Kentucky Revenue v Davis

Department of Revenue of Kentucky v. Davis

Supreme Court decision upholds a state's exempting interest on its own bonds but taxing its residents on bonds issued by other states

Summary

Davis filed a class action law suit against the Kentucky Department of Revenue, asserting that Kentucky's policy of taxing out-of-state bonds --but not in-state bonds --violated the dormant Commerce Clause of the United States Constitution
Preferential tax treatment for in-state bonds is common and is offered by nearly all the states that have an income tax
The state trial court ruled in favor of the Kentucky Department of Revenue
The Kentucky Court of Appeals reversed the lower court, striking down the tax policy. The Court found that Kentuckys bond taxation system is "facially unconstitutional as it obviously affords more favorable taxation treatment to in-state bonds than it does to extraterritorially issued bonds." It also rejected the State's "market participant" argument that, as a bond issuer, it acts as a participant in the bond market and not a regulator of the market, and therefore exempt from the Commerce Clause. The Court of Appeals held that the tax discrimination rather than the bond issuance was the focus of the statute, and the taxation was indisputably undertaken in the state's capacity as a regulator

Opinion

Litigants