U.S. Supreme Court Raises the Bar For State Tax Cases in Federal Court


On June 1, 2010, the U.S. Supreme Court issued its decision in Levin v. Commerce Energy, Inc., 2010 U.S. LEXIS 4380 (2010) holding that the doctrine of comity precludes federal courts, independently from the Tax Injunction Act (TIA), from considering a taxpayer challenge to a competitor’s alleged unconstitutionally favorable tax treatment.


Ohio grants three tax exemptions to regulated local gas distribution companies (LDCs) that independent gas marketers (IMs) do not receive: (1) the natural gas sales of LDCs are exempt from sales and use taxes and instead a gross receipts excise tax applies at a lower rate; (2) LDCs are not subject to the commercial activities tax imposed on an IM’s gross receipts; and (3) sales of natural gas between LDCs are exempt from the gross receipts tax, but the tax applies to sales from an LDC to an IM. Commerce Energy, Inc., and Interstate Gas Supply, Inc., two IMs that market and sell natural gas to Ohio consumers, filed suit in the U.S. District Court for the Southern District of Ohio alleging that the differential treatment of the LDCs violates the Equal Protection and Commerce Clauses of the United States Constitution. The plaintiffs asked the district court to invalidate the tax exemptions and permanently enjoin the State from enforcing them. The Ohio Tax Commissioner challenged the district court’s jurisdiction under both the TIA and the principles of comity.

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