New Energy Company of Indiana v. Limbach, 87-654

• Decision Date: 31 May 1988
• Docket Number: No. 87-654,87-654
• Parties: NEW ENERGY COMPANY OF INDIANA, Appellant, v. Joanne LIMBACH, Tax Commissioner of Ohio, et al
• Court: U.S. Supreme Court

486 U.S. 269

108 S.Ct. 1803

100 L.Ed.2d 302

NEW ENERGY COMPANY OF INDIANA, Appellant,

v Joanne LIMBACH, Tax Commissioner of Ohio, et al.

No. 87-654.

Argued March 29, 1988.

Decided May 31, 1988.

Syllabus

An Ohio statute awards a tax credit against the Ohio motor vehicle fuel sales tax for each gallon of ethanol sold (as a component of gasohol) by fuel dealers, but only if the ethanol is produced in Ohio or, if produced in another State, to the extent that State grants similar tax advantages to ethanol produced in Ohio. Appellant, an Indiana limited partnership, manufactures ethanol in Indiana, which has no sales tax exemption for ethanol, wherefore appellant's ethanol sold in Ohio is ineligible for the Ohio tax credit. Appellant sought declaratory and injunctive relief in the Ohio Court of Common Pleas of Franklin County, alleging that the Ohio tax credit violates the Commerce Clause of the Federal Constitution by discriminating against out-of-state ethanol producers. The court denied relief; the Ohio Court of Appeals and the Ohio Supreme Court affirmed.

Held: The Ohio statute discriminates against interstate commerce in violation of the Commerce Clause. Pp. 273-280.

(a) The Clause's "negative" aspect, directly limiting the States' power to discriminate against interstate commerce, prohibits economic protectionism—that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors. Thus, state statutes, such as Ohio's, that clearly discriminate against interstate commerce are invalid, unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism. There is no merit to appellees' argument that the availability of the Ohio tax credit to some out-of-state manufacturers (those in States that give tax advantages to Ohio-produced ethanol) shows that the Ohio provision is not discriminatory but, rather, is likely to promote interstate commerce by encouraging other States to enact similar tax advantages that will spur the interstate sale of ethanol. Discriminatory tax treatment for out-of-state goods is no more validated by the promise to remove it if reciprocity is accepted than would be the categorical exclusion of out-of-state goods. Nor is there any merit to appellees' argument that the Ohio statute should not be considered discrimination against interstate commerce because apparently only one Ohio ethanol manufacturer (appellee South Point Ethanol) is benefited by it and only one out-of-state manufacturer (appellant) is clearly disadvantaged. Where discrimination is patent, as it is here, neither a widespread advantage to in-state interests nor a widespread disadvantage to out-of-state competitors need be shown. Moreover, the "market participant" doctrine—under which the negative Commerce Clause's limitations apply only to a State's acting in its governmental capacity, not to its acting in the capacity of a market participant—has no application here. The state action at issue is not Ohio's purchase or sale of ethanol, but its assessment and computation of taxes. Although the tax credit scheme has the purpose and effect of subsidizing a particular industry, that does not transform it into a form of state participation in the free market. Pp. 273-278.

(b) The clear discrimination in this case cannot be validated by the justifications advanced by appellees: health and commerce. Appellees argue that the Ohio statute encourages use of ethanol to reduce harmful exhaust emissions, both in Ohio and in surrounding States whose polluted atmosphere may reach Ohio. There is no reason to suppose, however, that ethanol produced in a State that does not offer tax advantages to ethanol produced in Ohio is less healthy, and thus should have its importation into Ohio suppressed by denial of the otherwise standard tax credit; and ethanol use outside Ohio is just as effectively fostered by other States' subsidizing ethanol production or sale in some fashion other than by giving a tax credit to Ohio-produced ethanol. Thus, health is not the purpose of the Ohio provision, but is merely an occasional and accidental effect of achieving what is its purpose, favorable tax treatment for Ohio-produced ethanol. Essentially the same reasoning applies to the asserted justification that Ohio's reciprocity requirement is designed to increase commerce in ethanol by encouraging other States to enact ethanol subsidies. Pp. 278-280.

32 Ohio St.3d 206, 513 N.E.2d 258, reversed.

SCALIA, J., delivered the opinion for a unanimous Court.

Herman Schwartz, Washington, D.C., for appellant.

Richard C. Ferrin, for appellee.

Justice SCALIA delivered the opinion of the Court.

Appellant New Energy Company of Indiana has challenged the constitutionality of Ohio Rev.Code Ann. § 5735.145(B) (1986), a provision that awards a tax credit against the Ohio motor vehicle fuel sales tax for each gallon of ethanol sold (as a component of gasohol) by fuel dealers, but only if the ethanol is produced in Ohio or in a State that grants similar tax advantages to ethanol produced in Ohio. The question presented is whether § 5735.145(B) discriminates against interstate commerce in violation of the Commerce Clause, U.S. Const., Art. I, § 8, cl. 3.

I

Ethanol, or ethyl alcohol, is usually made from corn. In the last decade it has come into widespread use as an automotive fuel, mixed with gasoline in a ratio of 1 to 9 to produce what is called gasohol. The interest in ethanol emerged in reaction to the petroleum market dislocations of the early 1970's. The product was originally promoted as a means of achieving energy independence while providing a market for surplus corn; more recently, emphasis has shifted to its environmental advantages as a replacement for lead in enhancing fuel octane. See United States Department of Agriculture, Ethanol: Economic and Policy Tradeoffs 1 (1988). Ethanol was, however (and continues to be), more expensive than gasoline, and the emergence of ethanol production on a commercial scale dates from enactment of the first federal subsidy, in the form of an exemption from federal motor fuel excise taxes, in 1978. See Energy Tax Act of 1978, Pub.L. 95-618, § 221, 92 Stat. 3185, codified, as amended, at 26 U.S.C. §§ 4041, 4081 (1982 ed. and Supp. IV). Since then, many States, particu- larly those in the grain-producing areas of the country, have enacted their own ethanol subsidies. See United States General Accounting Office, Importance and Impact of Federal Alcohol Fuel Tax Incentives 5 (1984). Ohio first passed such a measure in 1981, providing Ohio gasohol dealers a credit of so many cents per gallon of ethanol used in their product against the Ohio motor vehicle fuel sales tax payable on both ethanol and gasoline. This credit was originally available without regard to the source of the ethanol. See Act of June 10, 1981, § 1, 1981-1982 Ohio Leg. Acts 1693, 1731-1732. In 1984, however, Ohio enacted § 5735.145(B), which denies the credit to ethanol coming from States that do not grant a tax credit, exemption, or refund to ethanol from Ohio, or, if a State grants a smaller tax advantage than Ohio's, granting only an equivalent credit to ethanol from that State.¹

Appellant is an Indiana limited partnership that manufactures ethanol in South Bend, Indiana, for sale in several States, including Ohio. Indiana repealed its tax exemption for ethanol, effective July 1, 1985, see Act of Mar. 5, 1984, §§ 4, 5, 8, 1984 Ind. Acts 189, 194-195, at which time it also passed legislation providing a direct subsidy to Indiana ethanol producers (the sole one of which was appellant). See Ind.Code §§ 4-4-10.1-1 to 4-4-10.1-8 (Supp.1987). Thus, by reason of Ohio's reciprocity provision, appellant's ethanol sold in Ohio became ineligible for the Ohio tax credit. Appellant sought declaratory and injunctive relief in the Court of Common Pleas of Franklin County, Ohio, alleging that § 5735.145(B) violated the Commerce Clause by discriminating against out-of-state ethanol producers to the advantage of in-state industry.² The court denied relief, and the Ohio Court of Appeals affirmed. A divided Ohio Supreme Court initially reversed, finding that § 5735.145(B) discriminated without adequate justification against products of out-of-state origin, and shielded Ohio producers from out-of-state competition. The Ohio Supreme Court then granted appellees' motion for rehearing and reversed itself, a majority of the court finding that the provision was not protectionist or unreasonably burdensome. 32 Ohio St.3d 206, 513 N.E.2d 258 (1987). We noted probable jurisdiction. 484 U.S. 984, 108 S.Ct. 500, 98 L.Ed.2d 499 (1987).

II

It has long been accepted that the Commerce Clause not only grants Congress the authority to regulate commerce among the States, but also directly limits the power of the States to discriminate against interstate commerce. See, e.g., Hughes v. Oklahoma, 441 U.S. 322, 326, 99 S.Ct. 1727, 1731, 60 L.Ed.2d 250 (1979); H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 534-535, 69 S.Ct. 657, 663, 93 L.Ed. 865 (1949); Welton v. Missouri, 91 U.S. (1 Otto) 275, 23 L.Ed. 347 (1876). This "negative" aspect of the Commerce Clause prohibits economic protectionism—that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state compet- itors. See, e.g., Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 270-273, 104 S.Ct. 3049, 3054-3056, 82 L.Ed.2d 200 (1984); H.P. Hood & Sons, supra, 336 U.S., at 532-533, 69 S.Ct., at 662; Guy v. Baltimore, 100 U.S. (10 Otto) 434, 443, 25 L.Ed. 743 (1880). Thus, state statutes that clearly discriminate against interstate commerce are routinely struck down, see, e.g., Sporhase v. Nebraska ex rel. Douglas, 458 U.S. 941, 102 S.Ct. 3456, 73 L.Ed.2d 1254 (1982); Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 100 S.Ct. 2009, 64 L.Ed.2d 702 (1980); Dean Milk Co. v. Madison, 340 U.S. 349, 71 S.Ct. 295, 95 L.Ed. 329 ...