Late in 2011, in Joseph v. Hyman, the Second Circuit Court of Appeals dismissed a complaint in which various parties challenged as unconstitutional an exemption from the New York sales tax on parking services.1 The Court of Appeals relied on the doctrine of comity to narrow even further a taxpayer’s ability to bring a constitutional challenge to a tax in federal court.2
In New York City, a New York State law provides for the imposition of a 10.375% sales tax on parking services (composed of a 4% state tax, a 6% city tax, and a 0.375% Metropolitan Commuter Transportation District tax) and authorizes New York City as a city “of one million or more” to impose a “Manhattan surcharge,” an additional 8% sales tax if the parking services are rendered in Manhattan.3 The law also includes an exemption from the 8% Manhattan surcharge for some residents who purchase long-term parking (the “Residential Exemption”).4 Therefore, in Manhattan, the total parking tax for those not entitled to the Residential Exemption amounts to 18.375%.
In Joseph, a civil rights class action suit commenced in August 2009, the plaintiffs were primarily commuters who parked their cars in the city and they asserted that the Residential Exemption was discriminatory and violated the Commerce, Equal Protection and Privilege and Immunities Clauses of the U.S. Constitution, and Article 1, Section 11 of the New York State Constitution.5 Estimates of the revenue effect of the Residential Exemption varied from $3 million to $22 million annually. Also, the plaintiffs cited Lunding v. New York Tax Appeals Tribunal6 and City of New York v. State7 to support their position that the various state and city defendants “violated clearly established constitutional law” and “failed to act in an objectively reasonable manner” and that the state and city defendants were not therefore entitled to qualified immunity.8 The plaintiffs argued that because the defendants were various state and city government officials and were acting under color of state law, the defendants’ actions violated 42 United States Code Section 1983 (“Section 1983”) and accordingly, the plaintiffs were entitled to attorneys fees under 42 United States Code Section 1988.9
Two significant potential barriers to the plaintiffs’ position were the Tax Injunction Act (the “TIA”)10 and the comity doctrine. The TIA bars federal courts from taking any action to “enjoin, suspend or restrain the assessment” of a state tax when “a plain, speedy and efficient remedy” is available in state court.11 Comity, which comes from the Latin “comitas,” meaning friendly,12 stands for the proposition that courts of one jurisdiction may accede or give effect to the decisions of another jurisdiction. Also, abstention doctrines and federal statutes–of which there are many–require federal courts to refrain from involvement in some matters, and to allow those matters to be resolved by state courts. For example, Congress enacted the TIA in 1937 because of concerns that federal courts were interfering in the collection of state taxes, and the enactment was grounded in principles of federalism. Other enactments include the Anti-Injunction Act13 and the Federal Tax Injunction Act.14 Abstention doctrines, which are generally known by the name of the case from which they hail, include the Pullman,15 Younger,16 Burford,17 Colorado River 18 and Rooker-Feldman19 abstention doctrines.
At the time of the briefing to the district court in Joseph v. Hyman, two U.S. Supreme Court cases, Fair Assessment in Real Estate Association, Inc. v. McNary20 and Hibbs v. Winn,21 set the framework for determining whether the TIA or principles of comity would bar federal court review of a constitutional challenge to a state tax.
In Fair Assessment, the U.S. Supreme Court held that comity barred a suit brought in federal court to review a local property tax assessment, even though the action was brought under Section 1983 alleging that the taxpayers were deprived of equal protection and due process of law because of unequal taxation of real property.22 As Section 1983 authorizes federal courts to hear cases challenging the constitutionality of state laws, the Court needed to reconcile that federal law with: (1) the TIA, which barred federal court access with respect to injunctive relief; (2) the prohibition, based on comity principles, against issuing declaratory judgments in state tax challenges;23 and (3) the notion that comity does not apply if a Section 1983 violation is alleged.24 The Court held that comity precluded the commencement in federal court of Section 1983 cases challenging state tax systems, as long as the state court remedies were “plain, adequate and complete.”25
However, in Hibbs, in a decision by Justice Ruth Bader Ginsburg, the U.S. Supreme Court held that neither the TIA nor principles of comity barred a suit challenging a state tax credit under the establishment clause on the basis that the credit improperly channeled public funds to pay for parochial schools, because the relief sought did not implicate enjoining the collection of a tax or contesting the validity of a tax imposition, but rather only challenged a credit and the success of the plaintiff’s action would result in greater, rather than diminished, state tax collections.26 In Hibbs, the Court stated in footnote 9 that it “relied upon ‘principles of comity’ to preclude original federalcourt jurisdiction only when plaintiffs have sought district-court aid in order to arrest or countermand state tax collection.”27 Relying on that footnote, the First, Sixth, Seventh and Ninth Circuits applied narrow views of the comity doctrine and a broad view of the route left open in Hibbs and allowed certain actions to proceed in federal court.28 The decision in Hibbs was regarded as an opening of the door to federal courts when challenging certain state tax provisions.
However, on November 2, 2009, the U.S. Supreme Court agreed to hear the Sixth Circuit case, Commerce Energy, Inc. v. Levin.29 On June 4, 2010, the Court, in another opinion by Justice Ginsburg, reversed the Sixth Circuit, held that the comity doctrine was “more embracive” than the TIA and barred a challenge in federal court to Ohio’s taxation of gas marketers, which was alleged to be discriminatory.30 The Court in Levin found the “comity calculus” presented was different from that presented in Hibbs, as the economic legislation implicated in Levin “does not involve any fundamental right or classification that attracts heightened judicial scrutiny or impinge on fundamental rights,” the litigation was intended to “improve [plaintiffs’] competitive position,” and the state courts are better positioned to address “state legislative preferences” and could craft remedial options that would impact tax collection and would therefore be unavailable to federal courts.31
Oral argument in Joseph was held on July 23, 2010 and the district court judge asked right off the bat why Levin was not a “gamechanger.” 32 Judge Richard J. Sullivan said, “I think you may have some interesting arguments and creative arguments . . . I just think that . . . after Levin, you probably should be across the street.”33 In response to the city’s argument that Levin established that the comity principle applied to plain vanilla or “run-of-the-mine” tax cases, Judge Sullivan noted that “one man’s vanilla is another man’s tutti-frutti” and recognized that “it’s sometimes hard to be able to know, when you’re in the trenches, what is a runof- the-mine tax case.”34 In an attempt to come within Hibbs, the plaintiffs in Joseph argued that because they were seeking to “enhance rather than deplete state coffers,” the TIA did not prohibit federal court review.35 The district court recognized that the plaintiffs were attempting to “slip the restraints” of the TIA, but dismissed the case under the comity doctrine, finding that no fundamental right is implicated in the parking tax exemption, that plaintiffs were not third-party challengers of the tax but were “objecting to their own tax burden, however indirectly” and that the state court is “better suited than this Court to identify and implement the remedial option that best comports with the legislative will.”36 The court also noted that the plaintiffs had not alleged that the state remedies were insufficient.37
In affirming the district court’s decision, the Second Circuit added little to the analysis, but did address the plaintiffs’ assertion that New York courts could not fashion remedies different from those available to district courts, concluding that state courts could, if necessary, prevent enforcement of discriminatory tax provisions, even if the result was a decrease in state tax revenue.38 The case was dismissed without prejudice and resort to the state courts remains available to challenge the exemption.39
Status of Comity After Levin
As recognized by Joseph, after Levin the bar to gain entry to the federal court system has been raised and only those plaintiffs whose claims involve fundamental rights, or who can demonstrate that the state review system is inadequate, will pass the hurdle.40 Reliance on the notion that a credit or an exemption provision is implicated, rather than an assessment, or that a suit is commenced by a nontaxpayer, is unlikely to provide the entry ticket.
In some respects, raising the bar was appropriate. Litigants should not be able to cast about for plaintiffs to avoid the prohibition against directly enjoining the collection of tax, that is by naming as plaintiff someone who is not actually a taxpayer, such as an employer who reimburses an employee for taxes paid. Likewise allowing a challenge to the grant of credits or exemptions of a particular tax, but not to tax assessments, may be too nuanced an approach to determine whether jurisdiction exists, particularly given the goal of the TIA and the comity doctrine, which is to keep most state tax challenges in state courts.
However, it remains true that litigating constitutional issues in state courts can be burdensome and unrewarding. ANR Pipeline Co. v. Louisiana Tax Commission highlights the need for federal jurisdiction and shows how easy it may be for a state to establish that the state court process has met the “plain, speedy, and efficient” requirement, thereby thwarting taxpayers’ resort to federal courts and any meaningful challenge to unconstitutional statutes.41 ANR Pipeline challenged as unconstitutional Louisiana’s taxation of interstate and intrastate natural gas pipelines at different assessment ratios.42 The Louisiana trial court had ruled that the tax ratio differential was unconstitutional on due process and equal protection grounds; the court did not reach the commerce clause challenge.43 However, the trial court also concluded that the fair market value would need to be redetermined, a process that would involve revaluations for each year and for each of the 52 parishes in which the pipeline was located. ANR Pipeline challenged the revaluation as violating its due process rights, but neither the Louisiana Court of Appeals, Louisiana Supreme Court nor the U.S. Supreme Court would hear the case, even though ANR Pipeline indicated to the U.S. Supreme Court that the review procedure could generate 1,500 new proceedings and that the company faced the possibility that instead of refunds they would receive assessments.44 ANR Pipeline’s fears proved correct. As a result of the revaluations, ANR Pipeline received assessments that more than eliminated the refunds to which it would have been entitled if the reduced valuation ratio had been applied to the fair market value originally reported–clearly a case of “no good deed goes unpunished.” ANR Pipeline then sought review by the trial court, which enjoined the revaluation proceedings and ordered refunds, but the Louisiana Court of Appeal vacated the trial court order and directed that the revaluation proceeding continue. ANR Pipeline appealed the revaluations– resulting in additional assessments of $15.7 million–and the Louisiana Tax Commission granted ANR Pipeline relief. Twenty parishes appealed the tax commission ruling in their home districts and ANR Pipeline sued in Louisiana’s first, second and third circuit courts of appeal.45 The second and third circuit courts of appeal denied the writs (the action in the third circuit court of appeal is still pending), allowing the 20 separate actions to proceed.
ANR Pipeline then sought the aid of the federal district court, requesting injunctive relief and damages under Section 1983. ANR Pipeline stressed that instead of refunds for their constitutional injuries, it received an additional $15.7 million in assessments and that there had been a “perversion and abuse” of the revaluation process. The federal district court referred to the Rooker-Feldman abstention doctrine, which prohibits lower federal court review of state decisions and said that the doctrine would not apply if an independent claim were presented, even if a ruling on the independent claim would be contrary to the state court decision. Because the state trial court never decided the commerce clause question that ANR Pipeline had raised, the court held that that issue could be viewed as an exception to the Rooker-Feldman abstention doctrine. However, the federal district court ruled that the Section 1983 claim grounded in the commerce clause was time-barred and further held that the TIA, the Anti-Injunction Act and the comity doctrine precluded its exercise of jurisdiction. The court noted that ANR Pipeline had available a plain, speedy and efficient remedy in the state courts, even if federal courts would have provided a “better” remedy.46 Regarding ANR Pipeline’s post-judgment claims of due process violations and to the conclusion that such action violated the TIA, the Anti-Injunction Act and principles of comity, the court found that ANR Pipeline had failed to allege that the defendants acted under a policy or custom, a necessary element to establish a Section 1983 due process claim, and it dismissed that claim as well. The Fifth Circuit affirmed the Louisiana federal district court decision, thus allowing Louisiana’s onerous property tax review procedures to continue, even though the revaluations appeared to have been applied in a retaliatory manner and even though ANR Pipeline would need to defend 20 homeparish review proceedings, finding that this was somehow an “adequate scheme” of state review.47 Years after the initial decision in ANR Pipeline, the issues remain unresolved.
The perception that state courts may be more overly protective of state fiscs than federal courts–regardless of whether that is borne out by empirical evidence– is one that hails from the early days of this country and is one held by many taxpayers. As recognized by Chief Justice John Marshall in a 1809 decision of the U.S. Supreme Court: “the constitution itself either entertains apprehensions on this subject, or views with such indulgence the possible fears and apprehension of suitors, that it has established national tribunals.”48 Justice Joseph Story confirmed just a few years later that “[t]he constitution has presumed (whether rightly or wrongly we do not inquire) that state attachments, state prejudices, state jealousies, and state interests might sometimes obstruct, or control, or be supposed to obstruct or control, the regular administration of justice.”49 Not much has changed in nearly 200 years. The notion of state court protectionism was recently acknowledged by the Iowa Supreme Court in its decision in KFC Corp. v. Iowa Dep’t of Revenue, in which the court observed that “it might be argued that state supreme courts are inherently more sympathetic to robust taxing powers of states than is the United States Supreme Court.”50 It is not uncommon for state counsel to meld the legally irrelevant financial implications of a taxpayer-favorable opinion into briefing and argument, further supporting the perception. States also may harbor fears that they might not fare as well under federal court scrutiny; it is telling that 44 states and the District of Columbia supported Ohio as amici before the U.S. Supreme Court in Levin.51 Another concern is the U.S. Supreme Court’s extraordinarily limited docket, which may be insufficient to provide taxpayers with protection from state tax actions that transcend constitutional boundaries. Generally, the Court grants fewer than 100 cases per term; less than 1% of the cases in which petitions are filed.52
Federal Court Review Not Entirely Foreclosed
Although resort to federal court may be more restrictive after Levin, as confirmed by some recent decisions, opportunities remain for federal court review. For example, in Amazon.com LLC v. Lay, the federal district court retained jurisdiction and held that the North Carolina Department of Revenue’s request for purchaser-specific detailed information, made in connection with its audit of Amazon, violated the First Amendment and the Video Privacy Protection Act.53 The federal district court distinguished Levin and observed that Amazon’s request was not a broad request to enjoin the collection of tax or argue that the state’s tax scheme was invalid.54 Interestingly, the court also found that the North Carolina procedure governing subpoenas was “not plain,” stressing that the Department of Revenue could not point to any set of procedural rules to govern tax subpoena disputes.55 The court was, however, concerned with principles of comity and promised to “fashion the most appropriately narrow relief possible.”56 Likewise, challenges to recently enacted revisions to New Jersey’s abandoned property law–not a tax law–were allowed to proceed in federal court over New Jersey’s assertion that the Buford abstention doctrine, which provides that federal courts should refrain from exercising jurisdiction if state policy is implicated, would dictate dismissal.57
Another interesting twist to federal court jurisdiction in tax cases was raised in Swift Frame v. City of San Diego, in which San Diego sought removal to federal court of the case commenced in a California state court by a taxpayer seeking a tax refund and the taxpayer–not San Diego–filed a motion for abstention.58 Once in federal court, San Diego moved to dismiss the case on the basis of the TIA and principles of comity.59 The city’s motion was granted and the request by taxpayer to remand the case to state court was not addressed;60 if the case is not remanded, it is unclear whether the taxpayer’s state court remedies would now be barred on statute of limitations grounds.
There is no question that taxes are vital to state governments’ survival. There is also no question that sometimes tax systems and the actions of government officials violate federal constitutional protections. It is highly questionable whether, given the TIA and the principles of comity, there are adequate protections available to taxpayers. An alternative federal judicial venue that can hear appeals from final decisions in state tax matters that the U.S. Supreme Court does not have the capacity to hear would provide a welcome safeguard.61