A judge in the Supreme Court, Albany County has allowed a declaratory judgment action challenging the constitutionality of flat taxes assessed under New York’s highway use tax regime to move forward, denying a motion to dismiss the plaintiffs’ Commerce Clause challenge to the taxes.  Owner Operator Ind. Drivers Ass’n v. N.Y.S. Dep’t of Taxation and Fin., 2014 NY Slip Op. 30226(U) (Sup. Ct. Albany Cnty. Jan. 28, 2014).

Background. New York State imposes a highway use tax on motor carriers operating certain heavy motor vehicles on its public highways.  The tax is primarily assessed based on miles traveled by a motor vehicle on public highways, and the rate of tax is determined by the weight of the vehicle.  In addition, the tax law requires motor carriers operating certain heavy motor vehicles to pay, for each vehicle, a $15 fee for a certificate of registration (“Registration Tax”) and a $4 fee for a decal that must be affixed to the vehicle (“Decal Tax”). Tax Law §§ 502(1)(a) & 502(6)(a).

A group of plaintiffs, including the Owner Operator Independent Drivers Association, a not-for-profit trade organization, filed a complaint challenging the constitutionality of the Registration Tax and Decal Tax on Commerce Clause and Due Process grounds, seeking a declaratory judgment, an injunction and refunds.  The plaintiffs asserted that, because the Registration Tax and Decal Tax, unlike the separate highway use tax imposed by Tax Law § 503, were flat taxes and were not apportioned based on the vehicles’ actual use of New York’s highways, these taxes fell more heavily on out-of-state vehicles, which used New York’s highways less than in-state trucks, and therefore imposed “a heavier per-mile tax burden on out-of-state trucks than on trucks which operate primarily within the State of New York.” The plaintiffs sought to represent a class of all out- of-state interstate motor carriers who have paid or will pay the Registration Tax and Decal Tax. The Department filed a motion to dismiss the plaintiffs’ complaint on the basis that the plaintiffs failed to state a cause of action, and also requested a denial of class certification in the case.

Trial Court Decision. Affording the plaintiffs “the benefit of every possible favorable inference,” as is required in evaluating a motion to dismiss, the trial court concluded that the plaintiffs’ Commerce Clause challenge to the Registration Tax and Decal Tax “set forth a cognizable legal theory” with “sufficient facts to state a Commerce Clause cause of action.” The court drew parallels between the Registration Tax and Decal Tax and the flat motor vehicle taxes struck down as unconstitutional by the U.S. Supreme Court in American Trucking Ass’n, Inc. v. Scheiner, 483 U.S. 266 (1987).  In American Trucking, the Supreme Court examined the constitutionality of a flat “marker fee” and “axle tax” assessed on certain heavy motor vehicles operating in Pennsylvania, and held that the flat taxes were “plainly discriminatory” against out-of-state taxpayers because, in “practical effect,” the taxes imposed a cost per mile on out-of- state trucks “approximately five times as heavy as the cost per mile borne by local trucks.” The court found that the plaintiffs provided sufficient allegations that the flat tax structure of the Registration Tax and Decal Tax imposes a heavier burden on out-of-state trucks than on trucks that operate primarily within New York.

The trial court also refused to dismiss the plaintiffs’ class certification request on the grounds that the Department’s motion was premature. Under New York State rules, plaintiffs need not make a motion for class certification until 60 days after the time to serve a responsive pleading has expired. The court concluded that it may not determine whether the plaintiffs were entitled to class action status until the plaintiffs actually make such a motion for class certification.

The trial court also refused to dismiss the plaintiffs’ demand for injunctive relief, concluding that if the plaintiffs “prevail on their constitutional challenge they cannot be fully compensated in money damages,” and rejected the Department’s assertion that the plaintiffs’ refund claims should be dismissed, ruling that the New York Supreme Court has jurisdiction over cases requesting monetary refunds where such relief is “incidental” to a constitutional issue.

However, the trial court did dismiss the plaintiffs’ Due Process challenge, concluding that the plaintiffs presented no cognizable Due Process claim, because the case as filed provided the plaintiffs with “both a fair opportunity to challenge the constitutionality” of the taxes and “a clear and certain remedy, damages and injunctive relief, in the event they prevail.”

Additional Insights

The trial court’s decision only analyzes whether the Department is entitled to a dismissal of the plaintiffs’ claims prior to filing an answer, and does not yet address the actual merits of the plaintiffs’ allegations. Nonetheless, the court initially seems amenable to the plaintiffs’ claims, so motor carriers paying the Registration Tax and Decal Tax for large fleets primarily operating outside of New York State should follow this case carefully.