RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 09a0036p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
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COMMERCE ENERGY, INC. dba COMMERCE
Plaintiffs-Appellants, --
ENERGY OF OHIO, INC., et al.,
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No. 08-3410
,
>
-
v.
RICHARD A. LEVIN, in his official capacity as -
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Ohio Tax Commissioner,
Defendant-Appellee. -
N
Appeal from the United States District Court
for the Southern District of Ohio at Columbus.
No. 07-00151—Michael H. Watson, District Judge.
Argued: December 10, 2008
Decided and Filed: February 4, 2009
*
Before: MARTIN and McKEAGUE, Circuit Judges; COLLIER, Chief District Judge.
_________________
COUNSEL
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.
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OPINION
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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
*
The Honorable Curtis L. Collier, Chief United States District Judge for the Eastern District of
Tennessee, sitting by designation.
1
No. 08-3410 Commerce Energy, et al. v. Levin Page 2
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
1
Because this case arises on a motion to dismiss, this Court must assume that all facts asserted
in plaintiffs’ complaint are true.
No. 08-3410 Commerce Energy, et al. v. Levin Page 3
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 (1982). In Hibbs v. Winn, 542
U.S. 88 (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. 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. 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
2
The parties agree that there is an adequate state-court remedy available.
No. 08-3410 Commerce Energy, et al. v. Levin Page 4
revenue.” Id. at 106. 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. 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. And, as with
Hibbs, the taxpayers here are third-parties who do not “contest their own tax liability,”
id. at 92, 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
No. 08-3410 Commerce Energy, et al. v. Levin Page 5
the flow of state tax revenue.” Hibbs, 542 U.S. at 106-07.3 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 (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.
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 (emphasis added) (citing Fair Assessment, 454 U.S. at 107-08). 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.
3
For support, the Commissioner also cites Colonial Pipeline Co. v. Collins, 921 F.2d 1237, 1243
(11th Cir.1991), which the Hibbs Court distinguished from the case before it by stating that Colonial
Pipeline “held that a taxpayer’s suit seeking a court-ordered redistribution of Georgia's ad valorem tax
system, which might have reduced plaintiff's tax bill, implicated § 1341’s jurisdictional bar.” Hibbs, 542
U.S. at 109 n.11. Yet the Commissioner improperly reads “might” to mean any hypothetical chance.
Instead, Colonial Pipeline explained that it was not “impressed by Colonial’s contention that the impact
of its requested relief would act only to increase the valuation and assessment of currently undervalued
property. . . . [I]mplementation of its requested relief could also have the equally likely alternative of
reducing the assessments on Colonial’s own property.” 921 F.2d at 1242 n.8 (first emphasis added, second
emphasis in original). Here, the chance of a decrease of state tax revenues is far less than “equal” to the
chance of an increase.
No. 08-3410 Commerce Energy, et al. v. Levin Page 6
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 action, as in Fair Assessment. When a plaintiff alleges that the
state tax collection or refund process is giving unfair benefits to someone
else, then according to Hibbs the Act and comity are not in play.
Id. at 762. Similarly, the Ninth Circuit, in Wilbur v. Locke, 423 F.3d 1101 (9th Cir.
2005), took at face value Hibbs’s admonition that comity principles preclude jurisdiction
“only when plaintiffs have sought district-court aid in order to arrest or countermand
state tax collection” and observed that the plaintiffs before it sought “no such relief.”
423 F.3d at 1110 (quoting Hibbs, 542 U.S. at 107 n.9).
Animating these courts’ disagreement with the Fourth Circuit are twin concerns.
First, a sweeping reading of Fair Assessment runs squarely against Hibbs’s instruction
that comity guts federal jurisdiction only when plaintiffs try to thwart tax collection.
Hibbs, 542 U.S. at 107 n.9.4 Second, an unduly broad view of comity would render an
4
In fact, the Fair Assessment Court did not purport to go as far as the Fourth Circuit interpreted.
The Fair Assessment Court noted that it “need[ed] not decide . . . whether the comity spoken of would also
bar a claim under § 1983 which requires no scrutiny whatever of state tax assessment practices, such as
a facial attack on tax laws colorably claimed to be discriminatory as to race.” Fair Assessment, 454 U.S.
No. 08-3410 Commerce Energy, et al. v. Levin Page 7
Act of Congress – the Tax Injunction Act – effectively superfluous, as its contours would
never be dispositive so long as extant “comity principles” uniformly barred challenges
to state taxation. In recognizing this, the Hibbs Court warned lower courts that prior
cases in this area are “not fairly cut loose from their secure, state-revenue-protective
moorings.” Id. at 107.
B.
The Seventh and Ninth Circuits have the more persuasive view. And, even
independent of its language, Hibbs’s logic also compels us to reject the approach
endorsed by the district court and the Fourth Circuit. In Hibbs, the Supreme Court
affirmed in toto a Ninth Circuit decision that – along with holding that the Act did not
bar plaintiffs’ claims – had specifically addressed and rejected comity as grounds for
dismissal. In fact, two Ninth Circuit judges would have voted to rehear that case en banc
because they believed that the claims were barred by comity. Winn v. Killian, 321 F.3d
911, 913-14 (2003) (Kleinfeld, J., dissenting, joined by O’Scannlain, J.). Yet, though
the Supreme Court did not extensively analyze comity, it both affirmed the Ninth Circuit
in full and stated that its opinion doing so was not inconsistent with comity principles.
Hibbs, 542 U.S. at 107-08 & n.9.
More importantly, the Hibbs Court stated that barring the claims before it would
have been inconsistent with a series of prior Supreme Court cases reviewing challenges
to state tax systems that had no jurisdictional infirmities. Id. at 111. Just as with a broad
reading of the Act, if a broad reading of comity forbade the relief requested here, then
any injunctions that compelled or led inevitably to the collection of state taxes would be
called into question, including Milliken v. Bradley, 433 U.S. 267 (1977). Hibbs loudly
voiced this concern: “In a procession of cases not rationally distinguishable from this
one, no Justice or member of the bar of this Court ever raised a § 1341 objection that,
according to the petitioner in this case, should have caused us to order dismissal of the
action for want of jurisdiction.” Hibbs, 542 U.S. at 111-12 (citing Mueller v. Allen, 463
at 107 n.4.
No. 08-3410 Commerce Energy, et al. v. Levin Page 8
U.S. 388 (1983)). This same logic applies to comity. If the Tax Commissioner is correct
that broad comity principles bar federal courts from hearing claims like the plaintiffs’,
then likely all the previous Supreme Court decisions that did not even address the Act
or comity principles were decided incorrectly. See, e.g., Missouri v. Jenkins, 495 U.S.
33, 57 (1990) (ordering state to collect taxes in amounts exceeding the ceiling set by
state law). We have no choice but to respect these Supreme Court judgments.
C.
To support the idea that comity and federalism principles bar vast swaths of state-
tax challenges, the Tax Commissioner and the district court both cite and heavily rely
upon this Court’s pre-Hibbs decision, In re Gillis, 836 F.2d 1001 (6th Cir. 1988). Yet,
though Gillis broadly warned that “principles of comity dictate that a federal court
should not intrude into the state tax system . . . [a]s long as an adequate state remedy
exists,” id. at 1009, it also indicated that it was simply on all fours with Fair Assessment,
and thus the above analysis reconciling Hibbs with Fair Assessment applies equally to
Gillis. And below, the district court gave Gillis its broadest conceivable reading, which
it felt was untouched by Hibbs, while the plaintiffs argue that Hibbs undermined or flat-
out overruled Gillis. Yet both views are too extreme: Gillis does not bar jurisdiction in
this case and it may be reconciled with Hibbs.
Indeed, we cannot resolve this case with abstract generalizations about
nontextual constitutional principles of comity and federalism. And though we
emphatically reject the view that these principles broadly bar from federal court nearly
every state-tax challenge, we also cannot make all-encompassing decrees regarding how
principles of comity and federalism will always apply; they are merely principles. To
determine whether comity and federalism preclude jurisdiction over state taxation
claims, courts must determine whether the relief requested in the pleadings would
significantly intrude upon traditional matters of state taxation such that dismissal is
necessary. Thus, the difference between this case and Gillis concerns the degree to
which the claims and relief requested would intrude upon a state’s power to organize,
No. 08-3410 Commerce Energy, et al. v. Levin Page 9
conduct, and administer its tax scheme. In Gillis, the plaintiffs went too far; here, they
have not.
In Gillis, the district court broadly certified a plaintiff class consisting of every
single Kentucky citizen who owned taxable property and whose property was assessed
via the challenged methods, and it had certified a defendant class of “all property
valuation administrators of counties in which taxable property owned by coal, oil, or gas
interests is located.” Gillis, 836 F.2d at 1008. By contrast, the plaintiffs here are two
retail natural gas suppliers and a natural gas purchaser and the sole defendant is the Ohio
Tax Commissioner. If plaintiffs’ claims were to succeed, the only entities affected would
be four natural gas distributors and the only taxes affected would be a limited class of
exemptions that apply to only these four entities. And so it is not foreseeable that Ohio
would have to substantially revise its tax code if their claims succeeded, and the
suggested intrusion into traditional matters of state taxation here is not significant
enough to trigger comity to bar jurisdiction.
D.
Finally, at oral argument, the Commissioner contended that if the plaintiffs’
claims are ultimately successful, hundreds of thousands of Ohio consumers might see
their taxes rise because in-state natural gas companies would pass any tax increase to
their consumers. As a result, he argues that comity requires dismissal. We reject this
argument for three reasons. First, the issue was not briefed, so we cannot take judicial
notice of so complex an ipse dixit from the Commissioner. While economists agree that
it is people and not corporations in the abstract that bear tax burdens, they disagree on
who ends up footing this bill and in what proportion.5 Some economists have argued that
5
The authorities are mixed. See, e.g., RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 706
(Aspen Publishers, 3d ed. 2007) (“The burden of [corporate taxes] is normally shared between consumers
and shareholders.”); HARVEY S. ROSEN, PUBLIC FINANCE, (McGraw-Hill/Irwin, 6th ed. 2002); JOSEPH E.
STIGLITZ, ECONOMICS OF THE PUBLIC SECTOR, (Norton, 2d ed. 1988); WILLIAM C. RANDOLPH,
INTERNATIONAL BURDENS OF THE CORPORATE TAX, CONGRESSIONAL BUDGET OFFICE WORKING PAPER
(2006) (“[D]omestic labor bears slightly more than 70 percent of the burden of the corporate income tax.”),
available at http://www.cbo.gov/doc.cfm?index=7503; Gregory N. Mankiw, The Problem With the
Corporate Tax, N.Y. TIMES, June 1, 2008 (“The ultimate payers of the corporate tax are those individuals
who have some stake in the company on which the tax is levied. If you own corporate equities, if you work
for a corporation or if you buy goods and services from a corporation, you pay part of the corporate . . .
tax.”).
No. 08-3410 Commerce Energy, et al. v. Levin Page 10
consumers pay all corporate taxes in the form of higher prices. Others have argued
instead that the tax is borne by shareholders because supply and demand dictates that the
prices of the underlying products must have already been set to maximize profits before
the tax was imposed, and so any increase in prices would decrease demand; thus,
shareholders bear the cost as a tax on equity capital. Or, in what seems to be the modern
trend, yet other economists argue that the corporate tax burden is shared in some
proportion not only by consumers and shareholders, but also by workers. This is
because capital is mobile and it will flow to other investments that produce higher
returns after taxes when a new tax is imposed because the imposition of new taxes
lowers an activity’s expected after-tax return. With less capital stock due to this capital
flight, the workers become less productive and therefore earn lower wages. The point
is that we must not thrust ourselves into the middle of this economic debate by blindly
accepting the Commissioner’s theory.
The second reason is that, in the context of whether a state tax challenge is barred
from federal court by principles of comity and federalism, the Commissioner’s argument
is “heads I win, tails you lose.” Both parties agree that if plaintiffs’ success were sure to
lead to a decrease in state taxes, then a federal forum would be inappropriate. Hibbs, 542
U.S. at 107 n.9. Yet, the Commissioner further argues that the plaintiffs’ claims here
would nevertheless significantly burden traditional matters of state taxation because they
would increase state tax revenues and that increase would allegedly be passed directly
to Ohio’s consumers. In other words, the Commissioner contends that claims that would
result in either a decrease or in an increase in state tax revenues should both be barred
by principles of comity and federalism such that nary a state tax challenge could be
heard in federal court. This would bar any and all federal challenges, inconsistent with
our comity discussion above.
No. 08-3410 Commerce Energy, et al. v. Levin Page 11
Third and finally, even if the Commissioner’s theory that any tax burden would
pass directly to Ohio consumers were correct, that would not alter our conclusion that
the plaintiffs’ claims are not barred by comity concerns. The Commissioner’s argument
seems to be that plaintiffs’ challenges automatically create an impermissible burden on
comity and federalism because corporate taxes are allegedly passed directly to
consumers. But the fact that it might burden consumers cannot be enough: the Supreme
Court has never intimated that challenges to discriminatory personal or consumption
taxes may not, as a class, be heard in federal court so long as doing so would not
otherwise significantly burden comity and federalism.6 Thus, a possible injunction
against the tax breaks challenged here would not impermissibly burden state taxation.
V.
In this case we reject an excessively expansive reading of the older cases
discussing comity as urged upon us by the Commissioner because that reading would
render an Act of Congress entirely superfluous, would ignore the Supreme Court’s
directive that comity strips 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,
and would sub silentio overrule a series of important cases from the lower courts and
Supreme Court, including Milliken v. Bradley, 433 U.S. 267 (1977), Mueller v. Allen,
463 U.S. 388 (1983), and possibly even Hibbs itself. That is unacceptable. But, though
principles of comity and federalism sweep somewhat more broadly than the Act, the
pertinent question is whether the claims and requested relief fall within that sweep.
Because comity is prudential, we can make few generalizations about when it applies.
Instead, our holding is narrow: the plaintiffs here challenge only a few limited
exemptions that affect four specific entities, and their success would not significantly
intrude upon traditional matters of state taxation in Ohio.
6
Moreover, the fact that some tax costs might affect “hundreds of thousands of consumers” is a
red herring because, even if true, it tells us nothing about the magnitude of the cost or burden – all costs
passed on to prices are spread among all consumers, yet that cost might still be quite small in the
aggregate. Indeed, in our above analysis we already determined that plaintiffs’ requested relief would not,
in sum, impermissibly burden state taxation, and whether that cost is shared by shareholders, consumers,
or workers must be irrelevant. The inquiry is about magnitude; it’s not a headcount.
No. 08-3410 Commerce Energy, et al. v. Levin Page 12
For the above reasons, we REVERSE the district court and REMAND for further
proceedings.