Attorney General Opinion JM-1003

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 guali- Austin, Texas 78774 fies for a credit claimed by a distributor on a gasoline/ alcohol mixture under section 153.123 of the Tax Code and re- lated questions Dear Mr. 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 on gasoline. of the code confers a tax credit on distributors of certain gasoline/alcohol mixtures, as defined in the section, and contains a reciprocity provision, which denies the tax credit to distributors of gasoline/alcohol mixtures contain- ing alcohol fermented or distilled in states not conferring equivalent tax benefits to distributors whose mixtures contain Texas-produced alcohol. First, you ask about the proper construction of section 153.123, specifically whether your long-standing construc- tion of subsection (b) is correct, which denies the credit to distributors of gasoline/alcohol mixtures whose alcohol is fermented or distilled in foreign countries. Second, you ask whether the reciprocity provision set out in subsection (b)(4) of the section is constitutional 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 a court addressing this issue would follow the rule in New Energy and would hold that the reciprocity provision set forth in subsection (b) (4) of section 153.123 violates the interstate~commerce clause of the United States Constitution, Because of our answer to your second question, we need not address your first question. p. 5151 Honorable Bob Bullock - Page 2 (JM-1003) Subsection (a) of section 153.123 of the Tax Code permits the granting of a tax credit to distributors of every gasoline and alcohol.mixture that meets 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 in Texas. Subsection (b)(4) of section 153.123 of the Tax Code provides the following: (4) Except as provided in this subdivi- sion, no mixture that contains alcohol that was mented or distilled In another state is eligible for a credit 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 or a credit or refund for taxes collected or an amount in lieu of taxes collected on a mixture of gasoline and alcohol, and if the 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.led in the other state meets th: specifications provided Subdivisions (l), (2), and (3) of Subsecti% (e) of this section, then the specifications for the mixture for which credits shall be made shall include . . . alcohol fermented and distilled in the other stat or in T x and the other state . However,eif a mix:uZZ of alcohol ferm nt d or istilled in another state and gas%iEe guzlifies under this subsection for a credit, the amount of the credit under this section for the mixture may not exceed the amount of the exemption, credit, or refund (stated in or converted to cents for each gallon of the mixture) pro- vided bv the state in which the al ho1 was Perme nted . . or distilled. (Bmphasis Ezded.) You ask: Does Texas Tax Code Section 153.123(b)(4) violate the Commerce Clause of the Constitution of the United States? p. 5152 Honorable Bob Bullock - Page 3 (JM-10.03) We answer your question in the affirmative. This year, in a 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, the United States Supreme Court held that an Ohio ethanol tax credit provision violated the interstate commerce clause of the United States Constitution and was therefore unconstitutional. In B&$ Energy, the following reciprocity provision, which was set forth in an Ohio tax statute conferring tax benefits in certain circumstances, was challenged: The qualified fuel otherwise eligible for the qualified fuel credit shall not contain ethanol produced outside Ohio unless the tax commissioner determines that the fuel claimed to be eligible for credit contains ethanol produced in a state that also grants an exemption, credit or refund from such state's motor vehicle fuel excise tax or sales tax for similar fuel containing ethanol produced in Ohio; provided however, that such credit shall not exceed the amount of the credit allowable for qualified fuel containing ethanol produced in Ohio. OHIO REV. CODE ANN. 5 5735.145(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 to discriminate against interstate commerce. This V~egative~~ aspect of the t;z;~e Clause prohibits economic protec- -- that is, regulatory measures designed to benefit in-state economic inter- ests by burdening out-of-state competitors. Thus, state statutes that clearly discrimin- ate against interstate commerce are routinely struck down, unless the discrimination is demonstrably justified by a valid factor unrelated economic (Citations om&ed.) protectionism. - p. 5153 Honorable Bob Bullock - Page 4 (JM-1003) New Energy suora at 1807. The court concluded that there was no such valid factor in this instance: Our cases leave open the possibility that a State may validate a statute that discrim- inates against interstate commerce by showing that it advances a legitimate local purpose that cannot be adequately served by reason- able nondiscriminatory alternatives. This is perhaps just another way of saying that what may appear to be a "discriminatoryw provision in the constitutionally prohibited sense -- that is, a protectionist enactment -- may on closer analysis not be so. However it be put, the standards for such justification are high.1 Id. at 1810. The United States Supreme Court decision in New Enerov was both anticipated, see. e a. publisher Indus.. Inc., 457, So.Zd 1374 (Fla: 1684v er Arch& Daniels Mid1 nd Co. v. State ex rel. Al&& 315 N.W.2d 597 (Minn. 1982): and, of course, has been followed. Se , a Russell Stewart Oil Co. v. State of Illinois, 529 N.i.2: 48; (Ill. 1988). We conclude that, on the basis of New 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 Constitu- tion. Because of a 1983 amendment including a specific non-severability provision which has the effect of invalidating the entire statute declared unconstitutional,2 if any part thereof is we need not address your first question. by state legislation, a virtually per se rule has been erected.") and Hushes v. Oklah ma 337 (1979)("[F]acial .discrimination by itzeli defect [and] [a]t a minimum . . . invokes scrutiny.lO) 1. The Court relied upon two fairly recent cases as precedent: Philadelwhia v. New Jersev, 437 U.S. 617, 624 (1978) (w[W]here simple economic protectionism is effected of invalidity 441 U.S. 322, may be a fatal the strictest 2. Subsection (b)(5) of section 153.123 declares: (Footnote Continued) p. 5154 Honorable Bob Bullock - Page 5 (JM-1003) SUMMARY Under the rule set out in pew Enerov Co. Qf Ind. v. L&p&&, 108 S.Ct. 1803 (1988), we conclude that a court 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, are not severable. If any portion 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 to Volume 2 of the Tax Code published by West Publishing Company would lead one to assume that subsection (b)(5) was impliedly repealed by the 1987 amendments to the section. However, such was 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, 5 2, 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 we would agree with 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 . . . .'I We have found nothing in the .legislative history of the 1987 amendment indicating that the legislature intended to repeal subdivision (5) of subsection (b). p. 5155 Honorable Bob Bullock - Page 6 (JM-1003) JIM MATTOX Attorney General of Texas MARY KELLER First Assistant Attorney General Lou MCCREARY Executive Assistant Attorney General JUDGE ZOLLIE STEAKLEY Special Assistant Attorney General RICK GILPIN Chairman, Opinion Committee Prepared by Jim Moellinger Assistant Attorney General , p. 5156