Shaper v. Tracy

• Decision Date: 29 September 1994
• Docket Number: No. 94APE01-32,94APE01-32
• Citation: 97 Ohio App.3d 760,647 N.E.2d 550
• Parties: SHAPER, Appellant, v. TRACY, Tax Commr., et al., Appellees. *
• Court: Ohio Court of Appeals

Page 760

97 Ohio App.3d 760

647 N.E.2d 550

SHAPER, Appellant, v. TRACY, Tax Commr., et al., Appellees. ^*

No. 94APE01-32.

Court of Appeals of Ohio, Tenth District, Franklin County.

Decided Sept. 29, 1994.

Krislov & Associates, Ltd., Clinton A. Krislov and Jonathan Nachsin, Chicago, IL, Moses Krislov Co., L.P.A., and Moses Krislov, Cleveland, Benesch, Friedlander, Coplan & Aronoff and Leon Friedberg, Columbus, for appellant.

Lee Fisher, Atty. Gen., Andrew S. Bergman and Lawrence D. Pratt, Asst. Attys. Gen., for appellee Tax Com'r and appellee Lee Fisher, Atty. Gen.

JOHN C. YOUNG, Judge.

This matter is before this court upon the appeal of Serene G. Shaper, appellant, from the December 7, 1993 judgment entry of the Franklin County Court of Common Pleas granting summary judgment in favor of Roger W. Tracy, Tax Commissioner of Ohio, and Lee Fisher, Attorney General of Ohio, appellees. The history of this case is as follows. Appellant is an Ohio resident who owns municipal bonds issued by non-Ohio entities. Appellant filed this action seeking declaratory and injunctive relief, pursuant to R.C. 2721.02 and Section 1983, Title 42, U.S.Code. Appellant claims that R.C. 5747.01(A)(1) is discriminatory because it includes in adjusted gross income the "interest or dividends on obligations or securities of any state or of any political subdivision or authority of any state," while exempting interest earned on bonds issued by Ohio and its subdivisions and authorities. Appellant sought to enjoin appellee Tax Commissioner from assessing and collecting state income tax on interest earned by Ohio residents who owned bonds issued by governmental entities outside the state of Ohio, and argued that Ohio's taxation scheme violated the Commerce Clause of the United States Constitution. ¹ Appellant also moved for class certification and for summary judgment. Appellees moved for summary judgment, and argued that appellant could not maintain an action for declaratory and injunctive relief under Ohio law, because she was limited to the administrative refund claim procedure and was required to exhaust those remedies first. Appellees also argued that appellant was not entitled to relief pursuant to Section 1983, Title 42, U.S.Code, and that R.C. 5747.01(A)(1) did not violate the Commerce Clause.

The trial court found that Ohio law permits a party to challenge the constitutionality of a state tax provision via a declaratory judgment action, and that appellant was not required to first exhaust her administrative remedies. However, the trial court found that appellant was not entitled to maintain an action pursuant to Section 1983, Title 42, U.S.Code, when she had full and adequate state remedies. In addition, the trial court found that appellant was not entitled to injunctive relief unless and until the court determined that R.C. 5747.01(A)(1) was unconstitutional. The trial court held that R.C. 5747.01(A)(1) was not violative of the Commerce Clause for two reasons. Initially, the court noted that if the Commerce Clause were to apply, the market participant doctrine exempted Ohio's activity from Commerce Clause scrutiny. Second, the court explained that the Commerce Clause had not been applied to acts of a sovereign on behalf of itself (as opposed to its citizenry), which provided the sovereign with a competitive advantage over another sovereign. Accordingly, the trial court granted summary judgment in favor of appellees, and denied appellant's motion for summary judgment.

Appellant filed this appeal and asserts the following assignments of error:

"The trial court erred in granting the state defendants' motions for summary judgment (Assignment of Error No. 1) and in denying plaintiff's motion for summary judgment (Assignment of Error No. 2)."

Appellant also presents the following issues for review:

"1. Whether, in a declaratory action against state officials challenging a state tax provision asserted to violate the Commerce Clause on its face, the action may be maintained, as one of its counts, under 42 U.S.C. § 1983 (Assignments of Error Nos. 1 and 2).

"2. Whether a state violates the Commerce Clause by its discriminatory income taxation of municipal bond interest on only the interest from bonds issued by non-Ohio issuers, while exempting interest earned on all bonds issued by Ohio entities (Assignments of Error Nos. 1 and 2).

"3. Does the Commerce Clause of the United States Constitution prohibit states from discriminating in their own interests, by an income tax that explicitly taxes only the interest earned from other states' bonds?

"4. Does the Commerce Clause not apply to state actions for their own fiscal benefit, in taxation schemes which intentionally discriminate against out-of-state bond issues?"

The instant action is before this court on an appeal from summary judgment. Summary judgment is proper when reasonable minds can come to but one conclusion, and that conclusion is adverse to the party against whom the motion for summary judgment is made, such party being entitled to have the evidence or stipulation construed most strongly in its favor. Civ.R. 56(C). The parties agree that this case involves a question of law rather than issues of material fact.

Appellant challenges the constitutionality of R.C. 5747.01(A)(1), which taxes the interest on obligations issued by non-Ohio governmental entities, while exempting any interest earned on obligations issued by Ohio governmental entities. R.C. 5747.01(A) provides in pertinent part:

" 'Adjusted gross income' means adjusted gross income as defined and used in the Internal Revenue Code, adjusted as follows:

"(1) Add interest or dividends on obligations or securities of any state or of any political subdivision or authority of any state, other than this state and its subdivisions and authorities[.]"

The trial court found that R.C. 5747.01(A)(1) was constitutional and did not violate the Commerce Clause for two reasons. Initially, the court found that the state of Ohio acts as a market participant when it issues bonds. The market participant doctrine recognizes that when a sovereign acts as a consumer or vendor in commerce, its actions as a market participant are distinct from its actions as a market regulator. The Commerce Clause is directed at the state's actions as a market regulator; therefore, actions as a market participant are exempt from Commerce Clause analysis. Clearly, when a state chooses to sell bonds and enter into the securities market, it is acting as a market participant. However, when a state chooses to tax its citizens, it is acting as a market regulator. As stated by the United States Supreme Court:

"The market-participant doctrine has no application here. The Ohio action ultimately at issue is neither its purchase nor its sale of ethanol, but its assessment and computation of taxes--a primeval governmental activity. To be sure, the tax credit scheme has the purpose and effect of subsidizing a particular industry, as do many dispositions of the tax laws. That does not transform it into a form of state participation in the free market. * * * " New Energy Co. of Indiana v. Limbach (1988), 486 U.S. 269, 277, 108 S.Ct. 1803, 1809, 100 L.Ed.2d 302, 311.

Thus, we find that the market participant doctrine has no application to the instant action, as the state of Ohio is acting as a market regulator in its assessment of taxes.

However, we do agree with the trial court's conclusion that neither the Supreme Court nor any case law examined has applied the Commerce Clause to a case such as this, where one governmental entity is taxing its residents for the interest earned on bonds issued by another governmental entity. The trial court found that much of the Commerce Clause case law developed thus far involved taxation schemes that benefitted a private industry or business in the state, to the detriment of out-of-state businesses. Accordingly, the trial court found that the Commerce Clause was simply never intended to apply to acts of a sovereign on behalf of itself where the end result is to provide the taxing state with a competitive advantage over another sovereign. Because the court found that the Commerce Clause did not apply to such a scenario, it found that R.C. 5747.01(A)(1) was not unconstitutional.

A review of the case law developed by the United States Supreme Court demonstrates that the Commerce Clause has been directed at acts of a sovereign on behalf of its citizenry to improperly provide its citizenry with a competitive advantage over the citizenry of other states. The parties herein have provided this court with numerous Commerce Clause cases whereby taxation schemes were challenged when a state's taxation scheme discriminated against out-of-state businesses or entities. See Dominion Natl. Bank v. Olsen (C.A.6, 1985), 771 F.2d 108; Boston Stock Exchange v. State Tax Comm. (1977), 429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514; Madden v. Kentucky (1940), 309 U.S. 83, 60 S.Ct. 406, 84 L.Ed. 590. None of the cases cited is directly on point. The instant action does not involve a taxation scheme whereby the citizenry of Ohio are provided with a competitive advantage over the citizenry of other states. Rather, the taxation scheme in the instant action benefits the state of Ohio itself.

Appellant is challenging Ohio's taxation scheme because Ohio includes, as adjusted gross income, interest income appellant earns from the bonds of other states. This court, after extensive research, has been able to locate only one case that is factually close, although the tax in question was not challenged on Commerce Clause grounds. In Bonaparte v. Tax Court (1881), 104 U.S. 592, 26 L.Ed. 845, the Supreme Court stated that "[t]he Constitution does not prohibit a State from including in the taxable property of her citizens so much of the registered public debt of another State as they respectively hold, although the debtor State may exempt it from taxation...