Basically Law

Read the decision here.

Issue.  Was Congress acting within its enumerated taxing powers under the Constitution when it imposed a tax on every employer of child labor?

Background.  After the Supreme Court held that Congress could not prevent/regulate child labor under its power to regulate interstate commerce, Congress passed the Child Labor Tax Law of 1919.  Under that Act, an employer of child labor was required to pay an excise tax of 10% of annual net profits.

One employer of child labor, Drexel Furniture Co., paid the tax and then sought a refund from the district courts.  The case was appealed to the Supreme Court which found that the "tax" was unconstitutional.

Court's Analysis.  The question for the Court was whether this law was a mere excise tax (constitutional) or a regulation of child labor in the States (unconstitutional at the time).  For the act to be a mere excise tax, it must be demonstrated that the tax was an incidental restraint and regulation.  The Court found this to be more.

This tax was nothing more than an unconstitutional regulation disguised as a tax.  The purpose of the law was to regulate child labor at the federal level.  It was too obvious for the Court to ignore what Congress was attempting.  As the Court notes:

To give such a magic word "tax" would be to break down all constitutional limitation of the powers of Congress and completely wipe out the sovereignty of the States.  The difference between a tax and a penalty is sometimes difficult to define and yet the consequence of the distinction in the required method of their collection often are important.  Taxes are occasionally imposed in the discretion of the legislature on proper subjects with the primary motive of obtaining revenue from them and with the incidental motive of discouraging them by making their continuous onerous. . .But there comes a time in the extension of the penalizing features of the so-called tax when it loses its character as such and becomes a mere penalty with the characteristics of regulation and punishment.

The Court found this to be a penalty and not a tax.  Since the Federal Government did not have the constitutional authority to impose such a penalty (at the time), this tax was unconstitutional.

Afterword.  Later, the Supreme Court would rule that Congress did have the power under the Commerce Clause to regulate and to prevent child labor.  However, the Court never overturned this case.  It would seem to render the Constitutional pointless if Congress could get around its enumerated powers by calling anything it chooses a "tax".  But, are we giving the courts to much power to make their own determination as to what is a tax and what is a penalty?  Some cases are obvious, but some are not.  Should we allow the Supreme Court to use its own judgment as to that of Congress?  Also, doesn't the Supreme Court do that already on a whole other host of issues, and we are comfortable with it?