On June 1, 2010, the United States Supreme Court in Levin v. Commerce Energy, Inc., 560 U.S. __ (2010), issued as close as it gets these days to a unanimous decision. Though fractured into four separate opinions, all of the Justices reached the same conclusion: that the United States District Court for the Southern District of Ohio correctly dismissed a state tax-related case. But, the distinction between the majority opinion and a concurrence by the Court’s most conservative Justices reveals that the door to federal court involvement in state tax matters remains open.
For direct marketers, access to federal courts for challenges to the constitutionality of state and local taxes and related enforcement efforts by the states is especially important. Not only are federal courts often more experienced in regards to federal constitutional issues, including Commerce Clause disputes, but they offer at least the appearance of a more neutral playing field since the federal courts are not funded by state tax revenue and are often called upon to play the role of arbiter in jurisdictional battles between the states. Thus, any decision that appears to restrict access to federal courts needs to be reviewed very closely.
Background. Under Ohio law, certain sellers of natural gas enjoy tax exemptions, while others do not. Mindful of the Tax Injunction Act, and its broad limitation on the federal courts entertaining suits seeking to arrest the collection of state tax (or to reduce the amount of tax so collected), the plaintiffs came up with a clever approach that convinced the United States Court of Appeals for the Sixth Circuit to reinstate the case previously dismissed by the District Court. In crafting their complaint, the plaintiffs sought not to reduce their own tax obligations or in any way arrest the collection of taxes. Rather, the relief they sought was to deny their competitors certain tax exemptions, the net result of which, if successful, would be to increase state tax revenues. Because the plaintiffs did not seek to arrest collection of tax, the Sixth Circuit agreed that they had avoided falling under the Tax Injunction Act’s restrictions.
In addition to the Tax Injunction Act, the doctrine of “comity” may also keep tax cases out of federal court. Comity is the doctrine under which a court can stay its hand in hearing a case that lies within its jurisdiction to hear, and to do so out of respect for the power of other courts--perhaps better suited--to resolve the matter. In tax cases like this one, a rationale for dismissal of a case on the basis of comity could include deference to state courts to resolve matters that impact on their governmental revenue-raising prerogatives and powers.
The plaintiffs in Levin argued, and the Sixth Circuit found, relying mainly upon a footnote from Hibbs v. Winn, 542 U.S. 88 (2004), that comity likewise did not bar the suit. In Hibbs, the Supreme Court explained in a footnote that principles of comity only preclude federal court jurisdiction “when plaintiffs have sough district-court aid in order to arrest or countermand state tax collection.” Hibbs, 542 U.S. at 107 n. 9. It made sense. After all, the plaintiffs expressly disclaimed any interest in having their own taxes reduced or inhibiting in any way the collection of taxes by the State of Ohio.
The Supreme Court Reverses. But, the Supreme Court ran away as fast as it could from the footnote in Hibbs. In its majority opinion, the Court held that the plaintiffs were not free to elect a form of relief that would sidestep the Tax Injunction Act or comity. Whether to strike down the exemptions (as the plaintiffs had requested) or to apply the exemptions to all natural gas sellers (including the plaintiffs) was the prerogative of the State of Ohio, the Court explained, and not the federal courts or the plaintiffs. The Court noted that it has, as a matter of practice, abstained from determining remedial choices, allowing states the flexibility to respond as they see fit once provided a finding that a state tax statute is constitutionally infirm. See. e.g., McKesson Corp. v. Fla. Dep’t of Business Regulation, 496 U.S. 18, 49-40 (1990).
The Court also distinguished Hibbs on the grounds that the plaintiffs in the Hibbs case were, effectively, strangers to the underlying tax controversy arising out of tax credits allowed for payments that subsidized parochial school scholarships. “It was essentially,” the majority in Levin observed, “an attack on the allocation of state resources for allegedly unconstitutional purposes” by “outsiders to the tax expenditure.” Thus, “[u]nlike the Hibbs plaintiffs, respondents do object to their own tax situation, measured by the allegedly more favorable treatment accorded [their competitors].” In Hibbs, the majority also noted, the only remedy was the invalidation of the tax credit—and, as a result, the case did not result in the intrusion of the federal courts into state remedial choices. Notably, in a concurring opinion, the more conservative Justices found that both comity and the Tax Injunction Act barred federal court adjudication of the case and supported their decision to reinstate the District Court’s dismissal.
Implications. The conservative members of the Court signaled the likely impact of the Levin case when they bemoaned the Court’s reliance on comity (a “prudential ground”) rather than the Tax Injunction Act (a "jurisdictional ground"). This is an important distinction—because the federal courts have it within their discretion to refrain from hearing a case where principles of comity, alone, are concerned. Such a discretionary decision ordinarily would be given considerable respect on appeal. In contrast, federal courts have no discretion to hear a case that is prohibited by the Tax Injunction Act. The Act reflects an absolute limitation on the courts' power to hear the matter. Justice Thomas pointedly identified the majority's holding as creating a loophole “to leave the door [of the federal courts] open to doing in future cases what it did in Hibbs, namely, retain federal court jurisdiction over constitutional claims that the Court simply does not believe Congress should have entrusted to state judges under the Act, see 542 U.S., at 113-28 (Kennedy, J., dissenting).”