Child Labor Tax Case

Supreme Court of the United States
42 S. Ct. 449, 1922 U.S. LEXIS 2458, 259 U.S. 20 (1922)

ELI5:

Rule of Law:

Congress may not use its taxing power as a penalty to regulate matters reserved to the states by the Tenth Amendment. A federal law that imposes a heavy exaction for departing from a detailed course of conduct, contains a scienter requirement, and is enforced by non-taxing agencies is an unconstitutional penalty, not a valid tax.

Facts:

The Drexel Furniture Company, a furniture manufacturer in North Carolina, employed a boy under the age of fourteen during the 1919 taxable year.
The Child Labor Tax Law of 1919 imposed a 10% excise tax on the entire annual net profits of any company employing children under specified age limits (under 14 in a factory or under 16 in a mine).
The law also regulated the hours and days of work for children between the ages of fourteen and sixteen.
The law stipulated that the tax would only be imposed on an employer who 'knowingly' employed an underage child.
The law granted inspection powers to both the Secretary of the Treasury and the Secretary of Labor to ensure compliance.
Pursuant to the law, the U.S. Collector of Internal Revenue, J.W. Bailey, assessed a tax of $6,312.79 against the Drexel Furniture Company for its 1919 profits.

Procedural Posture:

Drexel Furniture Company was assessed a tax of $6,312.79 by Bailey, the U.S. Collector of Internal Revenue.
Drexel Furniture Company paid the tax under protest and subsequently filed an unsuccessful claim for a refund.
Drexel Furniture Company (plaintiff) sued Bailey (defendant) in the U.S. District Court for the Western District of North Carolina to recover the amount paid.
The District Court entered a judgment in favor of Drexel Furniture Company.
Bailey, the Collector, (appellant) sought review of the District Court's judgment via a direct writ of error to the Supreme Court of the United States.

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Issue:

Does the Child Labor Tax Law of 1919 violate the Constitution by using the federal taxing power to regulate child labor, a matter reserved to the states under the Tenth Amendment?

Opinions:

Majority - Chief Justice Taft

Yes, the Child Labor Tax Law of 1919 is an unconstitutional violation of state sovereignty because it is not a true tax but rather a penalty designed to regulate child labor. The Court must look beyond the law's label as a 'tax' to its actual substance and purpose. Several features on the face of the act reveal it is a penalty: 1) it imposes a heavy, fixed exaction (10% of all net profits) for any departure, no matter how small, from a detailed code of conduct; 2) liability is conditioned on a 'scienter' (knowledge) requirement, which is characteristic of a penalty, not a tax; and 3) it authorizes the Secretary of Labor, whose function is worker protection, to conduct inspections. The Court found this case indistinguishable from Hammer v. Dagenhart, where it struck down a similar attempt to regulate child labor through the commerce power. To give such 'magic to the word tax' would be to break down all constitutional limitations on Congress and wipe out the sovereignty of the states.

Dissenting - Justice Clarke

Justice Clarke dissented without a written opinion.

Analysis:

This decision represents a high-water mark for the doctrine of 'dual federalism,' which strictly separates state and federal spheres of power. The Court established that its role includes scrutinizing the motive and effect of a congressional 'tax' to determine if it is a pretext for regulating local matters reserved to the states by the Tenth Amendment. This created a significant, though difficult to apply, distinction between a valid tax with an incidental regulatory effect and an unconstitutional penalty with a prohibitory purpose. While this specific holding's direct authority has waned as the Court later adopted a more deferential view of the taxing power, the underlying principle that there are constitutional limits on using enumerated powers for pretextual ends remains a key concept in federalism jurisprudence.

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