On October 4, 2021, the United States Supreme Court denied certiorari in an appeal from a decision of the Second Circuit which held that New York’s opioid stewardship payment, required as part of the New York Opioid Stewardship Act (the Act) constituted a tax and not a fee for purposes of the Tax Injunction Act (TIA), barring federal court jurisdiction over the case.1
In the underlying case, a number of parties challenged New York’s opioid stewardship payment requirements in federal district court, arguing that the Act’s prohibition on passing the charge on to consumers violated the commerce clause of the US Constitution. The district court agreed with the plaintiffs and invalidated the entire Act that created the opioid stewardship payment, finding that the stewardship payment requirement in the Act could not survive without the pass-through prohibition. The court also denied the state’s motion to dismiss on jurisdictional grounds. The state argued the payment was a tax barred by the TIA.
The petition for certiorari followed the Second Circuit’s decision in Association for Accessible Medicines v. James, decided September 14, 2020,2 in which the court held that the opioid stewardship payment is a tax and not a fee for purposes of the TIA, depriving federal courts of jurisdiction in the case. The TIA is a federal law enacted in 1937 that prohibits federal court jurisdiction in cases seeking to “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.”3 As a result, the Second Circuit reversed the district court’s judgment invalidating the Act.
In making its determination that the opioid stewardship payment was a tax and not a fee for purposes of the TIA, the Second Circuit noted (1) the funds generated by the payments were used to provide a benefit to the general public; (2) the funds were maintained by the state’s taxing authorities; (3) the legislature’s choice to not label the payment obligation a “tax” was not determinative of the issue; and (4) the fact that the payment was a fixed yearly amount rather than a percentage of sales was not relevant to the analysis. With respect to the use of the funds, the Second Circuit held that the depositing of the payments in a special fund was not conclusive for purposes of the tax versus fee analysis. Rather, the Second Circuit held that assessments that are segregated from general revenues may constitute taxes for purposes of the TIA so long as they are expended to provide a general benefit to the public. With respect to the opioid stewardship payments, the Second Circuit held that use of the proceeds to support public health programs in New York was a broad, statewide purpose for the benefit of the general public such that the payments were properly characterized as a tax.
Both the US Chamber of Commerce and the National Taxpayers Union Foundation filed separate amicus briefs with the Supreme Court in support of the petitioners’ request for certiorari. These parties’ amicus briefs argued that the Second Circuit’s decision regarding the tax versus fee distinction is an outlier and that the Second Circuit’s definition of a “tax” for purposes of the TIA is overly broad. The petitioners, in their petition for certiorari, made a similar argument, and pointed to decisions from other circuits which they argued had rejected such a broad reading of the TIA. Instead, the petitioners asserted that other circuits have held that when an exaction is set aside in a segregated fund and earmarked to pay for remedial programs necessitated by the payers’ activities, the exaction falls outside of the TIA’s scope and is subject to challenge in federal court.
| Eversheds Sutherland Observation: The Supreme Court’s denial of certiorari in this case is another in a long list of cases where taxpayers have been denied a federal forum to have their claims heard. The tax versus fee distinction created by the TIA has given rise to a whole class of litigation for purposes of determining the threshold question of federal court jurisdiction. This arbitrary distinction created by the TIA separating which cases may be heard in federal court has not only created unnecessary litigation but also gives state legislatures the ability to draft their statues in a manner that purposefully avoids federal court jurisdiction. The TIA, combined with the elimination of mandatory Supreme Court review of certain state court decisions in 1988,4 has created a situation where states are increasingly confident that their tax laws, and the state court decisions in tax cases, will not be subject to federal court review. |
1 Healthcare Distribution, et al. v. James, Case No. 20-1611 (cert. denied Oct. 4, 2021).
2 Ass’n for Accessible Meds. v. James, 974 F.3d 216 (2nd Cir. 2020).
4 P.L. 100-352, section 3, 102 Stat. 662.
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