Statute that Discriminates Against Out-of-State Business Applicants is Unconstitutional

On June 26, 2019, the U.S. Supreme Court held that a Tennessee statute was unconstitutional since it discriminated against out-of-state applicants for retail liquor licenses in violation of the Commerce Clause. 
 
In Tennessee Wine & Spirits Retailers Assn. v. Thomas, the Court examined a Tennessee law that imposed durational-residency requirements on persons and companies wishing to operate retail liquor stores. The law required applicants for an initial license to have resided in the State for the prior two (2) years; required an applicant for renewal of a license to reside in the State for 10 consecutive years; and provided that a corporation cannot obtain a license unless all of its stockholders are residents.
 
The U.S. Supreme Court held that the law’s 2-year residency requirement applicable to retail liquor store license applicants violates the Commerce Clause of the U.S Constitution, which restricts against state protectionism. The Commerce Clause prevents States from discriminating against citizens and products of other States and prevents States from passing facially neutral laws that place an impermissible burden on interstate commerce. Under the Commerce Clause, a state law that discriminates against out-of-state goods or nonresident economic actors can be sustained only on a showing that it is narrowly tailored to advance a legitimate local purpose. 
 
The Court found that the residency requirements to be mere protectionism, which is not a legitimate local purpose. The Court held the requirements were invalid regardless if applied to out-of-state alcohol products and producers or in-state alcohol distribution. The provision expressly discriminates against nonresidents without being narrowly tailored to advance the public health or safety. The interests advanced in support of a residency requirement (subject retailers to service of process, background checks, oversight, responsible sales practices) could all be achieved through other, less-restrictive means and without a 2-year residency requirement.
 
While the Court’s decision was in the context of obtaining a retail liquor license, it will serve as precedent for other business licenses and activities that involve interstate commerce and thus invoke the constitutional protections of the Commerce Clause and its prohibition against discrimination. If your business is expanding into other states, you should consider whether the foreign jurisdiction is imposing undue burdens merely because you are an out-of-state applicant or whether similar requirements are being imposed on all businesses. For example, requiring all businesses to maintain a statutory agent for service of process within the state likely would be constitutional, while other restrictions similar to the in-state residency requirement likely are not.