Commerce Energy, Inc. v. Levin

• Citation: 554 F.3d 1094
• Decision Date: 04 February 2009
• Docket Number: No. 08-3410.,08-3410.
• Parties: COMMERCE ENERGY, INC. dba Commerce Energy of Ohio, Inc., et al., Plaintiffs-Appellants, v. Richard A. LEVIN, in his official capacity as Ohio Tax Commissioner, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

554 F.3d 1094

COMMERCE ENERGY, INC. dba Commerce Energy of Ohio, Inc., et al., Plaintiffs-Appellants, v. Richard A. LEVIN, in his official capacity as Ohio Tax Commissioner, Defendant-Appellee.

No. 08-3410.

United States Court of Appeals, Sixth Circuit.

Argued: December 10, 2008.

Decided and Filed: February 4, 2009.

ARGUED: Stephen C. Fitch, Chester, Willcox & Saxbe, Columbus, Ohio, for Appellants. Barton A. Hubbard, Office of the Ohio Attorney General, Columbus, Ohio, for Appellee. ON BRIEF: Stephen C. Fitch, Gerhardt A. Gosnell II, Chester, Willcox & Saxbe, Columbus, Ohio, for Appellants. Barton A. Hubbard, Office of the Ohio Attorney General, Columbus, Ohio, for Appellee.

Before MARTIN and McKEAGUE, Circuit Judges; COLLIER, Chief District Judge.^*

OPINION

BOYCE F. MARTIN, JR., Circuit Judge.

Plaintiffs, in-state and out-of-state retail natural gas suppliers that market and sell natural gas to Ohio consumers and one of their Ohio customers, sued Ohio's Tax Commissioner, Richard Levin. They alleged that Ohio's tax scheme is discriminatory and thus unconstitutional under either the Commerce Clause or Equal Protection Clause because four local natural gas distribution companies benefit from certain tax exemptions and exclusions that they do not benefit from, despite their similar situations. But the district court granted the Commissioner's motion to dismiss for lack of subject matter jurisdiction, reasoning that, while the Tax Injunction Act, 28 U.S.C. § 1341, did not bar plaintiffs' claims, general principles of comity and federalism did. This latter conclusion was incorrect, and we therefore reverse and remand.

I.

Plaintiffs Commerce Energy, Inc. (which does business as Commerce Energy of Ohio, Inc.) and Interstate Gas Supply, Inc. are retail natural gas suppliers who market and sell natural gas to Ohio consumers.¹ Plaintiff Gregory Slone is an Ohio citizen who purchases natural gas from these retail suppliers. The plaintiff gas suppliers compete with local natural gas distribution companies who market and sell gas to Ohio consumers. These companies, unlike the plaintiffs, also own and operate distribution pipeline networks to deliver gas. While the plaintiff retail suppliers pay fees to use the distribution pipelines owned by the local gas distribution companies, the four local natural gas distributors are exempt from state and county sales and use taxes on their natural gas sales and instead pay a gross receipts excise tax that is lower than the taxes that retail suppliers pay. According to plaintiffs, Ohio law also excludes these local distributors from commercial activities taxes on taxable gross receipts. Finally, plaintiffs also challenge Ohio tax provisions that exclude sales of natural gas between local distributors from gross receipts taxes that the plaintiffs are subject to when they purchase natural gas from the local gas distributors.

The plaintiffs sued under the Declaratory Judgment Act, 28 U.S.C. §§ 2201-02, requesting that the district court declare these exclusions and exemptions unconstitutional and enjoin their application. The defendant Tax Commissioner responded by moving to dismiss these claims under FED.R.CIV.P. 12(b)(1) for lack of subject matter jurisdiction. The court dismissed plaintiffs' complaint, reasoning that general principles of comity and federalism barred their claims. Plaintiffs appeal.

II.

This Court reviews de novo the dismissal of a complaint under FED. R. CIV. P. 12(b)(1) for lack of subject matter jurisdiction. Am. Landfill, Inc. v. Stark/Tuscarawas/Wayne Joint Solid Waste Mgmt. Dist., 166 F.3d 835, 837 (6th Cir.1999).

III.

The first issue is whether the district court properly ruled that the Tax Injunction Act did not bar plaintiffs' challenges to the constitutionality of Ohio's natural gas taxation scheme. The Act directs federal courts not to "enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy, and efficient remedy may be had in the courts of such State." 28 U.S.C. § 1341.² It thus deprives federal courts of jurisdiction to hear certain challenges to state tax schemes. California v. Grace Brethren Church, 457 U.S. 393, 396, 102 S.Ct. 2498, 73 L.Ed.2d 93 (1982). In Hibbs v. Winn, 542 U.S. 88, 124 S.Ct. 2276, 159 L.Ed.2d 172 (2004), the Supreme Court clarified the Act's scope and reach. The plaintiffs there had brought an Establishment Clause challenge to income tax credits that provided financial aid to children who attended private schools. Id. at 92-93, 124 S.Ct. 2276. The Supreme Court held that the Act did not bar jurisdiction, and observed that for "near a half century, courts in the federal system, including the [Supreme] Court have entertained challenges to tax credits authorized by state law, without conceiving of § 1341 as a jurisdictional barrier." Id. at 93, 124 S.Ct. 2276. The Court sharply distinguished such cases from those in which the Act had barred claims, stating that the former "[a]ll involved plaintiffs who mounted federal litigation to avoid paying state taxes (or to gain a refund of such taxes). Federal-court relief, therefore, would have operated to reduce the flow of state tax revenue." Id. at 106, 124 S.Ct. 2276. In line with the Act's primary purpose of protecting state tax revenue, the Hibbs Court interpreted "assessment" to mean only the "recording of liability" of the taxpayer, and thus the Act applies only to "cases in which state taxpayers seek federal-court orders enabling them to avoid paying state taxes." Id. at 107, 124 S.Ct. 2276. As the district court correctly recognized, the Act does not prevent "third parties from pursing constitutional challenges to tax benefits in a federal forum." Id. at 108, 124 S.Ct. 2276. And, as with Hibbs, the taxpayers here are third-parties who do not "contest their own tax liability," id. at 92, 124 S.Ct. 2276, and success on their claims would not reduce state tax income: the relief they seek would increase the state's tax revenue by eliminating some or all of the tax-reducing exemptions and exclusions.

The Tax Commissioner replies that if plaintiffs are successful then state tax revenues could theoretically decrease in the future because the natural gas distribution companies could possibly file a future lawsuit seeking to enjoin the imposition of other taxes, and, if that future lawsuit succeeded, tax revenues would decrease. This argument is strained, to say the least. Indeed, we recently rejected it: "The Act does not strip federal courts of jurisdiction over all claims that might, after this or that happens, have some negative impact on local revenues; it strips jurisdiction over claims seeking to enjoin the collection of State `tax revenue.'" BellSouth Commc'ns, Inc. v. Farris, 542 F.3d 499, 503-04 (6th Cir.2008) (emphasis in original). It is thus not enough that there is some theoretical chance revenues might decrease due to a hypothetical future lawsuit; Hibbs tells us the Act is more straightforward: it applies only to "cases in which state taxpayers seek" to "avoid paying state taxes" where success would "operate[] to reduce the flow of state tax revenue." Hibbs, 542 U.S. at 106-07, 124 S.Ct. 2276.³ We therefore affirm the district court's conclusion that the Tax Injunction Act does not bar plaintiffs' claims.

IV.

Notwithstanding the Act, the district court went on to rule that principles of comity and federalism barred plaintiffs' claims. These principles reflect a "scrupulous regard for the rightful independence of state governments which should at all times actuate the federal courts" and thus they sometimes bar federal challenges to state taxation where the Act would not. Fair Assessment in Real Estate Ass'n, Inc. v. McNary, 454 U.S. 100, 102, 108, 102 S.Ct. 177, 70 L.Ed.2d 271 (1981). In Fair Assessment, the Supreme Court addressed the comity principle's applicability to suits bringing constitutional challenges to state tax laws under 42 U.S.C. § 1983. Although the question presented was narrow, Fair Assessment's language was broad: "[T]axpayers are barred by the principle of comity from asserting § 1983 actions against the validity of state tax systems in federal courts" so long as "plain, adequate, and complete" state court remedies are available. Id. at 114-16, 102 S.Ct. 177.

Nevertheless, in Hibbs, the Supreme Court — without disapproving of Fair Assessment's core holding — stated that it has "relied upon `principles of comity' . . . to preclude original federal-court jurisdiction only when plaintiffs have sought district-court aid in order to arrest or countermand state tax collection." Hibbs, 542 U.S. at 107 n. 9, 124 S.Ct. 2276 (emphasis added) (citing Fair Assessment, 454 U.S. at 107-08, 102 S.Ct. 177). Thus, while the Hibbs Court did not extensively address comity, it is hard to square that decision with the district court's expansive reading of Fair Assessment.

A.

Yet there is a circuit split. The district court heavily relied on DIRECTV v. Tolson, 513 F.3d 119 (4th Cir.2008), which, in dismissing a § 1983 claim, rejected the idea that Hibbs did anything to limit an expansive reading of Fair Assessment because the comity principle is "broader than the Act itself, and its scope is not restricted by § 1341." DIRECTV, 513 F.3d at 127 (citing Fair Assessment, 454 U.S. at 110). To the Fourth Circuit, the comity principle's breadth "was simply not before the Supreme Court in Hibbs." Id. at 127-28.

Other circuits disagree. The Seventh Circuit, for instance, has reconciled these cases by holding that Fair Assessment cannot bar each and every challenge to a state's taxation scheme because Hibbs "restrict[s] comity to cases that could tie up rightful tax revenue." Levy v. Pappas, 510 F.3d 755, 761 (7th Cir.2007) (quotations omitted). Levy explained:

When a plaintiff alleges that the state tax collection or refund process is singling her out for unjust treatment, then the Act and comity bar the federal...