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Commerce Clause

Court Holds Federal Ban on Home-Distilling Exceeds Congress' Enumerated Powers

A potentially important post-NFIB enumerated powers challenge.


Yesterday, in Hobby Distillers Association v. Alcohol and Tobacco Tax and Trade Bureau, a federal district court in Texas held that federal laws banning distilled spirits plants (aka "stills") in homes or dwellings exceed the scope of Congress' enumerated powers. Specifically, the court concluded that the prohibitions exceed the scope of the federal taxing power and the Interstate Commerce Clause, even as supplemented by the Necessary and Proper Clause. The court further entered a permanent injunction barring enforcement of these provisions against those plaintiffs found to have standing (one individual and members of the Hobby Distillers Association.) The plaintiffs were represented by attorneys at the Competitive Enterprise Institute, and background on the case (and the various filings) can be found on CEI's website here.

Hobby Distillers Association has the potential to be a significant post-NFIB challenge to the expansive of use of federal power. A few excerpts from the decision are below the jump.

On the taxing power:

This "power of the purse" grants Congress a broad power to tax and spend on things it cannot directly regulate through some other enumerated power. Id.; License Tax Cases, 72 U.S. 462, 471 (1866) ("It is true that the power of Congress is a very extensive power . . . given in the Constitution, with only one exception and only two qualifications."). Thus, Congress may reach any subject through taxation, so long as it: (1) does not tax exports; (2) apportions direct taxes among the states; and (3) imposes indirect taxes uniformly across the nation. See U.S. CONST. art. I, § 8, cl. 1; § 9, cl. 4. So too can Congress reach any subject with spending, going so far as to use federal funds to induce a state's compliance in regulating subjects otherwise unreachable by Congress. See, e.g., South Dakota v. Dole, 483 U.S. 203, 205–06 (1987) (holding that Congress could condition the receipt of federal highway funds on South Dakota's raising the state's drinking age to twenty-one).

But even broad power is not limitless. While Congress can certainly tax its way to burdening or influencing behavior, like taxing marijuana to discourage its use, United States v. Sanchez, 640 U.S. 42, 44–45 (1950), "Congress's authority under the taxing power is limited to requiring an individual to pay money into the Federal Treasury, no more. If a tax is properly paid, the Government has no power to compel or punish individuals subject to it." NFIB, 567 U.S. at 574. . . .

. . . every tax must produce some revenue for the government, period. NFIB, 567 U.S. at 564. Indeed, the production of revenue, however negligible, is any tax's "essential feature." Id. (citing United States v. Kahriger, 345 U.S. 22, 28 (1953) (abrogated on other grounds)); see, e.g., U.S. CONST. art. I, § 7, cl. 1 (requiring all bills for raising revenue to originate in the House of Representatives). Thus, mindful that "[e]very reasonable construction must be resorted to, in order to save a statute from unconstitutionality," Hooper v. California, 155 U.S. 648, 657 (1895), the Court concludes that §§ 5601(6) and 5178 (a)(1)(B) are not within Congress's enumerated taxing power.

First, §§ 5601(6) and 5178(a)(1)(B) do not raise revenue. Section 5178(a)(1)(B) simply prohibits the placement of a "distilled sprits plant . . . in any dwelling house, in any shed, yard, or inclosure [sic] connected with any dwelling house, or on board any vessel or boat," § 5178(a)(1)(B), nor does it allow any still in any location where beer or wine is produced, or any other business premises, unless excepted by the Secretary. Id. And § 5601(6) merely makes it a felony to violate § 5178.

Second, § 5178(a)(1)(B), compared to its textual neighbors, makes no mention of the secretary of the treasury, the commissioner of internal revenue, revenue generally, nor the protection of revenue. See 26 U.S.C. §§ 5178(a)(1)(A), (a)(1)(C). . . .

Thus, Congress did nothing more than statutorily ferment a crime— without any reference to taxation, exaction, protection of revenue, or sums owed to the government. That plasters sections 5601(6) and 5178(a)(1)(B) as "not a tax." The government argues that it is a proper use of the taxing power to "prevent[] concealment of stills and 'frauds on the revenue' [by prohibiting] distilling operations in certain locations." ECF No. 30 at 21. But that conflates the enumerated taxing power with the incidental powers contained in the necessary and proper clause— which is a distinct inquiry. See Part II(b). What matters here is simple: notwithstanding its placement in the internal revenue code, NFIB, 567 U.S., at 563–65, and a facially tangential connection to taxes imposed on spirits, Drexel Furniture, 259 U.S. at 36–37, Section 5178(a)(1)(B), enforced by a criminal penalty in Section 5601(6), lacks "the essential feature of any tax." NFIB, 567 U.S. at 564. Because "Congress's authority under the taxing power is limited to requiring an individual to pay money into the Federal Treasury," id. at 574, it follows that any law that does not require one to pay money into the treasury is not a exercise of the taxing power.

On whether Necessary and Proper to the execution of the taxing power.

Since Congress's taxing power is authoritative only from the time a tax liability arises to the point at which it is paid, NFIB, 567 U.S. at 574, "the taxing power does not give Congress the same degree of control over individual behavior [as the commerce power]." Id. So, it follows that Congress cannot rely on a "reasonable" or "rational" connection to an existing tax to regulate every individual behavior occurring before that tax obligation becomes effective. Thus, the applicable standard is not whether §§ 5178(a)(1)(B) and 5601(6) have a "reasonable connection" to revenue, but whether they are needful and "plainly adapted" to executing Congress's taxes on spirits. McCulloch, 4 Wheat. at 324–25, 421. Applied here, the Court concludes that §§ 5601(6) and 5178(a)(1)(B) fail this standard.

First, the provisions at issue punish individuals Congress cannot reach. The power to tax is a positive one. U.S. CONST., art. I, § 8 cl. 1. Congress has the power to lay and collect taxes. Id. And Congress has the power to punish those who defraud the government in the process of paying them. Comstock, 560 U.S. at 137. But §§ 5601(6) and 5178(b)(1)(A) criminalize conduct of persons not subject to the tax, because the tax liability exists only "from the time the spirits are in existence until such tax is paid." ECF No. 30 at 11 (quoting 26 U.S.C. § 5004(a)(1)). Thus, these provisions are not "needful" nor "proper" to "carry [the taxing power] into execution," U.S. CONST., art. 1, § 8, cl. 18; McCulloch, 4 Wheat. at 367, because Congress cannot criminalize the conduct of a person to whom its enumerated taxing power does not yet apply. NFIB, 567 U.S. at 557 ("The proposition that Congress may dictate the conduct of an individual today because of prophesied future activity finds no support in our precedent.").

Second, these provisions are not plainly adapted to executing the taxing power because they are not meaningfully connected to the modus operandi of spirits taxes. Id. Indeed, the plain text of the challenged provisions makes no reference to any mechanism or process that operates to protect revenue. Sections 5601(6) and 5178(a)(1)(B) only prohibit the certain placement of stills, while other provisions touch the product to be taxed. See, e.g., 26 U.S.C. § 5178(a)(2)(B) (requiring that distilling systems be so constructed as to prevent the removal of distilled spirits before it can be measured by the still's gauge, therefore accurately reporting a volume of spirits to be taxed); Id. § 5178(a)(2)(C) (allowing the Secretary of the Treasury to require still operators to notify the government if they change or add to a distilling apparatus "as [the Secretary] may deem necessary to facilitate inspection and [secure] the revenue"). . . .

Accordingly, the Court concludes that this arrangement is not "plainly adapted" to the execution of Congress's power to lay and collect taxes, because the prohibition is not "suitable and fitted . . . to the end proposed." McCulloch, 4 Wheat. at 324–25, 421. Indeed, this current arrangement is exemplary of the "distinction between those means which are incidental to the particular power, which follow as a corollary from it, and those which may be arbitrarily assumed as convenient to the execution of the power." McCulloch, 4 Wheat. at 365. While prohibiting the possession of an at-home still meant to distill beverage alcohol might be convenient to protect tax revenue on spirits, it is not a sufficiently clear corollary to the positive power of laying and collecting taxes. Accordingly, neither the Taxing Power nor the Necessary and Proper clause authorize 26 U.S.C. §§ 5178(b)(1)(A) or 5601(6) as enacted.

On the Commerce Power.

At issue here is the "substantial effects" doctrine, which allows Congress to reach purely local and non-economic activity that substantially affects commerce in the aggregate. NFIB, 567 U.S. at 549. Because this doctrine gives Congress the longest reach, it requires the most prerequisites to pass constitutional muster. It is generally settled that a regulation of local, non-commercial behavior falls within Congress's commerce power when it: (1) substantially affects interstate commerce in the aggregate, Wickard, 317 U.S. at 128–29; (2) serves a comprehensive statute that regulates commercial activity on its face, Gonzalez v. Raich, 545 U.S. 1, 19 (2005); and (3) is necessary to make that broader commercial regulation effective. Id. at 23–26.

Even so, Congress's reach under this doctrine is not limitless. Indeed, "[t]he Commerce Clause is not a general license to regulate an individual from cradle to grave, simply because he will predictably engage in particular transactions." NFIB, 567 U.S at 549. So, where regulating a purely local activity does not serve a broader, overarching statutory scheme, Congress cannot not reach it. United States v. Lopez, 514 U.S. 549, 567–68 (1995). . . .

While the Act is a statutory scheme that governs commerce on its face, the Court concludes that it is not the comprehensive kind that justifies Congressional regulation of local behavior, like in Wickard and Raich. To be sure, the Act is "comprehensive" in the sense that it addresses just about every facet of  the interstate alcohol market. It requires alcohol "businesses" to have permits, 27 U.S.C. §§ 203, 204; regulates bulk sales and bottling, id. § 206; and defines and prohibits unfair competition in interstate commerce. Id. § 205. And subchapter II of the Act prescribes various labelling requirements for alcohol products, mindful that "the American public should be informed about the health hazards that may result from the . . . abuse of alcoholic beverages." Id. § 213.

But the Act is not a "comprehensive" regulation of commerce of the kind that allows Congressional intervention in every related local activity. This is because the Act does not directly regulate the supply and demand of alcohol, does not make Congress a production manager over each distillery to inflate prices, and is not part of a federal directive to either promote or eliminate a national marketplace for alcohol. Compare 27 U.S.C. § 201 et seq.; Wickard, 317 U.S. at 128–29; Raich, 545 U.S. at 1. In short, the Act is not a "comprehensive" scheme of regulation because there are many aspects of the alcohol industry that Congress has left untouched. For example, the Act does not mandate the quantity of spirits that a distillery may produce. It is silent on a label's design and aesthetics absent a required warning label. And it despite providing parameters for fair competition, it does not influence how much market share a producer may obtain. There is simply no similar degree of control over the "production, distribution, and consumption" of alcohol as there was for wheat in Wickard or controlled substances in Raich. . . .

Beginning and ending with the text, neither of these provisions connect the prohibited behavior to interstate commerce. And no reasonable construction of the statutes can insert language that does. Hooper, 155 U.S. at 657. Like Lopez prohibited the knowing possession of a firearm at or near a school, §§ 5601(6) and 5178(a)(1)(B) prohibit the possession of a still with the intent to produce beverage alcohol in or near a residence, boat, vessel, or any site of business. 26 U.S.C. §§ 5601(6), 5178(a)(1)(B). The statute does not, for instance, prohibit the possession of a still with intent to imbibe where the still's components travelled in interstate commerce. Compare 18 U.S.C. § 922, et seq. Nor does it prohibit the possession of a still with intent to produce beverage alcohol for distribution in interstate commerce. Id. While the statutes may anticipate that one who distills liquor at home may attempt to distribute it in violation of some other federal law, the text remains the text. These provisions are simply "criminal statute[s] that by [their] terms" have no commerce-clause jurisdictional hook to bring the behavior Congress seeks to regulate within its authority. Lopez, 514 U.S. at 561.