DaimlerChrysler Corp. v. Cuno; Wilkins v. Cuno


Does either the investment tax credit or the property tax exemption at issue violate the Commerce Clause of the United States Constitution or the Equal Protection Clauses of the United States or Ohio State Constitutions by discriminating in favor of businesses locating new investments in Ohio and against incumbent businesses or those locating elsewhere?

Do the Respondents here (and plaintiffs below) have standing as the state and municipal taxpayers to challenge the tax incentive programs at issue?

Oral argument: 
March 1, 2006


The Ohio State investment tax credit (Ohio Revised Code ? 5733.33) encourages development in economically depressed areas by providing tax breaks to companies or individuals that choose to locate in such areas and to install new manufacturing machinery and equipment. The personal property tax incentive, under Ohio Rev. Code Ann. ?? 5709.62 and 5709.631, permits municipalities to grant property tax exemptions to corporations that develop in economically depressed areas and meet certain employment and investment levels. Together, these two statutes create incentives for corporate development in Ohio in otherwise unfavorable locations. Respondents, state and non-state taxpayers and one Ohio business forced to relocate upon the construction of a DaimlerChrysler plant, argue that this tax-incentive scheme is unconstitutional under the dormant Commerce Clause, which prohibits state taxes from discriminating against interstate commerce. Petitioners assert that (1) the Respondents lack standing to bring the suit, and (2) the dormant Commerce Clause prevents only state taxes which discourage companies from doing businesses in other states and not incentives that encourage companies to locate within the state.

Questions as Framed for the Court by the Parties 

DaimlerChrysler Corp. v. Cuno (04-1704):

Whether Ohio's investment tax credit, Ohio Revised Code ? 5733.33, which seeks to encourage economic development by providing a credit to taxpayers who install new manufacturing machinery and equipment in the State, violates the Commerce Clause of the United States Constitution.

Whether Respondents have standing to challenge Ohio's investment tax credit, Ohio Rev. Code Ann. ? 5733.33.

Wilkins v. Cuno (04-1724):

Does the dormant Commerce Clause allow a State to attempt to attract new business investment in the State by offering credits against the State's general corporate franchise or income tax, where the amount of the credit is based on the amount of a business's new investment in the State?

Whether Respondents have standing to challenge Ohio's investment tax credit, Ohio Rev. Code Ann. ? 5733.33.


Factual Background

DaimlerChrysler contracted with the City of Toledo, Ohio in 1998, to construct a new vehicle-assembly plant in exchange for tax incentives. See Cuno v. DaimlerChrysler, Inc., 386 F.3d 738, 741. DaimlerChrysler forecasted its total investment in the project to be about $1.2 billion, which would result in tax incentives totaling an estimated $280 million. Id. The tax incentives included an investment tax credit ("ITC") and a personal property tax exemption. Id. The ITC consisted of a credit against the state corporate franchise tax if the taxpayer "purchases new manufacturing machinery and equipment during the qualifying period, provided that the new manufacturing machinery and equipment are installed in [Ohio]." Ohio Rev. Code Ann. ? 5733.33(b)(1). The personal property tax incentive, under Ohio Rev. Code Ann. ?? 5709.62 and 5709.631, permits municipalities to offer incentives to corporations for development in economically depressed areas if the corporation maintains specified employment and investment levels for a set number of years (not to exceed ten years). Id. The exemption generally allows for a reduction of up to 75% of the corporation's property tax liabilities unless the school districts in which the proposed project is located consent to an increased percentage. In this case, two local school districts agreed to allow a 100% exemption to DaimlerChrysler's property tax liability for ten years. Id. at 42.

Procedural Background

Respondents, individual and small business taxpayers (state and municipal) in Toledo, initiated a challenge to the ITC and property tax exemptions in Ohio state court. Plaintiffs claimed that the ITC and property tax exemptions violated the Commerce Clause of the U.S. Constitution and the Equal Protection Clauses of the U.S. Constitution and the Ohio State Constitution. Petitioners, DaimlerChrysler Corporation and William W. Wilkins, Ohio State Tax Commissioner, removed the case to the Federal Court for the Northern District of Ohio with Respondents' permission. Cuno, 386 F.3d. at 741.At that time Respondents moved to remand the case back to state court, raising concerns that they might not have standing in federal court. Brief for Respondent at 4,5. The motion to remand was denied in November 2000. In August 2001, the district court granted the Petitioners' motion to dismiss the complaint. Respondents appealed this dismissal, and in October 2004, the Sixth Circuit partially reversed the district court, holding that the ITC was unconstitutional and violated the Commerce Clause but that the property tax exemption was constitutional. See generally Cuno, 386 F.3d 738. Both Petitioners petitioned the Sixth Circuit to rehear the case, but these requests were denied. Petitioners then petitioned the U.S. Supreme Court, which granted Certiorari in the spring of 2005. ?



Petitioners argue that the Respondents, including both Ohio and Michigan taxpayers, as well as Kim's Auto, a business that used to be located on the property now owned and utilized by DaimlerChrysler, lack standing to bring this suit in federal court. See Petitioner's Brief at 13-14. The Ohio taxpayers lack standing, DaimlerChrysler argues, because federal common law provides that taxpayer status is not adequate to establish standing. See Petitioner's Brief at 13-14. The Michigan taxpayers lack standing because they will be unable to prove either actual harm caused by DaimlerChrysler's locating its plant in Ohio or redressability, as the alleged harm suffered cannot be remedied. See Petitioner's Brief at 14. For both sets of taxpayers, the causal link between the investment tax credit ("ITC") and the claimed harm is too attenuated. Kim's Auto lacks standing because, although their property was confiscated under the Takings Clause, the ITC itself did not directly cause the relocation or any other harm to Kim's Auto. See Petitioner's Brief at 14.

The Respondent-taxpayers counter that the nexus between their status as state and municipal taxpayers is not too attenuated to establish standing considering (1) significant tax breaks to local corporations force other taxpayers to pay more taxes, thus taking up the slack for lost state revenues, (2) discouraging businesses from locating outside Ohio actually harms citizens of other states, such as Michigan, which would be a likely candidate for the DaimlerChrysler plant had it not decided to locate within Ohio, and (3) Petitioners failed to raise the standing issue in any of the prior litigation and, in fact, petitioned to have the case moved to federal court from state court. See Brief for Respondent at 7,8. If the Supreme Court disagrees with the Respondents, it will not likely rule on the other issues in the case.

Commerce Clause

Petitioners maintain that the Sixth Circuit misapplied the law when ruling that Ohio's ITC scheme violated the negative Commerce Clause, which is a judicially-created offspring of the Commerce Clause designed to facilitate interstate commerce. See Petitioner's Brief at 14-16. In Complete Auto Transit v. Brady, 430 U.S. 274, the Supreme Court ruled that a state tax cannot "discriminate against interstate commerce." Petitioners argue that the Court has adhered to an anti-protectionist view of "discrimination" that allows states to use tax schemes that encourage businesses to locate within their borders. See Petitioner's Brief at 14-16. This anti-protectionist approach allows states to use tax incentives encouraging competition among the states and preventing protectionist attitudes toward commerce, while disallowing schemes that penalize businesses that choose to locate or conduct business in another state. See Petitioner's Brief at 23-24. According to Boston Stock Exch. v. State Tax Comm'n, 429 U.S. 318, the negative Commerce Clause does not prevent state incentives that "encourage the growth and development of intrastate commerce and industry." DaimlerChrysler and the Ohio Tax Assessor argue that because the ITC is only available to those companies who locate new manufacturing equipment within Ohio, it functions as an incentive-based system and not as a penalty on companies that conduct business outside the state. See Petitioner's Brief at 24. If a company opts not to locate within Ohio they will not receive the credit, but will also not owe property taxes in Ohio.

Respondents, however, insist that the ITCs discriminate against companies who locate outside Ohio or whose business model does not include the purchase of large amounts of machinery and equipment. See Brief for Respondent at 9. Furthermore, they disagree with the distinction between incentive-based and penalty-based tax schemes and maintain that the negative Commerce Clause prevents such tax schemes because those taxpayers not receiving the credit are harmed. Essentially, they argue that when benefits are conferred on one party through reduced tax burdens, another party is inevitably harmed in the form of increased taxation. See Brief for Respondent at 10.


Interestingly, the state of Ohio changed the very tax statutes relevant to this case as the litigation progressed. However, the potential ramifications for state tax law throughout the country remain extremely significant. For example, thirty eight states currently employ incentive-based tax credits very similar to those at issue in Ohio. Thus, should the Court agree with the Sixth Circuit that Ohio's ITC is unconstitutional, states across the country will be forced to restructure their own tax law before, and/or in spite of, a flood of potential litigation brought by taxpayers or other entities challenging those newly-illegal laws.

A ruling in favor of the Respondents will result in a shift in state tax revenues. Taxpayers will likely pay fewer taxes as the large companies like DaimlerChrysler will shoulder a greater share of the state tax burden after losing their credits. Moreover, school districts in which those companies are located would receive an increase in property tax revenues. The side effects of these consequences are, however, unknown. Without the tax incentive to develop in depressed neighborhoods, corporations will choose development sites based on alternative criteria. Additionally, increased taxes can equate to increased prices for consumers. Also, although school districts will benefit from additional tax revenue, they will not benefit in the long run if additional development is deterred or companies like DaimlerChrysler move elsewhere.

However, this case will also affect those businesses that rely on these types of incentive-based tax structures when determining where to locate new projects or plants or whether to proceed with a certain project at all. Loss of such substantial tax breaks could force companies to relocate, shut down plants, and/or go out of business altogether. Such substantial financial repercussions can affect people in all sectors of the economy and throughout the country, from lost capital for investors to lost jobs for factory workers. Finally, a ruling against Ohio's ITC scheme would send politicians back to the drawing board in search of other viable ways to entice businesses, money, and development back into certain undesirable locations like Toledo that so desperately need the financial stability and hope that these large corporations might provide in the form of jobs and other types of taxes apart from those portions exempted by ITCs.


The court faces two major issues in this potentially landmark, constitutional case. The court’s ruling on the standing of the Respondents to bring the case will set precedent for who is able to bring future legal challenges to these types of tax legislation schemes. If Respondents are found to have standing to challenge the tax scheme at issue, many other similarly situated parties would have an open door to bring suit in states across the nation. Taxpayers could attempt to bring claims against municipalities for any number of issues in federal court, thereby avoiding the potentially biased state courts whose participants work daily with those same municipalities. Conversely, if the Court finds that Respondents do not have standing in this case, the decision would thereby close the door to taxpayer suits of this nature. If taxpayers are deemed not to have standing in this type of suit, they will be forced to pursue other routes to protest these types of tax schemes.

The second, and arguably more important, major issue the Court faces is the constitutionality of the challenged tax scheme itself. A ruling on this issue affirming the sixth circuit's findings would have far-reaching implications to some extent for most Americans. Many businesses throughout the United States rely (and have relied) on these types of incentive-based tax structures to make important business decisions regarding location, development, and expansion of business enterprises. If the Court finds these tax incentives unconstitutionally violate the commerce clause, many businesses similarly situated to DaimlerChrysler will face a financial burden in the form of increased tax liabilities. This increased burden would fly in the face of many bargains negotiated between business and municipal government officials. If the Court finds these types of tax schemes constitutionally sound, life will go on as normal for such businesses.

The purpose of these and similar tax incentive programs is to promote development in otherwise depressed areas of municipalities. Without such tax incentives, a corporation may have little reason to locate a new plant or factory in a depressed locality other than raw real estate prices. Although a school district granting a property tax exemption loses potential tax revenue by doing so, they indirectly benefit from the exemption as well. These benefits include the improvement of the surrounding community through development, an increase in job opportunities for community members, and thereby, an additional boost to the local economy. Further, school districts are willing to grant the tax exemption because they are waiving taxes from business that otherwise would not locate in their community in the first place. The flipside to these benefits is a resulting indirect increase in other taxpayers' tax burdens in order to meet municipal needs and potentially discriminatory treatment towards out-of-state competitors. Businesses with identical state taxable income would have higher tax burdens when they spend investment money out-of-state or don't meet the requirements of the tax-incentive scheme.


Ohio and Michigan taxpayers brought suit against DaimlerChrysler and the State of Ohio for allegedly infringing the dormant Commerce Clause of the United States Constitution by discouraging interstate commerce through the use of certain tax credits and incentives for companies that locate new equipment and machinery within the state. Should the Court rule that such a tax structure is unconstitutional, many states employing such tax incentives will be required to abandon them and attempt to find other ways to attract business to their state. Respondents seem to lose sight of the possibility that fostering economic growth within the state, especially within certain economically depressed areas, might better benefit the state than the corporate and property tax revenue they seek to generate. Many businesses likely chose a particular location based on the potential benefits of the state's tax structure and those businesses likely drive the local economies by creating jobs and contributing other corporate taxes that do not fall within any exemptions.Written by:

Liz Hanks

Amy McDonald


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