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United States v. Constantine

Supreme Court of the United States · 1935 · Constitutional Law

Constitutional LawTaxing PowerFederalismPolice Powertax vs penaltyfederalismTenth Amendmentstate police power

Facts

Respondent operated a restaurant in Birmingham, Alabama, where he sold malt liquor containing more than one-half of one percent alcohol in violation of state and city law. For the fiscal year at issue, he had registered as a retail liquor dealer and paid the ordinary $25 federal tax imposed on such dealers under R.S. 3244. He did not pay the additional $1,000 exaction imposed by § 701 on persons carrying on certain liquor businesses contrary to state or local law. He was then charged and sentenced for conducting that business without paying the $1,000 amount.

Issue

After repeal of the Eighteenth Amendment, was the $1,000 exaction in § 701 of the Revenue Act of 1926 a valid federal tax on an occupation, or was it in substance a penalty for violating state liquor laws and therefore beyond federal power?

Rule

Whether an exaction is a tax or a penalty depends on its substance, purpose, and operation, not on the label Congress gives it. If an additional exaction is triggered by conduct that violates law and is grossly disproportionate to the normal tax, it is a penalty rather than a tax; absent constitutional authority such as the repealed Eighteenth Amendment, Congress may not impose such a penalty for violations of state law.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Congress imposes a federal annual occupation tax of $40 on all retail fireworks dealers. In a later statute, it adds a $4,000 "special excise" payable only by dealers who sell fireworks in violation of state or municipal law. Maya Torres operates such a shop in Toledo, Ohio, pays the $40 tax, but refuses to pay the $4,000 charge.

If Maya challenges the $4,000 exaction, which argument is strongest under the governing doctrine?

Explanation. The majority rule is that a court looks past the statutory label to the exaction's purpose and operation. An added charge imposed only when the taxpayer violates state or local law, especially when it is vastly larger than the ordinary occupation tax, is treated as a penalty rather than a tax. Because it functions as punishment for violation of state or local law, it invades the states' reserved police power.