Levin v. Commerce Energy, Inc.


Does a federal court have jurisdiction to entertain a lawsuit that seeks to enjoin a state tax credit based on the Commerce Clause and the Equal Protection Clause?

Oral argument: 
March 22, 2010

Respondent, Commerce Energy, Inc., sued the Ohio Tax Commissioner, Petitioner, Richard Levin, alleging Ohio's tax scheme violates the Commerce Clause and the Equal Protection Clause of the U.S. Constitution. Commerce contends that four Ohio companies benefit from certain tax exemptions that Commerce is not eligible for as an out-of-state company. Levin argues that the Tax Injunction Act and principles of comity bar Commerce's suit from proceeding in a federal court. Commerce counters that a federal court has jurisdiction to hear their suit. In this case, the U.S. Supreme Court will clarify the scope of the federal judiciary's authority to hear lawsuits regarding state tax law.

Questions as Framed for the Court by the Parties 

1. Did the Court’s decision in Hibbs v. Winn, 542 U.S. 88 (2004), which addressed the scope of the Tax Injunction Act’s bar against federal cases seeking to enjoin the assessment and collection of state taxes, eliminate or narrow the doctrine of comity, which more broadly precludes federal jurisdiction over cases that intrude on the administration of state taxation?

2. Do either comity principles or the Tax Injunction Act bar federal jurisdiction over a case in which taxpayers allege, on equal protection and dormant Commerce Clause grounds, that their tax assessments are discriminatory relative to other taxpayers’ assessments?


Respondents, Commerce Energy, Inc., a California corporation, and Interstate Gas Supply Inc., an Ohio corporation (collectively “Commerce”), sell and market natural gas to consumers in Ohio. See Commerce Energy, Inc. v. Levin, 554 F.3d 1094, 1096 (2009). In Ohio, Commerce is designated as a “retail natural gas supplier” and competes with local utility companies known as local distribution companies (“LDCs”). LDCs own and operate the local pipelines that distribute natural gas to consumers. See Id.; Brief for Respondent, Commerce Energy, Inc., et al. at 4. Commerce pays the LDCs a fee to use the pipelines. See Commerce Energy, 554 F.3d at 1096. Additionally, under Ohio law, Commerce must pay three different taxes on the natural gas services they provide. See Brief for Respondent at 4. First, Commerce must charge and collect ordinary sales and use taxes on the gas supplied to consumers. See Id. Second, Commerce must pay a commercial activities tax based on Commerce’s gross receipts. See Id. Finally, Commerce is subject to a gross receipts tax for gas sales from an LDC to a retail supplier. See Id. The LDCs are exempt from each of these taxes, instead paying a gross receipts excise tax and an “MCF tax” that is based on the amount of gas the local companies sell and deliver. See Brief for Petitioner, Richard A. Levin, Tax Commissioner of Ohio at 6.

Commerce and Gregory Stone, one of its retail customers, sued Ohio Tax Commissioner Richard Levin (“Levin”), in the U.S. District Court for the Southern District of Ohio, alleging that the local companies benefit from discriminatory tax exemptions that give them a competitive advantage over retail suppliers. See Commerce Energy, 554 F.3d at 1096. Commerce sought a declaratory judgment under 28 U.S.C. §§ 2201–02 holding the exemptions unconstitutional and enjoining their application to the local distribution companies. See Id. Commerce claimed that the Ohio tax exemptions violated the dormant Commerce Clause by providing a discriminatory advantage to the in-state local companies and violated the Equal Protection Clause by discriminating against similarly situated businesses. See Id. Levin responded with a motion for dismissal, arguing that under principles of comity and the Tax Injunction Act, which limits the ability of federal district courts to interfere with state taxation schemes, the district court did not have subject matter jurisdiction over the case. See Id. The district court dismissed Commerce’s suit, holding that the principles of comity and federalism barred Commerce’s claims. See Id. On appeal, the Sixth Circuit reversed, holding that Commerce’s suit would not significantly intrude on Ohio’s interest in state taxation. See Id. at 1102. The U.S. Supreme Court granted certiorari on November 2, 2009 to determine whether the district court should have dismissed the case.


The Tax Injunction Act ("TIA"), 28 U.S.C. § 1341, provides that a district court “shall not 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.” Additionally, federal courts in the past applied a doctrine of comity, which precluded a federal court from exercising jurisdiction over a case that challenged state tax laws. This case will decide the extent to which the doctrine of comity remains relevant in the Court's jurisprudence and the proper role of the comity doctrine in interacting with the TIA.

The Supreme Court traditionally employed principles of comity to preclude plaintiffs from challenging state tax laws in federal court. Following the enactment of the TIA in 1937, the Court still looked to the principles of comity in determining whether federal jurisdiction applied. In Hibbs v. Winn, however, the Court upheld federal jurisdiction in a case challenging a state tax credit, the invalidation of which would increase rather than decrease the state’s tax revenue. The Court in Hibbs held that the TIA did not bar taxpayers from challenging a state statute that allowed tax credits for contributions to parochial schools. Furthermore, the Court noted that petitioners sought merely prospective injunctive relief under the Establishment Clause.

Do the principles of comity preclude federal jurisdiction in this case?

Petitioner, Richard A. Levin (“Levin”), asserts that the principles of comity remain unchanged after Hibbs. Levin argues that if the Court intended to disregard stare decisis and reverse its comity jurisprudence, it would have clearly asserted that fact. Consequently, Levin contends that given that the principles of comity continue to apply to federal jurisdiction, those principles should apply in this case, as allowing this case to proceed in federal court would constitute an improper and unwise intrusion into Ohio's regulatory regime. Levin asserts that under the principles of federalism, it is particularly important that federal courts do not interfere with a state's tax regime. Such interference, Levin contends, would disrupt the stability of the state's fiscal and regulatory regimes. Additionally, to adequately address the issues raised in this case, Levin argues that a district court would have to understand and pass judgment on Ohio's tax system. Further, Levin asserts that any adequate federally-imposed remedy would necessarily alter Ohio's tax regime. As a result, Levin contends, Ohio courts are in a far better position to consider the implications of altering the state's regulatory regime than a federal district court.

In contrast, respondents, Commerce Energy, Inc., et al. ("Commerce"), argue that the Supreme Court held in Hibbs and throughout its jurisprudence that comity principles do not bar any lawsuit that does not seek to impede a state's collection of taxes. Commerce also contends that the parties do not dispute the meaning of state law, so a federal court would only have to understand the statutory scheme rather than interpret state law. As federal courts are highly accustomed to understanding statutory schemes in order to apply constitutional analysis, this task should not prove beyond a federal court's expertise. Additionally, Commerce argues that a federal court could easily enjoin the tax exemption at issue without intruding on Ohio’s regulatory regime. Commerce contends that once a district court granted an injunction, it would then fall to the Ohio General Assembly to determine the best way to adjust the statute in order to ensure constitutionality. Commerce asserts that Hibbs established that federal courts do not act beyond their power in enjoining a tax exemption, and consequently, such an action in this case would not improperly intrude upon state authority.

Does the Tax Injunction Act bar federal jurisdiction in this case?

Levin argues that Hibbs only upheld federal jurisdiction as an exception to the TIA for a narrow and particular type of case. To meet this exception, the plaintiffs must meet three factors, including: (1) invalidation of the challenged law would increase, rather than decrease, a state's tax revenue; (2) the plaintiffs must be “third parties” who were not challenging their own tax liability; and (3) the challenge must be based on the Establishment Clause rather than state tax law. Levin asserts that given that Commerce fails to meet any of the three factors, the TIA must bar federal jurisdiction in this case. First, Levin contends that Commerce Energy challenges a major revenue-raising device and a ruling in favor of respondents would probably diminish Ohio's tax revenues. Second, unlike the taxpayer-plaintiffs in Hibbs who challenged the way their tax dollars were spent rather than their actual tax liability, Levin argues that in this case, Commerce is not a "third party" under Hibbs because it is contesting its own tax liability relative to the LDCs. Further, Levin suggests that if Commerce is deemed to be challenging only the tax treatment of the LDCs and not its own tax treatment, it would lack standing to bring suit at all in this case. Finally, Levin argues that the Court based the narrow exemption in Hibbs on the fact that federal courts had traditionally adjudicated challenges based on the Establishment Clause. In contrast, Commerce’s challenge in this case is based on state tax law, a matter traditionally dealt with in state court.

In contrast, Commerce argues that it seeks to enjoin tax exemptions applied to others, and consequently, an injunction would actually increase Ohio's tax revenue. Further, given that Commerce seeks to enjoin a tax exemption applied to others, Commerce contends that it is not challenging its own tax liability, just as the taxpayer-plaintiffs in Hibbs “were challenging a credit enjoyed by other taxpayers.” Commerce asserts that jurisdiction does not depend on which constitutional clause provides the basis for the challenge, and consequently, challenges based on the Establishment Clause should not receive primacy over any other challenge to state tax law. Finally, Commerce argues that even if the holding in Hibbs did not create a categorical rule that any state tax challenge which would not result in countermanding state tax revenue may warrant federal jurisdiction, the Court should create such a bright line rule here. Commerce contends that such a categorical rule is consistent with previous precedent and prevents the courts from employing an unpredictable multi-factor analysis to determine jurisdiction.


In this case, the U.S. Supreme Court will clarify the extent to which federal district courts have jurisdiction to hear lawsuits regarding state tax law under the Tax Injunction Act ("TIA"), 28 U.S.C. § 1341. Also at issue is whether federal jurisdiction is barred by principles of comity, under which federal courts respect state court jurisdiction over cases concerning certain matters of state law such as taxation, and decline to hear cases or grant remedies that would unduly intrude into such state affairs where an adequate remedy exists in state court. The Court’s ruling could impact any out-of-state plaintiff challenging state tax laws on federal constitutional grounds.

Petitioner, Richard Levin ("Levin"), contends that principles of comity require this lawsuit to be litigated in the state court system of Ohio. According to Levin, allowing this suit to proceed in federal court infringes on state sovereignty and violates the tenets of federalism. Levin asserts that one of the most fundamental principles of sovereignty is the ability to impose taxes on the citizens of the state. Levin also argues that removing such a lawsuit from the state courts will undermine the state’s fiscal stability. Furthermore, Levin contends that state courts are better equipped to make determinations of substantive state law, as they can employ more nuanced interpretations of state statutes.

Respondent, Commerce Energy, Inc. ("Commerce"), argues that the principles of comity and federalism do not strip federal courts of jurisdiction when plaintiffs are not attempting to impede the collection of a state tax. Commerce contends that its suit is not barred by the TIA and does not "significantly intrude upon traditional matters of state taxation.” Because Commerce is not seeking to avoid paying the tax it owes, Commerce argues that the principles of comity do not prohibit federal jurisdiction. Commerce urges the Court to adopt a bright-line test allowing federal courts to hear constitutional challenges to state tax exemptions and credits.

In support of Levin, forty-four states and the District of Columbia ("the States") contend that allowing federal courts to hear issues of state law could increase the danger that similarly situated parties will be treated differently depending on whether a state or federal court hears their case. Furthermore, the States contend that state courts are more familiar with the intricacies of state statutory law and will be more flexible than a federal court in crafting and developing state legal doctrines. However, the Council on State Taxation ("COST") counters that access to federal courts may be essential for out-of-state plaintiffs who bring constitutional challenges to biased state tax laws, because state courts may be "hesitant" to find their own laws discriminatory or unconstitutional. COST contends that, with the TIA, Congress intended to limit the scope of the principles of comity to bar federal jurisdiction only where the collection of a tax was being challenged.


In this case, the Court will determine the extent to which the doctrine of comity remains independently viable in precluding federal jurisdiction when a plaintiff seeks to challenge a state tax law in federal court and the extent to which a federal court may hear such a challenge pursuant to the Tax Injunction Act. Richard A. Levin contends that such cases belong in state court, as federal jurisdiction will improperly intrude upon a state’s administrative regime. Commerce Energy, et al., counters that federal courts should retain jurisdiction over those challenges in which the remedy would increase, rather than decrease, a state’s tax revenues.

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