On March 29, 2017, in a unanimous ruling, the US Supreme Court ruled that a New York statute, which prohibits identifying a surcharge to customers for credit card payments, regulates speech and is therefore subject to heightened scrutiny. Expressions Hair Design v. Schneiderman, No. 15-1391, 581 US __ (Mar. 29, 2017). The Court remanded the case to the US Court of Appeals for the Second Circuit to determine whether New York’s statute violates the First Amendment. Although not a tax case, the decision likely implicates state and local tax laws that either prohibit, or require, taxpayers to identify taxes and fees in customer invoices.
Background. New York General Business Law § 518 prohibits a seller from imposing a surcharge related to credit card fees. While the statute prohibits a retailer from advertising or separately stating a credit card surcharge, it does prohibit the retailer from charging a different price for credit card and cash sales.
Five New York businesses challenged the constitutionality of the statute, alleging it violated the First Amendment of the United States Constitution by regulating the business’s communication of prices, and by being unconstitutionally vague. The US District Court for the Southern District of New York ruled for the petitioners, finding that the statute regulates speech, not conduct, and is therefore subject to heightened scrutiny. In striking down the New York as violating the First Amendment, the District Court for the Southern District of New York applied a strict scrutiny standard.
On appeal, the Second Circuit vacated the District Court decision, abstaining from the First Amendment issue altogether, by concluding that the statute regulates conduct and not speech. The Supreme Court disagreed and remanded the case back to the Second Circuit for consideration of the First Amendment issue. In its opinion, Chief Justice Roberts wrote: “The law tells merchants nothing about the amount they are allowed to collect from a cash or credit card payer. Sellers are free to charge $10 for cash and $9.70, $10, $10.30, or any other amount for credit. What the law does regulate is how sellers may communicate their prices.” Expressions Hair Design, at *9.
Eversheds Sutherland Observation The Supreme Court’s ruling clarifies that laws regulating how a seller communicates its prices are subject to heightened constitutional scrutiny standard, making it more likely that these laws will not pass constitutional muster.
Background on First Amendment Scrutiny. To apply heightened scrutiny under the First Amendment, a law must regulate speech and not conduct. United States v. O’Brien, 391 US 367 (1968). In Expressions Hair Design, the Supreme Court found that simply because a statute regulates conduct does not mean it has no impact on speech. The decision signifies a shift towards more stringent analysis of statutes regulating commercial speech under the guise of regulating conduct. The Supreme Court concluded that regulating the relationship between a sticker price and the price charged means the statute is more than a pricing regulation—the communication of prices constitutes speech. Expressions Hair Design, at *8, n.2, 9.
Tax Statutes and the First Amendment. Although the Expressions case dealt with a surcharge, its reasoning is applicable to state and local tax statutes that require or restrict a taxpayer’s ability to separately identify taxes and fees on customer invoices. The Expressions ruling signifies that state and local statutes that bar truthful and non-deceptive speech will be subject to heightened scrutiny.
Examples of Challenges to Tax Statues Regulating Speech
In BellSouth v. Farris, the US Court of Appeals for the Sixth Circuit held that Kentucky’s telecommunications services tax, which banned providers from collecting the tax directly from consumers and separately stating the tax, was unconstitutional under the First Amendment. BellSouth Telecomm’ns., Inc. v. Farris, 542 F.3d 499 (6th Cir. 2008). The Sixth Circuit concluded that Kentucky’s ban did not prohibit the pass through of the tax, but only the telecommunications providers’ truthful line item stating the tax was charged. Since the speech regulated was truthful and not misleading, the court held that the statute failed heightened scrutiny.
Eversheds Sutherland Observation Following Bellsouth, taxpayers in other states have obtained rulings allowing them to pass through the economic impact of taxes. Taxpayers have also obtained rulings that statutes requiring taxpayers to separately state certain taxes are not required to do so, in certain situations.
Other courts, however, have upheld limited restrictions on taxpayers’ ability to separately identify taxes and fees. For example, the Washington Supreme Court concluded that businesses may not add the Washington Business & Occupation (B&O) tax as a separate charge to its sales prices, regardless of any prior disclosure to customers. Peck v. AT&T Mobility et al., 375 P.3d 304 (2012). But see Nelson v. Appleway Chevrolet Inc. 157 P.3d 847 (Wash. 2007) (stating that sellers were prohibited from passing through B&O charges, unless they were specifically included in the negotiated final price of the item sold).
Unlike Washington, Texas has allowed surcharging the Texas Franchise Tax if certain conditions are met. Tex. Policy Letter Ruling No. 201008847L (Aug. 6, 2010). Similarly, in Mosser Const., Inc. v. City of Toledo, the Ohio Court of Appeals concluded that the Ohio Commercial Activity Tax does not prohibit a contractor from including the cost of tax in the prices it charges for its services. 2007 Ohio 4910 (Ohio App. 2007).