New Energy Co. of Indiana v. Limbach
486 U.S. 269 (1988)
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Rule of Law:
A state tax credit that is available only for products manufactured in-state or in other states that provide a similar tax advantage to the home state's products violates the Commerce Clause by discriminating against interstate commerce.
Facts:
- Ohio enacted a law providing a tax credit to fuel dealers for each gallon of ethanol sold.
- Initially, this credit was available for all ethanol, regardless of its state of origin.
- Ohio later amended the law, creating Ohio Rev. Code Ann. § 5735.145(B), to make the credit available only for ethanol produced in Ohio or in a state that grants a reciprocal tax advantage to Ohio-produced ethanol.
- New Energy Company of Indiana is an Indiana-based partnership that manufactures ethanol and sells it in Ohio.
- Indiana repealed its tax exemption for ethanol and instead enacted a direct subsidy program for its in-state ethanol producers, including New Energy.
- Because Indiana's direct subsidy was not a reciprocal tax credit, ethanol produced by New Energy and sold in Ohio became ineligible for the Ohio tax credit.
Procedural Posture:
- New Energy Company of Indiana sought declaratory and injunctive relief in the Court of Common Pleas of Franklin County, Ohio.
- The Court of Common Pleas denied relief, upholding the statute.
- New Energy, as appellant, appealed to the Ohio Court of Appeals, which affirmed the trial court's decision.
- New Energy appealed to the Ohio Supreme Court, which initially reversed the lower courts.
- Upon a motion for rehearing by the appellees, the Ohio Supreme Court reversed its prior holding and affirmed the lower court decisions.
- The United States Supreme Court noted probable jurisdiction to hear the appeal from New Energy.
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Issue:
Does an Ohio law that awards a tax credit for the sale of ethanol only if the ethanol is produced in Ohio or in a state that grants a similar tax advantage to Ohio-produced ethanol violate the Commerce Clause?
Opinions:
Majority - Justice Scalia
Yes, the Ohio law violates the Commerce Clause. State statutes that clearly discriminate against interstate commerce are unconstitutional unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism. The Ohio statute is facially discriminatory because it explicitly denies a generally available tax credit to products based on their state of origin. The Court rejected the argument that the reciprocity provision promotes interstate commerce, citing precedent that a state may not use the threat of economic isolation as a weapon to force sister states into a reciprocity agreement. The market-participant doctrine does not apply because Ohio is not acting as a private participant in the market but is exercising its core governmental power of assessing and computing taxes. Finally, the state's proffered justifications of promoting health and commerce fail under strict scrutiny because the law is not tailored to achieve those goals; it is designed only to provide favorable treatment for Ohio-produced ethanol.
Analysis:
This decision reaffirms the Supreme Court's strong opposition to state laws that create explicit economic barriers based on a product's state of origin. By characterizing the reciprocity provision as facially discriminatory, the Court subjects such laws to the strictest scrutiny, making them nearly impossible to justify. The case clarifies the distinction between a permissible direct subsidy to an in-state industry and an impermissible discriminatory tax scheme, reinforcing that states cannot use their regulatory and taxing powers to penalize out-of-state competitors. This ruling solidifies the principle that the dormant Commerce Clause prohibits states from engaging in economic retaliation or coercion against each other.
