Supreme Court’s Denial of Review Causes Frustration Among Taxpayers, Taxing Agencies, Lower Courts

A man walks past the U.S. Supreme Court in Washington, D.C., U.S. Photographer: Andrew Harrer/Bloomberg

The dormant Commerce Clause limits state taxation favoring in-state entities that discriminate against out-of-state entities. In this article, Dickinson Wright PLLC’s Mario Franke and Giselle Alexander discuss the “similarly situated” test for evaluating discrimination and how the U.S. Supreme Court passed up an opportunity to clarify the law.


The Commerce Clause of the U.S. Constitution grants Congress plenary authority over interstate commerce. Even though the Commerce Clause is framed as a positive grant of power, the U.S. Supreme Court has recognized that the Commerce Clause is also “a limitation upon the power of the States.” Freeman v. Hewit, 329 U.S. 249, 252 (1946). Consequently, “[n]o State … may impose a tax which discriminates against interstate commerce … by providing a direct commercial advantage to local business.” Bacchus Imps. Ltd. v. Dias, 468 U.S. 263, 268 (1984). In other words, this negative command—known as the dormant Commerce Clause—prohibits certain discriminatory state taxation even when Congress has failed to legislate on the subject. Comptroller of the Treasury v. Wynne, 135 S. Ct. 1787, 1794 (2015).

The U.S. Supreme Court has previously explained that discrimination under the dormant Commerce Clause “assumes a comparison of substantially similar entities.” General Motors Corp. v. Tracy, 519 U.S. 278, 298 (1997). However, lower courts have had varying interpretations as to what is necessary to demonstrate that a state law discriminates against interstate commerce in a manner that favors one “substantially similar” entity (i.e., usually the in-state entity) over another entity (i.e., usually the out-of-state entity).

Recently, on January 16 of this year, the U.S. Supreme Court declined to review a decision by the Nevada Supreme Court that would have resolved the question what proof is necessary or what factors must be analyzed in order to establish “substantially similar” competitors under the dormant Commerce Clause to entitle a disfavored competitor to a remedy. Southern Cal. Edison Co. v. Nev. Dep’t of Taxation, U.S., No. 17-755, petition for review denied Jan. 16, 2018.

Lack of Guidance Presents Challenges

The lack of guidance by the U.S. Supreme Court with regard to dormant Commerce Clause issues has brought frustration among taxpayers, taxing agencies and the lower courts. Since different jurisdictions apply inconsistent standards to the determination of whether competitors are sufficiently similarly situated to substantiate cognizable discrimination under the dormant Commerce Clause, the outcomes for taxpayers and taxing agencies may be diametrically opposed, even though they may be dealing with same set of facts, depending on the particular commercial jurisdiction. For example, satellite providers and cable providers have been held to be similarly situated for the purpose of the dormant Commerce Clause in some jurisdictions while being held not to be similarly situated in other jurisdictions.

Jurisdictions that have addressed the issue have generally held that competitors are “similarly situated” as long as they compete within the same market. On the other hand, other jurisdictions—including Nevada—have held that mere proof that entities compete in the same market is insufficient to establish that they are similarly situated. Instead, these latter jurisdictions look at a variety of additional factors to determine whether entities are sufficiently similarly situated for purposes of the dormant Commerce Clause analysis. For example, factors taken into account by these jurisdictions to determine whether competitors are or are not similarly situated are as follows: differences in regulatory treatment, an entity’s business structure, a state’s justification for its law, and whether entities produce their competitive product with different inputs.

The problem with the most recent opinion emanating from the Nevada Supreme Court is its narrow definition of substantially similar entities. The Nevada Supreme Court found, among other things, that electricity producers who use coal as their input are not sufficiently similar to electricity producers who use other resources such as gas or geothermal steam as their input, although the output of these energy producers is identical and sold within the same market. Southern Cal. Edison v. State Dep’t of Taxation, 133 Nev. Adv. Op. 49 (July 27. 2017). Accordingly, the Nevada Supreme Court established a mirror-image requirement to establish that entities could be regarded as similarly situated for purposes of the dormant Commerce Clause.

Thus, by denying review of the Nevada Supreme Court opinion, the U.S. Supreme Court avoided an opportunity to delineate what factors must be a considered in determining whether disfavored and favored taxpayers are “similarly situated” for purposes of relief under the dormant Commerce Clause—a question that divides lower courts across the country.

Practical Implications, Future Problems

As a result of the U.S. Supreme Court’s lack of willingness to provide clear guidance and a taxpayer’s typical lack of meaningful pre-deprivation opportunities to contest the imposition of a tax, State governments and their taxing agencies may feel emboldened to create protectionist taxing schemes. In addition, given the slow and costly process of post-deprivation recoupment for tax refunds, States may legislate constitutionally questionable taxing schemes in order to generate instantaneous revenues while maybe having to refund those taxes many years later. In Southern Cal. Edison, the taxpayer spent over fifteen (15) years attempting to obtain a tax refund.

Once a State has enacted taxing schemes favoring in-state competitors or interests, other State governments may retaliate with their own protectionist laws leading to a downward spiral of undesirable interference and restraints of interstate commerce.

Moreover, these discriminatory tax schemes have significant monetary effects on the discriminated taxing entities. For example, in Southern Cal. Edison, the effective tax rate of the energy providers—that used inputs inside Nevada—was circa one (1) percent while the effective tax rate of the out-of-state energy provider—that used inputs extracted outside of Nevada—was between six (6) and (7) percent. Such drastic differences in the effective tax rate of direct competitors have obvious and material effects on the price differential and profit margins of the affected entities. As such, the U.S. Supreme Court should accept an invitation to address this matter given its far-reaching impact and perhaps negative ramifications on interstate commerce.

Mario Franke is an attorney at Dickinson Wright PLLC in El Paso, Texas. Mr. Franke’s practice involves business and commercial litigation, including labor & employment and tax issues. In addition to being an attorney, Mr. Franke is a Texas C.P.A.

Giselle Alexander is an attorney at Dickinson Wright PLLC in Phoenix, Arizona. Ms. Alexander’s practice involves tax litigation at the federal, state and local levels. She represents businesses, non-profits and high net worth individuals. In addition to being an attorney, Ms. Alexander is an Arizona C.P.A.