Diversified Ingredients v. Joseph Testa

United States Court of Appeals
For the Eighth Circuit
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No. 16-2791
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Diversified Ingredients, Inc.
lllllllllllllllllllll Plaintiff - Appellant
v.
Joseph W. Testa, Ohio State Tax Commissioner
lllllllllllllllllllll Defendant - Appellee
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Appeal from United States District Court
for the Eastern District of Missouri - St. Louis
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Submitted: January 12, 2017
Filed: January 23, 2017
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Before LOKEN, BEAM, and BENTON, Circuit Judges.
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LOKEN, Circuit Judge.
In a preliminary proposed audit, the Ohio Department of Taxation assessed
Diversified Ingredients, Inc. (“Diversified”), a Missouri corporation, as owing
$561,448.00 in unpaid tax, penalties, and interest under Ohio’s Commercial Activity
Tax (“CAT”). Diversified commenced this action in the Eastern District of Missouri
against Joseph W. Testa, the Ohio State Tax Commissioner, seeking a declaratory
judgment that the Interstate Income Act, 15 U.S.C. § 381, deprives Ohio of
jurisdiction to assess and collect the CAT on Diversified’s sales of goods
manufactured and shipped from outside Ohio to locations in Ohio, and an order
enjoining the State Tax Commissioner from asserting that jurisdiction. Diversified
appeals the district court1 order dismissing the action as barred by the Tax Injunction
Act, 28 U.S.C. § 1341, and by long-standing principles of comity that “restrain[]
federal courts from entertaining claims for relief that risk disrupting state tax
administration.” Levin v. Commerce Energy, Inc., 560 U.S. 413, 424 (2010).
Reviewing the dismissal for lack of subject matter jurisdiction de novo, we affirm.
See Dakota, Minn., & E.R.R. v. Schieffer, 711 F.3d 878, 880 (8th Cir. 2013).
The Ohio CAT is an annual tax on “the privilege of doing business in this
state.” See Ohio Rev. Code § 5751.02(A); Beaver Excavating Co. v. Testa, 983
N.E.2d 1317, 1324 (2012). The CAT is imposed on “gross receipts sitused to this
state,” § 5751.01(G). Gross receipts are sitused to Ohio “if the property is received
in this state by the purchaser,” § 5751.033(e). Subject to exclusions, “‘gross receipts’
means the total amount realized by a person, without deduction for the cost of goods
sold or other expenses incurred, that contributes to the production of gross income,”
§ 5751.01(F). The exclusions include “[a]ny receipts for which the tax imposed by
this chapter is prohibited by the constitution or laws of the United States or the
constitution of this state,” § 5751.01(F)(2)(ll).
Diversified sells commodities such as pet food ingredients to customers located
outside of Ohio and uses for-hire motor carriers to ship these commodities to
destinations directed by the customer. The contracts are negotiated and executed
outside Ohio. Diversified has no employees located in Ohio and is not registered to
do business in Ohio. At issue are Diversified’s sales to customers who direct the
delivery of Diversified products to manufacturing plants in Ohio. Although the
1
The Honorable Ronnie L. White, United States District Judge for the Eastern
District of Missouri.
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Interstate Income Act (“IIA”) limits state taxation of “net income,” 15 U.S.C. § 381,
and the CAT is imposed on a corporation’s gross receipts, Diversified claims that the
IIA divests Ohio of jurisdiction to assess the CAT against Diversified’s out-of-state
sales that are delivered to its customers in Ohio.
Reacting to Supreme Court decisions that rejected constitutional challenges to
the imposition of state income taxes on the income of out-of-state corporations,
Congress passed the IIA to establish a minimum standard for imposing net income
taxes based on solicitation of interstate sales. See Wis. Dept. of Revenue v. William
Wrigley, Jr., Co., 505 U.S. 214, 220-23 (1992). Specifically, 15 U.S.C. § 381provides in relevant part:
No State, or political subdivision thereof, shall have power to
impose . . . a net income tax on the income derived within such State by
any person from interstate commerce if the only business activities
within such State by or on behalf of such person during such taxable
year are either, or both, of the following:
(1) the solicitation of orders by such person, or his representative,
in such State for sales of tangible personal property, which orders are
sent outside the State for approval or rejection, and, if approved, are
filled by shipment or delivery from a point outside the State; and
(2) the solicitation of orders by such person, or his representative,
in such State in the name of or for the benefit of a prospective customer
of such person, if orders by such customer to such person to enable such
customer to fill orders resulting from such solicitation are orders
described in paragraph (1).
The district court declined to rule on whether the IIA strips Ohio of authority
to impose the CAT based on the Diversified transactions at issue. Instead, the court
held that the Tax Injunction Act (“TIA”) deprived it of subject matter jurisdiction to
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entertain this action. Diversified Ingredients, Inc. v. Testa, 2016 WL 2932160 (E.D.
Mo. May 19, 2016). We agree.
The TIA provides: “The district courts shall not enjoin, suspend or restrain the
assessment, levy or collection of any tax under State law where a plain, speedy and
efficient remedy may be had in the courts of such State.” 28 U.S.C. § 1341.
Congress enacted the TIA to “transfer jurisdiction . . . to the state courts” to grant
injunctive relief that could interfere with the State’s power to assess, levy, and collect
taxes. Rosewell v. LaSalle Nat. Bank, 450 U.S. 503, 515 n.19 (1981); see Tully v.
Griffin, Inc., 429 U.S. 68, 73 (1976). As originally enacted, the statute provided that
“no district court shall have jurisdiction of any suit to enjoin, suspend, or restrain
. . . .” Act of Aug. 21, 1937, 50 Stat. 738, codified at 28 U.S.C. § 41(1) (1940 ed.).
Though the explicit reference to jurisdiction was removed in the 1948 United States
Code revisions, the Supreme Court has continued to refer to the TIA as limiting
subject matter jurisdiction. See Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124,
1133-34 (2015); Levin, 560 U.S. at 429 n.10 & 433 (Thomas, J., concurring); Ark.
v. Farm Credit Servs. of Central Ark., 520 U.S. 821, 825-26 (1997); Cal. v. Grace
Brethren Church, 457 U.S. 393, 408 (1982) (TIA strips district courts of jurisdiction
to award declaratory relief). Thus, the district court properly decided this issue of law
in ruling on Testa’s Rule 12(b)(1) motion to dismiss for lack of subject matter
jurisdiction.
Diversified’s primary contention is that the district court erred in failing to
determine whether the IIA bars Ohio from imposing the CAT on Diversified’s out-of-
state sales because federal courts have exclusive jurisdiction to interpret and enforce
the IIA’s “federally conferred tax immunity.” It is true that the TIA has been held not
to preclude the grant of federal equitable relief to a party suing under a federal statute
that conferred original or exclusive jurisdiction on the federal courts. See Moe v.
Confederated Salish & Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 472
(1976) (Indian tribe suing under 28 U.S.C. § 1362); City Vending of Muskogee, Inc.
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v. Okla. Tax Comm’n, 898 F.2d 122, 123 (10th Cir. 1990) (Bankruptcy Code
exception to the TIA); Se. Pa. Transp. Auth. v. Pa. Pub. Utility Comm’n, 802 F. Supp.
1273, 1281-85 (E.D. Pa. 1992) (construing 45 U.S.C. §§ 546b and 581(c)(5)
exception); Firestone Tire & Rubber Co. v. Bodle, 645 F. Supp. 305, 310-11 (N.D.
Ohio 1986) (ERISA exception).
The IIA does not explicitly provide for exclusive federal jurisdiction, and
numerous appellate state court decisions have applied the IIA to specific state tax
cases. See, e.g., Gillette Co. v. Dep’t of Treasury, 497 N.W.2d 595, 597-99 (Mich.
App. 1993). These decisions confirm that the “deeply rooted presumption in favor
of concurrent state court jurisdiction” applies to the IIA. Tafflin v. Levitt, 493 U.S.
455, 459 (1990); see Gulf Offshore Co. v. Mobil Oil Corp., 453 U.S. 473, 478 (1981).
As the Supreme Court decision affirming a state court decision in Wrigley illustrates,
the IIA divests state legislatures of the power to impose net income taxes on certain
out-of-state transactions, but it does not divest state courts of jurisdiction to decide
whether the IIA bars a particular state tax assessment, levy, or collection. Of course,
this is a question of federal law that may ultimately be reviewed by the United States
Supreme Court.
The TIA applies to a suit in federal court seeking to enjoin assessment, levy or
collection of a state tax “where a plain, speedy and efficient remedy may be had in the
courts of such State.” 28 U.S.C. § 1341. Diversified argues that the Ohio CAT does
not provide a “plain” state court remedy because the statute expressly provides that
the CAT is “not subject to” the IIA. Ohio Rev. Code § 5751.02(A). The contention
is without merit. This TIA exception is procedural. It addresses only whether state
law provides a remedy that permits a taxpayer to challenge the state tax at issue in
state court. See Rosewell, 450 U.S. at 514-17. Here, the Ohio Revenue Code
provides taxpayers an appeal of right to an Ohio appellate court which will “hear and
decide” a claim that a state tax has been invalidly assessed or collected. Id. at 517;
see Ohio Rev. Code § 5717.04. This obviously includes authority to decide that
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imposing the CAT on Diversified’s out-of-state transactions violates the IIA,
regardless of the Ohio Legislature’s contrary intention. Cf. Beaver Excavating, 983
N.E.2d at 1324.
The district court further concluded that it should abstain from entertaining this
lawsuit under comity principles. In Levin, 560 U.S. at 417, the Supreme Court noted
that the long-standing doctrine restraining federal court relief that risks disrupting
state tax administration is “[m]ore embracive than the TIA.” Thus, our decision that
the TIA effectively transferred jurisdiction over Diversified’s equitable claims to the
Ohio state courts is not at odds with comity principles applied in Levin and earlier
cases. However, as we agree with the district court that the TIA deprived that court
of subject matter jurisdiction over Diversified’s claim, we decline to consider whether
dismissal was also appropriate under prudential comity principles.
The judgment of the district court is affirmed.
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