Opinion ID: 2518337
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Heading Rank: 4

Heading: The Federal Commerce Clause

Text: CIG argues that K.S.A. 79-5a01 violates the Commerce Clause of the United States Constitution because its inclusion of interstate and intercounty natural gas gathering systems as public utilities results in their taxation at an assessed value and rate higher than those applied to intracounty natural gas gathering systems. Historically the Commerce Clause has been interpreted `not only as authorization for congressional action, but also, even in the absence of a conflicting federal statute, as a restriction on permissible state regulation.' [Citation omitted.] This restrictive aspect has been referred to as the `dormant' Commerce Clause. The dormant Commerce Clause prohibits states, unless authorized by Congress, from `attempting to advance their own commercial interests by curtailing the movement of articles of commerce, either into or out of the state.' [Citation omitted.] Water District No. 1 v. Mission Hills Country Club, 265 Kan. 355, 365-66, 960 P.2d 239 (1998). Discrimination under the Commerce Clause presupposes a comparison between similarly situated entities. CIG contends its property should be assessed and taxed at the same rate as intracounty gas gathering system property. Therefore, this court must consider the threshold question of whether the interstate and intercounty systems are similarly situated to intracounty systems. In General Motors Corp. v. Tracy, 519 U.S. 278, 299-300, 136 L. Ed. 2d 761, 117 S. Ct. 811 (1997), the Supreme Court recognized the necessity of such an analysis in the context of allegedly competing entities providing different products. General Motors Corp. stated: This is so for the simple reason that the difference in products may mean that the different entities serve different markets, and would continue to do so even if the supposedly discriminatory burden were removed. If in fact that should be the case, eliminating the tax or other regulatory differential would not serve the dormant Commerce Clause's fundamental objective of preserving a national market for competition undisturbed by preferential advantages conferred by a State upon its residents or resident competitors. . . . . . . . Thus, in the absence of actual or prospective competition between supposedly favored and disfavored entities in a single market there can be no local preference, whether by express discrimination against interstate commerce or undue burden upon it, to which the dormant Commerce Clause may apply. (Emphasis added.) 519 U.S. at 299-300. Accordingly, it is essential that interstate and intercounty systems such as CIG serve the same market as intracounty systems or that the statute's discrimination affects the systems' economic choices in competitive markets. On this point, CIG contends, interstate and intercounty gas gathering systems operate in a competitive market with intracounty systems; and no evidence supports cost advantages for interstate or intercounty systems over intracounty systems. CIG further emphasizes that all of the gas gathering systems perform the same functions, transport natural gas from a lease or wellhead to a point of interconnection with a transmission line or processing facility, and are subject to the same regulation. See K.S.A. 2004 Supp. 55-150(d) (defining KCC-regulated gas gathering systems). It points to studies by the Federal Energy Regulatory Commission and the Federal Trade Commission, which were described by its expert witness, Dismukes, to confirm the existence of actual competition in the market in which it operates. The PVD disputes CIG's contention that lower taxes give intracounty systems a competitive edge. It asserts Dismukes could not cite a specific example to support CIG's theory, and CIG did not introduce evidence that it had lost revenue because of its tax treatment. The PVD also contends intracounty systems are customers of CIG and other interstate or intercounty systems, not competitors, because intracounty systems generally must connect with intercounty/interstate systems to deliver gas to a transmission pipeline. This symbiotic relationship allows interstate and intercounty systems to avoid the cost of building lines to marginal wells, and each type of system thus fulfills a niche in the natural gas market. In General Motors Corp., the plaintiff, a buyer of natural gas from an out-of-state marketer, sought refund of a use tax. General Motors challenged the exemption of local distribution companies from sales and use taxes on sellers of natural gas. The Supreme Court noted that the out-of-state marketers did not serve the local distributors' core market of small, captive users, typified by residential consumers who wanted or needed to buy natural gas bundled with services and protections required by regulatory authorities. The Court further observed that, although the captive market was not geographically distinguished from the area served by the out-of-state marketers, it was defined economically by its component customers' needs for bundled benefits. 519 U.S. at 301. While recognizing a possibility of competition between the local distributors and the out-of-state marketers for the noncaptive market, the Supreme Court concluded: [T]here is good reason to assume that any pricing changes that could result from eliminating the sales tax differential challenged here would be inadequate to create competition between [the local distributors] and marketers for the business of the utilities' core home market. 519 U.S. at 302. Thus the Supreme Court held the local distributors and the marketers were not similarly situated for purposes of dormant Commerce Clause analysis. 519 U.S. at 310. See also Alaska v. Arctic Maid, 366 U.S. 199, 204-05, 6 L. Ed. 2d 227, 81 S. Ct. 929 (1961) (holding lower business license on local fish processors raised no issue of discrimination against freezer ships; ships took catches south for canning, did not compete with those who freeze fish for the retail market); but see Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 269, 82 L. Ed. 2d 200, 104 S. Ct. 3049 (1984) (holding Hawaii excise tax from which certain locally produced beverages exempt did not present competitive threat to other liquors; yet this fact not dispositive of whether competition existed between locally produced beverages and foreign beverages). In this case, the BOTA majority resolved the issue of whether CIG and systems like it compete with intracounty systems and thus are similarly situated in CIG's favor. Our review of the record persuades us that this issue of fact was contested through a classic battle of the experts. Because there was substantial competent evidence to support the BOTA majority's finding, we are bound by it. It is not the job of this court to reweigh evidence, pass on the credibility of witnesses, or resolve conflicts in the evidence. Steele v. Harrison, 220 Kan. 422, 423, 552 P.2d 957 (1976). The BOTA majority performed those functions. Its finding that CIG and intracounty systems were competitive and thus similarly situated must stand. We next consider whether K.S.A. 79-5a01's differentiation between interstate and intercounty systems and intracounty systems passes a four-part test adopted by the United States Supreme Court in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 51 L. Ed. 2d 326, 97 S. Ct. 1076 (1977). If so, it does not violate the Commerce Clause; if it fails the test, it violates the Commerce Clause and must be struck down. The Complete Auto test applied to state taxes subject to a Commerce Clause challenge requires: (1) the tax [be] applied to an activity with a substantial nexus with Kansas; (2) the tax be fairly apportioned; (3) the tax not discriminate against interstate commerce; and (4) the tax fairly [relate] to the services provided by Kansas. 430 U.S. at 279. All four requirements must be met for the statute to pass constitutional muster. The PVD, of course, argues the Kansas statute meets all four requirements of Complete Auto. CIG, in its reply brief, concedes the state tax at issue here meets the first, second, and fourth requirements of the test. Accordingly, the only requirement before this court is the third: whether K.S.A. 79-5a01 discriminates against interstate commerce. Kansas cases have not previously dealt with this third requirement. The Complete Auto test's requirements that a tax be fairly apportioned and not be discriminatory against interstate commerce are, at least in part, concerned with avoiding multiple taxation by more than one state. See Geja's Cafe v. Metro. Pier & Expo. Auth., 153 Ill. 2d 239, 255, 606 N.E.2d 1212 (1992). The PVD cites 1 Hellerstein & Hellerstein, State Taxation, ¶ 4.12(2)(d), p. 4-61 (3d ed. 1998), for the proposition that `[i]t is only multiple taxation of interstate operations that offends the Commerce Clause.' However, as CIG points out in its reply brief, the PVD took this statement out of context, as the Hellersteins were addressing whether a state may tax the full value of instrumentalities of interstate commerce, such as aircraft, that have not acquired a tax situs in other states. There are no multiple taxation issues in the present case because all of the taxed property is within Kansas' borders. In the Commerce Clause context, the term discrimination means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter. Oregon Waste Systems, Inc. v. Department of Environmental Quality of Ore., 511 U.S. 93, 99, 128 L. Ed. 2d 13, 114 S. Ct. 1345 (1994). In Amerada Hess Corp. v. N.J. Taxation Div., 490 U.S. 66, 75, 104 L. Ed. 2d 58, 109 S. Ct. 1617 (1989), the Supreme Court set forth three factors to be evaluated to determine whether the third discrimination requirement of the Complete Auto test can be met. A state tax discriminates against interstate commerce if it (1) is facially discriminatory, (2) has a discriminatory intent, or (3) has the effect of unduly burdening interstate commerce. 490 U.S. at 75. If any one of these Amerada Hess factors is present, discrimination against interstate commerce is established under the third requirement of Complete Auto. CIG does not contend that the Kansas tax assessment procedure has a discriminatory intent; therefore, there is no need to examine the second Amerada Hess factor. As a prelude to consideration of the first and third factors, we first note CIG's citation to Professors Hellerstein for the proposition that the Court has scrutinized claims that a tax discriminates against interstate commerce with considerable vigilance . . . . [Moreover,] it has invalidated discriminatory levies whether or not the discrimination is intentional. 1 Hellerstein & Hellerstein, State Taxation, ¶ 4.13, p. 4-69. Regarding the first Amerada Hess factor, CIG argues that the statute is facially discriminatory because its public utility definition excludes competing intracounty natural gas gathering systems. As a result, the intracounty systems receive significant tax benefits not available to interstate and intercounty systems. CIG cites Chemical Waste Management, Inc. v. Hunt, 504 U.S. 334, 342, 119 L. Ed. 2d 121, 112 S. Ct. 2009 (1992), in which the Supreme Court concluded a tax law is discriminatory if it taxes a transaction more heavily when it crosses state lines than when it occurs entirely within a state. In addition, the Court in Oregon Waste Systems, 511 U.S. at 99, stated that state laws applying discriminatory restrictions on interstate commerce are virtually per se invalid. See also 1 Hellerstein & Hellerstein State Taxation, ¶ 4.13, p. 4-69 (A tax that by its terms or operation imposes greater burdens on out-of-state goods, activities, or enterprises than on competing in-state goods, activities, or enterprises will be struck down as discriminatory under the Commerce Clause.). The PVD, for its part, directs our attention to Nashville, C. & St. L. Ry. v. Browning, 310 U.S. 362, 84 L. Ed. 1254, 60 S. Ct. 968 (1940), in which the Supreme Court considered the constitutionality of a Tennessee ad valorem tax law. The law provided that the property of railroad and other public utility corporations was to be assessed for tax purposes at full cash value, while all other kinds of property were to be assessed at less than cash value. In addition, property of public service corporations was to be assessed by the Railroad and the Public Utilities Commission, while all other property was to be assessed by local officials. For more than 40 years, local officials had valued property at far less than its true worth, while the Commission had assessed property at full value. The Supreme Court found no constitutional violation. The Nashville Court emphasized that states may classify property for taxation; may set up different modes of assessment, valuation and collection; may tax some kinds of property at higher rates than others; and . . . may treat . . . utilities with that separateness which their distinctive characteristics and functions in society make appropriate. 310 U.S. at 368. PVD's reliance on this language is unpersuasive. It comes from the Supreme Court's Equal Protection rather than Commerce Clause analysis. The PVD also cites In re Tax Appeal of ANR Pipeline Co., 254 Kan. 534, 546-48, 866 P.2d 1060, cert. denied 513 U.S. 917 (1994), abrogation recognized by Colorado Interstate Gas Co. v. Beshears, 271 Kan. 596, 24 P.3d 113 (2001). In ANR Pipeline, BOTA refused to grant the Pipeline's request to have its property assessed on the same basis as railroad property. The federal Railroad Revitalization & Regulatory Reform Act of 1976 placed limitations on state taxation of railroad property. This court held that taxing railroads and pipelines differently did not violate the Commerce Clause or the Equal Protection Clause. 254 Kan. at 544-48. This Court noted that Kansas treated railroads and pipelines equally in its state constitution and its statutory definition of public utilities; Congress simply chose to favor railroads. 254 Kan. at 547. CIG properly distinguishes ANR Pipeline, because Congress has not ordered preferential treatment of intracounty gas gathering pipelines in Kansas. In this case, to the extent the statute is facially discriminatory against interstate commerce, it is imperfectly or incompletely so. Intercounty systems wholly contained within Kansas are taxed the same as interstate systems. Thus the Kansas tax does not necessarily exert pressure on interstate businesses to conduct more of their activities in the state. CIG points out, however, that the Hellersteins have addressed the import of imperfection or incompleteness of discrimination on Commerce Clause analysis. They state: [I]f a tax favors certain in-state residents or interests while discriminating against many other in-state as well as out-of-state residents or interests, does it nevertheless violate the Commerce Clause? The U.S. Supreme Court has answered this question in the affirmative, although not specifically in the context of a state tax. In Dean Milk Co. v. City of Madison, [340 U.S. 349, 354, 95 L. Ed 329, 71 S. Ct. 295 (1950)] the Court struck down a Madison, Wisconsin, ordinance barring the sale of milk not processed within five miles of the city. The Court found it `immaterial' that the ordinance discriminated equally against in-state milk processed outside the five-mile perimeter. The Court's position is consistent with its more recent pronouncements that there is no `de minimis' defense to discrimination and that it need not know `how unequal' a tax is `before concluding that it unconstitutionally discriminates.' 1 Hellerstein & Hellerstein, State Taxation, ¶ 4.13(1A), p. S 4-8 (3d ed. 2004 Supp.). In Dean Milk Co. v. Madison, 340 U.S. 349, 354, 95 L. Ed. 329, 71 S. Ct. 295 (1951), the Supreme Court found the ordinance erect[ed] an economic barrier protecting a major local industry against competition from without the State. The ban led to unjustified discrimination against interstate commerce, and the burden it produced exceeded any need to protect local health and safety; other reasonable nondiscriminatory alternatives were available, according to the Court. It simply did not matter that Wisconsin milk from outside the Madison area was subjected to the same proscription as that moving in interstate commerce. 340 U.S. at 354 n.4; cf. Brimmer v. Rebman, 138 U.S. 78, 83, 34 L. Ed. 862, 11 S. Ct. 213 (1891) (`a burden imposed by a State upon interstate commerce is not to be sustained simply because the statute imposing it applies alike to the people of all the States, including the people of the State enacting such statute'). And, in the much more recent case of Fulton Corp. v. Faulkner, 516 U.S. 325, 133 L. Ed. 2d 796, 116 S. Ct. 848 (1996), the Supreme Court concluded that an intangibles tax facially discriminated against interstate commerce. The Court noted that the state secretary of revenue had argued the tax was so small in amount as to have no practical impact. This argument was explicitly rejected: [W]e have never recognized a `de minimus' defense to a charge of discriminatory taxation under the Commerce Clause. 516 U.S. at 333 n.3. Other United States Supreme Court decisions have included similar pronouncements. See Associated Industries of Mo. v. Lohman, 511 U.S. 641, 650, 128 L. Ed. 2d 639, 114 S. Ct. 1815 (1994) ([A]ctual discrimination, wherever it is found, is impermissible, and the magnitude and scope of the discrimination have no bearing on the determinative question whether discrimination has occurred.); C & A Carbone, Inc. v. Clarkstown, 511 U.S. 383, 391, 128 L. Ed. 2d 399, 114 S. Ct. 1677 (1994) (flow control ordinance no less discriminatory because in-state or in-town processors are also covered by the prohibition); Maryland v. Louisiana, 451 U.S. 725, 760, 68 L. Ed. 2d 576, 101 S. Ct. 2114 (1981) (We need not know how unequal the [t]ax is before concluding that it unconstitutionally discriminates.). In view of these authorities, we have no hesitation in extending the rationale of the United States Supreme Court's Dean Milk decision to this state tax case. Like the sales preference of Dean Milk, which facially discriminated against all milk producers outside a 5-mile radius of Madison, Wisconsin, the tax we examine here benefits only a part of an industry located completely within the state. Other intrastate entities in the same industry  in Dean Milk, producers outside the protected city and environs but within Wisconsin, here, intercounty gas gathering systems within Kansas  are not benefitted. Put another way, there is no differential treatment of certain intrastate entities in comparison to entities in interstate commerce. But this imperfect discrimination is nevertheless discrimination. If there is no de minimis defense, we are compelled to conclude that the statute is facially discriminatory. Even if we were to reach the opposite conclusion on the facial discrimination Amerada Hess factor, we would conclude the statute has the effect of unduly burdening interstate commerce. See Amerada Hess, 490 U.S. at 75. BOTA found that CIG paid approximately $900,000 more in taxes than it would have paid if it were an intracounty system. There is substantial competent evidence in the record to support this factual finding, and such an impact can hardly be characterized as de minimis or even minor. Our statute is not evenhanded, and its impact exceeds the merely incidental. Cf. Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 472, 66 L. Ed. 2d 659, 101 S. Ct. 715 (1981); Blue Sky Bar, Inc. v. Stratford, 203 Conn. 14, 30, 523 A. 2d 467 (1987). We note that Massachusetts and California courts also have concluded that specific tax statutes or ordinances facially discriminated against or had an effect of unduly burdening interstate commerce in circumstances where the discrimination might be described as imperfect or incomplete. In an advisory opinion, the Massachusetts Supreme Judicial Court concluded that legislation reducing a surcharge on motor vehicle rental contracts from $10 to $3 only for residents of a city violated the Commerce Clause. The Massachusetts court concluded the surcharge discriminated against out-of-state consumers, and its constitutional flaw was not cured by the fact that it also discriminated against many in-state consumers. Opinion of the Justices to the House of Representatives, 428 Mass. 1201, 1208, 702 N.E.2d 8 (1998). In Union Oil Co. v. City of Los Angeles, 79 Cal. App. 4th 383, 94 Cal. Rptr. 2d 81 (2000), the California court considered a challenge to a Los Angeles tax ordinance, concluding it directly discriminated against interstate and intercity taxpayers doing business in the City. A Los Angeles business paying the payroll tax in Los Angeles is exempt from the business license tax (L.A. Mun. Code, § 21.24), although the intercity or interstate business performing the same activity in the City must pay the business license tax. 79 Cal. App. 4th at 388-89; see also General Motors Corp. v. City & County of San Francisco, 69 Cal. App. 4th 448, 81 Cal. Rptr. 2d 544 (1999) (holding business tax that differentiated between in-city manufacturers and out-of-city manufacturers violated Commerce Clause); General Motors Corp. v. City of Los Angeles, 35 Cal. App. 4th 1736, 42 Cal. Rptr. 2d 430 (1995) (holding business tax that differentiated between in-city manufacturers and out-of-city manufacturers violated Commerce Clause), abrogated on other grounds by Union Oil Co. of Cal. v. City of Los Angeles, 79 Cal. App. 4th 383, 94 Cal. Rptr. 2d 81 (2000). Both federal and state courts from many other jurisdictions have rejected assorted nontax measures on the basis of the Dean Milk rationale. See, e.g., Kentucky Power Co. v. Huelsmann, 352 F. Supp. 2d 777, 785-86 (E.D. Ky. 2005) (electricity curtailment priority statute; [T]he fact that some Kentucky customers are not within the favored class under [the law] does not change the constitutional analysis. Regulations that treat all out-of-staters in a disparate manner will be treated as discriminatory even though some in-staters are also adversely affected by the regulation.); Lett v. Paymentech, Inc., 81 F. Supp. 2d 992, 999 (N.D. Cal. 1999) (statutes requiring contracts for commission-based sales employees lacking fixed place of business in California; unreasonable burdens on interstate commerce cannot be saved by legislative enactments that also impose parallel burdens on intrastate commerce . . . . [T]he state's ability to regulate interstate commerce, circumscribed in the Constitution, is not enhanced or affected by its regulation of intrastate commerce.); Connecticut Carting Co. v. Town of East Lyme, 946 F. Supp. 152, 156 n.6 (D. Conn. 1995) (ordinance regulating waste collection and disposal; The fact that the ordinance also increases the cost of doing business for in-state competing facilities . . . is immaterial, as regulations are no less discriminatory because in-state businesses are also discriminated against.); Sanifill, Inc. v. Kandiyohi County, 559 N.W.2d 111, 115 n.3 (Minn. App. 1997) (waste disposal fee ordinance; The fact that intrastate as well as interstate commerce may be adversely affected . . . is immaterial to the determination of whether [the measure] is discriminatory for Commerce Clause purposes.); Homier Distrib. Co., v. City of Albany, 90 N.Y.2d 153, 159, 659 N.Y.S.2d 223, 681 N.E.2d 390 (1997) (city transient retailer tax; discriminatory character of law not altered because its burden may also fall upon some local businesses). Because K.S.A. 79-5a01 is facially discriminatory and has the effect of unduly burdening interstate commerce under Amerada Hess, it discriminates under Complete Auto. We therefore hold that its differentiation between interstate and intercounty natural gas gathering systems on the one hand and intracounty systems on the other is unconstitutional under the federal Commerce Clause, and we must reverse BOTA's decision because of its reliance on the statute. See K.S.A. 77-621(c)(1).