Arizona Public Service Company v. Snead, No. 77-1810

• Court: United States Supreme Court
• Writing for the Court: STEWART
• Citation: 99 S.Ct. 1629,60 L.Ed.2d 106,441 U.S. 141
• Docket Number: No. 77-1810
• Decision Date: 18 April 1979
• Parties: ARIZONA PUBLIC SERVICE COMPANY et al., Appellants, v. Arthur B. SNEAD, etc., et al

441 U.S. 141 99 S.Ct. 1629 60 L.Ed.2d 106 ARIZONA PUBLIC SERVICE COMPANY et al., Appellants,

v.

Arthur B. SNEAD, etc., et al.

No. 77-1810. Argued Feb. 26, 1979. Decided April 18, 1979. Syllabus

New Mexico has imposed an energy tax on the privilege of generating electricity within the State. This tax applies to all utility companies generating electricity within the State and may be credited against the New Mexico gross receipts tax liability for electricity sold at retail within New Mexico. But where the electricity is transmitted to other States for sale and consumption, there is no gross receipts tax liability against which to offset energy tax liability. A federal statute, 15 U.S.C. § 391, prohibits a State from imposing a tax on the generation or transmission of electricity which discriminates against out-of-state consumers, and further provides that a tax is discriminatory if it "results, either directly or indirectly, in a greater tax burden on electricity" generated and transmitted in interstate commerce than on electricity generated and transmitted in intrastate commerce. Appellant utility companies, owners of New Mexico power plants at which most of the electricity generated is ultimately sold to out-of-state consumers, brought action in a New Mexico state court seeking to have the energy tax invalidated on the ground, inter alia, that it violated the federal statute, but the New Mexico Supreme Court, affirming the trial court, upheld the tax.

Held: The New Mexico energy tax is invalid under the Supremacy Clause by reason of the federal statute. Because the tax itself, through operation of the tax-credit provisions, indirectly but necessarily discriminates against electricity sold outside New Mexico, it violates that statute. The federal statute does not exceed the permissible bounds of congressional action under the Commerce Clause, since Congress had a rational basis for finding that a tax such as New Mexico's interfered with interstate commerce, and selected a reasonable method to eliminate that interference. Pp. 146-151.

91 N.M. 485, 576 P.2d 291, reversed.

Page 142

Daniel J. McAuliffe, Phoenix, Ariz., for appellants.

Jan E. Unna, Sante Fe, N. M., for appellees.

Mr. Justice STEWART delivered the opinion of the Court.

New Mexico has imposed a tax on the privilege of generating electricity within its borders. The question in this case is whether that tax conflicts with federal law, statutory or constitutional.

I

The Four Corners power plants, located in New Mexico's desert northwest, are owned by the appellants, five public utilities companies.¹ Most of the electricity generated at the plants is ultimately sold to out-of-state consumers.² New

Page 143

Mexico imposes a 4% gross receipts tax on retail sellers of electricity,³ but since the bulk of the appellants' sales are made to consumers in other States, they do not incur significant liability for this tax. In 1975, New Mexico enacted the Electrical Energy Tax Act, the law at issue in this case.⁴ That Act imposes a tax on the privilege of generating electricity at the rate of 4/10 of a mill on each net kilowatt hour of electricity generated. This is roughly equivalent to a 2% tax on the retail value of the electricity. The tax is imposed on all companies generating electricity within the State. Section 9 of the Act, however, provides that this electrical energy tax may be fully credited against the company's gross receipts tax liability.

The Act and the regulations implementing it insure that the electrical generating company will receive full credit for the

Page 144

tax even if it does not itself make retail sales of electricity. This result is accomplished by requiring the generating company to assign its "potential credit" to the retailer, who in turn is required to reimburse the generating company for the value of this credit.⁵ The consequence is that a generating

Page 145

company's 2% tax is completely offset by the credit against the 4% retail sales tax when its electricity is sold within New Mexico. But to the extent that the electricity generated in New Mexico is not sold at retail in the State, there is no gross receipts tax liability against which to offset the electrical energy tax liability of the generating company.

In 1976, the State of Arizona, as a consumer of electricity and parens patriae for its citizens, sought to invoke this Court's original jurisdiction by a motion for leave to file a bill of complaint against New Mexico, asking for a declaratory judgment invalidating this New Mexico tax. The litigation now before us had already been initiated in the New Mexico courts by the present appellants, seeking essentially the same relief. This Court denied Arizona leave to file its complaint, concluding:

"[T]he pending state-court action provides an appropriate forum in which the issues tendered here may be litigated. If on appeal the New Mexico Supreme Court should hold the electrical energy tax unconstitutional, Arizona will have been vindicated. If, on the other hand, the tax is held to be constitutional, the issues raised now may be brought to this Court by way of direct appeal under 28 U.S.C. § 1257(2)." Arizona v. New Mexico, 425 U.S. 794, 797, 96 S.Ct. 1845, 1847, 48 L.Ed.2d 376, 378.

One of the alternative scenarios foreseen in our 1976 opinion has now eventuated. The New Mexico Supreme Court has upheld the validity of this energy tax against federal statutory and constitutional attacks, Arizona Public Serv. Co. v. O'Chesky, 91 N.M. 485, 576 P.2d 291, and the issues have been brought to this Court by way of direct appeal under 28 U.S.C. § 1257(2). 439 U.S. 891, 99 S.Ct. 246, 58 L.Ed.2d 236.

Page 146

II

The appellants contend that the New Mexico tax is invalid under a specific federal statute as well as under the Commerce, Due Process, and Import-Export Clauses of the Constitution. Because we conclude that under the Supremacy Clause ⁶ the tax is invalid by reason of this federal statute, we do not reach the substantive constitutional issues.

When Congress enacted the Tax Reform Act of 1976 it included a provision relating to state taxes on electricity. Section 2121(a) of the Act, 90 Stat. 1914, codified at 15 U.S.C. § 391, provides:

"No State, or political subdivision thereof, may impose or assess a tax on or with respect to the generation or transmission of electricity which discriminates against out-of-State manufacturers, producers, wholesalers, retailers, or consumers of that electricity. For purposes of this section, a tax is discriminatory if it results, either directly or indirectly, in a greater tax burden on electricity which is generated and transmitted in interstate commerce than on electricity which is generated and transmitted in intrastate commerce."

This provision was not in the bill as passed by the House of Representatives. Its genesis was in the Senate Finance Committee, although in its original version the definition of a discriminatory tax was different from that in the law finally enacted:

"For purposes of this section a tax is discriminatory that either directly or indirectly results in the payment of a higher gross or net tax on electricity which is generated and transmitted in interstate commerce than on elec-

Page 147

tricity which is generated and transmitted in intrastate commerce." H.R.10612, 94th Cong., 1st Sess., § 1323 (1976).

The Committee's Report described the reasons for including the provision:

"The committee has learned that one State places a discriminatory tax upon the production of electricity within its boundaries for consumption outside its boundaries. While the rate of the tax itself is identical for electricity that is ultimately consumed outside the State and electricity which is consumed inside the State, discrimination results because the State allows the amount of the tax to be credited against its gross receipts tax if the electricity is consumed within its boundaries. This credit normally benefits only domiciliaries of the taxing State since no credit is allowed for electricity produced within the State and consumed outside the State. As a result, the cost of the electricity to nondomiciliaries is normally increased by the cost the producer of the electricity must bear in paying the tax. However, the cost to domiciliaries of the taxing State does not include the amount of the tax.

"The committee believes that this is an example of discriminatory State taxation which is properly within the ability of Congress to prohibit through its power to regulate interstate commerce." (Footnote omitted.) S.Rep.No.94-938, pt. I, pp. 437-438 (1976), U.S.Code Cong. & Admin.News 1976, pp....