Federal jurisdiction over challenges to state tax benefits
Below, Josh Branson of Harvard Law School previews Levin, Tax Commissioner of Ohio v. Commerce Energy, Inc., one of two cases scheduled for argument before the Court on Monday, March 22. Check the Levin v. Commerce Energy (09-223) SCOTUSwiki page for additional updates.
Two sources of law restrict federal courts' jurisdiction over challenges to state tax law. First, the Tax Injunction Act ("TIA"), 28 U.S.C. § 1341, precludes federal courts from enjoining the "assessment, levy or collection" of any state tax when there is an adequate state remedy. Second, jurisdiction may be limited by the doctrine of comity, but the precise contours of those limits are less than clear. Nearly thirty years ago, in Fair Assessment in Real Estate Association, Inc. v. McNary (1981), the Supreme Court affirmed that the comity bar operates independently of the TIA and that it applies to at least some cases to which the TIA does not clearly apply "“ for example, in Fair Assessment itself, a claim for damages.
In 2004, in Hibbs v. Winn, the Supreme Court held that the TIA's jurisdictional bar applies only to cases in which plaintiffs are seeking "to avoid paying state taxes"; thus, the TIA does not preclude constitutional challenges by "third party" plaintiffs to state tax benefits. In its decision in Hibbs, the Court mentioned comity only in a footnote: citing Fair Assessment, it noted that it had "relied upon "principles of comity'" to preclude federal jurisdiction "only when plaintiffs have sought district-court aid in order to arrest or countermand state tax collection."
Six years after Hibbs, in No. 09-223, Levin v. Commerce Energy, to be argued on March 22, the Court will consider whether either comity or the TIA itself precludes federal courts from considering a taxpayer challenge to a competitor's allegedly unfairly favorable tax treatment.
The case arises from a challenge to Ohio's tax laws by two retail natural gas suppliers, as well as a customer of one supplier. For tax purposes, Ohio distinguishes between, on the one hand, retail suppliers "“ who sell gas to consumers but must also pay fees to use local distribution pipelines "“ and, on the other hand, competing local distributors "“ who own the pipelines and thus can both supply the gas and deliver it. The retail suppliers (who are respondents at the Court) allege that Ohio's tax scheme allows the distributors to pay lower taxes than they do, in violation of both the Equal Protection and Dormant Commerce Clauses.
The State of Ohio (represented in the suit by Tax Commissioner Richard Levin) countered that both the TIA and principles of comity precluded federal jurisdiction. The district court agreed with the State in part. It held that because the suppliers were not seeking to reduce their own tax burden, but were instead challenging the tax on the distributors, the TIA did not preclude jurisdiction. The district court did, however, agree with the State that principles of comity barred the federal suit, and it granted the State's motion to dismiss.
On appeal, the Sixth Circuit reversed. Although it agreed with the district court that the TIA did not bar the suppliers' suit, it held that comity also did not preclude federal jurisdiction. In particular, it held that the comity rule, like the TIA, bars federal suits only when the plaintiffs are seeking to thwart state tax collection. It reasoned first that a sweeping interpretation of the comity principle cannot be squared with the narrower interpretation embraced by the Court in its footnote in Hibbs. Second, it concluded, the State's view of comity would render the TIA essentially superfluous.
The State filed a petition for certiorari that emphasized a division among the courts of appeals regarding the proper interpretation of the principles of comity after the Court's decision in Hibbs. The Court granted certiorari on November 2, 2009.
In its opening brief on the merits, the State focuses on the importance and long pedigree of the comity doctrine, arguing that the Court has repeatedly emphasized the vital federalism interests protected by the principle of equitable restraint in state taxation cases. Those interests are at stake in this case, the State continues, because any inquiry into whether Ohio's tax regime is unconstitutionally discriminatory would require a federal court to construe several complicated and technical provisions of the Ohio tax code. Moreover, providing the suppliers with a remedy would require a significant overhaul of Ohio's natural gas tax laws, one result of which might be to ultimately decrease tax revenues. This point is echoed in the amicus brief filed by forty-four states, who insist that state courts are better suited to adjudicate constitutional challenges to state tax laws.
Turning to the rationales underlying the Sixth Circuit's holding, the State argues that the Supreme Court was unlikely to have tacitly overruled both Fair Assessment and the long line of precedent broadly applying the comity principle in a mere footnote in Hibbs. Nor, the State continues, is the TIA superfluous if it is read as a partial codification of background principles of comity; indeed, the Court's previous cases have emphasized that comity principles do extend in some cases beyond the reach of the TIA.
Finally, the State argues, even if Hibbs did limit comity to the scope of the TIA, the TIA itself bars jurisdiction in this case. The suppliers' attack on the allegedly preferential treatment provided to distributors effectively challenges the suppliers' own tax burden and distinguishes them from the neutral third-party plaintiffs whose Establishment Clause challenges were allowed to proceed in Hibbs.
In their brief on the merits, the suppliers counter that Hibbs forecloses the State's arguments. In particular, they argue, Hibbs is consistent with Fair Assessment and the Court's other cases extending comity principles beyond the TIA, as Hibbs in no way prohibits the application of those principles to preclude jurisdiction over claims for damages, which are not covered by the TIA. Instead, both Hibbs and the older cases reflect that federal courts will find jurisdiction to be barred by comity principles only when plaintiffs are seeking to curtail state tax collection. Moreover, the suppliers contest the State's characterization of the footnote in Hibbs, arguing that because comity was debated both in the briefs and at oral argument in that case, the Court's limited interpretation of the comity principle was a well-considered part of its holding.
The suppliers further argue that jurisdiction should not turn on a speculative inquiry into the effect that a claim will have on state tax policy, reasoning that such a subjective standard would contradict the Court's preference for clear and predictable jurisdictional rules. And in any event, the suppliers continue, federal adjudication in this case would not unduly impinge on state sovereignty; the suppliers seek a limited remedy"”an injunction against enforcement of a tax credit"”that would allow state authorities to retain discretion regarding how to recast Ohio's tax law so as to comport with the Constitution.
Finally, the suppliers argue that the TIA does not apply to cases challenging tax credits, and that neither the TIA's text nor Hibbs provides a basis for the State's distinction between plaintiffs motivated by economic competition and other "neutral" third-party plaintiffs.