
contains a three-factor formula for apportioning corporate income whereby the share of
a corporation�s total profit that a particular state may tax is determined by averaging: 1)
the share of the corporation�s total sales that are made to residents of the state (the sales
factor); 2) the share of the corporation�s total payroll that is paid to employees working
in the state (the payroll factor); and 3) the share of the corporation�s total property that
is located in the state (the property factor). Id. at 1782. Since then, the double-weighted
sales variant of this three-factor apportionment formula has been adopted by most states
and has become the new de facto standard. Id.

406. However, Congress may limit a state�s taxing authority. See, e.g., Public
Law 86-272 (preventing states from taxing corporations when the corporation�s only
nexus with the state is personal property sales solicitations conducted in the state). Act
of Sept. 14, 1959, Pub. L. No. 86-272, 73 Stat. 555-56 (codified as amended at 15

A. Corporate Taxation

1. The U.S. Approach

Forty-five states and the District of Columbia have enacted state
corporate income taxes401 that broadly conform to the federal corporate
income tax.402 Every state except Arkansas and Mississippi determines the
state corporate tax liability by beginning with federal taxable income.403 The
difficulty for the states then is allocating that tax base among themselves
when a multistate business is involved, as each state requires the business to
pay tax on just a portion of its profit.404 The tax laws of the majority of the
states determine the portion of the corporation�s profit that is subject to tax
by using an apportionment formula that refers to the shares of the
corporation�s total property, payroll, and sales located in each state.405

Although the states have broad leeway in designing division-of-tax
base formulas,406 they are subject to the constraints of the Due Process and



106 Florida Tax Review [Vol.7:2

U.S.C. §§ 381-384 (1976)). See 2 Pomp & Oldman, supra note 184, at 10-26. See
generally Kaye, supra note 126, at 165; see also Charles E. McLure, The Tax
Assignment Problem: Ruminations on How Theory and Practice Depend on History, 54
Nat�l Tax J. 339, 341 (2001).

407. See Quill Corp. v. North Dakota, 504 U.S. 298, 305 (1992) (stating that
�the [Due Process and Commerce] Clauses pose distinct limits on the taxing powers of
the States.�). Thus, a state may levy a corporate income tax only on the income (or a
portion thereof) that has a sufficient nexus with the taxing state. 2 Pomp & Oldman,
supra note 184, at 10-7. See also Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-45
(1954) (stating that �due process requires some definite link, some minimum
connection, between a state and the person, property, or transaction it seeks to tax.�).

408. Hellerstein & Hellerstein, supra note 170, at 419. For a state to impose
income tax generated in interstate commerce, there are two requirements: (1) a �minimal
connection� between the taxing state and the interstate activities generating the tax and
(2) a rational relationship between the income taxed and the activities conducted within
the state. See Exxon Corp. v. Wis. Dep�t of Revenue, 447 U.S. 207, 219 (1980). See
also Mobil Oil Corp. v. Comm�r of Taxes, 445 U.S. 425, 436-37 (1980). A state may
tax only income that is fairly attributable to a corporation�s income-producing activities
within the state. See Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159
(1983) (a state may not tax income earned outside its borders when imposing an income
tax). See also ASARCO v. Idaho State Tax Comm�n, 458 U.S. 307, 315 (1982) (stating
�a State may not tax value earned outside its borders.�); see also supra notes 264-67 and
accompanying text.

409. See, e.g., Case C-330/91, The Queen v. Inland Revenue Comm�rs, ex
parte Commerzbank AG, 1993 E.C.R. I-4017 (Articles 52 and 58 of the Treaty prevent a
Member State from granting repayment on overpaid tax to companies that are resident
for tax purposes in that State while refusing the supplement to companies resident for
tax purposes in another Member State); Imperial Chem. Indus. Plc (ICI) v. Colmer (Her
Majesty�s Inspector of Taxes), 1998 E.C.R. I-4695 (Article 52 precludes making a
particular form of tax relief in a Member State contingent on a holding company�s
business consisting wholly or mainly in the holding of shares in subsidiaries established
in that Member State).

410. See, e.g., Am. Trucking Ass�ns, Inc. v. Scheiner, 483 U.S. 266 (1987)
(challenged taxes do not pass the �internal consistency� test under which a state tax
must be of a kind that, if applied by every jurisdiction, there would be no impermissible
interference with free trade); Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)
(holding constitutional a Mississippi tax imposed for the privilege of doing business
within the state because there were no allegations of insufficient nexus, discrimination,

Commerce Clauses407 and may tax no more than their fair share of the
property, income, or receipts of the multistate business.408 Thus, while EU
Member States� corporate income tax laws had routinely denied nonresident
corporation�s branches various tax benefits that are available to resident
corporations,409 the U.S. case law with respect to corporations focuses on
issues of state taxation of interstate business. These issues include the risk of
multiple taxation, unfair apportionment, and the absence of due process
jurisdiction.410



2005] Tax Discrimination 107

unfair apportionment, or no relation to services provided); Okla. Tax v. Jefferson Lines,
514 U.S. 175 (1995) (finding the tax on the full cost of a bus ticket for interstate travel
was �fairly apportioned� because it reached only activity within the taxing state, that is,
the sale of the service); Nw. States Portland Cement Co. v. Minnesota, 358 U.S. 450
(1959) (the state�s taxation of a foreign business�s income within the state was not
unconstitutional, provided that the tax was properly apportioned to local activities within
the states and was not discriminatory).

411. Charles E. McLure, Jr., Corporate Tax Harmonization for the Single
Market: What the European Union is Thinking, 39 Bus. Econ. 28, 29 (2004). Many
states now use combined reporting methods. Hellerstein & Hellerstein, supra note 171,
at 519. However, 19 states still do not have combined reporting requirements. Id. at 583
tbl. 3.

412. McLure, supra note 411, at 29.
413. Commission of the European Communities, Company Taxation in the

Internal Market, Commission Staff Working Paper (Luxembourg: Office for Official
Publications of the European Communities, 2002). 

414. Id. at 458-60.
415. Walter Hellerstein & Charles E. McLure, Jr., The European Commission�s

Report on Company Income Taxation: What the EU Can Learn from the Experience of
the US States, 11 Int�l Tax & Pub. Fin. 199, 200 (2004).

416. Edward A. Zelinsky, Restoring Politics to the Commerce Clause: The
Case for Abandoning the Dormant Commerce Clause Prohibition on Discriminatory
Taxation, 29 Ohio N.U.L. Rev. 29, 29 (2002). Under his proposal, dormant Commerce

2. The EU Approach

Unlike many of the American states, the Member States of the EU
use separate accounting to compute the income of each member of a
corporate group and arms length prices to value the transactions between the
members of the group.411 Source rules are then used to attribute the income to
the �appropriate� Member State.412 The Commission is exploring the use of a
consolidated base with formulary apportionment for European multinationals
in lieu of the current system of separate accounting and the arm�s length
standard.413 This change is receiving serious consideration because of the
complexity of applying 25 Member States� national tax systems if the
company operates within the entire European Union.414 As pointed out by
Professors Hellerstein and McLure, depending on how the EU designs their
system, such a change would raise many of the issues currently litigated in
the United States.415

In the state corporate tax area in the United States, Professor
Zelinsky has concluded �that the time has come to scrap the dormant
Commerce Clause prohibition on discriminatory taxation. Since the
judicially-created prohibition has served its historic purpose, to create a
single common market of the United States, it can now safely be laid to
rest.�416 Zelinsky reaches this conclusion because judges and scholars have



108 Florida Tax Review [Vol.7:2

Clause restraints on state taxation such as the requirement �that taxes be fairly
apportioned among the states, that such taxes be levied only by states with a nexus to
the taxed activity, and that such taxes be reasonably related to the services the taxpayer
receives from the taxing state� would continue. Id.

417. Id. at 30.
418. Id. at 30-31.
419. Id. at 30.
420. Id. at 31.
421. Deloitte EU Study, supra note 300, at 23. See also Walter Hellerstein,

State Aid Control in the American Federal System, European Competition Law Annual
1999: Selected Issues in the Field of State Aids 577 (C. Ehlermann & M. Everson eds.,
2001).

422. Deloitte EU Study, supra note 300, at 23 n.105.

been unable to distinguish convincingly between state taxes and states� and
localities� direct expenditure programs or to identify a principled basis for
declaring which taxes are discriminatory and which are not.417 The Supreme
Court�s distinction between discriminatory taxation, which is prohibited
under their decisions, and equivalent direct government subsidies, which are
generally permitted, is fundamentally incoherent because taxes and subsidies
are often similar in design and effect.418 In light of this doctrinal
indeterminacy, Zelinsky believes that the only options are to abandon the
nondiscrimination principle in the context of state taxes or expand the
dormant Commerce Clause to cover state direct subsidy programs.419 Because
the United States contains a robust network of interstate economic actors
with the wherewithal to protect their interests politically, these interstate
actors no longer need the protection of this Commerce Clause doctrine.420 

The EU has avoided such inconsistencies by also prohibiting any
state aid through a Member State�s tax system. The principle of state aid
restrictions as set forth in Articles 87, 88 and 89 prohibits the Member States
from granting any advantage that distorts or has the potential to distort
competition or trade between the Member States.421 Although some Member
States have argued that these provisions are not applicable to tax measures,
the European Commission as well as the Court of First Instance have rejected
this argument.422

3. Analysis

The current situation in the EU with respect to Member States�
national tax systems is reminiscent of the first 100 years of Supreme Court
Commerce Clause jurisprudence in that the effect of ECJ case law is that in
certain circumstances cross-border activity can receive more advantageous
tax treatment than purely domestic activity. Corporate cases in the last five



2005] Tax Discrimination 109

423. See Case C-324/00, Lankhorst-Hohorst GmbH v. Finanzamt Steinfurt,
2002 E.C.R. I-11779 (holding that Germany�s thin capitalization rules violated the
freedom of establishment enshrined in Article 43 of the EC Treaty).

424. See Case C-168/01, Bosal Holding BV v. Staatssecretaris van Financiën,
2003 E.C.R. I-9409 (holding that Council Directive 90/435/EEC precludes a national
provision that made the deductibility of costs in connection with a parent company�s
holdings in a subsidiary established in another Member State contingent on the costs
being related to profits that are taxable in the parent company�s Member State).

425. See Case C-315/02, Lenz v. Finanzlandesdirektion für Tirol, 2004 E.C.R.
I-7063 (holding that a tax rate difference between foreign capital income and domestic
capital income infringed on the free movement of capital, which is prohibited under
Article 56 of the EC Treaty).

426. See Case C-319/02, Manninen, 2004 E.C.R. I-7477 (holding that a Finnish
law that taxed individuals at different rates depending on whether the dividend income
was received from Finnish or non-Finnish corporations was incompatible with Article
56 of the EC Treaty). For a more complete discussion of this case, see supra notes 358-
66.

427. Taxing Judgments: Corporate Tax and the EU Court, The Economist,
August 28, 2004, at 67-68. See also Lee A. Sheppard, Dowdy U.K. Retailer Set to
Destroy European Corporate Tax, 35 Tax Notes Int�l 132 (2004). �So off the wall are
some ECJ decisions that it is a wonder that European multinationals pay any tax at all.�
Id. at 132-33. In the recent Marks & Spencer case, UK legislation preventing the British
parent company from using its losses from subsidiaries in other Member States was
struck down, provided that the parent company had exhausted its opportunity to deduct
the losses in the country where the loss occurred. Case C-446/03, Marks & Spencer plc
v. David Halsey (HM Inspector of Taxes), ¶ 59, http://europa.eu.int/index_en.htm
(Select Documents tab; follow case law hyperlink; then follow case law since 1997
(CURIA) hyperlink) (ruling that a group relief tax provision that does not permit a
parent company to deduct losses from its foreign subsidiary is incompatible with the EC
Treaty if those losses cannot be deducted in the country of origin). For the potential
impact on a Member State�s tax revenue, see Clemens Fuest et al., The Tax Revenue
Implications of Marks & Spencer for Germany, 38 Tax Notes Int�l 763 (2005).
Germany�s possible tax revenue loss is estimated to be as high as 1.5% of the German
gross domestic product. Id. at 767. But cf. Gerard T.K. Meussen, Cross-Border Loss
Relief in the European Union Following the Advocate General�s Opinion in the Marks
& Spencer case, 45 Eur. Tax�n 282, 284 (2005) (explaining that the ECJ does not accept
possible tax losses as a public interest exception to a violation of a fundamental
freedom). For an analysis of Advocate General Maduro�s Opinion, see Michael Lang,
Marks and Spencer � More Questions than Answers: An Analysis of the Opinion
Delivered by Advocate General Maduro, 14 EC Tax Rev. 95 (2005).

years have found the German thin capitalization rules,423 the Dutch interest
allocation rules,424 the Austrian foreign-source investment income tax rules,425

and the Finnish corporate tax legislation426 all in violation of EC Treaty
law.427 European commentators have raised the question of whether the
Danish controlled foreign corporation (CFC) rules are compatible with EC



110 Florida Tax Review [Vol.7:2

428. Anders Rubinstein & Nikolaj Bjornholm, News Analysis: Do the Lenz
and Manninen Decisions Invalidate Danish Dividend and CFC Taxation?, 36 Tax Notes
Int�l 286, 286 (2004).

429. Case C-196/04, Cadbury Schweppes plc v. Comm�rs of Inland Revenue,
2004 O.J. (C 168) 3 (referral to the ECJ for a ruling on the issue of whether tax
legislation that provides different rates of taxation for companies with subsidiaries in the
same and different Member States is compatible with the EC Treaty). Jens Schönfeld
predicts that the ECJ is likely to answer the Special Commissioner�s question by
replying that the UK CFC legislation is incompatible with the EC Treaty. Jens
Schönfeld, The Cadbury Schweppes Case: Are the Days of the United Kingdom�s CFC
Legislation Numbered?, 44 Eur. Tax�n 441, 452 (2004). The United Kingdom�s CFC
legislation is also being challenged in Case C-203/05, Vodafone 2 v. Her Majesty�s
Revenue and Customs. Hans van den Hurk, et al., EU Tax Review, 39 Tax Notes Int�l
39, 41 (2005).

430. Emilio Cencerrado, Controlled Foreign Company and Thin Capitalization
Rules are not Applicable in Spain to Entities Resident in the European Union, 13 EC
Tax Rev. 102, 103 (2004). Interestingly, Germany responded to the Lankhorst judgment
by extending their then legislation to lender companies resident in Germany as well
whereas Spain amended their legislation to exempt all residents of the EU unless the
territory is classified as a tax haven. Id. at 105.

431. Luc Hinnekens, Forum: European Court Goes for Robust Tax Principles
for Treaty Freedoms. What About Reasonable Exceptions and Balances?, 13 EC Tax
Rev. 65, 66 (2004).

432. See infra Part IV.
433. Cencerrado, supra note 430, at 107.

law428 and the Finance and Tax Tribunal referred a question dealing with the
UK�s CFC legislation to the ECJ on April 29, 2004.429 European tax scholars
are concerned that the pendulum has swung so far in favor of taxpayers as to
create a preference for cross-border activity. Denying the Member States the
ability to maintain certain domestic anti-avoidance measures jeopardizes tax
justice as well as causing substantial losses in the tax revenue of the Member
States.430

Given the progress made towards the Internal Market, it is time for a
more balanced approach that takes into account the Member States� needs to
finance their governments. This could be accomplished through a more
judicious use of the rule of reason.431 It seems unreasonable that only one
justification has ever been accepted by the ECJ in direct taxation cases.432

Emilio Cencerrado suggests reliance on Article 4 of the EC Treaty, which
obligates the Member States to avoid excessive public deficits.433 This is
accomplished in part through sound tax policies that combat anti-avoidance
conduct. Unlike in the United States, in the case of the European Union, it is
the judicial branch�s decisions that are affecting the Member States� ability to
finance their governments.



2005] Tax Discrimination 111

434. 522 U.S. 287 (1998).
435. Id. at 293.
436. Id. at 291-93 (citing N.Y. Tax Law § 631(b)(6) (McKinney 1997), which

states that the deduction for alimony �shall not constitute a deduction derived from New
York sources.�).

437. Id. at 293.
438. Brief for Petitioners at 4, Lunding (No. 96-1462). 
439. After the department of Taxation and Finance denied the deduction, the

Lundings appealed to the New York Division of Tax Appeals where they were also
denied. They then brought an action before the Appellate Division of the New York
Supreme Court. Lunding, 522 U.S. at 293. See also Lunding v. Tax App. Trib., 639
N.Y.S.2d 519 (N.Y. App. Div. 1996), rev�d, Lunding v. Tax App. Trib., 675 N.E.2d 816
(N.Y. 1996), rev�d, Lunding v. N.Y. Tax App. Trib., 522 U.S. 287 (1998). �The New
York Division of Taxation, the State Tax Appeals Tribune, and the New York Court of
Appeals determined that he was not entitled to the deduction; only the Appellate
Division, Third Department, found fault with New York�s denial of the alimony
deduction.� Diann Lee Smith, New York: Denial of Alimony Deduction for
Nonresidents Unconstitutional, 10 Multistate Tax Analyst 8 (1998).

440. Lunding, 522 U.S. at 293. For a critique of this position, see Michael J.
McIntyre & Richard D. Pomp, Post-Marriage Income Splitting Through the Deduction
for Alimony Payments: A Reply to Professor Schoettle on Lunding v. New York, 13 St.
Tax Notes 1631 (1997).

B. Individual Taxation

1. The U.S. Supreme Court�s Approach

The most recently litigated case of individual tax discrimination in
the United States is Lunding v. New York Tax Appeals Tribunal.434 In this
case, a Connecticut married couple filed a New York nonresident income tax
return and took a pro rata deduction of the alimony paid by the husband to
the former spouse in proportion to the percentage of the husband�s business
income that was earned in New York (approximately 48%).435 The New York
State income tax statute did not allow for such a deduction for
nonresidents.436 The deduction was denied and the Department of Taxation
and Finance recalculated the couple�s tax liability.437 The recalculated New
York State tax liability was 14.8% higher than what a New York resident
with the same income and alimony would be required to pay.438 The
Lundings appealed the assessment through the administrative process and
then through the New York State court system.439 The taxpayers asserted that
New York�s tax provision violated the Privileges and Immunities Clause
because it resulted in a nonresident�s tax liability being greater than if the
nonresident was a resident.440

The New York Court of Appeals upheld the constitutionality of the
New York statute�s disparate tax treatment of alimony paid by a nonresident



112 Florida Tax Review [Vol.7:2

441. Lunding v. Tax App. Trib., 675 N.E. 2d 816, 821 (N.Y. 1996), rev�g, 639
N.Y.S.2d 519 (N.Y. App. Div. 1996).

442. 334 U.S. 385, 396 (1948).
443. 252 U.S. 37 (1920).
444. 252 U.S. 60 (1920).
445. Lunding, 675 N.E.2d at 819.
446. Id. at 821.
447. Id.
448. Lunding, 522 U.S. at 289-90.
449. Id. at 315. �[A] State may defend its position by demonstrating that �(i)

there is a substantial reason for the difference in treatment; and (ii) the discrimination
practiced against nonresidents bears a substantial relationship to the State�s objectives.��
Id. at 298 (citing Supreme Court of N.H. v. Piper, 470 U.S. 274, 284 (1985)).

450. Id. at 297.
451. Id. at 299.
452. Id. at 296 (citing Paul v. Virginia, 75 U.S. (8 Wall.) 168, 180 (1869)).

as fully justified because in effect �the advantage granted residents is offset
by the additional burden of being taxed on all sources of income.�441 The
�substantial reason test� created in the Toomer v. Witsell case,442 allows a
state�s disparate treatment of nonresidents only when they have a valid
independent reason. The New York Court of Appeals asserted that Shaffer v.
Carter443 and Travis v. Yale & Towne Mfg. Co.444 �established that limiting
taxation of nonresidents to their in-State income was a sufficient justification
for similarly limiting their deductions to expenses derived from sources
producing that in-State income.�445 Thus, the New York Court of Appeals
agreed with New York State�s argument that the nonresident discrimination
was justified given that nonresidents were only taxed on in-state income
while residents were taxed on worldwide income.446 The Court of Appeals�
finding that alimony payments are �wholly linked to personal activities
outside the State� was further justification for the disallowance.447

The Supreme Court reversed and declared the tax provision
unconstitutional in a six to three decision.448 The majority held that the New
York tax provision violated the Privileges and Immunities Clause because
the state had not presented a substantial justification for the discriminatory
treatment of nonresidents.449 Although the Privileges and Immunities Clause
affords no assurance of precise equality in taxation between residents and
nonresidents of a particular State,450 New York failed to assert �a substantial
justification for its different treatment of nonresidents, including an
explanation of how the discrimination relates to the State�s justification.�451

Justice O�Connor, writing for the majority, pointed out that the
purpose of the Privileges and Immunities Clause is to �strongly . . . constitute
the citizens of the United States one people,� by �placing the citizens of each
State upon the same footing with the citizens of other States, so far as the
advantages resulting from citizenship in those States are concerned.�452 One



2005] Tax Discrimination 113

453. Id. (citing Shaffer v. Carter, 252 U.S. 37, 56 (1920)); see also Toomer v.
Witsell, 334 U.S. 385, 396 (1948); Ward v. Maryland, 79 U.S. (12 Wall.) 418, 430
(1871).

454. Lunding, 522 U.S. at 308.
455. Id.
456. Travis v. Yale & Towne Mfg. Co., 252 U.S. 60, 79-80 (1920).
457. Lunding, 522 U.S. at 309.
458. Id. at 304-05.
459. Id. at 311.
460. Id. at 310, 314. �Alimony payments also differ from other types of

personal deductions, such as mortgage interest and property tax payments, whose situs
can be determined based on the location of the underlying property.� Id. at 310.

461. Id. �And as a personal obligation that generally correlates with a
taxpayer�s total income or wealth, alimony bears some relationship to earnings
regardless of their source.� Id. at 314.

462. Id. at 327 (Ginsburg, J., dissenting).

such advantage is the right of a citizen of any State to �remove to and carry
on business in another without being subjected in property or person to taxes
more onerous than the citizens of the latter State are subjected to.�453 She
noted that there were other provisions within New York�s tax scheme that
allowed for a proportionate deduction by nonresidents of personal expenses
other than alimony.454 Therefore, �[a]lthough the State has considerable
freedom to establish and adjust its tax policy respecting nonresidents, the end
results must, of course, comply with the Federal Constitution, and any
provision imposing disparate taxation upon nonresidents must be
appropriately justified.�455 Citing Travis,456 the Court held that nonresidents
must be allowed tax exemptions in parity with residents.457

The Court also rejected New York�s second justification that
alimony was linked to Lunding�s personal life outside the state.458 The Court
distinguished alimony from valid disallowances such as business losses from
out-of-state activities, because alimony is not �geographically fixed in the
manner that other expenses, such as business losses, mortgage interest
payments, or real estate taxes, might be.�459 The majority argued that
alimony, while personal, bore some relationship to Lunding�s overall
earnings including amounts earned in New York.460 �[A]limony payments
reflect an obligation of some duration that is determined in large measure by
an individual�s income generally, wherever it is earned.�461

The dissenters, Justice Ginsburg, Chief Justice Rehnquist, and
Justice Kennedy, disagreed with this contention noting that other factors such
as the length of the marriage, the recipient�s earnings, and child custody and
support arrangements are more significant influences.462 Criticizing the
majority�s approach as inconsistent, the dissent argued that the majority�s



114 Florida Tax Review [Vol.7:2

463. Id.
464. McIntyre & Pomp, supra note 172, at 246.
465. See supra notes 336-39 and accompanying text.
466. Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-

225.
467. Case C-80/94, Wielockx v. Inspecteur der Directe Belastingen, 1995

E.C.R. I-2493.
468. Id. ¶ 2.
469. Id. ¶ 10.
470. Id. ¶ 3.
471. Id. ¶ 4.

holding would require states to allow nonresidents every personal deduction
allowed to residents.463

2. The European Court of Justice�s Approach

Thus, Lunding raised the following fundamental question: Is a State
constitutionally required to extend to nonresident taxpayers who are subject
to tax only on income arising within that State the same personal deductions
and other related allowances that it grants to its residents, who are taxable on
their worldwide income?464 The European Court of Justice has had essentially
the same question referred to it by Member State national courts since the
Avoir Fiscal case was decided in 1986.465 This section will focus on a line of
cases examining this problem as it arises for individual taxpayers with
respect to the income tax. Although the Schumacker case466 was the first in
this line of individual income tax cases, I will begin by discussing the
Wielockx case467 as its fact pattern is more analogous to that of Lunding.

In Wielockx, the European Court of Justice dealt with a similar issue
to that examined in Lunding. Mr. Wielockx, a Belgian national resident in
Belgium, challenged the Inspector of Taxes of the Netherlands concerning
the latter�s refusal to allow a deduction for his contributions to a pension
reserve.468 Mr. Wielockx was self-employed and had a physiotherapy practice
in the Netherlands where he received his entire income. Thus, he had to pay
income tax in the Netherlands.469

The Netherlands 1964 Law on Income Tax �defines �national
taxpayers� as natural persons resident in the Netherlands as opposed to
�foreign taxpayers,� natural persons who are not resident in the Netherlands
but who do receive income there.�470 A voluntary pension-reserve tax scheme
was adopted in 1972, allowing self-employed persons �to allocate a
proportion of the profits of their business to form a pension reserve . . . .�471

The 1964 law provided that �national taxpayers� (the residents) �are subject
to tax on the income arising from their business profits, reduced by amounts



2005] Tax Discrimination 115

472. Id. ¶ 5. �[W]hen the taxpayer reaches the age of sixty-five, the pension
reserve is to be liquidated. It is then treated as income and taxed either once on the total
capital or when periodic payments are made from that capital.� Id. ¶ 6.

473. Id. ¶ 7.
474. Id. ¶ 13.
475. Id. ¶ 14.
476. Case C-204/90, Bachmann v. Belgium, 1992 E.C.R. I-249 (accepting the

necessity of preserving the fiscal cohesion of the applicable tax system as a justification
for making the deductibility of annuity contributions contingent on their being paid in
that State); see also supra note 325.

477. Wattel, supra note 52, at 239.
478. Case C-80/94, Wielockx v. Inspecteur der Directe Belastingen, 1995

E.C.R. I-2493, ¶ 16 (citing Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker,
1995 E.C.R. I-225, ¶¶ 21, 26).

479. Id. ¶ 17.
480. Id. ¶ 19.
481. Id. ¶ 20.

added to the pension reserve and increased by amounts taken out of it.�472

Under the 1964 law, �foreign taxpayers� (the nonresidents) �are taxed solely
on their �taxable national income,� namely their total income in the
Netherlands during a calendar year as reduced by losses.�473

The ECJ was asked whether Article 52 (now Art. 43) prohibits a
Member State from permitting residents to deduct a pension reserve from
their taxable income, while denying such a deduction to Community national
taxpayers who, �although resident in another Member State, receive all or
almost all of their income in the first State.�474 Is that difference in treatment
�justified by the fact that the periodic pension payments subsequently drawn
out of a pension reserve by the non-resident taxpayer are not taxed in the
State in which he works but in the State of residence . . . ?�475 Here the
Netherlands was invoking the Bachmann justification,476 that it is essential to
the cohesion of their tax system to maintain tax symmetry between the
deductibility of the contributions and the taxability of the subsequent receipts
within the same tax jurisdiction.477

While acknowledging that �direct taxation falls within the
competence of the Member States . . . ,� the Court reiterated that Member
States must �avoid any overt or covert discrimination by reason of
nationality.�478 �[D]iscrimination arises through the application of different
rules to comparable situations or the application of the same rule to different
situations.�479 A difference in treatment between resident and nonresident
taxpayers cannot �in itself be categorized as discrimination within the
meaning of the Treaty.�480 However, a nonresident taxpayer �who receives all
or almost all of his income in the State where he works is objectively in the
same situation . . .� as a resident of that State who also works there because
both are taxed in that State alone.481 Therefore, if a nonresident taxpayer is



116 Florida Tax Review [Vol.7:2

482. Id. ¶ 21.
483. Id.
484. Id. ¶ 22.
485. Case C-204/90, Bachmann v. Belgium, 1992 E.C.R. I-249.
486. Case C-80/94, Wielockx v. Inspecteur der Directe Belastingen, 1995

E.C.R. I-2493, ¶ 23. The Bachmann judgment has been severely criticized for ignoring
the bilateral treaty in effect between Belgium and Germany. Wattel, supra note 52, at
240.

487. Case C-80/94, Wielockx v. Inspecteur der Directe Belastingen, 1995
E.C.R. I-2493, ¶ 25. The ECJ explained:

[T]he effect of double-taxation conventions which, like the one
referred to above, follow the OECD model is that the State taxes all
pensions received by residents in its territory, whatever the State in
which the contributions were paid, but, conversely, waives the right
to tax pensions received abroad even if they derive from contributions
paid in its territory which it treated as deductible. Fiscal cohesion has
not therefore been established in relation to one and the same person
by a strict correlation between the deductibility of contributions and
the taxation of pensions but is shifted to another level, that of the
reciprocity of the rules applicable in the Contracting States. 

Id. ¶ 24. Professor Wattel calls this the invention of �macro-cohesion.� Wattel, supra
note 52, at 238.

488. Case C-80/94, Wielockx v. Inspecteur der Directe Belastingen, 1995
E.C.R. I-2493, ¶ 27.

489. Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-
225.

not allowed the same tax deductions, his personal situation will not be taken
into account in either State.482 �Consequently his overall tax burden will be
greater and he will be at a disadvantage compared to a resident.�483

The Court found that a nonresident taxpayer who �receives all or
almost all of his income in the State where he works but who is not entitled
to set up a pension reserve qualifying for deductions under the same tax
conditions as a resident taxpayer suffers discrimination.�484 The
Netherlands�s attempt to justify this discrimination based �on the principle of
fiscal cohesion laid down in . . .� Bachmann485 was dismissed by the Court.486

The Court held that fiscal cohesion had been achieved by virtue of the
bilateral convention concluded with Belgium.487 The discriminatory treatment
could not be �justified by the fact that the pension payments subsequently
drawn out of the pension reserve by the nonresident taxpayer . . .� would be
taxed in the State of residence pursuant to the respective Member State�s
double taxation treaty.488

Previously in the Schumacker case,489 the ECJ had closely examined
the distinction drawn in national tax laws between residents and nonresidents
when a Belgian national challenged the way Germany taxed his earnings as



2005] Tax Discrimination 117

490. See Elizabeth Keeling, Some Observations on Finanzamt Köln-Altstadt
v. Schumacker, 1 EC Tax J. 135 (1995-96).

491. Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-
225, ¶ 15.

492. Id. ¶ 16.
493. Id. ¶ 3.
494. Id. ¶¶ 4, 5.
495. Id. ¶ 7.
496. Id.
497. Id.
498. Id. ¶ 17.
499. Id. ¶ 18.
500. Id. ¶ 12.
501. See Nils Mattsson, Does the European Court of Justice Understand the

Policy Behind Tax Benefits Based on Personal and Family Circumstances?, 43 Eur.
Tax�n 186 (2003).

an employee.490 Mr. Schumacker earned his income in Germany while living
in Belgium with his wife who did not work outside the home.491 Pursuant to a
double taxation treaty between Belgium and Germany, Germany was entitled
to tax his income.492 Under German tax law, different tax regimes are applied
to persons depending on their residence.493 Residents of Germany are subject
to tax on all their income (�unlimited taxation�) while individuals with no
permanent residence in Germany are subject to tax only on the part of their
income arising from employment in Germany (�limited taxation�).494

To calculate the tax, �employed persons subject to unlimited taxation
are divided into several taxation categories . . . .�495 Married individuals who
are not separated may use the �splitting� tariff provided that both spouses are
German residents subject to unlimited taxation.496 The �splitting� tariff was
designed to mitigate the progressive nature of the income tax rates by
aggregating the spouses� total income, attributing 50% to each spouse and
then taxing accordingly.497

Mr. Schumacker asked the Finanzamt to calculate his tax on an
equitable basis, by reference to the �splitting� tariff.498 The German tax
authority refused to refund the extra taxes deducted from his wages due to his
tax classification as an unmarried person.499 Under the legislation in force at
the time, persons subject to limited taxation came within this category
regardless of their family circumstances.500 Consequently, they did not
qualify for the tax benefit of �splitting� and nonresident married employed
persons were treated in the same way as unmarried persons. Schumacker
appealed his case to the Bundesfinanzhof (Federal Tax Court).501

The Bundesfinanzhof asked for a preliminary ruling from the ECJ
with respect to the following questions (as summarized):



118 Florida Tax Review [Vol.7:2

502. Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-
225, ¶ 19.

503. Id. ¶ 24.
504. Id. ¶ 21 (citing Case C-246/89, Comm�n v. United Kingdom, 1991 E.C.R.

I-4585, ¶ 12).
505. Id. ¶ 22.
506. Id. ¶ 23 (citing Case C-175/88, Biehl v. Administration des Contributions,

1990 E.C.R. I-1779, ¶ 12).
507. Id. ¶ 28. The ECJ explained:
[N]ational rules . . . under which a distinction is drawn on the basis
of residence in that non-residents are denied certain benefits which
are, conversely, granted to persons residing within national territory,
are liable to operate mainly to the detriment of nationals of other

1. Does Article 48 of the EEC Treaty restrict the right of Germany to
levy income tax on a national of another Member State? If so:
2. Does Article 48 allow Germany to impose a higher level of
income tax on a Belgian resident than on an otherwise comparable
person resident in Germany, if he commences employment in
Germany without transferring his permanent residence there?
3. Does it make any difference if the Belgian referred to above
derives almost all (that is over 90%) of his income from Germany
and this income is only taxable in Germany, in accordance with the
Double Taxation Agreement between Germany and Belgium?
4. Is it contrary to Article 48 for Germany to exclude nonresidents
who derive income from employment in Germany from the benefit
of annual adjustment procedures that are available to residents?502

After reviewing the German legislation and rationale, the ECJ
explained that the principle of free movement of persons within the
Community limits the right of a Member State to enforce discriminatory
provisions with respect to the taxation of a national of another Member
State.503 The Court stated that although �direct taxation does not as such fall
within the purview of the Community, the powers retained by the Member
States must nevertheless be exercised consistently with Community law
. . . .�504 Additionally, �Article 48(2) (now Art. 39(2)) requires the abolition
of any discrimination based on nationality between workers of the Member
States as regards, inter alia, remuneration.�505 The Court stated that �the
principle of equal treatment with regard to remuneration would be rendered
ineffective if it could be undermined by discriminatory national provisions
on income tax.�506

With respect to questions two and three, the Court found that where a
distinction is drawn on the basis of residence, the rule is likely to operate to
the detriment of nationals of other Member States.507 Indirect discrimination



2005] Tax Discrimination 119

Member States. Non-residents are in the majority of cases foreigners.
Id.

508. Id. ¶ 30.
509. Id. ¶ 41.
510. Id. ¶ 58.
511. Id.
512. Farmer, supra note 312, at 77.
513. Lunding v. N.Y. Tax App. Trib., 522 U.S. 287, 311 (1998) (citing Travis

v. Yale & Towne Mfg. Co., 252 U.S. 60, 80 (1920)).
514. Id. at 313 (citing Brief for State of Ohio et al. 8). Thus, �the taxpayer

would pay roughly the same total tax in the two States, the only difference being that
[the taxpayer�s resident State] would get more and New York less of the revenue.� Id.

does arise when different rules are applied to comparable situations.508

Because Schumacker earned a major part of his income in Germany and was
not entitled to any tax benefits in Belgium on account of his family
circumstances, he was comparably situated to a resident of Germany. Thus,
the Community principle of equal treatment requires that Germany consider
his personal and family circumstances and grant him the same tax benefits as
residents.509 As to the fourth question, Article 48 of the Treaty (now Art. 39)
mandates equal treatment at the procedural level for nonresident and resident
EU nationals.510 The ECJ found that the refusal to grant these nonresidents
the benefit of the annual adjustment procedures that were available to
residents constituted unjustified discrimination.511

Note that in both the Schumacker and Wielockx cases, the Court
examines the overall tax situation of the taxpayer (and only that specific
taxpayer) and looks at the home state position as well as the host state
situation.512 The specific taxpayer analysis is disregarded in the Supreme
Court�s opinion in Lunding. Instead, the Supreme Court takes a more global
approach:

[W]e are not satisfied by the State�s argument that it need
not consider the impact of disallowing nonresidents a
deduction for alimony paid merely because alimony
expenses are personal in nature, particularly in light of the
inequities that could result when a nonresident with alimony
obligations derives nearly all of her income from New York,
a scenario that may be �typical.�513

However, the Supreme Court rejected an attempt by various States,
as amici for respondents, to assert that the effect of New York�s statute was
de minimis given that �States imposing an income tax typically provide a
deduction or credit to their residents for income taxes paid to other States.�514

This was not the case for Mr. Lunding, as Connecticut imposed no income



120 Florida Tax Review [Vol.7:2

515. Id. at 314 (citing Reply Brief for Petitioners 4 n.1).
516. Id. at 314 (citing Austin v. New Hampshire, 420 U.S. 656, 668 (1975));

see also Travis, 252 U.S. at 81-82.
517. Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-

225, ¶ 31; Case C-80/94, Wielockx v. Inspecteur der Directe Belastingen, 1995 E.C.R.
I-2493, ¶ 18.

518. Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-
225, ¶ 36; Case C-80/94, Wielockx v. Inspecteur der Directe Belastingen, 1995 E.C.R.
I-2493, ¶ 20.

519. Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-
225, ¶ 36; Case C-80/94, Wielockx v. Inspecteur der Directe Belastingen, 1995 E.C.R.
I-2493, ¶ 22.

520. Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-
225, ¶ 36; Case C-80/94, Wielockx v. Inspecteur der Directe Belastingen, 1995 E.C.R.
I-2493, ¶ 13.

521. Case C-391/97, Gschwind v. Finanzamt Aachen-Au$enstadt, 1999 E.C.R.
I-5451.

522. Id. ¶¶ 2, 9.
523. Id. ¶¶ 9, 10.
524. Id. ¶ 10.

tax on earned income for the year in question.515 Finally, the Court
admonished that �the constitutionality of one State�s statutes affecting
nonresidents [cannot] depend upon the present configuration of the statutes
of another State.�516

In Schumacker and Wielockx the taxpayers won their cases because
although the situations of residents and of nonresidents are not, as a rule,
comparable,517 �the position is different where the nonresident receives no
significant income in the State of his residence and obtains the major part of
his taxable income from an activity performed in the State of employment
. . . . �518 Because Mr. Wielockx derived all of his income in the Netherlands
and Mr. Schumacker earned 90% of his income in Germany, these Member
States were not justified in treating them differently than residents with
respect to the tax treatment of their personal and family circumstances.519 The
question that naturally arose next was what constitutes �the major part� of a
taxpayer�s income.520 This question was dealt with in the Gschwind case.521

In Gschwind, the ECJ also interpreted an Article 48 (now Art. 39)
question raised by a Dutch national regarding taxes assessed on his income
from employment in Germany.522 Mr. Gschwind lived in the Netherlands
with his wife. In 1991 and 1992, Mr. Gschwind was employed in Germany
earning approximately 58% of the couple�s total income while his wife was
employed in the Netherlands.523 Pursuant to the income tax treaty between
Germany and the Netherlands, Mr. Gschwind paid income tax on his
earnings to Germany and his wife paid income tax to the Netherlands.524



2005] Tax Discrimination 121

525. Id. ¶ 4.
526. Id. ¶ 6. Germany had amended their income tax law in 1995 in order to

take into account the judgment by the ECJ in the Schumacker case. See supra notes 484-
93, 495-502 and accompanying text.

527. Case C-391/97, Gschwind v. Finanzamt Aachen-Au$enstadt, 1999 E.C.R.
I-5451, ¶ 11. Mr. Gschwind did not request personal deductions in Germany but rather
only sought the splitting benefit. In the tax regime of the Netherlands that seeks to avoid
double taxation, Mr. Gschwind lost his basic allowance and all other personal
deductions available to residents. Peter J. Wattel, Progressive Taxation of Nonresidents
and Intra-EC Allocation of Personal Tax Allowances: Why Schumacker, Asscher, Gilly,
and Gschwind do not Suffice, 40 Eur. Tax�n 210, 218 (2000).

528. Case C-391/97, Gschwind v. Finanzamt Aachen-Au$enstadt, 1999 E.C.R.
I-5451, ¶¶ 12, 13. The question referred to the Court was:

Is it contrary to Article 48 of the EC treaty for Paragraph 1(3), second
sentence, in conjunction with Paragraph 1a1.2 of the
Einkomensteuergesetz (German Law on Income Tax) to provide that
a Netherlands national deriving taxable income from employment in
Germany without having a permanent residence or usual abode there
and his spouse, who is not permanently separated from him and
likewise has no permanent residence or usual abode in Germany and
earns income abroad, are not to be treated as persons subject to
unlimited taxation for the purposes of applying Paragraph 26(1), first
sentence of the Einkommensteuergesetz (joint assessment) on the
ground that the combined income of the spouses for the calendar year
in question does not fall as to at least 90% within the
Einkommensteuergesetz, or that the income not subject to the
Einkommensteuergesetz amounts to more than DEM 24 000?

Id. ¶ 13.

Under the German income tax code, a married couple is able to apply
for a joint assessment and use a splitting procedure that results in a lower tax
liability.525 However, for the splitting procedure to apply to nonresident
couples, 90% of the couple�s total income must be taxable in Germany.526

Thus, for the 1991 and 1992 tax years, Mr. Gschwind was treated as if he
was single and forced to pay an additional tax liability.527 After Mr.
Gschwind�s objection to his treatment as an unmarried person was dismissed,
he appealed to the Tax Court of Cologne, which referred the question to the
ECJ for a preliminary ruling.528 Essentially, the issue was 

whether Article 48  (2) of the Treaty precludes the
application of a Member State�s legislation which grants
resident married couples favourable tax treatment . . . , yet
makes the same treatment of non-resident married couples
subject to the condition that at least 90% of their total
income must be subject to tax in that Member State or, . . . ,



122 Florida Tax Review [Vol.7:2

529. Id. ¶ 14.
530. Id. ¶ 32.
531. Id. ¶ 27.
532. Id. ¶ 29.
533. Case C-403/03, Schempp v. Finanzamt Munchen V, http://europa.

eu.int/index_en.htm (Select Documents tab; follow case law hyperlink; then follow case
law since 1997 (CURIA) hyperlink).

534. Id. ¶ 11.
535. Id. ¶ 4.
536. Id. ¶ 8.
537. Id. ¶ 9.

that their income from foreign sources not subject to tax in
that State must not be above a certain ceiling.529

The ECJ concluded that the treatment of the Gschwind family by the
German tax authority was not discriminatory in violation of Article 48 (2)
(now Art. 39 (2).530 In order for the nonresident couple to be protected under
the Schumacker doctrine, three elements must be met: (1) the couple earns no
significant income in their State of residence, (2) the tax the couple is
required to pay in the foreign state is higher than a resident couple would
pay, and (3) the couple is similarly situated to the resident couple in that they
derive the major part of their taxable income from activity in the State of
employment.531 In these circumstances, the State of residence is not in a
position to grant tax benefits resulting from the taking into account personal
and family circumstances. Thus, the State of employment must do so. In the
Gschwinds� case, the Court assumed that the Netherlands would take into
account the personal and family circumstances of Mr. Gschwind despite his
lack of income in the State because of the 42% of income his wife brought to
the couple�s combined income in the resident State.532 Because 58% of total
income in State of employment is not enough to earn ECJ protection, one can
conclude that the ECJ also would not have found in Mr. Lunding�s favor.

However, evidence that the ECJ might protect Mr. Lunding can be
found in the ECJ�s judgment in the Schempp case.533 The German Federal
Tax Court asked for a preliminary ruling from the ECJ with respect to
whether the non-deductibility of maintenance payments from a German
resident taxpayer to his ex-spouse residing in Austria constitutes tax
discrimination based on Articles 12 and 18.534 Maintenance payments by a
German resident to a divorced spouse are generally deductible by the payer
and are also regarded as taxable income to the recipient.535 However, where
the ex-spouse resides in another Member State, the recipient must prove
through production of a certificate issued by the relevant taxing authorities
that the maintenance payments will be taxed.536 Mr. Schempp was unable to
produce the certificate because Austria does not tax maintenance payments.537



2005] Tax Discrimination 123

538. Id.; see also Claudia Daiber, Multinational Tax Cases Top ECJ Agenda,
37 Tax Notes Int�l 966, 966-67 (2005).

539. Case C-403/03, Schempp v. Finanzamt Munchen V, ¶ 39,
http://europa.eu.int/index_en.htm (Select Documents tab; follow case law hyperlink;
then follow case law since 1997 (CURIA) hyperlink).

540. Id. ¶ 47; Daiber, supra note 538, at 967.
541. Case C-403/03, Schempp v. Finanzamt Munchen V, ¶ 35,

http://europa.eu.int/index_en.htm (Select Documents tab; follow case law hyperlink;
then follow case law since 1997 (CURIA) hyperlink).

542. Id. ¶¶ 34, 36, 43.
543. Id. ¶ 33.
544. Case C-385/00, de Groot v. Staatssecretaris van Financien, 2002 E.C.R.

I-11819.
545. Id. ¶ 46.
546. Id. ¶ 27.

Schempp argued that he suffered discrimination because, had his former wife
been resident in Germany, he would have been able to deduct these
maintenance payments.538 This would be true even though his spouse would
not have actually paid any German income tax, as her income was less than
the taxable minimum.539

The ECJ found that this German income tax provision is not
incompatible with the EC Treaty.540 �[T]he payment of maintenance to a
recipient resident in Germany cannot be compared to the payment of
maintenance to a recipient in Austria. The recipient is subject in each of
those two cases, as regards taxation of the maintenance payments, to a
different tax system.�541 Thus, Articles 12 or 18 do not prohibit the German
tax law because the criterion used in the tax law relates solely to the tax
treatment of the maintenance payments in the Member State of the
recipient�s residence and not in any way to the nationality or residence of the
payer of the maintenance payments.542 The ECJ points out that, if Mr.
Schempp�s former wife moved to the Netherlands where maintenance
allowances are subject to taxation, Mr. Schempp would be able to benefit
fully from the maintenance payment deduction.543 This is not the case in
Lunding, where the deduction of alimony was clearly dependent on the
residence of the payer. A resident of New York gets the deduction whereas a
nonresident does not, regardless of the tax circumstances of the recipient.

The de Groot case,544 however, demonstrated some problems with
the Schumacker doctrine. In this case, the ECJ had to tackle the question of
whether Article 48 (now Art. 39) precludes a national tax law system that
proportionally decreases a resident�s personal tax benefits on account of
employment income from other Member States.545 Mr. de Groot was a
resident of the Netherlands but also earned significant income from
Germany, France and the United Kingdom.546 He paid taxes in these three



124 Florida Tax Review [Vol.7:2

547. Id. ¶¶ 30-31.
548. Id. ¶ 21.
549. Id. ¶ 18.
550. Id. ¶¶ 29, 36-37.
551. Id. ¶ 30.
552. Id. ¶ 48.
553. Id. ¶ 49.
554. Id.
555. Id. ¶ 79.
556. Id. ¶ 98. As the ECJ explained: 
[T]he mechanisms used to eliminate double taxation or the national
tax systems which have the effect of eliminating or alleviating double
taxation must permit the taxpayers in the States concerned to be
certain that, as the end result, all their personal and family
circumstances will be duly taken into account . . . .

Id. ¶ 101.

countries and also paid tax in the Netherlands.547 Although the Netherlands
exempted the foreign income pursuant to the respective tax treaties with
Germany, France and the United Kingdom, the foreign income was taken
into account for purposes of computing the appropriate progressive rate.548

After calculating tax on total income, a tax relief amount was calculated by
multiplying the tax by a proportionality factor (foreign gross income divided
by total gross income).549 As a result of this calculation, Mr. de Groot lost a
proportionate share of his tax deduction (more than 60%), which included a
proportionate share of his alimony deduction.550 Neither Germany, France,
nor the United Kingdom took his alimony deduction into account for
purposes of calculating his tax liability in each of these countries.551

Mr. de Groot observed that the free movement of persons provisions
of the EC Treaty are intended to preclude any national legislation that would
place Community citizens at a disadvantage because they engage in cross-
border activities.552 He claimed that he was disadvantaged, comparing his tax
liability with the tax he would pay the Netherlands if he worked exclusively
in the Netherlands.553 He received a smaller tax deduction because his
employment income was earned from several Member States.554 The ECJ
agreed with de Groot and reasoned that although �the rules on freedom of
movement for workers are intended, in particular, to secure the benefit of
national treatment in the host State, they also preclude the State of origin
from obstructing the freedom of one of its nationals to accept and pursue
employment in another Member State . . . .�555 Overruling accepted tax
principles, the ECJ required the State of residence to grant all of the personal
allowances regardless of the fact that the tax system of the Netherlands
exempted foreign income from taxation.556 With respect to the argument that
the disadvantage suffered by the taxpayer was compensated for by the lack of
a progressive tax rate being applied by the other tax jurisdictions, the ECJ



2005] Tax Discrimination 125

557. Id. ¶ 97 (citing with respect to the freedom of establishment, Case 270/83,
Comm�n v. French Republic, 1986 E.C.R. 273 (Avoir Fiscal), ¶ 21; Case C-107/94,
Asscher v. Staatssecretaris van Financien, 1996 E.C.R. I-3089, ¶ 53; Case C-307/97,
Compagnie de Saint-Gobain, Zweigniederlassung Deutschland v. Finanzamt Aachen-
Innenstadt 1999 ECR I-6161, ¶ 54; with respect to the freedom to provide services, Case
C-294/97, Eurowings Luftverkehrs AG v. Finanzamt Dortmund-Unna, 1999 E.C.R. I-
7447, ¶ 44; and, with respect to the free movement of capital, Case C-35/98,
Staatssecretaris van Financien v. B.G.M. Verkooijen, 2000 E.C.R. I-4071, ¶ 61).

558. See Christian Wimpissinger, Gerritse Case Addresses Source Taxation as
Hindrance, 31 Tax Notes Int�l 624, 626 (2003).

559. Case C-234/01, Gerritse v. Finanzamt Neukölln-Nord, 2003 E.C.R. I-
5933.

560. Id. ¶ 24.
561. Id. ¶¶  9-10.
562. Id. ¶ 3.
563. Id. ¶¶ 3, 8.
564. Id. ¶ 13.
565. Id. ¶ 24.

found �that detrimental tax treatment contrary to a fundamental freedom
cannot be justified by the existence of other tax advantages, even if those
advantages exist . . . .�557

However, in a more recent direct tax decision with respect to the free
movement of services, the ECJ confirmed the generally accepted allocation
of the right to tax among residence and source states.558 In Gerritse,559 the
ECJ had to tackle the question of whether Article 59 (now Art. 49) precludes
a national law that taxes gross income when taxing nonresidents, but net
income when taxing residents.560 Mr. Gerritse, a citizen and resident of the
Netherlands, earned approximately 6,000 DEM, or 10% of his income, for
performing as a drummer in Berlin.561 German income tax law distinguished
between residents, who are allowed to deduct business expenses, and
nonresidents like Gerritse, who are not allowed to deduct such expenses.562

Resident taxpayers are taxed on worldwide income at progressive tax rates
with a nontaxable threshold of 12,095 DEM, whereas nonresident artists are
taxed at a flat 25% rate.563

Mr. Gerritse argued that if he were a German resident, he would not
have been required to pay taxes on the amount of income earned in Berlin, as
that amount was less than the nontaxable threshold.564 The German Court
referred the matter to the ECJ, asking whether the Treaty precludes a German
tax law that allows no business deductions and a uniform tax rate applied to
nonresidents, whereas residents are able to deduct business expenses and are
taxed according to a progressive tax table, including a nontaxable threshold
amount.565 Because Gerritse performed services in Germany, the main issue



126 Florida Tax Review [Vol.7:2

566. Id. ¶ 23.
567. Id. ¶ 28.
568. Id. ¶ 35.
569. Id. ¶ 53.
570. Id. ¶ 54.
571. Id. ¶¶ 54-55.
572. Id. ¶ 55.
573. Three New Tax Cases Before the ECJ, Dec. 20, 2004, at

http://www.allarts.nl/english/articles/2004 (follow �Three New Cases ECJ . . .�
hyperlink) (explaining that the ECJ will likely expand on the Gerritse decision in the
recently referred tax cases of C-290/04 FKP Scorpio Konzertproduktion, C-345/04
Centro Equestro de Leziria Grande Lda. and C-386/04 Centro di Musicologia Walter
Stauffer, and rule that Member States cannot tax nonresident artists and sportsmen more
heavily than resident artists and sportsmen).

before the Court concerned the freedom to provide services, rather than the
freedom of establishment.566 

With respect to the deductibility of the business expenses, the ECJ
ruled that a tax law permitting only residents to deduct business expenses
constitutes indirect discrimination on grounds of nationality, contrary to the
principles of Articles 59 and 60 (now Arts. 49 and 50) of the EC Treaty.567

Regarding the different rates of taxation, the Finanzamt and the Finnish
Government attempted to justify the difference by arguing that the obligation
to consider a taxpayer�s personal situation is the responsibility of the State of
residence and not the State where the income is generated.568 The ECJ ruled
that although different rates of taxation for residents and nonresidents
constitutes indirect discrimination violating Article 60 (now Art. 50),569 the
flat tax rate (in this case 25%) must be compared to the appropriate tax rate
in the progressive rate table.570 In this case, Germany�s flat rate was not in
violation of Treaty provisions because when the tax-free allowance amount
was added to his net income (as he had already received the benefit of a tax-
free allowance in his State of residence), Germany would have applied a rate
of tax of 26.5% using the progressive rate table.571 Thus, in this case, the 25%
flat rate was not in excess of the rate that would have been applied to a
resident using the progressive rate table after factoring in the tax-free
allowance.572 Three cases recently referred to the ECJ further question
whether or not a Member State can tax nonresident artists and sportsmen
more heavily than resident artists and sportsmen.573

3. Analysis

In the area of tax discrimination, both the Supreme Court and the
European Court of Justice are engaged in a similar enterprise, balancing
well-established tax principles against rights provided by a Constitution or a



2005] Tax Discrimination 127

574. Tribe, supra note 44, § 6-37, at 1270.
575. Id.
576. EC Treaty, supra note 15, Art. 48 (ex Art. 58).
577. Case C-55/94, Gebhard v. Consiglio dell�Ordine degli Avvocati e

Procuratori di Milano, 1995 E.C.R. I-4165, ¶ 37 (citing Case C-19/92, Kraus v. Land
Baden-Wuerttemberg, 1993 E.C.R. I-1663, ¶ 32).

578. Id. �Nothing in the record indicates that nonresidents use larger boats or
different fishing methods than residents, that the cost of enforcing the laws against them
is appreciably greater, or that any substantial amount of the State�s general funds is
devoted to shrimp conservation.� Toomer v. Witsell, 334 U.S. 385, 398 (1948).

579. Tribe, supra note 44, § 6-37, at 1256. 
580. Lunding v. N.Y. Tax App. Trib., 522 U.S. 287, 297 (1998) (citing Austin

v. New Hampshire, 420 U.S. 656, 665 (1975)).

Treaty. In the American jurisprudence, there appear to be three different tests
to be applied depending on which constitutional right is asserted. Matters are
further unnecessarily complicated by the fact that corporations may not avail
themselves of protection under the Privileges and Immunities Clause.574 Only
individuals may assert this protection; corporations must invoke either the
Equal Protection or the Commerce Clause.575

In the EU, however, the Treaty requires that corporations must be
treated like natural persons.576 In addition, the case law has evolved to the
extent that there is now a uniform approach that is followed with respect to
each of the Four Freedoms. In 1995, the Court summarized this approach in
the Gebhard case:

It follows, however, from the Court�s case-law that national
measures liable to hinder or make less attractive the exercise
of fundamental freedoms guaranteed by the Treaty must
fulfil four conditions: they must be applied in a non-
discriminatory manner; they must be justified by imperative
requirements in the general interest; they must be suitable for
securing the attainment of the objective which they pursue;
and they must not go beyond what is necessary in order to
attain it.577

Thus, the ECJ is applying a very similar test to the Supreme Court�s
substantial equality test where an individual state must demonstrate a
sufficient link between the legitimate interests served and the discrimination
practiced578 and that less restrictive alternatives were impractical.579 The
Supreme Court has described this balance as �a rule of substantial equality of
treatment� for resident and nonresident taxpayers.580 

In the jurisprudence of the ECJ, it is settled law that discrimination
can arise only through the application of different rules to comparable



128 Florida Tax Review [Vol.7:2

581. Case C-279/93, Finanzamt Köln-Altstadt v. Schumacker, 1995 E.C.R. I-
225, ¶ 30.

582. See, e.g., id. ¶ 31.
583. Id. ¶ 34.
584. Hellerstein, supra note 201, at 1332 n.104. See also Metro. Life Ins. Co.

v. Ward, 470 U.S. 869 (1985) (invalidating Alabama statute that taxed out-of-state
insurance companies at a higher rate than domestic companies because the state�s
purposes were not legitimate to pass the equal protection rational basis test); Wheeling
Steel Corp. v. Glander, 337 U.S. 562 (1949) (holding that where a state has permitted
a foreign corporation to enter and transact business equal protection must be accorded
at least to the extent that their property is entitled to an equally favorable ad valorem tax
basis).

585. See Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 359-60
(1973) (holding that an Illinois constitutional amendment authorizing ad valorem taxes
on personal property of corporations but not with respect to personal property of
individuals did not violate the Equal Protection Clause because it was not the result of
invidious discrimination and was within the state�s discretion to make classifications for
tax purposes); see also Allied Stores of Ohio v. Bowers, 358 U.S. 522, 526-27 (1959)
(holding that an Ohio statute imposing an ad valorem tax on property stored by local
companies while exempting out-of-state owners of warehouses did not deny domestic
corporations the equal protection of the law).

586. Nordlinger v. Hahn, 505 U.S. 1, 10 (1992).
587. See United States R.R. Ret. Bd. v. Fritz, 449 U.S. 166, 174, 179 (1980).
588. See Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 464 (1981).
589. Nordlinger, 505 U.S. at 11 (citing Cleburne v. Cleburne Living Ctr., Inc.,

473 U.S. 432, 446 (1985)).
590. Zinn & Reed, supra note 235, at 92.

situations or the application of the same rule to different situations.581 The
ECJ has consistently stated since the Schumacker judgment that �[i]n relation
to direct taxes, the situations of residents and of nonresidents are not, as a
rule, comparable.�582 Thus, a Member State�s failure to grant certain tax
benefits to a nonresident that it grants to a resident is not, as a rule,
discriminatory because these two categories of taxpayers are not in a
comparable situation.583

This analysis resembles the equal protection rational basis test that is
used in tax cases.584 The Equal Protection Clause does not prohibit the states
from making reasonable classifications among such persons585 and �requires
only that the classification rationally further a legitimate state interest.�586

The statute will be upheld as long as there is a plausible policy reason for the
classification,587 plausible legislative facts on which a rational legislator could
have relied,588 and �the relationship of the classification to its goal is not so
attenuated as to render the distinction arbitrary or irrational.�589 However,
unlike the ECJ, the Supreme Court has rarely invalidated state tax laws solely
on the basis that they violate the Equal Protection Clause.590 Legislatures
have been given broad latitude in the classifications and distinctions created



2005] Tax Discrimination 129

591. Regan v. Taxation With Representation, 461 U.S. 540, 547 (1983). See
also Madden v. Kentucky, 309 U.S. 83, 88 (1940) (noting that legislatures have the
greatest freedom with respect to classifications in the tax area). One exception to this
deference exists with respect to interstate business and classifications involving
residency usually taking the form of a �domestic preference tax.� Zinn & Reed, supra
note 235, at 92.

592. Metro. Life Ins. Co. v. Ward, 470 U.S. 869, 878 (1985).
593. Id.
594. Higher tax liabilities that are the result of nondiscriminatory differences

in each State�s tax rates do not violate the free movement of workers. See, e.g., Case C-
336/96, Gilly v. Directeur des Services Fiscaux du Bas-Rhin, 1996 E.C.R. I-2793, ¶¶
30, 47.

595. Case C-136/00, Danner, 2002 E.C.R. I-8147, Op. ¶ 38.

by tax statutes.591 But legitimate state interest does not include a state
favoring �its own residents by taxing foreign corporations at a higher rate
solely because of their residence . . . .�592 This �constitutes the very sort of
parochial discrimination that the Equal Protection Clause was intended to
prevent.�593

This Schumacker test appears to function in the simple cross-border
employment situation where the workers are earning substantially all of their
income from the host state. However, complications such as a spouse earning
income in a different Member State, as in Gschwind, or a person earning
income from multiple Member States, as in de Groot, could cause an
individual to be worse off by engaging in cross-border activity. The question
to be addressed is how much protection should be guaranteed by the
European Union or the United States. Does not a cross-border worker
knowingly disadvantage herself every time she works in a State with a higher
tax rate than her own?594 There has to be a balance struck between the
encouragement of an internal market and the compelling needs of the States
and Member States to raise the revenues necessary for their governance. In
the Danner case, Advocate General Jacobs states that the ECJ�s 

primary task in preliminary rulings is not to decide specific
cases on the basis of narrowly distinguished facts, or to solve
a problem for the national court in the particular case, but to
state clearly and coherently for the benefit of everyone in the
Community what the correct understanding of the law is, and
to give rulings of general significance.595

Unfortunately, although much guidance has been given to the Member
States, most of the recent cases are adjudicating very similar issues to those



130 Florida Tax Review [Vol.7:2

596. Jonathan Schwarz, Personal Taxation Under the European Court of Justice
Microscope, 58 Bull. Int�l Fisc. Doc. 12 546, 550 (2004).

597. Since Connecticut�s enactment of an individual income tax in 1992, the
concern over under taxation is relieved. Instead, the question becomes an issue of how
the personal income tax should be apportioned between New York and Connecticut.
After the Lunding decision, nonresident payers of alimony will pay less New York tax,
which results in a smaller credit against their Connecticut taxes. The nonresident
recipient of alimony will only pay tax to Connecticut, as is the case of a former spouse
of a New Yorker who now resides in Connecticut. Thus, the current effect of the
Lunding decision is to shift tax revenues to Connecticut, a decision New York had
previously made with respect to the former spouses of New York residents. See
McIntyre & Pomp, supra note 172, for a defense of the New York taxing scheme for
alimony.

598. Lunding v. N.Y. Tax App. Trib., 522 U.S. 287, 311 (1998).
599. Id.
600. The Justices� Caseload, at http://www.supremecourtus.gov/about/

justicecaseload.pdf (last visited Jan. 16, 2006).

that have been previously decided.596 The use of a legislative instrument such
as a directive would be more efficient in establishing appropriate tax law.

Even though the United States does not have a system of preliminary
rulings, Supreme Court opinions serve the same function by providing the
state courts with judicial guidance. Thus, it follows that the U.S. Supreme
Court should also give rulings of general significance. The Lunding majority
did not limit their examination to Mr. Lunding�s particular fact pattern,
which was unsympathetic for the tax year in question since Connecticut had
no income tax at that point and Mr. Lunding derived only 48% of his income
from New York.597 The Lunding majority was 

not satisfied by the State�s argument that it need not consider
the impact of disallowing nonresidents a deduction for
alimony paid merely because alimony expenses are personal
in nature, particularly in light of the inequities that could
result when a nonresident with alimony obligations derives
nearly all of her income from New York, a scenario that may
be �typical� . . . .598

The Lunding majority also expressed concern about the nonresident who
makes payments to a New York resident and the double taxation that would
ensue.599

The Supreme Court only grants certiorari in about 100 cases of the
approximately 7,000 petitions filed per Term.600 Although the Court�s recent



2005] Tax Discrimination 131

601. Quirk & Shaver, supra note 121, at 650-51 (citing, e.g., Citicorp N. Am.
Inc. v. Franchise Tax Bd., 100 Cal. Rptr. 2d 509 (Cal. Ct. App. 2000), cert.
denied, 533 U.S. 963 (2001); Kalama Chem., Inc. v. Washington, 9 P.3d 236 (Wash.
App. 2000), cert. denied, 533 U.S. 931 (2001)).

602. See supra note 427 for a discussion of the different approaches Member
States have taken with respect to the finding of incompatibility of CFC legislation.

603. EC Treaty, supra note 15, Art. 4.

denials of certiorari show a lack of enthusiasm for state tax cases,601 the
Court�s review is particularly significant in a constitutional challenge to a
state tax system in order to send appropriate messages to the state
legislatures. Unfortunately when state taxpayers turn to Congress, the result
is that no one pays taxes.

VI. CONCLUSION

The judgments of the European Court of Justice have caused some
coordination of various individual and corporate tax laws through negative
integration. Pure tax harmonization has not resulted, in that a finding of
incompatibility of a tax law with a Treaty provision does not guarantee that
all Member States will resolve the problem in the same way legislatively.602

Arguably, this judicial action was necessary during the infancy stage of the
Internal Market. However, given the progress made towards the Internal
Market, it is time for a more balanced approach that takes into account a
Member State�s need to finance its government. This could be accomplished
through a more judicious use of the rule of reason, on occasion exercising,
like the Supreme Court, an extra dose of judicial sympathy for the Member
State�s taxing power. Alternatively, a European scholar suggests reliance on
Article 4 of the EC Treaty. Because this treaty provision obligates the
Member States to avoid excessive public deficits,603 sound tax policies that
combat anti-avoidance conduct would need to be accepted as justifications
for infringements of the Treaty freedoms.

On the legislative side, the Council is designed to safeguard the
economic interests of the Member States. The Finance Minister�s
acknowledged responsibility is to look after the Member State�s interests in
tax matters before the Council. The Commission should refocus its energies
on formulating Community tax policy, making proposals to the Council, and
drafting the detailed measures needed for their implementation. The
Commission should continue to push for a move to qualified majority voting
for certain tax issues. Hopefully, the Member States will soften their
opposition as they experience the frustration that EU enlargement has only
exacerbated the inability to have agreement on any new Community tax
legislation. At a bare minimum, the Commission can issue recommendations,



132 Florida Tax Review [Vol.7:2

which although not legally binding, would be persuasive in pushing Member
States towards more tax coordination.

In contrast to my EU recommendation, with respect to the United
States, I advocate less congressional involvement. The recent U.S.
experience with federal intervention in state tax legislation demonstrates that
Congress is being too generous with the states� money. Unlike the Council of
Ministers, Congress does not represent the states and there is increasing
temptation to enact legislation that benefits a select constituency at a revenue
cost to the states. At present, the United States is better off with increased
judicial oversight, because in the name of reducing complexity, the
congressional answer seems to be that no one should pay taxes. I conclude
with a recommendation that the Supreme Court should give priority to state
tax conflicts and additional restraints should be placed on the ability of
Congress to tamper with state tax laws. I recommend the creation of a
Committee of Treasurers patterned after the EU�s Economic and Social
Committee or the Committee of the Regions but in this case comprised of the
treasurers of the fifty states. This Committee of Treasurers would have to be
consulted with respect to any federal intervention in state tax legislation.