June 01, 2010

Supreme Court Decides Levin v. Commerce Energy, Inc.

On June 1, the Supreme Court decided Levin v. Commerce Energy, Inc., No. 09-223, holding that principles of comity, under which federal courts normally will not entertain claims that risk disrupting state tax administration, prohibited the federal courts from considering a claim that Ohio's tax laws discriminated unconstitutionally in favor of local businesses and against interstate businesses. Such a challenge must be brought in state court.

Natural gas traditionally has been sold to consumers by "local distribution companies" (LDCs), which distribute natural gas only within a local service area using their own networks of gas pipelines. More recently, consumers have also had the option of purchasing natural gas from "independent marketers" (IMs) that sell gas but do not own distribution pipelines, using the LDC facilities to deliver their gas to customers. Ohio law grants LDCs several tax exemptions that IMs do not receive. Commerce Energy, an IM, brought suit in federal district court claiming that this statutory scheme discriminated against IMs and their customers in violation of the Commerce and Equal Protection Clauses of the U.S. Constitution. The district court dismissed the suit, holding that, although it was not blocked by the Tax Injunction Act (TIA), it was precluded by the doctrine of comity. The Sixth Circuit Court of Appeals reversed, holding that neither the TIA nor comity barred a decision on the merits, because the suit did not attempt to prevent the collection of state taxes but sought to expand tax collections, by requesting an order striking down the allegedly discriminatory exemption.

The Supreme Court reversed. It held that, under the comity doctrine, a taxpayer's complaint of allegedly discriminatory taxation must be brought in state court, even when it is framed as a request to increase a competitor's tax burden rather than to decrease the complaining taxpayer's tax. The comity doctrine rests on the principle that, because states rely primarily on taxation to fund their governments' operations, their tax-enforcement methods should not be interfered with absent strong cause. The TIA is merely a partial codification of this principle. In the context of the claims of discrimination asserted here, the Constitution requires at most equal treatment, but it does not specify how that equality should be achieved—by extending the allegedly discriminatory exemption to Commerce Energy or invalidating the exemption entirely. In previous cases, originating in state court, in which state tax provisions were held to be discriminatory, the Court remanded to the state court to allow determination of the appropriate remedy there. But if lower federal courts were permitted to consider the merits of claims of discriminatory taxation, deferring to the state court to determine the appropriate remedy for the alleged discrimination would be impossible, because an action brought in federal court cannot be remanded to state court.

The Court suggested, however, that comity might not apply if a tax challenge involved a fundamental right or classification to which federal courts give heightened scrutiny, rather than a commercial matter over which states enjoy wide regulatory latitude.

Justice Ginsburg delivered the opinion of the Court, in which Chief Justice Roberts and Justices Stevens, Kennedy, Breyer, and Sotomayor joined. Justice Kennedy filed a concurring opinion. Justice Thomas filed an opinion concurring in the judgment in which Justice Scalia joined. Justice Alito filed an opinion concurring in the judgment.

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