We’ve blogged a number of times about the Dormant Commerce Clause (“DCC”) as an additional basis for bolstering both preemption and Due Process arguments. Here’s another prescription drug-based example.
The state of New York decided to impose a special tax on opioid manufacturers to finance various responses to the so-called “opioid epidemic.” The tax came in the form of an “a $600 million ‘stewardship fund.’” Healthcare Distribution Alliance v. Zucker, ___ F. Supp.3d ___, 2018 WL 6651682 (S.D.N.Y. Dec. 19, 2018). There was a problem with that, however. What happens with business taxes? They get passed along (like tort verdicts do) in the form of higher retail prices based on increased costs of doing business. So the New York legislature, to paraphrase Dr. Seuss, “got an idea. An awful idea. They got a wonderful, awful idea.” No, they didn’t steal Christmas, but they decided to prohibit the manufacturers subject to the tax from passing it along to consumers:
In the provision defining stewardship payments, the [New York statute] states, “No licensee shall pass the cost of their ratable share amount to a purchaser, including the ultimate user of the opioid, or such licensee shall be subject to penalties pursuant to subdivision ten of this section.” Later, in the penalties provision, the Act notes that “[w]here the ratable share, or any portion thereof, has been passed on to a purchaser by a licensee, the commissioner may impose a penalty not to exceed one million dollars per incident.”
Id. at *3 (quoting N.Y. Pub. Health Law §§3323(2), 3323(10)(c)).
New York, however, is only one state. The taxed manufacturers, by contrast, sell their products nationwide, as authorized by those products’ multiple FDA approvals. New York has no power, and the statute had no mechanism, to enforce the prohibition against passing along the cost of “ratable shares” of tax liability in any place other than New York.
Enter the DCC. What New York did, whether by intent or default, was to pass a tax, to the benefit of in-state “opioid stewardship” programs that would inevitably be paid for solely by opioid consumers in other states, as to whom the statute’s no-pass-through prohibition did not operate.
That arrangement, the court in Healthcare Distribution held, is a burden on interstate commerce that is unconstitutional under the DCC. First, neither New York, nor any other state, can enact extraterritorial burdens on interstate commerce:
The absolute constitutional prohibition on state regulation of commerce occurring beyond the state’s borders is clear. . . . A statute that directly controls commerce occurring wholly outside the boundaries of a State exceeds the inherent limits of the enacting State’s authority and is invalid regardless of whether the statute’s extraterritorial reach was intended by the legislature. The Constitution is concerned with the maintenance of a national market for interstate commerce. Therefore, even if a statute may not in explicit terms seek to regulate interstate commerce, it can do so nonetheless by its practical effect and design.
Id. at *16 (citations and quotation marks omitted). Second, states may not discriminate against interstate commerce – such as by imposing taxes that exempt in-state commerce:
The Dormant Commerce Clause also contains an antidiscrimination principle. . . . [S]tates are aware of the obvious constitutional problems of tariffs. . . . Instead, the cases are filled with state laws that aspire to reap some of the benefits of tariffs by other means. . . . [The DCC] examin[es] whether the challenged action shifts the costs of regulation onto other states, permitting in-state lawmakers to avoid the costs of their political decisions. If a regulation unambiguously discriminates in its effect, it almost always is invalid per se.
Id. (citations and quotation marks omitted)
Imposing burdens solely on interstate commerce is precisely what New York’s tax on opioids – combined with the no-pass-through provision limited to New York – did:
[When the statute’s] provisions are given their clearest meaning, the Dormant Commerce Clause violation is clear. An opioid manufacturer based in Maine that wished to pass on the surcharge it paid on New York transactions by selling opioids at a markup to a pharmacy in New Mexico could face a million-dollar penalty from New York State. While the statute may not in explicit terms seek to regulate interstate commerce, that it does so nonetheless by its practical effect and design” is abundantly clear.
Id. at *17 (citation and quotation marks omitted). That’s the regulatory part. If, however, the statute were construed not to apply to interstate commerce so as to avoid the Scylla of extraterritoriality, it falls directly into the Charybdis of discrimination:
If the [New York statutory] pass-through prohibition applies only to in-state purchasers, New York would clearly reap some of the benefits of tariffs by other means. New York opioid customers would be protected from any price increases in their purchases, and New York would receive a source of funding subsidized by the out-of-state purchasers of opioids. . . . [O]ut-of-state drug purchasers, with no representation in New York’s legislature or executive, would bear the cost of New York’s policy program. This shifting of burdens and benefits is antithetical to the idea of intra-national free trade and demonstrates why the Dormant Commerce Cause exists, i.e., to prohibit discrimination as to “any part of the stream of commerce − from wholesaler to retailer to consumer.
Id. (citations and quotation marks omitted).
There were a lot of other issues that the court in Healthcare Distribution had to plow through between page *3 and *16, but they were all ultimately invalid procedural roadblocks thrown up by New York in order to protect the unconstitutional windfall it was attempting to confer upon itself (and its citizens) at the expense of the rest of the country – justiciability, the Tax Injunction Act, tax comity, abstention, ripeness, and standing. If any of those interest you, be our guest. We’re satisfied with the unconstitutionality of state attempts to tax interstate commerce in prescription drugs.