# McKesson Corporation v. Division of Alcoholic Beverages and Tobacco Department of Business Regulation of Florida

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United States Supreme Court
496 U.S. 18
McKesson Corporation v. Division of Alcoholic Beverages and Tobacco Department of Business Regulation of Florida
No. 88-192 Argued: March 22, 1989. --- Decided: Dec 6, 1989
Syllabus
After Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 104 S.Ct. 3049, 82 L.Ed.2d 200, held that Hawaii's liquor excise tax scheme which allowed tax preferences for alcoholic beverages manufactured from certain products grown in the State-violated the Commerce Clause because it had the purpose and effect of discriminating against interstate commerce, Florida revised its similar tax preference scheme to provide special rate reductions for specified products commonly grown in that State and used in alcoholic beverages produced there. Petitioner McKesson Corporation, a wholesale liquor distributor whose products did not qualify for the rate reductions, paid the applicable taxes for a number of months. McKesson then filed suit in state court against respondent taxing authorities seeking, inter alia, a refund in the amount of the excess taxes it had paid as a result of its disfavored treatment. The trial court invalidated the tax scheme under Bacchus Imports, enjoining future enforcement of the preferential rate reductions, but declined to order a refund or any other form of relief for taxes McKesson had already paid. The court's order was stayed pending appeal, and the State continued to collect taxes with the local preferences still in effect. The Florida Supreme Court ultimately affirmed in all respects, ruling that the refusal to order a refund was proper in light of "equitable considerations."
Held:
1. The Eleventh Amendment-which provides in part that the federal "[j]udicial power . . . shall not . . . extend to any suit . . . commenced or prosecuted against one of the United States by Citizens"-does not preclude the Supreme Court's exercise of appellate jurisdiction over cases brought against States that arise from state courts. This view has been implicit in the Court's consistent practice and uniformly endorsed in its cases, including cases involving state tax refund actions brought in state court, for almost 170 years. See, e.g., Cohens v. Virginia, 6 Wheat. 264, 412, 5 L.Ed. 257; General Oil Co. v. Crain, 209 U.S. 211, 233, 28 S.Ct. 475, 483, 52 L.Ed. 754; Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 109 S.Ct. 1500, 103 L.Ed.2d 891. Pp. 26-31.
2. If a State penalizes taxpayers for failure to remit their taxes in a timely fashion, thus requiring them to pay first and obtain review of the tax's validity later in a refund action, the Due Process Clause of the Fourteenth Amendment requires the State to afford them meaningful postpayment relief for taxes already paid pursuant to a tax scheme ultimately found unconstitutional. Pp. 31-52.
(a) This Court's precedents demonstrate the traditional legal analysis appropriate for determining Florida's constitutional duty to provide retrospective relief to McKesson for its payment of an unlawful tax. Atchison, T. & S.F.R. Co. v. O'Connor, 223 U.S. 280, 285-286, 32 S.Ct. 216, 217, 56 L.Ed. 436; Ward v. Love County Board of Comm'rs, 253 U.S. 17, 24, 40 S.Ct. 419, 422, 64 L.Ed. 751; Carpenter v. Shaw, 280 U.S. 363, 369, 50 S.Ct. 121, 123, 74 L.Ed. 478; Montana National Bank of Billings v. Yellowstone County, 276 U.S. 499, 504, 505, 48 S.Ct. 331, 333, 72 L.Ed. 673; Iowa-Des Moines National Bank v. Bennett, 284 U.S. 239, 247, 52 S.Ct. 133, 136, 76 L.Ed. 265. Pp. 32-36.
(b) Under these cases, a State must provide procedural safeguards against an unlawful tax exaction because such exaction constitutes a deprivation of property under the Due Process Clause. A State may do so either by providing a form of predeprivation process-e.g., by authorizing taxpayers to sue to enjoin imposition of the tax prior to its payment or to withhold payment and then interpose their objections as defenses in a state-initiated tax enforcement proceeding-or by providing retrospective relief as part of its postdeprivation procedure. Since Florida has established various financial sanctions and summary remedies to encourage liquor distributors to tender tax payments before resolution of any dispute over the tax's validity, the State does not provide a meaningful opportunity for predeprivation relief. Thus, in a postdeprivation refund action, the State must provide distributors not only a fair opportunity to challenge the accuracy and legal validity of their tax obligation, but also a "clear and certain remedy," O'Connor, supra, 223 U.S., at 285, 32 S.Ct., at 217, for any erroneous or unlawful tax collection. Because the state courts did not invalidate Florida's liquor excise tax scheme in its entirety, but declared it unconstitutional only insofar as it discriminated against interstate commerce, the State is free to choose among several alternative courses in providing a meaningful remedy. It may refund to McKesson the difference between the tax it paid and the tax it would have been assessed were it extended the same rate reductions as its competitors. Cf. Montana National Bank, supra, and Bennett, supra. The State may also, to the extent consistent with other constitutional restrictions, assess and collect back taxes from McKesson's competitors who benefited from the rate reductions during the contested tax period, calibrating the retroactive assessment to create in hindsight a nondiscriminatory scheme. Cf. id., 284 U.S., at 247, 52 S.Ct., at 136. Furthermore, the State may implement a combination of a partial refund to McKesson and a partial retroactive assessment of tax increases on favored competitors, so long as the resultant tax actually assessed during the contested period reflects a nondiscriminatory scheme. However, the State may not, as respondents contend, deny McKesson retrospective relief on the theory that the highest tax rate would have been imposed on all distributors had the State known that the tax scheme actually enacted would be declared unconstitutional, such that McKesson would have paid the same tax in any event. Since this approach in fact treats McKesson worse than distributors of the favored local products, it is inconsistent with the requirement of due process: to place McKesson in a position equivalent to that actually occupied by the competitors so as to render valid the tax actually assessed. If, through the State's own choice of relief, McKesson ends up paying a smaller tax than it would have paid had the State initially imposed the highest rate on everyone, McKesson will not enjoy any unpalatable "windfall," but will merely be protected from the competitive economic disadvantage proscribed by the Commerce Clause. Pp. 36-43.
(c) Neither of the "equitable considerations" cited by the State Supreme Court is sufficient to override the constitutional requirement of retrospective relief. First, the court's observation that "the tax preference scheme [was] implemented . . . in good faith reliance on a presumptively valid statute" bespeaks a concern that an obligation to provide refunds for taxes collected pursuant to what later turns out to be an unconstitutional tax scheme would undermine the State's ability to engage in sound fiscal planning. But that ability is adequately secured by the State's freedom to impose various procedural requirements designed to allow it to predict with greater accuracy the availability of undisputed treasury funds; for example, it may specify by statute that refunds will be available only to those taxpayers paying under protest or providing some other timely notice of complaint, or it may refrain from collecting taxes pursuant to a scheme declared invalid by a competent tribunal pending further review. Florida's failure to avail itself of such methods of self-protection weakens any "equitable" justification for avoiding its constitutional obligation. Moreover, Florida's tax scheme could hardly be said to be a "presumptively valid statute," since it reflected only cosmetic changes from the prior tax scheme that itself was virtually identical to the one struck down in Bacchus Imports. Second, the state court's speculation that a refund would result in a "windfall" for McKesson, which has "likely passed on" the cost of the tax to its customers, is rejected in the context of this case. The tax injured McKesson not only because it left it poorer in an absolute sense than before (a problem that might be rectified to the extent the economic incidence of the tax was passed on to others), but also because it increased the price of McKesson's products as compared to the preferred local products, such that McKesson most likely lost sales to the favored distributors or else incurred other costs (e.g., for advertising) in an effort to maintain its market share. The State cannot persuasively claim that "equity" entitles it to retain tax moneys taken unlawfully from McKesson due to its pass-on of the tax where the pass-on itself furthers the very competitive disadvantage constituting the Commerce Clause violation that rendered the deprivation unlawful in the first place. United States v. Jefferson Electric Mfg. Co., 291 U.S. 386, 402, 54 S.Ct. 443, 449, 78 L.Ed. 859, distinguished. Pp. 44-49.
(d) The State's interests in avoiding serious economic and administrative dislocation and additional administrative costs may play a role in choosing the form of and fine-tuning the relief to be provided McKesson, though Florida's interest in financial stability does not justify a refusal to provide relief. Pp. 49-51.
524 So.2d 1000 (Fla.1988), reversed and remanded.
BRENNAN, J., delivered the opinion for a unanimous Court.
David G. Robertson, San Francisco, Cal., for petitioner.
H. Bartow Farr, III, Washington, D.C., for respondents.
Justice BRENNAN delivered the opinion of the Court.

## Notes

This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).
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