ATTORNEYS FOR PETITIONERS: ATTORNEYS FOR RESPONDENT:
ROBERT W. LOSER II JEFFREY A. MODISETT
PATRICK M. O'BRIEN Attorney General of Indiana
STEERS SULLIVAN, P.C Indianapolis, Indiana Indianapolis, Indiana
DAVID A. ARTHUR
Deputy Attorney General
BULKMATIC TRANSP. CO. et al., ) ) ) Petitioners, ) ) v. ) Cause No. 49T10-9711-TA-00195 ) DEPARTMENT OF STATE REVENUE, ) ) Respondent. ) _____________________________________________________________________REVENUE _____________________________________________________________________
ON APPEAL FROM A FINAL DETERMINATION OF THE DEPARTMENT OF STATE
tax and motor carrier fuel surcharge tax.See footnote
granting of summary judgment. On May 6, 1999, the Court heard oral argument on the
everyday consumers of motor vehicle fuel,See footnote
and the motor carrier surcharge tax, which
is imposed at a rate of $0.11 per gallon. As a result, motor carriers pay $0.27 per
gallon of motor fuel consumed on Indiana highways. See Bulkmatic Transp. Co., 691
N.E.2d at 1373 n.2; Roehl Transp., 653 N.E.2d at 545 n.3.
The two taxes [hereinafter be referred to collectively as the motor carrier fuel tax] are calculated by using a straightforward apportionment formula. First, the motor carrier determines the amount of fuel it consumes in its entire operations, both within and without Indiana. See Bulkmatic II, 691 N.E.2d at 1373. This figure is then multiplied by a fraction, the numerator of which is the total number of miles traveled on Indiana highways and the denominator of which is the total number of miles traveled within and without Indiana. See Roehl Transp., 653 N.E.2d at 545. The resulting product, which putatively represents the number of gallons of fuel consumed by a motor carrier on Indiana highways, is then multiplied by the applicable rate of $0.27 to arrive at the motor carrier's motor carrier fuel tax liability. See Bulkmatic II, 691 N.E.2d at 1373.
Although all of the fuel consumed in a motor carrier's operations is included in the calculation of the tax, not all of the fuel consumed in a motor carrier's operations is due to highway driving. See Roehl Transp., Inc., 653 N.E.2d at 544. Some commercial vehicles have a single fuel tank that supplies both the vehicle's engine and attached
equipment on the vehicle.See footnote
See Bulkmatic I, 648 N.E.2d at 1156. Under the statutory
formula, fuel consumed while operating the attached equipment is treated the same as
fuel consumed operating the engine, and, consequently, the motor carrier's tax liability
will reflect the fuel consumed operating the attached equipment. See Bulkmatic II, 691
N.E.2d at 1373 & n.3. (For the sake of consistency with the terminology used in
Bulkmatic II, the Court will refer to the attached equipment as power take-off (PTO)
To alleviate this result, the Indiana General Assembly exempted the fuel used in operating PTO equipment from the motor carrier fuel tax. See Ind. Code Ann. §§ 6-6- 4.1-4(d), -4.5(d) (West Supp. 1998) (amended 1999). The amount of fuel exempted from the tax is determined not by how much fuel is actually consumed in operating the PTO equipment, but rather by a rule adopted by the Department.See footnote 7 See Bulkmatic II, 691 N.E.2d at 1373. The rule adopted by the Department exempts a fixed percentage of the fuel consumed. (Thus, the exemption is referred to as the proportional use exemption.) The fixed percentage varies according to the type of vehicle and the type of PTO equipment on the vehicle. See id.; Ind. Admin. Code tit. 45, r. 13-4-7 (1996). However, the Indiana General Assembly has limited this exemption to the use of PTO
equipment in Indiana.See footnote
As a result, although the fuel consumed in a motor carrier's
operation of PTO equipment in all fifty states is considered in the determination of a
motor carrier's tax liability, Indiana only exempts fuel consumed by operating this PTO
equipment in Indiana.
The practical effect of the in Indiana limitation is to exact a different price for the use of Indiana roads based on where the motor carrier decides to operate its PTO equipment. See Bulkmatic II, 691 N.E.2d at 1376. For example, if 10,000 gallons of motor fuel are apportioned to Indiana under the statutory formula, the motor carrier's tax liability will be $2700 before the proportional use exemption. If the motor carrier's fleet only travels through Indiana and never uses PTO equipment in Indiana, then the motor vehicle's tax liability will remain at $2700. If, however, the motor carrier uses PTO equipment in Indiana, that tax liability will be decreased by the proportional use exemption,See footnote 9 thereby lowering the effective motor carrier fuel tax rate. As a result, if a motor carrier uses PTO equipment, the amount of that motor carrier's tax liability depends on where it uses the PTO equipment. As noted above, in Bulkmatic II, this Court recently held that the disparity in tax treatment caused by the in Indiana limitation violated the Commerce Clause because it discriminated against interstate commerce.
The Department chose not to appeal that decision. Now, the Department asks the
Court to reconsider Bulkmatic II in this case.
By its terms, the Commerce Clause is only an authorization for Congress to regulate commerce. However, it is settled law that the Commerce Clause, even in the absence of Congressional action, acts as a limitation upon the power of the states. See Camps Newfound/Owatonna v. Town of Harrison, Inc., 520 U.S. 564, 571, 117 S.Ct. 1590, 1596, 137 L.Ed.2d 852 (1997). One of these limitations is that a state may not discriminate against interstate commerce. See West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 192, 114 S.Ct. 2205, 2211, 129 L.Ed.2d 157 (1994). This limitation also acts upon the states' power to tax, and no state, consistent with the Commerce Clause, may impose a tax that discriminates against interstate commerce. See General Motors Corp. v. Tracy, 519 U.S. 278, 287, 117 S.Ct. 811, 818, 136 L.Ed.2d 761 (1997) (The negative or dormant implication of the Commerce Clause prohibits state taxation . . . that discriminates against . . . interstate commerce . . . .); Westinghouse Elec. Corp. v. Tully, 466 U.S. 388, 403, 104 S.Ct. 1856, 1865, 80 L.Ed.2d 388 (1984) (collecting cases).
As noted by one commentator, the U.S. Supreme Court has never precisely delineated the scope of the doctrine that bars discriminatory taxation by states. See Walter Hellerstein, Commerce Clause Restraints on State Tax Incentives, 82 Minn. L. Rev. 413, 415 (1997); see also West Lynn Creamery, Inc., 512 U.S. at 210, 114 S.Ct. at 2220 (Scalia, J., concurring) (labelling U.S. Supreme Court negative Commerce Clause jurisprudence a quagmire once one gets past facial discrimination against interstate
commerce); Westinghouse Elec. Corp., 466 U.S. at 403, 104 S.Ct. at 1865 (case-by-
case analysis of state taxation schemes has not always provided precise guides to the
states). However, the basic principle is clear: a state taxation scheme must operate
evenhandedly with respect to interstate commerce. See Fulton Corp. v. Faulkner, 516
U.S. 325, 331, 116 S.Ct. 848, 856, 133 L.Ed.2d 796 (1996) ([A] State may not tax a
transaction or incident more heavily when it crosses state lines than when it occurs
entirely within the State.) (quotation omitted); Hellerstein, supra, at 415 (A tax which
its terms or operation imposes greater burdens on out-of-state goods, activities, or
enterprises will be struck down as discriminatory under the Commerce Clause.). The
in Indiana limitation on the proportional use exemption violates this basic principle and
therefore violates the Commerce Clause. This conclusion is confirmed by a detailed
review of three Supreme Court Commerce Clause cases
In Maryland v. Louisiana, 451 U.S. 725, 101 S.Ct. 2114, 68 L.Ed.2d 576 (1981), the Supreme Court evaluated the constitutionality of Louisiana's First-Use Tax on certain uses of natural gas brought into Louisiana. The Supreme Court noted that [a] state tax must be assessed in light of its actual effect considered in conjunction with other provisions of the State's tax scheme. Id. at 756, 101 S.Ct. at 2134 (emphasis added). Accordingly, a court examining a state tax must look not only to the tax, but also to any credits, exemptions or exclusions associated with that tax. See id., 101 S.Ct. at 2134; see also West Lynn Creamery, Inc., 512 U.S. at 211, 114 S.Ct. at 2220 (Scalia, J., concurring) (neutral tax combined with discriminatory credit or exemption violates the Commerce Clause because it is in principle no different from discriminatory
taxation of out-of-state economic interests). In the case of Louisiana's First-Use Tax,
due to the various credits and exemptions associated with that tax, in-state consumers
of natural gas were exempted from the burdens of the tax, whereas out-of-state
consumers were not. Moreover, the Supreme Court found that one of the credits
(Severance Tax Credit) associated with the tax favored those who owned natural gas
subject to the tax and engaged in oil, gas, and mineral production in Louisiana.
According to the Supreme Court, this was improper because
the obvious economic effect of this Severance Tax Credit is to encourage natural gas owners involved in the production of  gas [subject to the tax] to invest in mineral exploration and development within Louisiana rather than to invest in further development of [gas subject to the tax] or in production in other States.
Id. at 757, 101 S.Ct. at 2134 (emphasis added).
In Boston Stock Exchange v. New York Tax Commission, 429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514 (1977), the Supreme Court was called upon to determine the constitutionality of a New York stock-transfer tax. The tax at issue was imposed on a securities transaction if any part of that transaction occurred within New York. (Due to the nature of the securities business, transactions related to a sale of securities may take place in New York, while other transactions, such as the actual sale of the securities, may take place outside of New York.) If the taxable transfer involved a sale, the tax was imposed on the selling price per share and the number of shares sold.
In imposing this stock-transfer tax, New York provided incentives for non- residents tranferring securities to conduct their sales within New York. New York offered these non-residents a 50% reduction in the tax when the sale was made in New
York. New York also limited the total tax liability of any taxpayer (resident or non-
resident) to $350 for any single transaction involving a sale in New York. As a result,
taxpayers contemplating large-block transactions could reduce their tax liability if they
made those sales in New York.
The Supreme Court struck down this stock-transfer tax scheme. New York, the Supreme Court found, did not provide the evenhanded treatment demanded by the Commerce Clause. Id. at 332, 97 S.Ct. at 608. Rather, New York was using its power to tax an in-state operation as a means of requiring other business operations to be performed in the home State. Id. at 336, 97 S.Ct. at 610 (internal quotation marks and alteration omitted). This was wholly incompatible with the policy of free trade between the states embodied in the Commerce Clause.
In 1984, relying heavily on Maryland v. Louisiana and Boston Stock Exhange , the U.S. Supreme Court decided Westinghouse Electric Corp. v. Tully, a case with a great deal of factual similarity to the one at bar. Westinghouse Electric arose after Congress enacted Domestic International Sales Corporations (DISC) tax incentives. Under federal tax law, DISCs were exempted from income tax, and their shareholders were only taxable on a portion of that income. New York decided to attribute DISC income to a DISC's parent corporation and apportion that income (along with the parent's non-DISC income) on the basis of a standard apportionment formula (i.e., on the basis of the parent's in-state property, payroll, and receipts versus total property, payroll, and receipts). New York also provided a tax credit on DISC income based on the ratio of the DISC's export business actually conducted in New York to export
business conducted in all states. Westinghouse Electric Corp. challenged the
constitutionality of the tax credit. It asserted that the credit violated the Commerce
Clause because it discriminated against parents of DISCs to the extent that the DISCs
made export shipments from outside New York.
The Supreme Court agreed. First, the Supreme Court noted that New York's credit was not insulated from scrutiny simply because the DISC income was fairly apportioned to New York under New York's apportionment formula. In the words of the Supreme Court, Fairly apportioned and non-discriminatory are not synonymous terms[,] id. at 399, 104 S.Ct. at 1863, and nothing about the apportionment process releases the State from the constitutional restraints that limit the way in which it exercises its taxing power over the income within its jurisdiction. Id. at 398-99, 104 S.Ct. at 1863. The Court also rejected New York's argument that restricting the credit to those exports made from New York would prevent taxpayers from receiving a credit with respect to DISC income not apportioned to New York. The Court stated, This argument ignores the fact that the percentage of the DISC's accumulated income that is subject to New York's franchise tax is determined by the parent's business allocation percentage, not by the export ratio.See footnote 10 Id. at 399, 104 S.Ct. at 1863.
with its discriminatory export credit.
The in Indiana limitation distorts a neutral
apportionment formula and has the unmistakable effect of discriminating against out-of-
state PTO use.
By engaging in this discrimination, Indiana is exercising its power to tax motor fuel to coerce the direction of additional economic activity to Indiana. See Boston Stock Exch., 429 U.S. at 336, 97 S.Ct. at 610; see also Bulkmatic II, 691 N.E.2d at 1377 (quoting Hellerstein, supra, at 426-27). Because motor carriers are subjected to a a higher tax burden if they use their PTO equipment outside of Indiana, they will be more likely to use that equipment in Indiana. Thus, motor carriers are unable to make a tax-neutral decision about where they will use their PTO equipment. See Boston Stock Exch., 429 U.S. at 331, 97 S.Ct. at 607-08.
In addition, the in Indiana limitation on the proportional use exemption runs afoul of the Commerce Clause's prohibition on discrimination against out-of-state economic interests. See Camps Newfound, 520 U.S. at 579-80, 117 S.Ct. at 1598. As noted in Bulkmatic II, PTO equipment is often used in loading and unloading cargo. See Bulkmatic II, 691 N.E.2d at 1376-77; see also Camps Newfound, 520 U.S. at 576, 117 S.Ct. at 1598 (effect of discriminatory property tax exemption was to dissuade camps from serving out-of-state clientele). By reducing the transaction costs of Indiana onloads and offloads of cargo relative to out-of-state onloads and offloads of cargo, the in Indiana exemption makes the petitioners more likely to make onloads and offloads of cargo for their Indiana customers. See Bulkmatic II, 691 N.E.2d at 1376-77. The Commerce Clause forbids Indiana from using its taxing power in such a manner. See
Westinghouse Elec. Corp., 466 U.S. at 406, 104 S.Ct. at 1867.
The Department's arguments to the contrary do not alter this conclusion. Before turning to the merits of the Department's arguments, the Court notes that the Department has not favored the Court with any citation to Supreme Court Commerce Clause case law in those portions of its brief dealing with the constitutionality of the in Indiana limitation. This would be troubling enough if the Court had not issued its decision in Bulkmatic II. However, because Bulkmatic II specifically discussed many recent U.S. Supreme Court decisions dealing with the Commerce Clause and state taxation, the failure of the Department to discuss these cases is inexcusable.See footnote 12 See County Line Towing, Inc. v. Cincinnati Ins. Co., No 35A02-9811-CV-938, slip op. at 9 (Ind. Ct. App. July 22, 1999) (briefs should be of material assistance to court) (citing Young v. Butts, 685 N.E.2d 147, 151 (Ind. Ct. App. 1997)).
The Department's main argument in support of the constitutionality of the in Indiana limitation has some surface appeal. In the Department's view, one must focus on the lodestar. The lodestar is the total number of gallons of motor fuel
apportioned to Indiana under the statutory apportionment formula. Some of these
gallons, because they are subject to Indiana's unquestioned power to tax, see Roehl
Transp., Inc., 653 N.E.2d at 545-46, may be exempted from tax as well. In addition, as
the Department points out, gallons that are not apportioned to Indiana are not subject
to Indiana motor carrier fuel tax. As a result, the Department argues, Indiana does not
have to exempt gallons that were never apportioned to Indiana in the first place.
A similar argument was decisively rejected in Westinghouse Electric Corp. In that case, New York argued that the DISC tax credit merely forgives a portion of the tax that New York has jurisdiction to levy, Westinghouse Elec. Corp., 466 U.S. at 398, 104 S.Ct. at 1862, and therefore was constitutional. The Court stated,
New York's apportionment procedure determines what portion of a business' income is within the jurisdiction of New York. Nothing about the apportionment process releases the State from the constitutional restraints that limit the way in which it exercises its taxing power within its jurisdiction.
Id. at 398-99, 104 S.Ct. at 1863. Consequently, the mere fact that Indiana is refunding
tax that it could have kept does not make the in Indiana limitation constitutional.
As for the Department's contention that Indiana does not have to pay refunds for gallons never subject to taxation, a similar argument was also decisively rejected in Westinghouse Electric Corp. In that case, New York argued that limiting its DISC credit to exports originating from New York ensured that New York was not exempting income not taxable by New York in the first place. The Court saw through that argument: This argument ignores the fact that the percentage of DISC accumulated income that is subject to New York's franchise tax is determined by the parent's business allocation
percentage, not by the export ratio. Id. at 399, 104 S.Ct. at 1863; see also Hellerstein,
supra, at 444. Similarly, gallons of motor fuel are apportioned to Indiana on the basis
of the percentage of miles traveled in Indiana, not on the basis of where a motor carrier
uses its PTO equipment.
Thus, the in Indiana limitation distorts the apportionable base and has the effect of treating differently motor carriers solely on the basis of where they choose to use their PTO equipment. The Department's contention that the in Indiana limitation merely prevents refunds of taxes that have not been paid only serves to obfuscate this reality. The bottom line is that all other things being equal (i.e., total motor fuel consumption and percentage of miles traveled within Indiana), a motor carrier will pay more tax to Indiana the more it uses its PTO equipment elsewhere.See footnote 13 Any argument that does not
acknowledge this indisputable fact is disingenuous.
Moreover, the Department's contention that the in Indiana limitation merely prevents refunds of taxes that have never been paid is also factually erroneous. When a motor carrier consumes motor fuel in operating PTO equipment, Indiana taxes a percentage of that motor fuel based on the percentage of miles traveled in Indiana. This is true whether the fuel is consumed inside or outside Indiana. This, coupled with the fact that the apportionment percentage does not vary according to where the motor carrier uses its PTO equipment, makes the Department's contention that the fuel was never taxed in the first place simply untrue.
In essence, the Department's argument is an attempt to point to the legitimacy of the apportionment formulaSee footnote 14 to mask the unconstitutionality of the in Indiana limitation. But the Court is not so easily hoodwinked. Indiana certainly has a right to include motor fuel consumed in out-of-state PTO use in its apportionment formula; it also has the right to use the percentage of miles traveled in Indiana in that formula. However, in doing so, it may not discriminate between gallons consumed in out-of-state PTO use and gallons consumed in in-state PTO use because the apportionment formula does not take into account the percentage of in-state PTO use. See Westinghouse Elec.
Corp., 466 U.S. at 399, 104 S.Ct. at 1863 ('Fairly apportioned' and 'nondiscriminatory'
are not synonymous terms.) However, as a result of the in Indiana limitation, in-state
gallons are treated better than out-of-state gallons. This is not the substantially
evenhanded treatment demanded by the Commerce Clause. See Boston Stock Exch.,
429 U.S. at 332, 97 S.Ct. at 608.
The Department's final argument is that, because the motor fuel has already been apportioned to Indiana, the proportional use exemption does not involve interstate commerce, and, therefore, the in Indiana limitation cannot discriminate against interstate commerce. This argument is completely without merit. The consumption of fuel in the transportation and loading and unloading of cargo is in interstate commerce, see Case of the State Freight Tax, 82 U.S. (15 Wall.) 232, 275-76 (1872), and the motor carrier fuel taxing scheme affects this commerce by increasing its costs.See footnote 15 Because this taxing scheme affects interstate commerce, it is subject to Commerce Clause scrutiny. See Commonwealth Edison Co., 453 U.S. at 614-17, 101 S.Ct. at 2952-53. As a result, the in Indiana limitation cannot be saved on this basis.
Now that the Court has resolved the question of the constitutionality of the in Indiana limitation, the Court turns to the Department's other arguments in response to the petitioners' summary judgment motion. The Department's main contention is that, even if the in Indiana limitation is unconstitutional, the Court may not order refunds because there is no statutory authorization to do so. Accordingly, the Department
maintains that the only possible remedy for the petitioners is for the Court to declare
the entire proportional use exemption unconstitutional and hold the exemption void ab
initio. As a result, no motor carrier would be entitled to the proportional use exemption,
and, thus, any discrimination would be removed.
Of course, as a prospective matter, the Department is certainly correct. The Commerce Clause only requires that the states not discriminate against interstate commerce. See Associated Indus. v. Lohman, 511 U.S. 641, 656, 114 S.Ct. 1815, 1825, 128 L.Ed.2d 639 (1994). As a result, when a state tax exemption has been declared unconstitutional under the Commerce Clause, the state may either apply the exemption in a non-discriminatory manner or remove the exemption altogether. In this case, the Indiana General Assembly has already made that choice by substantially
amending the proportional use exemption.
However, that only addresses one part of the problem. The question remains about what remedy is due the petitioners who have been taxed in an unconstitutional manner. The Department contends that they should get nothing. Due process requires otherwise.See footnote 16 See generally Reich v. Collins, 513 U.S. 106, 115 S.Ct. 547, 130 L.Ed. 549 (1994); McKesson Corp. v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed. 17 (1990). In this case, by applying for a refund under subsections 6-6-4.1-4(d), -4.5(d), the petitioners have pursued a clear and certain
postdeprivation remedy (i.e., a remedy for those who chose to pay the tax and litigate
later). Reich, 513 U.S. at 113, 115 S.Ct at 551; Newsweek, Inc. v. Florida Dep't of
Revenue, ___ U.S. ___, 118 S.Ct. 904 (1998). As a result, they are entitled to
meaningful backward-looking relief.See footnote
Harper v. Virginia Dep't of Taxation, 509 U.S.
86, 101, 113 S.Ct. 2510, 2519, 125 L.Ed.2d 74 (1993).
Of course, meaningful backward looking relief does not necessarily mean refunds. It means that Indiana must put the petitioners in the same position as they would have been absent the discrimination vis- à -vis those who received favorable treatment. See Associated Indus., 511 U.S. at 656, 114 S.Ct. at 1825 (quoting McKesson Corp., 496 U.S. at 44 n.27, 110 S.Ct. at 2254 n.27). Simply declaring the proportional use exemption void ab initio does not do so. Accordingly, the Department's remedy is plainly inadequate.
In its brief, the Department unsuccessfully attempts to distinguish Reich and Newsweek, Inc. by pointing out that those cases involved an unconstitutional tax, rather than an unconstitutional refund. This case involves (as described above) a refund scheme whereby taxpayers first pay the motor carrier fuel tax and then apply for a refund. Therefore, according to the Department, the authority to tax is not at issue, as it was in Reich and Newsweek, Inc. Rather, it is the authority to refund a portion of that tax that is at issue. Consequently, it is the refund and not the tax itself that must be thrown out to set the constitutional balance correct. (Dep't Br. at 12).
in Indiana limitation. This would allow the Department to exercise any appeals that it
may wish to take on the constitutionality of the in Indiana limitation without having to
litigate the other issues first.See footnote
The Court finds this suggestion well-taken.
Consequently, the Court now GRANTS partial summary judgment on behalf of the petitioners on the issue of the constitutionality of the in Indiana limitation on the proportional use exemption. Specifically, the Court holds that the in Indiana limitation on the proportional use exemption violates the Commerce Clause, U.S. Const. art I, § 8, cl. 3.
When New York took the step of limiting the credit by reference to the
DISC's New York export ratio, it was tying the credit to New York activities in a
manner that no longer corresponded evenhandedly to the DISC income being
taxed. Rather, the effective New York tax rate on the DISC income being taxed
(i.e., the DISC income apportioned to New York by the parent's business allocation percentage) varied directly with the extent of the taxpayer's New York
DISC-related activities. The greater the percentage of a DISC's export
shipments from New York, the greater the relative credit for taxes paid upon
DISC income within New York's tax power, and the lower the effective New York
tax rate on such income. The lower the percentage of a DISC's export
shipments from New York, the lower the relative credit for taxes paid upon DISC
income, and the higher effective New York tax rate on such income. New York
thus released its grip on DISC income within its taxing power only to the extent
that DISC-related activities were carried on in the state. It kept its grip firmly
upon DISC income within its taxing power to the extent that DISC-related
activities were carried on outside the state.
1 Jerome R. Hellerstein & Walter Hellerstein, State Taxation, ¶ 4.13[b] (3d ed. 1998) (footnote omitted).
The Court rejects this suggestion. That it is permissible to have the incidence of this tax fall more heavily on some trucks due to their lower gas mileage has nothing to do with whether conditioning the amount of a motor carrier's tax on the state in which the motor carrier chooses to use its PTO equipment is constitutional. It is this fact of life that the Department has consistently ignored throughout its brief.
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