Tax Type
Corporation Income Tax
Description
Coal Employment and Production Incentive Tax Credit
Topic
Credits
Date Issued
02-27-1986
[Opinion - Virginia Attorney General: 1986 at 266]
REQUEST BY: Honorable Edward E. Willey Member, Senate of Virginia
OPINION BY: Mary Sue Terry, Attorney General
OPINION:
You ask whether H.B. 755, introduced in the 1986 Regular Session of the General Assembly, violates any provision of the United States Constitution or the Constitution of Virginia. The version you have presented is the engrossed bill with House amendments dated February 4, 1986. The bill, which creates the Virginia Coal Employment and Production Incentive Tax Credit, allows certain public utility corporations to claim a credit against the gross receipts license tax which is imposed by § 58.1-2626 of the Code of Virginia. The credit is measured by the tons of coal purchased by such corporations in a given tax year, provided such coal is mined and consumed in Virginia. The particular credit varies according to certain factors not relevant to your question.
After considerable research, it is my opinion that, for the reasons which follow, the requirement of H.B. 755 limiting the credit computation to purchases of coal mined in Virginia is constitutional. The requirement that the coal be consumed in Virginia, however, violates the Commerce Clause of the United States Constitution.
I. The Bill
As originally introduced, H.B. 755 added § 58.1-2626.1, which provides a credit against the gross receipts license tax imposed by § 58.1-2626 for corporations "in the Commonwealth doing the business of furnishing water, heat, light or power." The amount of the credit is determined by reference to the tons of coal purchased which are mined in Virginia. Nothing in the original bill required the taxpayer to burn the coal in Virginia.
The bill was amended on the House floor by dividing the proposed section into two paragraphs, the first covering the credit for coal purchases in excess of the base year 1985 and the second pertaining to the credit for all coal purchased. The amendment added the further requirements that (1) the corporation furnish the water, heat, light or power to the Commonwealth or its citizens, (2) the coal be purchased by the corporation claiming the credit, and (3) the coal be consumed in Virginia.1
II. Purpose of Legislation
Although the bill contains no statement of legislative purpose, the title of the bill and the headline of the section strongly suggest that the purpose of the bill is to increase the production of coal in Virginia and the consequent employment associated with that increased production. There is no suggestion in the legislation that the purpose of the credit is to reduce the gross receipts license tax on utilities generally or to provide an incentive for coal-consuming utilities to locate their generating plants in Virginia. In the absence of express legislative purpose, we may place reliance upon the title and the headline. See Jordan, et als. v. So. Boston, 138 Va. 838, 122 S.E. 265 (1924).
Unlike many of the factual situations contained in the case decisions discussed later in this Opinion, the tax credit incentive proposed by amended H.B. 755 seeks to achieve its legislative purpose by an indirect means, in contrast to plans which act directly on the industry which is the subject of the legislative purpose. Here, a derivative benefit to the Virginia coal industry is achieved by creating an incentive for public utility corporations to make purchases favoring the domestic coal industry. While the tax credit incentive is limited to water, heat, light or power public utility corporations serving Virginia customers, any and every such corporation, whether domestic or foreign, may take advantage of the credit incentive to reduce the gross receipts license tax on business done in Virginia, so long as the coal purchased is mined and consumed in Virginia.
III. Users Affected
The impact of this bill and the analysis of its constitutionality can be better understood against the background of potential taxpayers who may seek a credit. The class of taxpayers affected by the bill are public utility corporations, a discrete group of commercial enterprises regulated by the State Corporation Commission. Entry into the class is limited. Collectively, they are the principal consumers of coal in the Commonwealth.
Public utility corporations which furnish water, heat, light or power to Virginia consumers and which are thereby eligible for the tax credit could fall into any one of at least three general classifications: (1) utilities which have all of their generating plants and all of their customer service areas wholly within Virginia; (2) utilities which have generating plants in Virginia but serve Virginia consumers and consumers in other states; and (3) utilities which have all of their generating plants outside of Virginia but serve consumers both within and without Virginia. There are other combinations and permutations of these circumstances, but these three general classifications will suffice for purposes of this Opinion.
If Virginia coal is purchased by a qualifying public utility corporation, there are no restrictions or direct taxes on the resale of that Virginia coal to non-Virginia purchasers or on the consumption of such coal outside of Virginia. The selection of either of these business options, however, would result in the ineligibility of the taxpayer to claim the tax credit for any such coal so resold or consumed.
IV. Legal Framework - Protectionism and Market Participation
There are two lines of cases in the Supreme Court of the United States which bear on the result of this Opinion. The first line I will refer to as the " protectionist" line of tax cases, which includes: Metropolitan Life Ins. Co. v. Ward, 105 S.Ct. 1976 (1985); Armco Inc. v. Hardesty, 104 S.Ct. 2620 (1984); Bacchus Imports, Ltd. v. Dias, 104 S.Ct. 3049 (1984); and Westinghouse Elec. Corp. v. Tully, 104 S.Ct. 1856 (1984). The second line of cases I will refer to as the "market participant" line of cases, which includes: South-Central Timber Development, Inc. v. Wunnicke, 104 S.Ct. 2237 (1984); White v. Mass. Council of Constr. Employers, 460 U.S. 204 (1983); Reeves, Inc. v. Stake, 447 U.S. 429 (1980); and Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976).
Both the protectionist and the market participant lines of cases invite analysis under the Commerce as well as the Equal Protection Clauses of the United States Constitution. See Art. I, § 8, Cl. 3 and Amend. XIV, § 1 of the United States Constitution.
"The Commerce Clause, unlike the Equal Protection Clause, is integrally concerned with whether a state purpose implicates local or national interests. The Equal Protection Clause, in contrast, is concerned with whether a state purpose is impermissibly discriminatory; whether the discrimination involves local or other interests is not central to the inquiry to be made."
Metropolitan Life, 105 S.Ct. at 1681 n.6.
"Under Commerce Clause analysis, the State's interest, if legitimate, is weighed against the burden the state law would impose on interstate commerce. In the equal protection context, however, if the State's purpose is found to be legitimate, the state law stands as long as the burden it imposes is found to be rationally related to that purpose, a relationship that is not difficult to establish."
Id. at 1683.
The protectionist cases illustrate the general rule that, while pursuant to its police powers a state may enact laws that have the purpose and effect of encouraging domestic industry, the state may not constitutionally impose a discriminatory burden upon the business of other states merely to protect and promote local businesses. See Metropolitan Life, 105 S.Ct. at 1681 n.6.
In the market participant cases, the Supreme Court has distinguished between situations in which a state enters the market as a participant and those in which it enters the market as a regulator. When acting as a "participant" [seller (see, e.g., Reeves) or buyer (see, e.g., Alexandria Scrap)], the state is allowed more freedom of action than when it is "regulating" or exerting control over the marketplace. The Court finds that this distinction " makes good sense and sound law." South-Central Timber,2 104 S.Ct. at 2244, quoting Reeves, Inc., 447 U.S. at 436. "In essence, the Court recognized the principle that the Commerce Clause places no limitations on a State's refusal to deal with particular parties when it is participating in the interstate market in goods." Id.
V. Analysis
The tax credit provided by H.B. 755, as amended, has two requirements of particular relevance here. The first is that the coal must be mined in Virginia. The second is that the coal must be consumed in Virginia.
A. "Mined in Virginia" Requirement -- Valid
I have examined both the protectionist and the market participant lines of cases in light of the Commerce and the Equal Protection Clauses of the United States Constitution. In my judgment, the Supreme Court would analyze the "mined in Virginia" requirement as a "market participant" case and would view the Commonwealth as a "participant" and not a "regulator," thereby warranting a more benevolent or relaxed review of the requirement. See Alexandria Scrap (a state need not be a direct participant in the marketplace in order to come within the market participant doctrine). Regardless of whether a challenge is based on the market participant or protectionist line of cases, however, it is my opinion that the provisions in H.B. 755 which make the credit dependent upon the coal having been mined in Virginia can withstand a challenge based on either the Commerce Clause or the Equal Protection Clause, or both.
The Coal Employment and Production Incentive Tax Credit can be distinguished from the Motor Fuel Tax and Special Fuel Tax exemptions granted by §§ 58.1-2105(E) and 58.1-2116(D) (commonly referred to as the gasohol exemption), which was the subject of my Opinion found in the 1985-1986 Report of the Attorney General at 294. In that Opinion, I found that the gasohol legislation could not withstand constitutional challenge in view of the cases which I have cited above in this Opinion.
The distinguishing factors between the two legislative enactments can be summarized as follows:
1. Gasohol involves a direct tax on the sale of the commodity. The coal incentive credit works indirectly, not on the sale of coal, but on the gross receipts tax liability of the purchasers of coal.
2. An out-of-state anhydrous ethanol producer cannot avoid the discriminatory tax which makes his product less competitive in the gasohol market. Nothing in the coal incentive credit mandates purchasing behavior, because the utilities are free to purchase coal from whatever source they choose.
3. The gasohol market involves open, unregulated competition among both in-state and out-of-state producers. The coal incentive credit applies to a closed class of public utilities in a regulated arena completely free of competition.
4. Gasohol falls squarely within and is condemned by the protectionist tax line of cases. The coal incentive credit (apart from the in-state consumption requirement, which will be addressed below) falls squarely within and is validated by the market participant line of cases.
5. The objective of the gasohol legislation can only be constitutionally achieved by substituting a subsidy or grant system for Virginia anhydrous ethanol producers. See S.B. 79, Amendment in the Nature of a Substitute, pp. 7-9, "Alcohol Fuel Production Incentive Program Fund." The objective of the coal incentive credit can be achieved without modification apart from the in-state consumption requirement addressed below.
B. "Consumed in Virginia" Requirement -- Invalid
In addition to linking eligibility for the Virginia Coal Employment and Production Incentive Tax Credit to the purchased coal having been mined in Virginia, H.B. 755, as amended, also requires that the coal be consumed in Virginia. The reason for this limitation is not anywhere set forth in the bill.
From my review of the market participant and protectionist lines of cases, it is my judgment that the in-state consumption requirement would be analyzed by the Supreme Court as a protectionist case and therefore be subject to more rigorous review than the "mined in Virginia" requirement.
The in-state consumption restriction is virtually indistinguishable in its effect from the New York tax credit restriction struck down in the Westinghouse case. Westinghouse is a Commerce Clause decision in the protectionist line of cases. In Westinghouse, New York had granted a tax credit which was limited in its application to gross receipts from export products shipped by the taxpayer from a regular place of business in New York. Westinghouse, 104 S.Ct. at 1860. The stated purpose of the credit was "to 'provide a positive incentive for increased business activity in New York State' . . . ." Id. The effect was to require export companies which did business in New York and which desired to qualify for the tax credit, but which had their warehouses outside New York, to move those warehouses to New York. Ruling against New York, the Court said:
"Whether the discriminatory tax diverts new business into the State or merely prevents current business from being diverted elsewhere, it is still a discriminatory tax that 'forecloses tax-neutral decisions and . . . creates . . . an advantage' for firms operating in New York by placing 'a discriminatory burden on commerce to its sister States.' Boston Stock Exchange, 429 U.S., at 331 . . . ." (Emphasis added.)
Westinghouse, 104 S.Ct. at 1867.
A public utility corporation which services consumers in Virginia, and thus is subject to the gross receipts license tax imposed by § 58.1-2626, could have one or more of its generating plants located outside Virginia. It would be impossible for such a corporation, whether domestic or foreign, to be able to qualify for the H.B. 755 coal incentive tax credit for coal consumed in such out-of-state generating plants. As in Westinghouse, the only way such a corporation could qualify for the credit would be to relocate its out-of-state generating plants to Virginia, an obviously burdensome and impractical option. Accordingly, on the basis of the decision in the Westinghouse case, I conclude that the instate consumption requirement in H.B. 755 imposes a discriminatory burden on interstate commerce and, thus, violates the Commerce Clause of the United States Constitution.
There is also support for this conclusion in the market participant line of cases. Mr. Justice White, writing for the majority in the South-Central Timber case, observed:
"'[T]he Court has viewed with particular suspicion state statutes requiring business operations to be performed in the home State that could more efficiently be performed elsewhere. Even where the State is pursuing a clearly legitimate local interest, this particular burden on commerce has been declared to be virtually per se illegal.'"
104 S.Ct. 2247, quoting Pike v. Bruce Church, 397 U.S. 137, 145 (1970). Such limitations will be regarded as protectionist even if economic protectionism was not intended by the limitation. See Metropolitan Life, 105 S.Ct. at 1684.
Where a natural resource like timber or coal is involved, such restrictions are even more troublesome. See South-Central Timber, 104 S.Ct. at 2245; accord Reeves, 447 U.S. at 443. In South-Central Timber, the Court struck down a restriction on purchasers of timber owned by Alaska which required the purchaser to process the timber in Alaska before shipping it out of state. This "downstream" restriction left the purchaser without any choice as to what it might do with the purchased timber.
The prohibited "downstream" restrictions were described in South-Central Timber as follows:
"The limit of the market-participant doctrine must be that it allows a State to impose burdens on commerce within the market in which it is a participant, but allows it to go no further. The State may not impose conditions, whether by statute, regulation, or contract, that have a substantial regulatory effect outside of that particular market . . . .
Although the State may be a participant in the timber market, it is using its leverage in that market to exert a regulatory effect in the processing market, in which it is not a participant . . . .
There are sound reasons for distinguishing between a State's preferring its own residents in the initial disposition of goods when it is a market participant and a State's attachment of restrictions on dispositions subsequent to the goods coming to rest in private hands."
104 S.Ct. 2245-46. Thus, even if the "mined in Virginia" requirement is permissible, the Commerce Clause of the United States Constitution prohibits the Commonwealth from attaching restrictions on the disposition of Virginia coal - here that the coal be consumed in Virginia - once the coal is purchased by the public utility corporation.3
VI. Conclusions
Every bill passed and signed into law is entitled to a presumption of constitutionality. It is only where the statute is plainly repugnant to some constitutional provision that it should be declared void. See City of Charlottesville v. DeHaan, 228 Va. 578, 323 S.E.2d 131 (1984). House Bill 755 was, in my opinion, constitutional as originally introduced, even though the tax credit was contingent on the purchased coal having been mined in Virginia. The constitutional infirmity arises solely from the further limitation that the coal must be consumed in Virginia. The amended version of H.B. 755 would, in my opinion, be constitutional if this latter limitation were deleted everywhere it appears in the bill.4 Unless and until such action is taken, I must reluctantly conclude that, because of the restriction that the coal must be consumed in Virginia, H.B. 755 violates the Commerce Clause of the United States Constitution.
1 Parenthetically, I note that the restructuring of the proposed statute creates a credit based upon the excess purchases for the 1987 tax year, leaves a hiatus for the 1988 tax year, and introduces the full credit for all coal purchases for tax year 1989 and tax years thereafter.
2 Most of the references in this Opinion to the South-Central Timber decision are to material in Pts. III and IV of the opinion of Mr. Justice White. Only Pts. I and II comprised the opinion of the Court, since only four justices joined in Pts. III and IV. Nonetheless, the guidance set forth in Pts. III and IV is based exclusively on prior Court decisions and is, therefore, reliable.
3 In view of my conclusion that the in-state consumption requirement violates the Commerce Clause, it is unnecessary for me to address the Equal Protection Clause.
4 The Commonwealth is under no constitutional obligation to subsidize that portion of the business of water, heat, light or power companies which is devoted to serving customers outside of Virginia. In lieu of the Virginia consumption restriction, a limitation could be designed to ensure that the amount of credit which may be claimed bears some rational relationship to the amount of the utilities' service rendered to Virginia customers compared to service rendered to non-Virginia customers even though Virginia coal may be consumed in rendering service to non-Virginia customers.
Attorney General's Opinion