January 9, 1989

Honorable Bob Bullock Opinion NO. JM-1003 Comptroller of Public Accounts Re: Whether foreign-produced or L.B.J. State Office Bldg. foreign-acquired alcohol gualiAustin, Texas 78774 fies fora credit claimed by a distributor on a gasoline/ alcohol mixture under section 153.123 of the Tax Code and related questions

DearMr. Bullock:
Chapter 153 of the Tax Code governs (RQ-1509)

state taxes on sets forth the Section 153.123 motor fuels; subchapter B of chapter 153 provisions regarding the tax ongasoline. of the code confers atax credit ondistributors of certain gasoline/alcohol mixtures, as defined in the section, and contains a reciprocity provision, which denies the tax credit todistributors ofgasoline/alcohol mixtures containing alcohol fermented ordistilled in states not conferring equivalent tax benefits to distributors whose mixtures contain Texas-produced alcohol.
First, you ask about theproper construction of section 153.123, specifically whether your long-standing construction of subsection (b)is correct, which denies the credit to distributors of gasoline/alcohol mixtures whose alcohol is fermented ordistilled in foreign countries. Second, you askwhether the reciprocity provision set out in subsection (b)(4)of the section isconstitutional under the rule of the recent United States Supreme Court decision, New Eneroy

Indiana v. Limbach. Tax Comm'r of Ohio, 108 S.Ct. co. of 1803 (1988) [hereinafter New Enercy].

We conclude that acourt addressing this issue would follow the rule inNew Energy andwould hold that the reciprocity provision set forth in subsection (b)(4) of section 153.123 violates the interstate~commerce clause of theUnited States Constitution, Because of our answer to your second question, we need not address your first question.

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Subsection (a) of section 153.123 of the Tax Code permits the granting of atax credit to distributors of every gasoline and alcohol.mixture thatmeets the specifica- ;$s of subsection (e),except as provided in subsection

. Subsection (b)(4)sets forth a reciprocity clause, limiting the-grant of such tax credits to distributors of a mixture containing alcohol fermented or distilled "in another state" that itself provides an equivalent tax benefit for mixtures containing alcohol fermented or distilled inTexas. Subsection (b)(4)of section 153.123 of the Tax Code provides the following:

(4)Except asprovided inthis subdivision, nomixture that contains alcohol that
wasmented or distilled Inanother state iseligible foracredit on its first sale or use in the state. If the comptroller certifies that mother state provides exemption from that state's taxes an applicable to gasoline ora credit or refund for taxes collected or an amount in lieu of taxes collected on a mixture of gasoline and alcohol, and ifthe other state's exemotion. credit. 

### or refund allowance applies to a mixture that includes alcohol fermented or distilled in Texas, and if the alcohol nted r dista.J.ledinthe other state **meets** th: specifications provided Subdivisions (l), (2),and (3)of Subsecti% (e)of this section, then the specifications for themixture forwhich credits shall be made shall include
. . .alcohol fermented and distilled inthe other stat or in T x and the other state. However,eif a mix:uZZ of alcohol ferm ntd or istilled in another state and gas%iEe guzlifies under this subsection fora credit, the amount of the credit under this section for themixture may not exceed the amount of the exemption, credit, or refund (stated inor converted to cents foreach gallon of themixture) provided bv the state inwhich the al ho1 was 

### Perme nted . . ordistilled. (Bmphasis Ezded.)

You ask:

**Does** Texas Tax Code Section 153.123(b)(4) violate the Commerce Clause of the Constitution of theUnited States?

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We answer your question inthe affirmative.

This year, ina case involving a state ethanol tax credit statute containing a reciprocity provision substantively identical to that contained in subsection 153.123 (b)(4)of the Tax Code, theUnited States Supreme Court held that an Ohio ethanol tax credit provision violated the interstate commerce clause of theUnited States Constitution andwas therefore unconstitutional.

InB&$ Energy, the following reciprocity provision, which was set forth inanOhio tax statute conferring tax benefits incertain circumstances, was challenged:

The qualified fuelotherwise eligible for the qualified fuel credit shall not contain ethanol produced outside Ohio unless the tax commissioner determines that the fuel claimed tobe eligible for credit contains ethanol produced in a state that also grants an exemption, credit orrefund from such state's motor vehicle fuel excise tax or sales tax for similar fuel containing ethanol produced inOhio; provided however, that such credit shall not exceed the amount of the credit allowable for qualified fuel containing ethanol produced inOhio.

OHIO REV. CODEANN. 55735.145(B)

The Court concluded that the interstate commerce clause of the (1987).

Ohio statute violated the U.S. Constitution:

It has long been accepted that the Commerce Clause not only grants Congress the authority to regulate commerce among the States, but also directly limits the power of the States todiscriminate against interstate
commerce. This V~egative~~ aspect of the t;z;~e Clause prohibits economic protec-

-- that is, regulatory measures designed tobenefit in-state economic interests by burdening out-of-state competitors. Thus, state statutes that clearly discriminate against interstate commerce are routinely struck down, unless the discrimination is demonstrably justified **by** a valid factor unrelated economic (Citations om&ed.) protectionism.

-

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New Energy suora at 1807. The court concluded that there
was no suchvalid factor inthis instance:

Our cases leave open the possibility that
a State mayvalidate a statute that discriminates against interstate commerce by showing that itadvances a legitimate local purpose that cannot **be** adequately served by reasonable nondiscriminatory alternatives. This is perhaps just another way of saying that what may appear tobe a "discriminatoryw provision inthe constitutionally prohibited sense -- that is, aprotectionist enactment --may on closer analysis notbe so. However it be put, the standards for such justification are high.1

Id. at 1810. TheUnited States Supreme Court decision in New Enerov was both anticipated, see. ea. publisher Indus.. Inc., 457, So.Zd 1374 (Fla: 1684v er Arch& Daniels Mid1 nd Co.v. State ex rel.Al&& 315N.W.2d 597 (Minn. 1982): and, of course, has been followed. Se , a Russell Stewart Oil Co.v. State of Illinois, 529N.i.2: 48; (Ill. 1988).

We conclude that, on the basis ofNew Em, a court presented with the issue would conclude that the Texas reciprocity provision of subsection (b)(4) of section 153.123 of the Tax Code unconstitutionally violates the interstate commerce clause of the United States Constitution. Because ofa 1983 amendment including a specific non-severability provision which has the effect of invalidating the entire statute declared unconstitutional,2 ifany part thereof is
we need not address your first question.

by state legislation, avirtually per se rule has been erected.") andHushes v. Oklahma 337 (1979)("[F]acial .discriminationby itzeli defect [and] [a]t a minimum
. . .invokes scrutiny.lO) 1. The Court relied upon two fairly recent cases as precedent: Philadelwhia v. NewJersev, 437 U.S. 617, 624 (1978) (w[W]here simple economic protectionism is effected of invalidity 441U.S. 322, may be a fatal the strictest

2. Subsection (b)(5)of section 153.123 declares: (Footnote Continued)

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SUMMARY

Under the rule set out inpew Enerov Co. Qf Ind.v. L&p&&, 108 S.Ct. 1803 (1988),we conclude that acourt would hold that the tax credit reciprocity provision set forth in subsection (b)(4) of section 153.123, Tax Code, violates the interstate commerce clause of the United States Constitution and is unconstitutional.

(Footnote Continued)

The provisions of Section 153.123, Tax Code, arenot severable. Ifanyportion of Section 153.123, Tax Code, is held to be unlawful or unconstitutional, the entire section shall have no force and effect.

Acts 1983, 68th Leg., ch. 287, S 1,at 1425. A close reading of the statutory supplement toVolume 2of the Tax Code published byWest Publishing Company would lead one to assume that subsection (b)(5)was impliedly repealed by the 1987amendments to the section. However, suchwas not the case. The specific nonseverability provision in section 153.123 was included as subdivision (5)of subsection (b)in 1983. Acts 1983~, 68th Leg., ch. 287, § 1, at 1428. Subsection (b)was next amended in 1987,when Senate Bill No. 522 amended subdivisions (1) through (4) of that subsection. However, subdivision (5)was not amended: it remains unchanged from its original enactment. Acts 1987, 70th Leg., ch. 552, 52, at 2216. If the language introducing the 1987 amendatory provisions had read: I'Subsection(b),Section 153.123, Tax Code, as amended, is amended to read . . .,'I wewould agreewith the editors of West Publishing Company that the 1987 amendment to subsection (b)effectively replaced the entire subsection. Instead, the language reads: %ubdivisions (l), (2), (3), and (4), Subsection (b), Section 153.123, Tax Code, as amended, are amended to read . . . .'IWe have found nothing inthe .legislativehistory of the 1987 amendment indicating that the legislature intended to repeal subdivision (5) of subsection (b).

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JIM MATTOX Attorney General ofTexas

MARY KELLER First Assistant Attorney General

LouMCCREARY Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY Special Assistant Attorney General

RICK GILPIN Chairman, Opinion Committee
Prepared by JimMoellinger Assistant Attorney General ,

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