IN THE SUPREME COURT OF IOWA

No. 14–0494

Filed April 10, 2015

LSCP, LLLP,

Appellant,

vs.

COURTNEY M. KAY-DECKER, Director, IOWA DEPARTMENT 

OF REVENUE,

Appellee.

Appeal from the Iowa District Court for Polk County, Rebecca 

Goodgame Ebinger, Judge.

An ethanol producer appeals after the Iowa Department of Revenue 

and the district court both concluded Iowa’s excise tax on natural gas 

delivery is constitutional. AFFIRMED.

Christopher E. James and William E. Hanigan of Davis, Brown, 

Koehn, Shors & Roberts, P.C., Des Moines, for appellant.

Thomas J. Miller, Attorney General, Donald D. Stanley Jr., Special 

Assistant Attorney General, and James D. Miller, Assistant Attorney 

General, for appellee.
2

HECHT, Justice.

Iowa taxes the delivery of natural gas at variable tax rates 

depending on volume and the taxpayer’s geographic location within the 

state. In this appeal, we confront several constitutional challenges to 

that statutory framework.

I. Background Facts and Proceedings.

LSCP, LLLP1 operates an ethanol manufacturing plant near 

Marcus, Iowa. Operations began in April 2003. The ethanol LSCP 

manufactures at its Marcus plant is sold primarily through a marketing 

firm for use as fuel. LSCP also produces several ethanol byproducts, all 

of which are marketed for use as feed for livestock.

LSCP’s manufacturing processes use a substantial volume of 

natural gas. The gas supplies energy for the plant’s steam boilers and is 

burned to provide ambient heat for the plant in the winter months. The 

relevant unit of measurement for the natural gas LSCP consumes is a 

therm. Between 2007 and 2010, LSCP consumed millions of therms of 

natural gas each year.2 

There are no natural gas producers in Iowa. Accordingly, all 

natural gas consumed in the state necessarily comes from out-of-state 

suppliers through federally regulated interstate pipelines. Most 

consumers receive their natural gas from a state-regulated local 

distribution company (LDC). LDCs connect to the interstate pipeline, 

1LSCP is an acronym for Little Sioux Corn Processors.

2One therm equals 100,000 British thermal units (Btu). One Btu represents the 

amount of heat required to raise the temperature of one pound of water by one degree 

Fahrenheit. U.S. Energy Info. Admin., Frequently Asked Questions, 

http://www.eia.gov/tools/faqs/faq.cfm?id=45&t=8 (last updated Mar. 30, 2015). 

Because it consumes millions of therms of natural gas per year, LSCP is a very highvolume consumer of natural gas.

 
3

redirect the natural gas at a reduced pressure into pipes that are smaller 

in diameter, and move it to the locations where it is ultimately 

consumed. In other words, in the delivery of natural gas, the role of an 

LDC is analogous to the role played by utility companies delivering 

electricity to consumers. MidAmerican Energy is an example of an LDC. 

Some consumers of natural gas bypass LDCs and connect directly 

to an interstate pipeline. Companies owning interstate pipelines must 

allow direct connections to any consumer agreeing to certain terms and 

conditions. See 18 C.F.R. § 284.8(a), (e) (2014). Some industrial 

consumers of natural gas connect directly because they require natural 

gas service at higher pressures not available from an LDC. Although the 

record does not reflect whether a need for higher pressure was a reason 

for LSCP’s choice, it is undisputed that LSCP bypassed an LDC and 

connected directly to an interstate pipeline.

In 1998, five years before LSCP began operations, the legislature 

restructured the statutes authorizing taxes on electricity and natural gas 

providers. See 1998 Iowa Acts ch. 1194, § 3 (codified at Iowa Code 

§ 437A.2 (1999)). The new framework took effect January 1, 1999. Id.

§ 40. As the district court explained:

Prior to 1998, natural gas utility companies were taxed 

on the property they owned in the area the utility serviced—

an ad valorem tax. . . . [C]hapter 437A replaced the ad 

valorem property tax system with an excise tax on the 

delivery, consumption, or use of natural gas—the 

“Replacement Tax.” Iowa Code § 437A.3(26).

Whereas the former system taxed property, the new system taxes 

activity. The general assembly expressly intended the new replacement 

tax scheme to preserve revenue neutrality, approximate the amount of 

taxes that were paid under the former ad valorem framework, and 
4

“remove tax costs as a factor in a competitive environment.” Id. § 3; Iowa 

Code § 437A.2 (2007). 

Under the new replacement tax framework, the state is divided into 

fifty-two natural gas competitive service areas (CSAs). Iowa Code 

§ 437A.3(22). Within each CSA, “[a] replacement delivery tax is imposed 

on every person who makes a delivery of natural gas to a consumer 

within th[e] state.” Id. § 437A.5(1). The statute contains a formula for 

calculating the amount of replacement tax due. See id. The amount of 

tax is equal to the number of therms a taxpayer delivered into a 

particular CSA multiplied by the delivery tax rate for that CSA. Id. § 

437A.5(1)(a).

The Iowa Department of Revenue (the Department) calculated each 

CSA’s initial delivery tax rate using a statutorily-prescribed mathematical 

formula. See id. § 437A.5(3). First, the Department calculated average 

“centrally assessed property tax liability allocated to natural gas service 

of each taxpayer, other than a municipal utility, principally serving a 

natural gas [CSA] for the assessment years 1993 through 1997 based on 

property tax payments made.” Id. § 437A.5(3)(a). The Department next 

determined “the number of therms of natural gas delivered to consumers 

which would have been subject to taxation . . . in calendar year 1998” in 

each CSA had the replacement tax been in effect. Id. § 437A.5(3)(b). 

Finally, the initial tax rate was determined by dividing the number 

computed under subsection (3)(a) by the number of therms calculated 

under subsection (3)(b). See id. § 437A.5(3)(c). With this initial 

determination as a baseline, any CSA’s delivery tax rate can be adjusted 

each tax year based upon the number of therms delivered within that 

CSA. See id. § 437A.5(1)(a), (8).
5

Typically, the replacement tax applies to LDCs because they 

remove natural gas from the interstate pipeline and deliver it to 

consumers. However, LSCP has bypassed an LDC. Thus, section 

437A.5(1) does not directly apply to LSCP, because strictly speaking, 

LSCP does not deliver natural gas; the interstate pipeline does. 

Interstate pipeline companies are exempt from the replacement 

tax. See id. § 437A.5(7) (providing the replacement tax in section 

437A.5(1) does not apply to natural gas delivered by a pipeline other than

those governed by chapter 479); id. § 479.2(2) (excluding interstate 

natural gas pipelines from the definition of “pipeline” under chapter 479). 

Yet, those who bypass LDCs by directly connecting to an interstate 

pipeline do not avoid the replacement tax under section 437A.5. Section 

437A.5(2) imposes the replacement tax on consumers who directly 

connect and draw natural gas from an interstate pipeline. Id.

§ 437A.5(2) (“If natural gas is consumed in this state . . . and the 

delivery, purchase, or transference of such natural gas is not subject to 

the tax imposed in subsection 1, a tax is imposed on the consumer at the 

rates prescribed under subsection 1.”). Accordingly, because LSCP is a 

direct-connect consumer and the interstate pipeline company is exempt, 

LSCP is required to pay the replacement tax on the therms of natural gas 

it consumes. As the district court noted, the statute essentially “treats a 

direct-connect consumer as delivering the natural gas to itself.”

In 2010, LSCP filed with the Department a claim for a refund of 

replacement tax LSCP paid for tax years 2007 through 2010, asserting 

the replacement tax in section 437A.5(2) is unconstitutional because it is 

based on the CSA in which a taxpayer is located. In particular, LSCP 

asserted the replacement tax violates the Federal Equal Protection 
6

Clause, article I, section 6 of the Iowa Constitution, and the dormant 

Commerce Clause.3 

Chapter 437A establishes a limitations period of three years for 

taxpayers filing claims for refunds of replacement tax due to clerical or 

mathematical errors. Iowa Code § 437A.14(1)(b). However, the chapter 

also establishes a shorter limitations period of ninety days for making 

refund claims based on an assertion the tax is unconstitutional. Id. 

LSCP’s claim for refunds filed with the Department contended the shorter 

limitations period for refund claims based on constitutional grounds 

violates the Federal Equal Protection Clause and article I, section 6 of the 

Iowa Constitution. Therefore, LSCP asserted its refund claims were 

timely filed within the broader three-year limitations period.

An administrative law judge (ALJ) denied LSCP’s refund claims and 

rejected the constitutional challenges to both the refund limitations 

period and the replacement tax itself. The ALJ reasoned that under both 

the Federal Equal Protection Clause and article I, section 6 of the Iowa 

Constitution, any unequal treatment in the statutory framework was 

supported by a rational basis; that the shorter limitations period for filing 

refund claims was rationally related to encouraging prompt filing of 

claims that may impact many other taxpayers; and that the replacement 

tax framework does not violate the dormant Commerce Clause because it 

taxes the activity of natural gas delivery without regard to the supplier’s 

location.

3Initially, LSCP also raised a due process challenge to the replacement tax. The 

due process challenge is not asserted in this appeal, and we therefore do not address it.

 
7

LSCP sought judicial review in the district court. The district court 

denied each of LSCP’s constitutional challenges. LSCP appealed, and we 

retained the appeal.

II. Scope of Review.

“We generally review a district court’s decision on a petition for 

judicial review of agency action for correction of errors at law. However, 

in cases . . . where constitutional issues are raised, our review is 

de novo.” Qwest Corp. v. Iowa State Bd. of Tax Review, 829 N.W.2d 550, 

557 (Iowa 2013) (citation omitted). This is one such case.

III. The Parties’ Positions.

A. LSCP. 

1. Equal protection. LSCP first contends the natural gas 

replacement tax violates both the Federal Equal Protection Clause and 

article I, section 6 of the Iowa Constitution. LSCP asserts it is similarly 

situated to other directly connected ethanol plants within the state, but 

is taxed at a different rate than other such plants solely because of its 

geographic location within a particular CSA. See Racing Ass’n of Cent. 

Iowa v. Fitzgerald (RACI I), 648 N.W.2d 555, 559 (Iowa 2002) (focusing on 

the main activity being taxed—slot machine gambling—rather than 

dissimilar scenery surrounding different facilities), rev’d, Fitzgerald v. 

Racing Ass’n of Cent. Iowa, 539 U.S. 103, 110, 123 S. Ct. 2156, 2161, 

156 L. Ed. 2d 97, 105 (2003); see also Racing Ass’n of Cent. Iowa v. 

Fitzgerald (RACI II), 675 N.W.2d 1, 15 (Iowa 2004) (“In the end, we return 

to the fact that the item taxed—gambling revenue—is identical.”). In 

particular, LSCP compares itself to a biorefining plant located in 

Emmetsburg. Like LSCP, the Emmetsburg plant is directly connected, 

but because it is situated within two miles of the city of Emmetsburg, it 

is in the Emmetsburg CSA and therefore benefits from a replacement tax 
8

rate of zero.4 See Iowa Code § 437A.3(22)(a)(1)(j) (establishing the 

Emmetsburg CSA). This disparity of taxation, LSCP posits, violates our 

constitutional command that “[a]ll persons in like situations should 

stand equal before the law.” Chi. & Nw. Ry. v. Fachman, 255 Iowa 989, 

1002, 125 N.W.2d 210, 217 (1963).

2. Limitations period for refund claims. LSCP contends the shorter 

limitations period for refund claims based on a constitutional objection 

also violates the Federal Equal Protection Clause and article I, section 6 

of the Iowa Constitution. In LSCP’s view, the shorter limitations period 

draws a classification between constitutional claims and other types of 

claims, and therefore impedes its fundamental right of meaningful access 

to the courts to resolve constitutional claims. Because it contends a 

fundamental right is at stake, LSCP urges our application of strict 

scrutiny analysis rather than the less demanding rational basis 

standard.

3. Dormant Commerce Clause. Finally, LSCP posits that the 

natural gas replacement tax penalizes consumers purchasing natural gas 

from nonresident suppliers. The penalty arises, LSCP asserts, because 

LDCs have freedom to allocate their replacement tax burden among their 

customers at different rates—and, because LDCs often do allocate the tax 

burden differently, many high-volume LDC customers pay tax at a lower 

rate than does LSCP. Because there are no natural gas suppliers in 

Iowa, LSCP contends the statutory framework establishing the higher 

rate it pays as a directly connected consumer is applied only to 

4A witness for the Department explained that the replacement tax formula under 

sections 437A.5(3)(a)–(c) utilizes only “centrally assessed” tax liability. See Iowa Code 

§ 437A.5(3)(a). Because municipalities are locally assessed, the witness explained, the 

numerator in the fraction prescribed in section 437A.5(3) would always be zero for 

many municipal CSAs. 

 
9

transactions involving nonresident suppliers in violation of the dormant 

Commerce Clause.

B. The Department. 

1. Equal protection. The Department first asserts LSCP is not 

similarly situated to any “individuals who are allegedly treated differently 

under the challenged statute.” Timberland Partners XXI, LLP v. Iowa 

Dep’t of Revenue, 757 N.W.2d 172, 175 (Iowa 2008); see City of Coralville 

v. Iowa Utils. Bd., 750 N.W.2d 523, 531 (Iowa 2008) (“Dissimilar 

treatment of persons dissimilarly situated does not offend equal 

protection.”). In City of Coralville, we said “[c]itizens serviced by different 

public utilities are not similarly situated.” City of Coralville, 750 N.W.2d 

at 531. Relying on this language, the Department asserts LSCP is not 

similarly situated to ethanol plants in other CSAs, even if those other 

ethanol plants are directly connected natural gas consumers. In other 

words, the Department contends each directly connected ethanol plant is 

a customer of a different public utility: itself.

But even assuming LSCP is similarly situated to other replacement 

taxpayers, the Department contends ample rational bases for the 

replacement tax regime are elucidated in the legislature’s 1998 

enactment. In particular, the Department relies on legislative findings 

accompanying the enactment and a separate section of the statute 

entitled “PURPOSES.” 1998 Iowa Acts ch. 1194, §§ 1, 3. With these 

expressly stated legislative purposes as a backdrop, the Department 

asserts the tax need only be applied uniformly, and the fact that the 

consequences may not be uniform is of no moment. See City of 

Coralville, 750 N.W.2d at 530–31.

2. Limitations period for refund claims. The Department concedes 

chapter 437A provides a shorter limitations period for refund claims 
10

based on constitutional objections. However, it contends rational basis 

analysis—not strict scrutiny—is the appropriate test for constitutional 

challenges involving different limitations periods. See Fed. Land Bank of 

Omaha v. Arnold, 426 N.W.2d 153, 156 (Iowa 1988) (applying the rational 

basis test to “different redemption periods for ‘member’ and ‘nonmember’ 

institutions”); Conner v. Fettkether, 294 N.W.2d 61, 62 (Iowa 1980) 

(applying the rational basis test to a limitations period for tort claims 

that depended upon the plaintiff’s age). Applying that standard, the 

Department asserts the legislature had a rational basis for subjecting 

constitutional claims to a shorter limitations period. Specifically, it 

contends a shorter limitations period for constitutional challenges 

launched against tax statutes limits the amounts of refunds to which 

state coffers are potentially exposed and promotes predictable fiscal 

planning for governmental entities. See Am. States Ins. Co. v. State, 560 

N.W.2d 644, 650 (Mich. Ct. App. 1996) (“Protection of the state treasury 

is certainly a legitimate state purpose.”). 

3. Dormant Commerce Clause. The Department contends LSCP 

lacks standing to bring a dormant Commerce Clause challenge because 

it is not an out-of-state supplier being taxed discriminatorily. Further, 

the Department contends LSCP lacks standing because the statutory 

framework does not impose an additional sales tax only on out-of-state 

transactions, like the tax scheme at issue in General Motors Corp. v. 

Tracy, 519 U.S. 278, 282, 117 S. Ct. 811, 816, 136 L. Ed. 2d 761, 770 

(1997). 

On the merits, the Department asserts LSCP mischaracterizes the 

necessary comparison under the dormant Commerce Clause. It states 

the comparison is not between LSCP and customers who obtain gas 

through an LDC; rather, the comparison is between LSCP and LDCs 
11

themselves. While individual LDC customers may pay lower rates than 

LSCP, they do so only because LDCs are allowed to pass their delivery 

tax costs to their customers through tariffs, and can do so at varying 

rates. LDCs, however, are ultimately liable for the entire amount of their 

respective delivery tax at the same rate as LSCP. Therefore, the 

Department asserts, the replacement tax formula does not discriminate 

against LSCP for its decision to bypass the LDC, nor does it discriminate 

against interstate commerce in general.

IV. Analysis.

We address only the substantive constitutional challenges to the 

replacement tax itself. Our conclusions on those issues obviate any need 

to address the limitations period issue.

A. Equal Protection. LSCP raises claims under both the 

Fourteenth Amendment to the United States Constitution and article I, 

section 6 of the Iowa Constitution. It relies principally on our decision in 

RACI II, in which we distinguished between the two provisions. RACI II, 

675 N.W.2d at 5–7. We may conclude the state provision is more 

protective. See id. at 6–7. However, on a basic level, both constitutions 

establish the general rule that similarly situated citizens should be 

treated alike. Qwest Corp., 829 N.W.2d at 558. 

1. Fourteenth Amendment. The Equal Protection Clause of the 

Fourteenth Amendment provides that no state shall “deny to any person 

within its jurisdiction the equal protection of the laws.” U.S. Const. 

amend. XIV, § 1. The United States Supreme Court has explained that 

“state tax classifications require only a rational basis to satisfy the Equal 

Protection Clause.” Tracy, 519 U.S. at 311, 117 S. Ct. at 830, 136 L. Ed. 

2d at 787; accord Fitzgerald, 539 U.S. at 106–07, 123 S. Ct. at 2159, 156 

L. Ed. 2d at 102–03; see also Armour v. City of Indianapolis, ___ U.S. ___, 
12

___, 132 S. Ct. 2073, 2080, 182 L. Ed. 2d 998, 1005 (2012) (applying the 

rational basis test because “Indianapolis’[s tax] classification involves 

neither a ‘fundamental right’ nor a ‘suspect’ classification”). Under the 

rational basis test,

the Equal Protection Clause is satisfied so long as there is a 

plausible policy reason for the classification, the legislative 

facts on which the classification is apparently based 

rationally may have been considered to be true by the 

governmental decisionmaker, and the relationship of the 

classification to its goal is not so attenuated as to render the 

distinction arbitrary or irrational. 

Nordlinger v. Hahn, 505 U.S. 1, 11, 112 S. Ct. 2326, 2332, 120 L. Ed. 2d 

1, 13 (1992) (citations omitted).

The rational basis standard as applied in equal protection claims 

grounded in the Fourteenth Amendment “is especially deferential in the 

context of classifications made by complex tax laws.” Id.; see also 

Madden v. Kentucky, 309 U.S. 83, 88, 60 S. Ct. 406, 408, 84 L. Ed. 590, 

593 (1940) (“[I]n taxation, even more than in other fields, legislatures 

possess the greatest freedom in classification.”). It does not require 

optimal or perfect line-drawing, instead requiring “only that the line 

actually drawn be a rational line.” Armour, ___ U.S. at ___, 132 S. Ct. at 

2083, 182 L. Ed. 2d at 1008. “But there is a point beyond which the 

State cannot go without violating the Equal Protection Clause. The State 

. . . may not resort to a classification that is palpably arbitrary.” Allied 

Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 527, 79 S. Ct. 437, 441, 3 

L. Ed. 2d 480, 485 (1959).

The Supreme Court’s decision in Fitzgerald provides an illustration 

of geographic tax rate differences that have been found consistent with 

the Federal Equal Protection Clause. Fitzgerald, 539 U.S. at 110, 123 S. 

Ct. at 2161, 156 L. Ed. 2d at 105. In Fitzgerald, Iowa assessed slot 
13

machine gambling revenue from riverboat casinos at a maximum rate of 

twenty percent. Id. at 105, 123 S. Ct. at 2158, 156 L. Ed. 2d at 102. 

The legislature later passed a law authorizing additional slot machine 

gambling at racetracks5—yet taxed revenue from those machines at a 

higher rate of thirty-six percent. Id. The Supreme Court emphasized 

that tax legislation must be viewed as a whole. Id. at 108, 123 S. Ct. at 

2160, 156 L. Ed. 2d at 103. Thus, although the racetracks were subject 

to a higher tax rate based on geographic location, the Court concluded 

that, under the Fourteenth Amendment, the differential in statewide tax 

rates was rationally related to promoting economic development in 

certain communities or protecting a reliance interest the riverboat 

operators had developed. Id. at 109, 123 S. Ct. at 2160, 156 L. Ed. 2d at 

104. Accordingly, the Court found the differential tax rate did not violate 

the Fourteenth Amendment’s Equal Protection Clause. Id. at 110, 123 S. 

Ct. at 2161, 156 L. Ed. 2d at 105.

Applying the rational basis analysis articulated by the Supreme 

Court in Fitzgerald, we find alternative rational bases for the natural gas 

replacement tax structure. For example, the legislature may have wished 

to promote economic development in municipalities by creating CSAs 

featuring municipal LDCs offering tax advantages for new business 

prospects. See id. at 109, 123 S. Ct. at 2160, 156 L. Ed. 2d at 104 

(concluding a lower tax rate for riverboat slot machine revenue was 

rationally related to “encourag[ing] the economic development of river 

communities”). Similarly, the legislature may have had reasonable 

grounds for exempting from the replacement tax consumers of natural 

5A racetrack that also offers slot machine gambling is called a racino. See 

DePaul v. Commonwealth, 969 A.2d 536, 548 n.14 (Pa. 2009).

 
14

gas who had directly connected before the new tax formulation was 

adopted in 1998 in reliance on the former ad valorem system. The 

legislature could have believed those consumers should be shielded from 

the replacement tax under section 437A.5(2) because it would upend 

their reliance and significantly—perhaps unfairly—increase their tax 

liability. See id. (concluding a difference in tax rates for riverboat slot 

machine revenue and racino slot machine revenue was rationally related 

to protecting riverboat operators’ reliance interest on the lower rate); City 

of New Orleans v. Dukes, 427 U.S. 297, 298, 305, 96 S. Ct. 2513, 2514, 

2518, 49 L. Ed. 2d 511, 514, 518 (1976) (per curiam) (concluding a city 

ordinance satisfied the rational basis test when it only allowed pushcart 

food vendors in the French Quarter to continue operating if they had 

been operating for at least eight years, because “newer businesses were 

less likely to have built up substantial reliance interests”); see also Iowa 

Code § 437A.5(7) (exempting direct-connect consumers from the 

replacement tax under section 437A.5(2) if their direct-connect facilities 

were already in place on January 1, 1999).

Because we conclude these objectives supply a rational basis 

under the standard expressed by the Supreme Court, we conclude the 

variable tax rates survive LSCP’s equal protection challenge based on the 

Fourteenth Amendment. See Fitzgerald, 539 U.S. at 110, 123 S. Ct. at 

2161, 156 L. Ed. 2d at 105. Thus, we need not consider whether the 

replacement delivery tax is also rationally related to other state interests. 

See Nordlinger, 505 U.S. at 14 n.5, 112 S. Ct. at 2334 n.5, 120 L. Ed. 2d 

at 15 n.5. We conclude Iowa’s natural gas delivery tax does not violate 

the Federal Equal Protection Clause when imposed on a directly 

connected consumer under section 437A.5(2).
15

2. Article I, section 6. Article I, section 6 provides, “All laws of a 

general nature shall have a uniform operation; the general assembly 

shall not grant to any citizen, or class of citizens, privileges or

immunities, which, upon the same terms shall not equally belong to all 

citizens.” Iowa Const. art. I, § 6.6 Recognizing that constitutional 

command, we have said “[l]aws relating to taxation . . . must have a 

uniform operation to meet the requirements of constitutional provisions.” 

W.J. Sandberg Co. v. Iowa State Bd. of Assessment & Review, 225 Iowa 

103, 109–10, 278 N.W. 643, 646 (1938). However, uniform operation 

does not necessarily require uniform consequences. See City of 

Coralville, 750 N.W.2d at 530–31; City of Waterloo v. Selden, 251 N.W.2d 

506, 508–09 (Iowa 1977) (“An iron rule of equal taxation is neither 

attainable nor necessary.”); Cook v. Dewey, 233 Iowa 516, 519, 10 

N.W.2d 8, 10 (1943) (“The constitution requires uniform operation 

throughout the State, not uniformity of consequences resulting from 

such operation.” (Internal quotation marks omitted.)); W.J. Sandberg Co., 

225 Iowa at 110, 278 N.W. at 646 (“[I]n the matter of taxation, perfect 

uniformity, which . . . means an equal distribution of the burdens of 

taxation upon all persons of a given class, is impossible of perfect 

application.”).

Like the United States Supreme Court’s application of rational 

basis review to Fourteenth Amendment equal protection challenges, we 

ensure uniform operation under the Iowa Constitution by reviewing 

economic legislation—which includes tax statutes—under a rational 

6In recent cases, we have “refer[red] to article I, section 6 as the ‘equal protection 

clause’ of the Iowa Constitution.” Qwest Corp., 829 N.W.2d at 557 n.4 (collecting 

cases). In some instances, we have called article I, section 6 the “equality provision.” 

See, e.g., In re A.W., 741 N.W.2d 793, 806 (Iowa 2007); RACI II, 675 N.W.2d at 7; Chi. & 

Nw. Ry., 255 Iowa at 996, 125 N.W.2d at 214.

 
16

basis test.7 See Qwest Corp., 829 N.W.2d at 558. In Qwest Corp., we 

explained to pass the rational basis test, the statute must be “ ‘rationally 

related to a legitimate state interest.’ ” Id. (quoting Sanchez v. State, 692 

N.W.2d 812, 817–18 (Iowa 2005)); see also City of Coralville, 750 N.W.2d 

at 530. A legitimate interest can be any reasonable justification, not just 

the one the legislature actually chose. See Qwest Corp., 829 N.W.2d at 

558; RACI II, 675 N.W.2d at 8 (“[A] person challenging a statute 

shoulders a heavy burden . . . . This burden includes the task of 

negating every reasonable basis that might support the disparate 

treatment.” (Citations omitted.)). Further, the fit between the means 

chosen by the legislature and its objective need only be rational, not 

perfect. See Qwest Corp., 829 N.W.2d at 558.

“We have said before the legislature acts with broad authority in 

the realm of taxation.” RACI I, 648 N.W.2d at 558; accord Hearst Corp. v. 

Iowa Dep’t of Revenue & Fin., 461 N.W.2d 295, 305 (Iowa 1990); Selden, 

251 N.W.2d at 508. Thus, “[w]hen we have applied the rational basis test 

to tax laws, they have generally been upheld without much difficulty.” 

Qwest Corp., 829 N.W.2d at 558; accord Sperfslage v. Ames City Bd. of 

Review, 480 N.W.2d 47, 49 (Iowa 1992) (“Th[e rational basis] standard is 

easily satisfied in challenges to tax statutes.”); Hearst Corp., 461 N.W.2d 

at 306; Heritage Cablevision v. Marion Cnty. Bd. of Supervisors, 436 

N.W.2d 37, 38 (Iowa 1989). After all, “[t]axing statutes are presumed to 

7Rational basis analysis under article I, section 6 of the Iowa Constitution is not, 

however, constrained by or limited to judicial interpretations of the Fourteenth 

Amendment Equal Protection Clause. “[W]e maintain our authority to adopt our own 

equal protection analysis under the Iowa Constitution . . . .” City of Coralville, 750 

N.W.2d at 530; see also RACI II, 675 N.W.2d at 4 (“It is this court’s constitutional 

obligation as the highest court of this sovereign state to determine whether the 

challenged classification violates Iowa’s constitutional equality provision.”).

 
17

be constitutional.” Home Builders Ass’n of Greater Des Moines v. City of 

West Des Moines, 644 N.W.2d 339, 352 (Iowa 2002); accord Sperfslage, 

480 N.W.2d at 49 (“We recognize a presumption favoring the 

constitutionality of taxing statutes.”).

“These rigorous standards have not, however, prevented this court 

from finding economic . . . legislation in violation of equal protection 

provisions.” RACI II, 675 N.W.2d at 8–9. “[E]ven in the economic sphere, 

a citizen’s guarantee of equal protection is violated if desirable legislative 

goals are achieved . . . through wholly arbitrary classifications or 

otherwise invidious discrimination.” Fed. Land Bank, 426 N.W.2d at 

156. Thus, the deference we afford the legislature’s classifications “is 

not, in and of itself, necessarily dispositive” under article I, section 6. 

Bierkamp v. Rogers, 293 N.W.2d 577, 581 (Iowa 1980). “It is for the 

judicial department to determine whether any department has exceeded 

its constitutional functions . . . .” Luse v. Wray, 254 N.W.2d 324, 327 

(Iowa 1977) (internal quotation marks omitted).

“The first step of [analyzing] an equal protection claim is to identify 

the classes of similarly situated persons singled out for differential 

treatment.” Grovijohn v. Virjon, Inc., 643 N.W.2d 200, 204 (Iowa 2002). 

“If a plaintiff fails to articulate, and the court is unable to identify, a class 

of similarly situated individuals who are allegedly treated differently 

under the challenged statute,” our analysis ends and we need not 

consider whether the ends are legitimate and the means rationally 

related. Timberland Partners, 757 N.W.2d at 175. However, “[n]o two 

groups are identical in every way,” so LSCP is not required to show it 

mirrors another class of taxpayers exactly. See Qwest Corp., 829 N.W.2d 

at 561 (emphasis added).
18

In this case, LSCP posits the relevant class consists of all directly 

connected ethanol plants located in Iowa who pay tax rates that differ 

solely based on their geographic location. The directly connected plants 

all bypass an LDC, obtain natural gas directly from an interstate 

pipeline, and use that gas to produce ethanol and related byproducts. In 

contrast, the Department, relying on our decision in City of Coralville, 

contends “[c]itizens serviced by different public utilities are not similarly 

situated.” City of Coralville, 750 N.W.2d at 531. In other words, the 

Department asserts each directly connected ethanol plant acts as its own

utility, with itself as a customer—and therefore, LSCP cannot 

demonstrate any similarly situated class of taxpayers treated differently 

in violation of article I, section 6. See Timberland Partners, 757 N.W.2d 

at 175. 

In Qwest Corp., we cautioned against making intricate distinctions 

between purported classes of similarly situated individuals, because if we 

did so, almost every equal protection claim could be resolved against the 

plaintiffs on the “similarly situated” requirement. Qwest Corp., 829 

N.W.2d at 561. We therefore assumed the two proffered groups in Qwest 

Corp. were similarly situated, without deciding the question. See id. We 

do the same here. We assume (without deciding) for purposes of analysis 

that LSCP has identified a class of similarly situated taxpayers subjected 

to allegedly different treatment.

We now proceed to the next step of equal protection analysis. In 

this step, “we must examine the legitimacy of the end to be achieved; we 

then scrutinize the means used to achieve that end.” Fed. Land Bank, 

426 N.W.2d at 156. 
19

At the legitimacy step, our rational basis test under article I, 

section 6 is not toothless. See RACI II, 675 N.W.2d at 9. To determine 

whether the ends are legitimate, we first ask whether

the claimed state interest [is] realistically conceivable. Our 

court must then decide whether this reason has a basis in 

fact. Finally, we must consider whether the relationship 

between the classification . . . and the purpose of the 

classification is so weak that the classification must be 

viewed as arbitrary.

Id. at 7–8 (citations omitted) (footnotes omitted). The “realistically 

conceivable” standard requires more than “a purely superficial analysis 

and implies that the court is permitted to ‘probe to determine if the 

constitutional requirement of some rationality in the nature of the class 

singled out has been met.’ ” Id. at 7 n.3 (quoting Greenwalt v. Ram Rest. 

Corp. of Wyo., 71 P.3d 717, 731 (Wyo. 2003)). “Basis in fact” means “the 

court will undertake some examination of the credibility of the asserted 

factual basis for the challenged classification rather than simply 

accepting it at face value.” Id. at 8 & n.4. In other words, although 

“actual proof of an asserted justification [i]s not necessary, . . . the court 

w[ill] not simply accept it at face value and w[ill] examine it to determine 

whether it [i]s credible as opposed to specious.” Qwest Corp., 829 

N.W.2d at 560; see RACI II, 675 N.W.2d at 7 n.3 (differentiating between 

“credible” and “specious”).

When it enacted chapter 437A, the legislature expressly identified 

the interests it sought to advance. For example, the legislature 

announced an objective to “remove tax costs as a factor in a competitive 

environment by imposing like generation, transmission, and delivery 

taxes on similarly situated competitors who generate, transmit, or deliver 

. . . natural gas in the same [CSA].” Iowa Code § 437A.2. In other words, 

the legislature sought to promote competition in the natural gas delivery 
20

market by preventing companies with no property in the state—and 

therefore, few if any assets reached by the ad valorem tax—from enjoying 

an unfair advantage due to their comparatively lower tax liability. The 

legislature also expressly announced its objective “to preserve revenue 

neutrality and debt capacity for local governments and taxpayers” by 

creating a new and different system generating tax revenue calculated to 

replicate the amount that was collectible under the prior framework. See 

id. The legislature chose to advance this objective by creating a new 

variable tax rate dependent on the centrally assessed property tax 

liability allocated to the natural gas service of each taxpayer principally 

serving each CSA, averaged over tax years 1993 to 1997 under the 

former ad valorem tax structure. See Iowa Code § 437A.5(3).

In adopting the new replacement tax formulation, the legislature 

explained its reasons for eschewing “imposition of a single statewide 

delivery tax rate [that] would unfairly increase tax costs for some 

taxpayers while reducing such costs for others.” 1998 Iowa Acts ch. 

1194, § 1. The legislature expressly rejected LSCP’s preference for 

statewide rate uniformity, finding it “would impede a competitive 

environment.” Id. In addition to the goals of market competition and 

revenue continuity, the legislature noted its policy objective of providing 

“a system of taxation which reduces existing administrative burdens on 

state government.” Iowa Code § 437A.2. 

Although in the process of rational basis review we do not simply 

accept claimed legitimacy of the interests (the ends) legislation purports 

to advance, LSCP does not contest the legitimacy of the interests 

expressly proffered by the Department in this case. Rather, LSCP 

contends the means and ends bear no rational relation to one another. 

See Fed. Land Bank, 426 N.W.2d at 156–57 (“FLB concedes the 
21

legitimacy of the challenged legislation’s public purpose. . . . The 

question is whether these legitimate goals are rationally served by [the] 

legislative scheme . . . .”). We now turn to that question.

When applying the rational basis test, we uphold a classification 

against an equal protection challenge statute if it is rationally related to 

at least one legitimate state interest. See City of Coralville, 750 N.W.2d 

at 530 (“[W]e will sustain a legislative classification if it is rationally 

related to a legitimate state interest.” (Emphasis added.)). Thus, if we 

determine rate variation based on the taxpayer’s geographic location is a 

rational classification made in furtherance of any legitimate state 

interest, we will uphold the replacement tax framework against LSCP’s 

challenge. 

Under the Iowa Constitution, we determine whether a classification 

rationally furthers a legitimate state interest by evaluating whether the 

classification features “extreme degrees of overinclusion and 

underinclusion in relation to any particular goal.” Bierkamp, 293 N.W.2d 

at 584; see also RACI II, 675 N.W.2d at 10. If a classification involves 

extreme overinclusion or underinclusion “in relation to any particular 

goal, it cannot [reasonably] be said to . . . further that goal.” Bierkamp, 

293 N.W.2d at 584. Although LSCP does not expressly raise its 

challenges in terms of extreme over- or underinclusiveness, its assertions 

can be characterized under that framework. For example, LSCP

implicitly asserts the replacement delivery tax regime is both 

overinclusive and underinclusive because LSCP and other directly 

connected consumers are shoehorned into the system, while preexisting

directly connected consumers are exempt. In particular, LSCP contends 

the replacement tax regime is overinclusive—sweeping in taxpayers that 

should not be subject to it—because the rate in LSCP’s CSA is based on 
22

historic property values LSCP cannot control; because LSCP cannot 

affect its own replacement tax rate; and because LSCP cannot pass tax 

costs to customers through a tariff.

We conclude none of these assertions identifies a classification that 

is extremely overinclusive and underinclusive. The 1998 session law 

enacting the replacement tax stated in part that the legislature wanted to 

ensure fairness in the electricity and natural gas markets. See 1998 

Iowa Acts ch. 1194, §§ 1, 3. For example, the legislature found “a single 

statewide delivery tax rate would unfairly increase tax costs for some 

taxpayers while reducing costs for others.” Id. § 1. Thus, to prevent an 

unjust result, the legislature created geographic CSAs and developed a 

formula that would make any changes in tax liability much less drastic 

compared to the previous system than a single statewide tax rate would 

be. Similarly, the legislature wanted to remove tax costs as a factor in 

the competitive market for natural gas service. See id. § 3. Perhaps it 

was concerned a natural gas supplier could exploit the ad valorem 

system by locating in a low tax state and maintaining little or no property 

in Iowa, yet directing substantial service toward Iowa. Additionally, the 

legislature may have decided to avoid a potential loophole for consumers 

connecting directly to a pipeline after January 1, 1999, if the delivery tax 

did not apply to them—a loophole that would make tax costs a factor in 

location and bypass decisions. In other words, while the legislature 

created an exemption for “grandfathered” directly connected consumers

and subjected future directly connected consumers to a tax rate they 

cannot control, we conclude these features of the classification are

neither overinclusive nor underinclusive to an extreme degree. No 

constitutional violation results unless “a classification involves extreme 
23

degrees of overinclusion and underinclusion in relation to any particular 

goal.” Bierkamp, 293 N.W.2d at 584 (emphasis added).

We conclude the legislature could have rationally believed8 the 

replacement tax regime—switching to an excise tax and imposing that 

tax on directly connected consumers at rates prevailing within the CSA 

where they are located—was rationally related to its goals. The 

replacement delivery tax may not create uniform results, but “the law 

operates uniformly in the constitutional sense.” Cook, 233 Iowa at 519, 

10 N.W.2d at 10. It does not violate article I, section 6 of the Iowa 

Constitution.

B. Dormant Commerce Clause. In KFC Corp. v. Iowa Department 

of Revenue, we explained the background of the dormant Commerce 

Clause:

The United States Constitution expressly authorizes 

Congress to “regulate Commerce . . . among the several 

States.” U.S. Const. art. I, § 8, cl. 3. Since the nineteenth 

century, the United States Supreme Court has interpreted 

the Commerce Clause as more than merely an affirmative 

grant of power, finding a negative sweep to the Clause as 

8In Bierkamp, we explained “changes in underlying circumstances may vitiate 

any rational basis.” Bierkamp, 293 N.W.2d at 581. Further, “the passage of time may 

call for a less deferential standard of review as the experimental or trial nature of 

legislation is less evident.” Id.; see also State v. Groves, 742 N.W.2d 90, 93 (Iowa 2007) 

(“[W]hen applying a rational basis test under the Iowa Constitution, changes in the 

underlying circumstances can allow us to find a statute no longer rationally relates to a 

legitimate government purpose.”). LSCP relies on our statement in Bierkamp and 

contends while there may originally have been a rational basis between some ends and 

the means used to achieve them, that basis no longer exists—and we can properly 

determine the relation using a present-day viewpoint rather than a retrospective one.

However, we have never applied the Bierkamp reevaluation standard to an equal 

protection claim involving a tax statute. See Qwest Corp., 829 N.W.2d at 562 & n.7. 

Further, we have stated the standard generally applies when the changed

circumstances are developing legal trends—not simply a look back in time to verify 

whether the legislature actually accomplished its goals. Qwest Corp., 829 N.W.2d at 

562 n.7. “There have been no [major] developments of which we are aware in . . . tax 

jurisprudence.” Id. Accordingly, we decline to apply the Bierkamp reevaluation 

standard in this case.

 
24

well. See Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 448–

49, 6 L. Ed. 678, 688–89 (1827); Gibbons v. Ogden, 22 U.S. 

(9 Wheat.) 1, 72–78, 6 L. Ed. 23, 70–78 (1824). As a result, 

the Supreme Court has applied the “negative” or “dormant” 

Commerce Clause to limit state taxation powers 

notwithstanding the absence of congressional legislation.

KFC Corp. v. Iowa Dep’t of Revenue, 792 N.W.2d 308, 313 (Iowa 2010). 

In short, the dormant Commerce Clause “limits the power of the states to 

erect barriers against interstate trade.” Iowa Auto. Dealers Ass’n v. Iowa 

State Appeal Bd., 420 N.W.2d 460, 462 (Iowa 1988).

The Supreme Court has further explained the “dormant” aspect of 

the Commerce Clause: “The negative or dormant implication of the 

Commerce Clause prohibits state taxation . . . that discriminates against 

or unduly burdens interstate commerce . . . .” Tracy, 519 U.S. at 287, 

117 S. Ct. at 818, 136 L. Ed. 2d at 773. In this context, the term 

“discrimination” means “differential treatment of in-state and out-of-state 

economic interests that benefits the former and burdens the latter.” Or. 

Waste Sys., Inc. v. Dep’t of Envtl. Quality, 511 U.S. 93, 99, 114 S. Ct. 

1345, 1350, 128 L. Ed. 2d 13, 21 (1994); accord NextEra Energy Res. LLC 

v. Iowa Utils. Bd., 815 N.W.2d 30, 48 (Iowa 2012). Before evaluating 

whether chapter 437A discriminates against or unduly burdens 

interstate commerce, however, we must first determine whether LSCP 

has standing to raise this dormant Commerce Clause challenge.

1. Standing to raise a dormant Commerce Clause claim. Usually, 

parties asserting dormant Commerce Clause challenges are out-of-state 

entities subjected to an allegedly discriminatory regulation. See, e.g., 

Hunt v. Wash. State Apple Adver. Comm’n, 432 U.S. 333, 339, 97 S. Ct. 

2434, 2439, 53 L. Ed. 2d 383, 391 (1977) (noting the Washington 

plaintiff challenging a North Carolina regulation brought suit in North 

Carolina federal court); Complete Auto Transit, Inc. v. Brady, 430 U.S. 
25

274, 275–76, 97 S. Ct. 1076, 1077, 51 L. Ed. 2d 326, 328–29 (1977) 

(noting the plaintiff was a Michigan company challenging a Mississippi 

tax assessment); KFC Corp., 792 N.W.2d at 310 (noting the plaintiff was 

“a Delaware corporation with its principal place of business in Louisville, 

Kentucky” that owned no properties in Iowa). The Department asserts 

because LSCP is not an out-of-state entity allegedly subjected to 

discriminatory treatment under chapter 437A, it has no standing to 

challenge the statute under the dormant Commerce Clause.

However, “cognizable injury from unconstitutional discrimination 

against interstate commerce does not stop at members of the class 

against whom a State ultimately discriminates.” Tracy, 519 U.S. at 286, 

117 S. Ct. at 818, 136 L. Ed. 2d at 772. In Tracy, a case also involving 

tax on natural gas, the Supreme Court stated customers of the class 

subjected to discrimination “may also be injured, as . . . where the 

customer is liable for payment of the tax and as a result presumably 

pays more for the gas it gets from out-of-state producers and marketers.” 

Id. Further, at least two other Supreme Court cases have demonstrated 

that in-state plaintiffs are not precluded from raising dormant Commerce 

Clause challenges. See W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 

190–91, 114 S. Ct. 2205, 2209–10, 129 L. Ed. 2d 157, 165 (1994) (noting 

the plaintiffs were Massachusetts milk dealers asserting a monthly 

premium payment distributed only to in-state farmers violated the 

dormant Commerce Clause); Bacchus Imps., Ltd. v. Dias, 468 U.S. 263, 

267, 104 S. Ct. 3049, 3053, 82 L. Ed. 2d 200, 206–07 (1984) (concluding 

in-state liquor wholesalers had standing to challenge Hawaii’s liquor tax, 

in part because they were “entitled to litigate whether the . . . tax has 

had an adverse competitive impact on their business”).
26

We assume, without deciding, that LSCP has standing in this case. 

We do so because we conclude even if LSCP has standing, the 

replacement delivery tax framework does not violate the dormant 

Commerce Clause. Cf. Qwest Corp., 829 N.W.2d at 561–62 (assuming 

equal protection plaintiffs were similarly situated because their claims 

failed on the merits). We now explain why that is so.

2. The Complete Auto Transit test. In Complete Auto Transit, the 

Supreme Court stated a tax can survive a Commerce Clause challenge 

“when the tax is applied to an activity with a substantial nexus to the 

taxing State, is fairly apportioned, does not discriminate against 

interstate commerce, and is fairly related to the services provided by the 

State.” Complete Auto Transit, 430 U.S. at 279, 97 S. Ct. at 1079, 51 L. 

Ed. 2d at 331. We must evaluate whether each of these requirements is 

met.

“Substantial nexus” means more than “a proxy for notice”—its 

meaning in due process cases. See Quill Corp. v. North Dakota, 504 U.S. 

298, 313, 112 S. Ct. 1904, 1913–14, 119 L. Ed. 2d 91, 107 (1992). 

Nonetheless, the replacement tax on natural gas delivery clearly has a 

nexus to Iowa because it involves taxation of natural gas delivered into 

Iowa for consumption here. See KFC Corp., 792 N.W.2d at 328 

(concluding the Department could tax an out-of-state company’s 

“revenue earned . . . from the use of its intangibles by franchisees located 

within the State of Iowa”).

A tax is fairly apportioned when a state only taxes its fair share of 

the property or activity. See Okla. Tax Comm’n v. Jefferson Lines, Inc., 

514 U.S. 175, 184–85, 115 S. Ct. 1331, 1338, 131 L. Ed. 2d 261, 271 

(1995). A fairly apportioned tax must be both internally and externally 

consistent. Id. at 185, 115 S. Ct. at 1338, 131 L. Ed. 2d at 271–72. 
27

Internal consistency occurs when every other state could adopt the same 

tax without placing “interstate commerce at a disadvantage as compared 

with commerce intrastate.” Id. External consistency occurs if a state 

does not tax anything “beyond that portion of value fairly attributable to 

economic activity within the taxing state.” Id. at 185, 115 S. Ct. at 1338, 

131 L. Ed. 2d at 272. These two requirements are somewhat related 

because if a state achieves external consistency, any other state could 

adopt the same regime without overburdening interstate commerce. 

Here, Iowa only taxes activity within the state—natural gas delivered into 

Iowa. Accordingly, we conclude the replacement tax is fairly 

apportioned.

A tax is fairly related to services when it “is assessed in proportion 

to a taxpayer’s activities or presence in a State.” Commonwealth Edison 

Co. v. Montana, 453 U.S. 609, 627, 101 S. Ct. 2946, 2958, 69 L. Ed. 2d 

884, 900 (1981); see also Moorman Mfg. Co. v. Bair, 254 N.W.2d 737, 750 

(Iowa 1977). When this occurs, “the taxpayer is shouldering its fair 

share of supporting the State’s” services such as police and fire 

protection. Commonwealth Edison Co., 453 U.S. at 627, 101 S. Ct. at

2958, 69 L. Ed. 2d at 900. In Commonwealth Edison Co., the Supreme 

Court concluded a Montana tax on coal mining satisfied this element 

because it was “measured as a percentage of the value of the coal taken.” 

Id. at 626, 101 S. Ct. at 2958, 69 L. Ed. 2d at 900. The tax was related 

only to the coal mined in Montana, and here the replacement tax is 

related only to the natural gas delivered in Iowa. We conclude the tax is 

fairly related to services provided by the State.

We now turn to the question of whether the tax is discriminatory.

3. Differential treatment amounting to discrimination. A 

discriminatory regulation can be directly and facially discriminatory or 
28

have discriminatory effect. See Brown-Forman Distillers Corp. v. N.Y. 

State Liquor Auth., 476 U.S. 573, 579, 106 S. Ct. 2080, 2084, 90 L. Ed. 

2d 552, 559–60 (1986); Iowa Auto. Dealers Ass’n, 420 N.W.2d at 462. 

We address each of these features of discrimination in turn.

A regulation that directly discriminates against out-of-state 

economic interests is relatively easy to spot. Regulations or statutes that 

are per se discriminatory often make the distinction between in-state and 

out-of-state interests expressly. See, e.g., Camps Newfound/Owatonna, 

Inc. v. Town of Harrison, 520 U.S. 564, 568, 117 S. Ct. 1590, 1594, 137 

L. Ed. 2d 852, 859 (1997) (discussing a Maine statute that expressly 

provided fewer tax benefits to charities serving non-Maine residents than 

to charities serving Maine residents); Fulton Corp. v. Faulkner, 516 U.S. 

325, 333, 116 S. Ct. 848, 855, 133 L. Ed. 2d 796, 806 (1996) (finding 

facially discriminatory a North Carolina tax regime that expressly “taxes 

stock only to the degree that its issuing corporation participates in 

interstate commerce”); Chem. Waste Mgmt., Inc. v. Hunt, 504 U.S. 334, 

338–39, 112 S. Ct. 2009, 2012, 119 L. Ed. 2d 121, 129–30 (1992) 

(describing an Alabama statute that expressly imposed an additional 

hazardous waste disposal fee only on hazardous waste originating 

outside Alabama). Iowa’s replacement tax on natural gas delivery does 

not make an express distinction because it applies to all therms of 

natural gas delivered within the state, regardless of whether the gas goes 

directly from an interstate pipeline to a consumer or is first routed 

through an LDC. Accordingly, the natural gas delivery tax does not 

directly discriminate against interstate commerce.

“A state law is discriminatory in effect when, in practice, it affects 

similarly situated entities in a market by imposing disproportionate 

burdens on out-of-state interests and conferring advantages upon in-
29

state interests.” Family Winemakers of Cal. v. Jenkins, 592 F.3d 1, 10 

(1st Cir. 2010). In Family Winemakers, the similarly situated entities 

were wine producers and the relevant market was the market for wine 

sales in Massachusetts. See id. at 4. “ ‘Small’ ” wineries were allowed to 

sell “in three ways: by shipping directly to consumers, through 

wholesaler distribution, and through retail distribution.” Id. “ ‘Large’ ” 

wineries—none of which were located in Massachusetts—could not sell to 

retailers at all, and could only choose either to ship directly to consumers 

or to contract with a wholesaler. Id. The First Circuit Court of Appeals 

held the distinction between types of wineries and the distribution 

networks they were permitted to utilize “significantly alter[ed] the terms 

of competition” between in-state and out-of-state entities. Id. at 11.

Here, LSCP asserts the relevant market is for the consumption of 

natural gas, and the similarly situated entities are all consumers within 

the same CSA as LSCP—especially those that receive natural gas from an 

LDC. LSCP asserts because the LDC passes on its replacement tax 

burden to consumers at varying rates, the replacement tax’s effect—

when imposed on a directly connected consumer—is to incentivize 

contracting with an LDC and discourage direct connections, which by 

definition facilitate interstate transactions. LSCP analogizes to the 

relationship between sales tax and use tax, and contends the two must 

be equal. See Associated Indus. of Mo. v. Lohman, 511 U.S. 641, 648, 

114 S. Ct. 1815, 1821, 128 L. Ed. 2d 639, 647 (1994) (finding Missouri’s 

tax scheme that imposed an additional use tax only on out-of-state goods 

“r[an] afoul of the basic requirement that . . . the burdens imposed on 

interstate and intrastate commerce must be equal”). LSCP asserts 

section 437A.5(1) creates the functional equivalent of a sales tax, and 

section 437A.5(2) establishes the functional equivalent of a use tax—
30

because LDCs subject to section 437A.5(1) engage in in-state delivery, 

and directly connected consumers subject to section 437A.5(2) engage in 

transactions with out-of-state suppliers. Citing the Lohman rule, LSCP 

contends section 437A.5 provides LDC customers with what LSCP terms 

“a disguised Replacement Tax rate reduction” because LDCs are allowed 

to pass on their tax burden to their customers at varying rates.

We conclude LSCP’s reliance on Lohman is misplaced. In Lohman, 

Missouri imposed “an ‘additional use tax’ of 1.5% on the privilege of 

storing, using, or consuming within the State any article of personal 

property purchased outside the State.” Id. at 644, 114 S. Ct. at 1819, 

128 L. Ed. 2d at 645. No statewide sales tax accompanied this 

additional use tax, but political subdivisions had discretion to impose 

additional sales taxes. Id. Thus, sales tax and use tax could be equal 

under the statutory scheme, but only if a political subdivision exercised 

its discretion to impose additional sales tax and fixed its additional sales 

tax at 1.5 percent. See id. By contrast, in this case, the replacement tax 

begins from a point of equivalence. Sections 437A.5(1) and (2) expressly 

impose the same tax on both LDCs and directly connected consumers. 

Iowa Code § 437A.5(1)–(2). Thus, the natural gas replacement tax is 

wholly unlike the scheme at issue in Lohman, and the discretion LDCs 

have to allocate their tax burden is wholly unlike the Missouri localities’ 

discretion to create (or avoid creating) a tax burden in the first place. 

Further, we conclude LSCP has misidentified the entities to which 

it is similarly situated for dormant Commerce Clause purposes. It is true 

that LSCP and LDC customers both consume natural gas. But the tax 

LSCP is challenging applies to the delivery of gas. An LDC’s customers 

receive but do not deliver gas. Thus, LSCP is not similarly situated to 

LDCs’ customers, but to LDCs themselves. Put another way, the tax is 
31

imposed on entities obtaining gas from an interstate pipeline, not all 

entities obtaining gas from any source. To adapt a colloquialism, 

equating LSCP with the customers of LDCs in this context is like 

comparing apples to cantaloupes. See Hunt, 432 U.S. at 336, 97 S. Ct. 

at 2438, 53 L. Ed. 2d at 389–90; Pike v. Bruce Church, Inc., 397 U.S. 137, 

139, 90 S. Ct. 844, 845–46, 25 L. Ed. 2d 174, 176–77 (1970).

A comparison of LSCP and any LDC wishing to provide service in 

the same CSA reveals there is no differential tax rate between them. See 

Iowa Code § 437A.5(2) (imposing upon directly connected consumers a 

tax “at the rates prescribed under subsection 1”—the same rate that 

applies to LDCs). The statutory framework exacts no penalty for 

participating in interstate commerce. Indeed, LDCs are participating in 

interstate commerce to the same extent—and subject to the same taxes—

as directly connected natural gas consumers. An LDC is free to pass its 

tax burden on to customers, but it ultimately remains liable for the 

entire amount; the LDC itself is not subject to any rate reduction, 

disguised or otherwise. Further, LSCP can pass on the tax costs through 

the price of its product, just as LDCs do. 

We conclude the replacement tax framework does not have a 

discriminatory effect on interstate commerce. Accordingly, the Complete 

Auto Transit test is satisfied and the tax as a whole does not violate the 

dormant Commerce Clause.

4. Extraterritoriality. Under the extraterritoriality doctrine, “a 

statute that directly controls commerce occurring wholly outside the 

boundaries of a State” is invalid. Healy v. Beer Inst., 491 U.S. 324, 336, 

109 S. Ct. 2491, 2499, 105 L. Ed. 2d 275, 288 (1989). “The critical 

inquiry is whether the practical effect of the regulation is to control 

conduct beyond the boundaries of the State.” Id.
32

LSCP raises the extraterritoriality doctrine, but focuses on different 

language from Healy: the effect that “would arise if not one, but many or 

every, State adopted similar legislation.” Id. LSCP summarizes its 

extraterritoriality argument this way: 

[LSCP]’s complaint is not that its therms are taxed more 

than once. Its complaint is that its therms are taxed more. 

If every state would adopt the Iowa Replacement Tax regime, 

and allow its LDCs to discount rates for large general service 

customers, while requiring their taxing authorities to 

demand the full rates from residents bypassing their LDCs, 

then all residents of all states would be rewarded for buying 

locally by saving taxes, thereby impeding interstate 

commerce.

As we have explained in our analysis of discriminatory effect, however, 

LSCP’s therms are not taxed more than those an LDC delivers to 

customers. The Department still demands full rates from LDCs, but 

LDCs have the option to pass some of those costs on to consumers.

Further, the replacement tax does not violate the rule announced 

in Healy because it does not regulate conduct occurring “wholly outside 

the boundaries of a State.” Id. at 336, 109 S. Ct. at 2499, 105 L. Ed. 2d 

at 288 (emphasis added). Because the replacement tax only applies 

when natural gas is delivered into Iowa, it does not violate the 

extraterritoriality doctrine.

C. Limitations Period for Tax Refund Claims. “[C]ourts have a 

duty to avoid constitutional questions when [the] merits of a case may be 

fairly decided without facing such questions.” Moorman Mfg. Co., 254 

N.W.2d at 749; see also Salsbury Labs. v. Iowa Dep’t of Envtl. Quality, 

276 N.W.2d 830, 837 (Iowa 1979) (“Avoidance of constitutional issues 

except when necessary for proper disposition of [a] controversy is a 

bulwark of American jurisprudence.”); City of Des Moines v. Lohner, 168 

N.W.2d 779, 782 (Iowa 1969) (“We do not consider constitutional 
33

questions unless it is necessary for the disposition of the case.”). 

Because we have concluded the replacement tax regime is constitutional 

and LSCP is not entitled to receive a refund, we do not reach the 

question whether the different limitations period for refund claims based 

on constitutional objections is itself constitutional. See Hawkeye Land 

Co. v. Iowa Utils. Bd., 847 N.W.2d 199, 209 (Iowa 2014); Lohner, 168 

N.W.2d at 782.

V. Conclusion.

A rational basis exists for the variable excise tax imposed on the 

delivery of natural gas under section 437A.5. Accordingly, we affirm the 

district court’s determination that LSCP has failed to establish a violation 

of the Fourteenth Amendment of the United States Constitution or 

article I, section 6 of the Iowa Constitution. We also affirm the district 

court’s determination that the natural gas delivery tax framework does 

not obstruct interstate commerce or discriminate against it in violation of 

the dormant Commerce Clause.

AFFIRMED.

All justices concur except Zager, J., who takes no part.