2 June 2010
The Tax Injunction Act (“TIA”), 28 U.S.C. § 1341, prohibits federal district courts from restraining “the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had” in state courts. On June 1, 2010, in Levin v. Commerce Energy, Inc., No. 09-233, the Supreme Court held that, even when the TIA does not by its terms apply, broader principles of comity may prevent federal district courts from entertaining claims that pose the risk of disrupting a state’s taxation scheme. The practical impact of the Court’s decision is likely to be significant. By clarifying the comity doctrine’s continued viability as a prudential limitation on federal-court authority distinct from the TIA’s jurisdictional bar, the decision increases the probability that challenges to discriminatory state tax schemes will have to be litigated in state rather than federal court.
The underlying dispute in Levin concerned tax exemptions that Ohio law afforded to public utilities providing natural gas to customers within their geographic service areas but not to “independent marketers” of natural gas. The plaintiffs in the case were independent marketers. Alleging that they had been subject to discriminatory state taxation in violation of the Commerce and Equal Protection Clauses, the plaintiffs sought injunctive relief invalidating the tax exemptions enjoyed by their public-utility competitors. The district court dismissed the complaint, but the Sixth Circuit reversed. It reasoned that the TIA did not bar the suit and that principles of comity had no greater sweep than the TIA itself. Latching onto a footnote in Hibbs v. Winn, 542 U.S. 88 (2004), the Sixth Circuit concluded that a more expansive construction of the comity doctrine would render the TIA “effectively superfluous.” Slip op. at 4.
In an opinion by Justice Ginsburg, the Supreme Court reversed. The Court held that “a complaint of allegedly discriminatory state taxation, framed as a request to increase a commercial competitor’s tax burden,” falls squarely within the class of suits barred by the comity doctrine. Id. at 1. The Court clarified that neither the TIA nor Hibbs abrogated the doctrine, which continues to serve as an independent, prudential bar on federal-court adjudication of certain challenges to state tax schemes. The TIA was “best understood,” the Court said, “as but a partial codification of the federal reluctance to interfere with state taxation.” Id. at 8 (emphasis added). As for Hibbs, the Court explained that the footnote on which the Sixth Circuit relied “is most sensibly read to affirm that, just as the case was a poor fit under the TIA, so it was a poor fit for comity.” Id. at 15.
In holding that the comity doctrine barred the independent marketers’ suit, the Court explained that, if the plaintiffs prevailed on the merits (i.e., obtained a determination that the tax burdens were unconstitutionally disparate), the “most obvious way to achieve parity would be to reduce [their] tax liability.” Id. at 13. But this relief was unavailable, because the TIA, subject only to very narrow exceptions, prohibits a federal court from enjoining the collection of state taxes. And ordering different relief—“reshap[ing] the relevant provisions of Ohio’s tax code” by invaliding the tax exemptions enjoyed by the public utilities—would, in the Court’s view, require a federal court to “engage in the very interference in state taxation the comity doctrine aims to avoid.” Id.
Although all nine members of the Court joined the judgment, Justices Kennedy, Alito, and Thomas (joined by Justice Scalia) each wrote a concurring opinion that expressed skepticism about the decision in Hibbs. Unlike their colleagues, moreover, Justices Thomas and Scalia would have dismissed the plaintiffs’ suit under the TIA (a jurisdictional statute) rather than on grounds of comity (a prudential doctrine).
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