For those of you chomping at the bit to review such cases as Bonaparte v. Tax Court (1882), the Kentucky Department of Revenue versus George Davis gives you a chance to refresh your memory.  The Court overturned by 7-2 though with a ton of side opinions a lower court ruling that said it was unconstitutional for states to give preferential tax treatment in their own bonds versus those of other states.  Wall Street was more or less unanimously pleased with the ruling, given the turbulence that would have ensued in the already volatile municipal bond market.  California surely dodged a bullet.

David Souter wrote the decision for the court in an unusual fit for him of stare decisis and historical justification.  The decision hinges in part whether the states are akin to private market participants in the markets they regulate.  In Bonaparte, the court held that a…

foreign State is properly treated as a private entity with respect to state-issued bonds that have traveled outside its borders. See id., at 595 (beyond its borders, a debtor State “is compelled to go into the market as a borrower, subjectto the same disabilities in this particular as individuals,” and has none “of the attributes of sovereignty as to the debt it owes”) (p. 13)

 But, amongst the states within the union:

 There is no forbidden discrimination because Kentucky, as a public entity, does not have to treat itself as being “substantially similar” to the other bond issuers in the market. [Given the particular state-centric goals municipal finance attempts to achieve.]

A series of cases are cited by the majority, most notably United Haulers from last year.  There the court ruled the state could favor itself over private entities in matters of health, safety, and welfare of its citizens.  Here the state’s bonding authority is judged to be different and therefore the protectionism a tax differential implies is allowable.  The court notes 41 states have this policy in place and states were unanimously in favor of overturning the brief (well, of course they are, noted the opposition, given that they are the beneficiaries of the discriminatory allowance.)

Scalia joined the seven but noted he rather have Congress set policy here and Thomas would likely concur were Congress to overturn this policy and mandate equal treatment.  Alito and Kennedy, writing for the dissent, disagreed, saying the court essentially decided this not on sound constitutional principles but for the stability of the market and allowed a protectionist loophole that could be exploited in other ways.  Borders here are not relevant in a mostly national market for capital.

Both sides have reasonable jurisprudence brought to their arguments.  But this case illuminates possible court reaction to what will surely be a big consumer test, which are internet sales taxes levied by one state for good bought in another.   The court here holds that bond issuance is different than tax policy, though the dissent believes the historical conceptual separation is not appropriate since both aim at the same goal of revenue generation.

Congress has held off allowing internet taxation for a while, something that is doomed at some point to expire.  Would levying a sales tax on commerce that really has occurred in another state be held to be favorable treatment?  The dormant Commerce clause faces one of its biggest tests yet where technology raced far ahead of what the founders would have concieved as possible, and Kentucky is a warm up pitch.  It’s not beach reading, but the slight differentials between the justices could be magnified in many unexpected ways should the court face that test with these members.