The distinction between real and sham taxes (so-called taxes that, in substance, are really punishments) was used in BAILEY V. DREXEL FURNITURE CO. (1922) (also known as the Child Labor Tax Case) and United States v. Constantine (1935) to vindicate the principle of enumerated federal powers. The Supreme Court applied this distinction again in Department of Revenue of Montana v. Kurth Ranch (1994) to invalidate a state's assessment of a tax on possession of prohibited drugs after the possessor had been separately prosecuted for the crime of possession. Holding the "tax" really a penalty, the Court held that assessing it after the possession had already been the subject of criminal prosecution violated the guarantee against DOUBLE JEOPARDY.
To mark the always debatable boundary between real and sham taxes, the Court in Kurth Ranch employed some of the same factors used in Constantine and the Child Labor Tax Case. Montana's drug possession "tax" was extremely high in amount (a factor not determinative by itself), and the "tax" was conditioned on the possession's being a crime. This was different from "mixed-motive taxes," imposed not only to raise revenue but also to discourage the activity taxed. With cigarette taxes, for example, deterrence of smoking might be a goal, but that goal is moderated not only by the desire to raise revenue but also by other objectives, such as permitting satisfaction of consumer demand and avoiding severe detriment to tobacco industry employment. The Court said, however, that "when the taxed activity is completely forbidden" the evident motivation is not so mixed, and the so-called tax ceases to be justifiable as a revenue measure because "the legitimate revenue-raising purpose that might support such a tax could be equally well served by increasing the fine imposed upon conviction." When a government "taxes" an activity that is completely unlawful, the "tax" is not a revenue device, but rather a penalty to enforce the prohibition.
The Court in Kurth Ranch also deemed it significant that the "tax" was for possessing property that could not be possessed lawfully and that had been confiscated and destroyed before the tax was assessed. "A tax on 'possession' of goods that no longer exist and that the taxpayer never lawfully possessed has an unmistakable punitive character," the Court said.
In the past, one could remark that this distinction between real taxes and "taxes" that amount to...