Lscp, Lllp v. Courtney M. Kay-Decker, Director, Iowa Department of Revenue , 861 N.W.2d 846 ( 2015 )

IN THE SUPREME COURT OF IOWA
No. 14–0494
Filed April 10, 2015
LSCP, LLLP,
Appellant,
vs.
COURTNEY M. KAY-DECKER, Director, IOWA DEPARTMENT
OF REVENUE,
Appellee.
Appeal from the Iowa District Court for Polk County, Rebecca
Goodgame Ebinger, Judge.
An ethanol producer appeals after the Iowa Department of Revenue
and the district court both concluded Iowa’s excise tax on natural gas
delivery is constitutional. AFFIRMED.
Christopher E. James and William E. Hanigan of Davis, Brown,
Koehn, Shors & Roberts, P.C., Des Moines, for appellant.
Thomas J. Miller, Attorney General, Donald D. Stanley Jr., Special
Assistant Attorney General, and James D. Miller, Assistant Attorney
General, for appellee.
2
HECHT, Justice.
Iowa taxes the delivery of natural gas at variable tax rates
depending on volume and the taxpayer’s geographic location within the
state. In this appeal, we confront several constitutional challenges to
that statutory framework.
I. Background Facts and Proceedings.
LSCP, LLLP 1 operates an ethanol manufacturing plant near
Marcus, Iowa. Operations began in April 2003. The ethanol LSCP
manufactures at its Marcus plant is sold primarily through a marketing
firm for use as fuel. LSCP also produces several ethanol byproducts, all
of which are marketed for use as feed for livestock.
LSCP’s manufacturing processes use a substantial volume of
natural gas. The gas supplies energy for the plant’s steam boilers and is
burned to provide ambient heat for the plant in the winter months. The
relevant unit of measurement for the natural gas LSCP consumes is a
therm. Between 2007 and 2010, LSCP consumed millions of therms of
natural gas each year. 2
There are no natural gas producers in Iowa. Accordingly, all
natural gas consumed in the state necessarily comes from out-of-state
suppliers through federally regulated interstate pipelines. Most
consumers receive their natural gas from a state-regulated local
distribution company (LDC). LDCs connect to the interstate pipeline,
1LSCP is an acronym for Little Sioux Corn Processors.
2One therm equals 100,000 British thermal units (Btu). One Btu represents the
amount of heat required to raise the temperature of one pound of water by one degree
Fahrenheit. U.S. Energy Info. Admin., Frequently Asked Questions,
http://www.eia.gov/tools/faqs/faq.cfm?id=45&t=8 (last updated Mar. 30, 2015).
Because it consumes millions of therms of natural gas per year, LSCP is a very high-
volume consumer of natural gas.
3
redirect the natural gas at a reduced pressure into pipes that are smaller
in diameter, and move it to the locations where it is ultimately
consumed. In other words, in the delivery of natural gas, the role of an
LDC is analogous to the role played by utility companies delivering
electricity to consumers. MidAmerican Energy is an example of an LDC.
Some consumers of natural gas bypass LDCs and connect directly
to an interstate pipeline. Companies owning interstate pipelines must
allow direct connections to any consumer agreeing to certain terms and
conditions. See 18 C.F.R. § 284.8(a), (e) (2014). Some industrial
consumers of natural gas connect directly because they require natural
gas service at higher pressures not available from an LDC. Although the
record does not reflect whether a need for higher pressure was a reason
for LSCP’s choice, it is undisputed that LSCP bypassed an LDC and
connected directly to an interstate pipeline.
In 1998, five years before LSCP began operations, the legislature
restructured the statutes authorizing taxes on electricity and natural gas
providers. See 1998 Iowa Acts ch. 1194, § 3 (codified at Iowa Code
§ 437A.2 (1999)). The new framework took effect January 1, 1999. Id.
§ 40. As the district court explained:
Prior to 1998, natural gas utility companies were taxed
on the property they owned in the area the utility serviced—
an ad valorem tax. . . . [C]hapter 437A replaced the ad
valorem property tax system with an excise tax on the
delivery, consumption, or use of natural gas—the
“Replacement Tax.” Iowa Code § 437A.3(26).
Whereas the former system taxed property, the new system taxes
activity. The general assembly expressly intended the new replacement
tax scheme to preserve revenue neutrality, approximate the amount of
taxes that were paid under the former ad valorem framework, and
4
“remove tax costs as a factor in a competitive environment.” Id. § 3; Iowa
Code § 437A.2 (2007).
Under the new replacement tax framework, the state is divided into
fifty-two natural gas competitive service areas (CSAs). Iowa Code
§ 437A.3(22). Within each CSA, “[a] replacement delivery tax is imposed
on every person who makes a delivery of natural gas to a consumer
within th[e] state.” Id. § 437A.5(1). The statute contains a formula for
calculating the amount of replacement tax due. See id. The amount of
tax is equal to the number of therms a taxpayer delivered into a
particular CSA multiplied by the delivery tax rate for that CSA. Id. §
437A.5(1)(a).
The Iowa Department of Revenue (the Department) calculated each
CSA’s initial delivery tax rate using a statutorily-prescribed mathematical
formula. See id. § 437A.5(3). First, the Department calculated average
“centrally assessed property tax liability allocated to natural gas service
of each taxpayer, other than a municipal utility, principally serving a
natural gas [CSA] for the assessment years 1993 through 1997 based on
property tax payments made.” Id. § 437A.5(3)(a). The Department next
determined “the number of therms of natural gas delivered to consumers
which would have been subject to taxation . . . in calendar year 1998” in
each CSA had the replacement tax been in effect. Id. § 437A.5(3)(b).
Finally, the initial tax rate was determined by dividing the number
computed under subsection (3)(a) by the number of therms calculated
under subsection (3)(b). See id. § 437A.5(3)(c). With this initial
determination as a baseline, any CSA’s delivery tax rate can be adjusted
each tax year based upon the number of therms delivered within that
CSA. See id. § 437A.5(1)(a), (8).
5
Typically, the replacement tax applies to LDCs because they
remove natural gas from the interstate pipeline and deliver it to
consumers. However, LSCP has bypassed an LDC. Thus, section
437A.5(1) does not directly apply to LSCP, because strictly speaking,
LSCP does not deliver natural gas; the interstate pipeline does.
Interstate pipeline companies are exempt from the replacement
tax. See id. § 437A.5(7) (providing the replacement tax in section
437A.5(1) does not apply to natural gas delivered by a pipeline other than
those governed by chapter 479); id. § 479.2(2) (excluding interstate
natural gas pipelines from the definition of “pipeline” under chapter 479).
Yet, those who bypass LDCs by directly connecting to an interstate
pipeline do not avoid the replacement tax under section 437A.5. Section
437A.5(2) imposes the replacement tax on consumers who directly
connect and draw natural gas from an interstate pipeline. Id.
§ 437A.5(2) (“If natural gas is consumed in this state . . . and the
delivery, purchase, or transference of such natural gas is not subject to
the tax imposed in subsection 1, a tax is imposed on the consumer at the
rates prescribed under subsection 1.”). Accordingly, because LSCP is a
direct-connect consumer and the interstate pipeline company is exempt,
LSCP is required to pay the replacement tax on the therms of natural gas
it consumes. As the district court noted, the statute essentially “treats a
direct-connect consumer as delivering the natural gas to itself.”
In 2010, LSCP filed with the Department a claim for a refund of
replacement tax LSCP paid for tax years 2007 through 2010, asserting
the replacement tax in section 437A.5(2) is unconstitutional because it is
based on the CSA in which a taxpayer is located. In particular, LSCP
asserted the replacement tax violates the Federal Equal Protection
6
Clause, article I, section 6 of the Iowa Constitution, and the dormant
Commerce Clause. 3
Chapter 437A establishes a limitations period of three years for
taxpayers filing claims for refunds of replacement tax due to clerical or
mathematical errors. Iowa Code § 437A.14(1)(b). However, the chapter
also establishes a shorter limitations period of ninety days for making
refund claims based on an assertion the tax is unconstitutional. Id.
LSCP’s claim for refunds filed with the Department contended the shorter
limitations period for refund claims based on constitutional grounds
violates the Federal Equal Protection Clause and article I, section 6 of the
Iowa Constitution. Therefore, LSCP asserted its refund claims were
timely filed within the broader three-year limitations period.
An administrative law judge (ALJ) denied LSCP’s refund claims and
rejected the constitutional challenges to both the refund limitations
period and the replacement tax itself. The ALJ reasoned that under both
the Federal Equal Protection Clause and article I, section 6 of the Iowa
Constitution, any unequal treatment in the statutory framework was
supported by a rational basis; that the shorter limitations period for filing
refund claims was rationally related to encouraging prompt filing of
claims that may impact many other taxpayers; and that the replacement
tax framework does not violate the dormant Commerce Clause because it
taxes the activity of natural gas delivery without regard to the supplier’s
location.
3Initially, LSCP also raised a due process challenge to the replacement tax. The
due process challenge is not asserted in this appeal, and we therefore do not address it.
7
LSCP sought judicial review in the district court. The district court
denied each of LSCP’s constitutional challenges. LSCP appealed, and we
retained the appeal.
II. Scope of Review.
“We generally review a district court’s decision on a petition for
judicial review of agency action for correction of errors at law. However,
in cases . . . where constitutional issues are raised, our review is
de novo.” Qwest Corp. v. Iowa State Bd. of Tax Review, 829 N.W.2d 550,
557 (Iowa 2013) (citation omitted). This is one such case.
III. The Parties’ Positions.
A. LSCP.
1. Equal protection. LSCP first contends the natural gas
replacement tax violates both the Federal Equal Protection Clause and
article I, section 6 of the Iowa Constitution. LSCP asserts it is similarly
situated to other directly connected ethanol plants within the state, but
is taxed at a different rate than other such plants solely because of its
geographic location within a particular CSA. See Racing Ass’n of Cent.
Iowa v. Fitzgerald (RACI I), 648 N.W.2d 555, 559 (Iowa 2002) (focusing on
the main activity being taxed—slot machine gambling—rather than
dissimilar scenery surrounding different facilities), rev’d, Fitzgerald v.
Racing Ass’n of Cent. Iowa, 539 U.S. 103, 110, 123 S. Ct. 2156, 2161,
156 L. Ed. 2d 97, 105 (2003); see also Racing Ass’n of Cent. Iowa v.
Fitzgerald (RACI II), 675 N.W.2d 1, 15 (Iowa 2004) (“In the end, we return
to the fact that the item taxed—gambling revenue—is identical.”). In
particular, LSCP compares itself to a biorefining plant located in
Emmetsburg. Like LSCP, the Emmetsburg plant is directly connected,
but because it is situated within two miles of the city of Emmetsburg, it
is in the Emmetsburg CSA and therefore benefits from a replacement tax
8
rate of zero. 4 See Iowa Code § 437A.3(22)(a)(1)(j) (establishing the
Emmetsburg CSA). This disparity of taxation, LSCP posits, violates our
constitutional command that “[a]ll persons in like situations should
stand equal before the law.” Chi. & Nw. Ry. v. Fachman, 255 Iowa 989,
1002, 125 N.W.2d 210, 217 (1963).
2. Limitations period for refund claims. LSCP contends the shorter
limitations period for refund claims based on a constitutional objection
also violates the Federal Equal Protection Clause and article I, section 6
of the Iowa Constitution. In LSCP’s view, the shorter limitations period
draws a classification between constitutional claims and other types of
claims, and therefore impedes its fundamental right of meaningful access
to the courts to resolve constitutional claims. Because it contends a
fundamental right is at stake, LSCP urges our application of strict
scrutiny analysis rather than the less demanding rational basis
standard.
3. Dormant Commerce Clause. Finally, LSCP posits that the
natural gas replacement tax penalizes consumers purchasing natural gas
from nonresident suppliers. The penalty arises, LSCP asserts, because
LDCs have freedom to allocate their replacement tax burden among their
customers at different rates—and, because LDCs often do allocate the tax
burden differently, many high-volume LDC customers pay tax at a lower
rate than does LSCP. Because there are no natural gas suppliers in
Iowa, LSCP contends the statutory framework establishing the higher
rate it pays as a directly connected consumer is applied only to
4A witness for the Department explained that the replacement tax formula under
sections 437A.5(3)(a)–(c) utilizes only “centrally assessed” tax liability. See Iowa Code
§ 437A.5(3)(a). Because municipalities are locally assessed, the witness explained, the
numerator in the fraction prescribed in section 437A.5(3) would always be zero for
many municipal CSAs.
9
transactions involving nonresident suppliers in violation of the dormant
Commerce Clause.
B. The Department.
1. Equal protection. The Department first asserts LSCP is not
similarly situated to any “individuals who are allegedly treated differently
under the challenged statute.” Timberland Partners XXI, LLP v. Iowa
Dep’t of Revenue, 757 N.W.2d 172, 175 (Iowa 2008); see City of Coralville
v. Iowa Utils. Bd., 750 N.W.2d 523, 531 (Iowa 2008) (“Dissimilar
treatment of persons dissimilarly situated does not offend equal
protection.”). In City of Coralville, we said “[c]itizens serviced by different
public utilities are not similarly situated.” City of Coralville, 750 N.W.2d
at 531. Relying on this language, the Department asserts LSCP is not
similarly situated to ethanol plants in other CSAs, even if those other
ethanol plants are directly connected natural gas consumers. In other
words, the Department contends each directly connected ethanol plant is
a customer of a different public utility: itself.
But even assuming LSCP is similarly situated to other replacement
taxpayers, the Department contends ample rational bases for the
replacement tax regime are elucidated in the legislature’s 1998
enactment. In particular, the Department relies on legislative findings
accompanying the enactment and a separate section of the statute
entitled “PURPOSES.” 1998 Iowa Acts ch. 1194, §§ 1, 3. With these
expressly stated legislative purposes as a backdrop, the Department
asserts the tax need only be applied uniformly, and the fact that the
consequences may not be uniform is of no moment. See City of
Coralville, 750 N.W.2d at 530–31.
2. Limitations period for refund claims. The Department concedes
chapter 437A provides a shorter limitations period for refund claims
10
based on constitutional objections. However, it contends rational basis
analysis—not strict scrutiny—is the appropriate test for constitutional
challenges involving different limitations periods. See Fed. Land Bank of
Omaha v. Arnold, 426 N.W.2d 153, 156 (Iowa 1988) (applying the rational
basis test to “different redemption periods for ‘member’ and ‘nonmember’
institutions”); Conner v. Fettkether, 294 N.W.2d 61, 62 (Iowa 1980)
(applying the rational basis test to a limitations period for tort claims
that depended upon the plaintiff’s age). Applying that standard, the
Department asserts the legislature had a rational basis for subjecting
constitutional claims to a shorter limitations period. Specifically, it
contends a shorter limitations period for constitutional challenges
launched against tax statutes limits the amounts of refunds to which
state coffers are potentially exposed and promotes predictable fiscal
planning for governmental entities. See Am. States Ins. Co. v. State, 560
N.W.2d 644, 650 (Mich. Ct. App. 1996) (“Protection of the state treasury
is certainly a legitimate state purpose.”).
3. Dormant Commerce Clause. The Department contends LSCP
lacks standing to bring a dormant Commerce Clause challenge because
it is not an out-of-state supplier being taxed discriminatorily. Further,
the Department contends LSCP lacks standing because the statutory
framework does not impose an additional sales tax only on out-of-state
transactions, like the tax scheme at issue in General Motors Corp. v.
Tracy, 519 U.S. 278, 282, 117 S. Ct. 811, 816, 136 L. Ed. 2d 761, 770
(1997).
On the merits, the Department asserts LSCP mischaracterizes the
necessary comparison under the dormant Commerce Clause. It states
the comparison is not between LSCP and customers who obtain gas
through an LDC; rather, the comparison is between LSCP and LDCs
11
themselves. While individual LDC customers may pay lower rates than
LSCP, they do so only because LDCs are allowed to pass their delivery
tax costs to their customers through tariffs, and can do so at varying
rates. LDCs, however, are ultimately liable for the entire amount of their
respective delivery tax at the same rate as LSCP. Therefore, the
Department asserts, the replacement tax formula does not discriminate
against LSCP for its decision to bypass the LDC, nor does it discriminate
against interstate commerce in general.
IV. Analysis.
We address only the substantive constitutional challenges to the
replacement tax itself. Our conclusions on those issues obviate any need
to address the limitations period issue.
A. Equal Protection. LSCP raises claims under both the
Fourteenth Amendment to the United States Constitution and article I,
section 6 of the Iowa Constitution. It relies principally on our decision in
RACI II, in which we distinguished between the two provisions. RACI II,
675 N.W.2d at 5–7. We may conclude the state provision is more
protective. See id. at 6–7. However, on a basic level, both constitutions
establish the general rule that similarly situated citizens should be
treated alike. Qwest Corp., 829 N.W.2d at 558.
1. Fourteenth Amendment. The Equal Protection Clause of the
Fourteenth Amendment provides that no state shall “deny to any person
within its jurisdiction the equal protection of the laws.” U.S. Const.
amend. XIV, § 1. The United States Supreme Court has explained that
“state tax classifications require only a rational basis to satisfy the Equal
Protection Clause.” Tracy, 519 U.S. at 311, 117 S. Ct. at 830, 136 L. Ed.
2d at 787; accord Fitzgerald, 539 U.S. at 106–07, 123 S. Ct. at 2159, 156
L. Ed. 2d at 102–03; see also Armour v. City of Indianapolis, ___ U.S. ___,
12
___, 132 S. Ct. 2073, 2080, 182 L. Ed. 2d 998, 1005 (2012) (applying the
rational basis test because “Indianapolis’[s tax] classification involves
neither a ‘fundamental right’ nor a ‘suspect’ classification”). Under the
rational basis test,
the Equal Protection Clause is satisfied so long as there is a
plausible policy reason for the classification, the legislative
facts on which the classification is apparently based
rationally may have been considered to be true by the
governmental decisionmaker, and the relationship of the
classification to its goal is not so attenuated as to render the
distinction arbitrary or irrational.
Nordlinger v. Hahn, 505 U.S. 1, 11, 112 S. Ct. 2326, 2332, 120 L. Ed. 2d
1, 13 (1992) (citations omitted).
The rational basis standard as applied in equal protection claims
grounded in the Fourteenth Amendment “is especially deferential in the
context of classifications made by complex tax laws.” Id.; see also
Madden v. Kentucky, 309 U.S. 83, 88, 60 S. Ct. 406, 408, 84 L. Ed. 590,
593 (1940) (“[I]n taxation, even more than in other fields, legislatures
possess the greatest freedom in classification.”). It does not require
optimal or perfect line-drawing, instead requiring “only that the line
actually drawn be a rational line.” Armour, ___ U.S. at ___, 132 S. Ct. at
2083, 182 L. Ed. 2d at 1008. “But there is a point beyond which the
State cannot go without violating the Equal Protection Clause. The State
. . . may not resort to a classification that is palpably arbitrary.” Allied
Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 527, 79 S. Ct. 437, 441, 3
L. Ed. 2d 480, 485 (1959).
The Supreme Court’s decision in Fitzgerald provides an illustration
of geographic tax rate differences that have been found consistent with
the Federal Equal Protection Clause. Fitzgerald, 539 U.S. at 110, 123 S.
Ct. at 2161, 156 L. Ed. 2d at 105. In Fitzgerald, Iowa assessed slot
13
machine gambling revenue from riverboat casinos at a maximum rate of
twenty percent. Id. at 105, 123 S. Ct. at 2158, 156 L. Ed. 2d at 102.
The legislature later passed a law authorizing additional slot machine
gambling at racetracks 5—yet taxed revenue from those machines at a
higher rate of thirty-six percent. Id. The Supreme Court emphasized
that tax legislation must be viewed as a whole. Id. at 108, 123 S. Ct. at
2160, 156 L. Ed. 2d at 103. Thus, although the racetracks were subject
to a higher tax rate based on geographic location, the Court concluded
that, under the Fourteenth Amendment, the differential in statewide tax
rates was rationally related to promoting economic development in
certain communities or protecting a reliance interest the riverboat
operators had developed. Id. at 109, 123 S. Ct. at 2160, 156 L. Ed. 2d at
104. Accordingly, the Court found the differential tax rate did not violate
the Fourteenth Amendment’s Equal Protection Clause. Id. at 110, 123 S.
Ct. at 2161, 156 L. Ed. 2d at 105.
Applying the rational basis analysis articulated by the Supreme
Court in Fitzgerald, we find alternative rational bases for the natural gas
replacement tax structure. For example, the legislature may have wished
to promote economic development in municipalities by creating CSAs
featuring municipal LDCs offering tax advantages for new business
prospects. See id. at 109, 123 S. Ct. at 2160, 156 L. Ed. 2d at 104(concluding a lower tax rate for riverboat slot machine revenue was
rationally related to “encourag[ing] the economic development of river
communities”). Similarly, the legislature may have had reasonable
grounds for exempting from the replacement tax consumers of natural
5A racetrack that also offers slot machine gambling is called a racino. See
DePaul v. Commonwealth, 969 A.2d 536, 548 n.14 (Pa. 2009).
14
gas who had directly connected before the new tax formulation was
adopted in 1998 in reliance on the former ad valorem system. The
legislature could have believed those consumers should be shielded from
the replacement tax under section 437A.5(2) because it would upend
their reliance and significantly—perhaps unfairly—increase their tax
liability. See id. (concluding a difference in tax rates for riverboat slot
machine revenue and racino slot machine revenue was rationally related
to protecting riverboat operators’ reliance interest on the lower rate); City
of New Orleans v. Dukes, 427 U.S. 297, 298, 305, 96 S. Ct. 2513, 2514,
2518, 49 L. Ed. 2d 511, 514, 518 (1976) (per curiam) (concluding a city
ordinance satisfied the rational basis test when it only allowed pushcart
food vendors in the French Quarter to continue operating if they had
been operating for at least eight years, because “newer businesses were
less likely to have built up substantial reliance interests”); see also Iowa
Code § 437A.5(7) (exempting direct-connect consumers from the
replacement tax under section 437A.5(2) if their direct-connect facilities
were already in place on January 1, 1999).
Because we conclude these objectives supply a rational basis
under the standard expressed by the Supreme Court, we conclude the
variable tax rates survive LSCP’s equal protection challenge based on the
Fourteenth Amendment. See Fitzgerald, 539 U.S. at 110, 123 S. Ct. at
2161, 156 L. Ed. 2d at 105. Thus, we need not consider whether the
replacement delivery tax is also rationally related to other state interests.
See Nordlinger, 505 U.S. at 14 n.5, 112 S. Ct. at 2334 n.5, 120 L. Ed. 2d
at 15 n.5. We conclude Iowa’s natural gas delivery tax does not violate
the Federal Equal Protection Clause when imposed on a directly
connected consumer under section 437A.5(2).
15
2. Article I, section 6. Article I, section 6 provides, “All laws of a
general nature shall have a uniform operation; the general assembly
shall not grant to any citizen, or class of citizens, privileges or
immunities, which, upon the same terms shall not equally belong to all
citizens.” Iowa Const. art. I, § 6. 6 Recognizing that constitutional
command, we have said “[l]aws relating to taxation . . . must have a
uniform operation to meet the requirements of constitutional provisions.”
W.J. Sandberg Co. v. Iowa State Bd. of Assessment & Review, 225 Iowa
103, 109–10, 278 N.W. 643, 646 (1938). However, uniform operation
does not necessarily require uniform consequences. See City of
Coralville, 750 N.W.2d at 530–31; City of Waterloo v. Selden, 251 N.W.2d
506, 508–09 (Iowa 1977) (“An iron rule of equal taxation is neither
attainable nor necessary.”); Cook v. Dewey, 233 Iowa 516, 519, 10
N.W.2d 8, 10 (1943) (“The constitution requires uniform operation
throughout the State, not uniformity of consequences resulting from
such operation.” (Internal quotation marks omitted.)); W.J. Sandberg Co.,
225 Iowa at 110, 278 N.W. at 646 (“[I]n the matter of taxation, perfect
uniformity, which . . . means an equal distribution of the burdens of
taxation upon all persons of a given class, is impossible of perfect
application.”).
Like the United States Supreme Court’s application of rational
basis review to Fourteenth Amendment equal protection challenges, we
ensure uniform operation under the Iowa Constitution by reviewing
economic legislation—which includes tax statutes—under a rational
6In recent cases, we have “refer[red] to article I, section 6 as the ‘equal protection
clause’ of the Iowa Constitution.” Qwest Corp., 829 N.W.2d at 557 n.4 (collecting
cases). In some instances, we have called article I, section 6 the “equality provision.”
See, e.g., In re A.W., 741 N.W.2d 793, 806 (Iowa 2007); RACI II, 675 N.W.2d at 7; Chi. &
Nw. Ry., 255 Iowa at 996, 125 N.W.2d at 214.
16
basis test. 7 See Qwest Corp., 829 N.W.2d at 558. In Qwest Corp., we
explained to pass the rational basis test, the statute must be “ ‘rationally
related to a legitimate state interest.’ ” Id. (quoting Sanchez v. State, 692
N.W.2d 812, 817–18 (Iowa 2005)); see also City of Coralville, 750 N.W.2d
at 530. A legitimate interest can be any reasonable justification, not just
the one the legislature actually chose. See Qwest Corp., 829 N.W.2d at
558; RACI II, 675 N.W.2d at 8 (“[A] person challenging a statute
shoulders a heavy burden . . . . This burden includes the task of
negating every reasonable basis that might support the disparate
treatment.” (Citations omitted.)). Further, the fit between the means
chosen by the legislature and its objective need only be rational, not
perfect. See Qwest Corp., 829 N.W.2d at 558.
“We have said before the legislature acts with broad authority in
the realm of taxation.” RACI I, 648 N.W.2d at 558; accord Hearst Corp. v.
Iowa Dep’t of Revenue & Fin., 461 N.W.2d 295, 305 (Iowa 1990); Selden,
251 N.W.2d at 508. Thus, “[w]hen we have applied the rational basis test
to tax laws, they have generally been upheld without much difficulty.”
Qwest Corp., 829 N.W.2d at 558; accord Sperfslage v. Ames City Bd. of
Review, 480 N.W.2d 47, 49 (Iowa 1992) (“Th[e rational basis] standard is
easily satisfied in challenges to tax statutes.”); Hearst Corp., 461 N.W.2d
at 306; Heritage Cablevision v. Marion Cnty. Bd. of Supervisors, 436
N.W.2d 37, 38 (Iowa 1989). After all, “[t]axing statutes are presumed to
7Rational basis analysis under article I, section 6 of the Iowa Constitution is not,
however, constrained by or limited to judicial interpretations of the Fourteenth
Amendment Equal Protection Clause. “[W]e maintain our authority to adopt our own
equal protection analysis under the Iowa Constitution . . . .” City of Coralville, 750
N.W.2d at 530; see also RACI II, 675 N.W.2d at 4 (“It is this court’s constitutional
obligation as the highest court of this sovereign state to determine whether the
challenged classification violates Iowa’s constitutional equality provision.”).
17
be constitutional.” Home Builders Ass’n of Greater Des Moines v. City of
West Des Moines, 644 N.W.2d 339, 352 (Iowa 2002); accord Sperfslage,
480 N.W.2d at 49 (“We recognize a presumption favoring the
constitutionality of taxing statutes.”).
“These rigorous standards have not, however, prevented this court
from finding economic . . . legislation in violation of equal protection
provisions.” RACI II, 675 N.W.2d at 8–9. “[E]ven in the economic sphere,
a citizen’s guarantee of equal protection is violated if desirable legislative
goals are achieved . . . through wholly arbitrary classifications or
otherwise invidious discrimination.” Fed. Land Bank, 426 N.W.2d at
156. Thus, the deference we afford the legislature’s classifications “is
not, in and of itself, necessarily dispositive” under article I, section 6.
Bierkamp v. Rogers, 293 N.W.2d 577, 581 (Iowa 1980). “It is for the
judicial department to determine whether any department has exceeded
its constitutional functions . . . .” Luse v. Wray, 254 N.W.2d 324, 327
(Iowa 1977) (internal quotation marks omitted).
“The first step of [analyzing] an equal protection claim is to identify
the classes of similarly situated persons singled out for differential
treatment.” Grovijohn v. Virjon, Inc., 643 N.W.2d 200, 204 (Iowa 2002).
“If a plaintiff fails to articulate, and the court is unable to identify, a class
of similarly situated individuals who are allegedly treated differently
under the challenged statute,” our analysis ends and we need not
consider whether the ends are legitimate and the means rationally
related. Timberland Partners, 757 N.W.2d at 175. However, “[n]o two
groups are identical in every way,” so LSCP is not required to show it
mirrors another class of taxpayers exactly. See Qwest Corp., 829 N.W.2d
at 561 (emphasis added).
18
In this case, LSCP posits the relevant class consists of all directly
connected ethanol plants located in Iowa who pay tax rates that differ
solely based on their geographic location. The directly connected plants
all bypass an LDC, obtain natural gas directly from an interstate
pipeline, and use that gas to produce ethanol and related byproducts. In
contrast, the Department, relying on our decision in City of Coralville,
contends “[c]itizens serviced by different public utilities are not similarly
situated.” City of Coralville, 750 N.W.2d at 531. In other words, the
Department asserts each directly connected ethanol plant acts as its own
utility, with itself as a customer—and therefore, LSCP cannot
demonstrate any similarly situated class of taxpayers treated differently
in violation of article I, section 6. See Timberland Partners, 757 N.W.2d
at 175.
In Qwest Corp., we cautioned against making intricate distinctions
between purported classes of similarly situated individuals, because if we
did so, almost every equal protection claim could be resolved against the
plaintiffs on the “similarly situated” requirement. Qwest Corp., 829
N.W.2d at 561. We therefore assumed the two proffered groups in Qwest
Corp. were similarly situated, without deciding the question. See id. We
do the same here. We assume (without deciding) for purposes of analysis
that LSCP has identified a class of similarly situated taxpayers subjected
to allegedly different treatment.
We now proceed to the next step of equal protection analysis. In
this step, “we must examine the legitimacy of the end to be achieved; we
then scrutinize the means used to achieve that end.” Fed. Land Bank,
426 N.W.2d at 156.
19
At the legitimacy step, our rational basis test under article I,
section 6 is not toothless. See RACI II, 675 N.W.2d at 9. To determine
whether the ends are legitimate, we first ask whether
the claimed state interest [is] realistically conceivable. Our
court must then decide whether this reason has a basis in
fact. Finally, we must consider whether the relationship
between the classification . . . and the purpose of the
classification is so weak that the classification must be
viewed as arbitrary.
Id. at 7–8 (citations omitted) (footnotes omitted). The “realistically
conceivable” standard requires more than “a purely superficial analysis
and implies that the court is permitted to ‘probe to determine if the
constitutional requirement of some rationality in the nature of the class
singled out has been met.’ ” Id. at 7 n.3 (quoting Greenwalt v. Ram Rest.
Corp. of Wyo., 71 P.3d 717, 731 (Wyo. 2003)). “Basis in fact” means “the
court will undertake some examination of the credibility of the asserted
factual basis for the challenged classification rather than simply
accepting it at face value.” Id. at 8 & n.4. In other words, although
“actual proof of an asserted justification [i]s not necessary, . . . the court
w[ill] not simply accept it at face value and w[ill] examine it to determine
whether it [i]s credible as opposed to specious.” Qwest Corp., 829
N.W.2d at 560; see RACI II, 675 N.W.2d at 7 n.3 (differentiating between
“credible” and “specious”).
When it enacted chapter 437A, the legislature expressly identified
the interests it sought to advance. For example, the legislature
announced an objective to “remove tax costs as a factor in a competitive
environment by imposing like generation, transmission, and delivery
taxes on similarly situated competitors who generate, transmit, or deliver
. . . natural gas in the same [CSA].” Iowa Code § 437A.2. In other words,
the legislature sought to promote competition in the natural gas delivery
20
market by preventing companies with no property in the state—and
therefore, few if any assets reached by the ad valorem tax—from enjoying
an unfair advantage due to their comparatively lower tax liability. The
legislature also expressly announced its objective “to preserve revenue
neutrality and debt capacity for local governments and taxpayers” by
creating a new and different system generating tax revenue calculated to
replicate the amount that was collectible under the prior framework. See
id. The legislature chose to advance this objective by creating a new
variable tax rate dependent on the centrally assessed property tax
liability allocated to the natural gas service of each taxpayer principally
serving each CSA, averaged over tax years 1993 to 1997 under the
former ad valorem tax structure. See Iowa Code § 437A.5(3).
In adopting the new replacement tax formulation, the legislature
explained its reasons for eschewing “imposition of a single statewide
delivery tax rate [that] would unfairly increase tax costs for some
taxpayers while reducing such costs for others.” 1998 Iowa Acts ch.
1194, § 1. The legislature expressly rejected LSCP’s preference for
statewide rate uniformity, finding it “would impede a competitive
environment.” Id. In addition to the goals of market competition and
revenue continuity, the legislature noted its policy objective of providing
“a system of taxation which reduces existing administrative burdens on
state government.” Iowa Code § 437A.2.
Although in the process of rational basis review we do not simply
accept claimed legitimacy of the interests (the ends) legislation purports
to advance, LSCP does not contest the legitimacy of the interests
expressly proffered by the Department in this case. Rather, LSCP
contends the means and ends bear no rational relation to one another.
See Fed. Land Bank, 426 N.W.2d at 156–57 (“FLB concedes the
21
legitimacy of the challenged legislation’s public purpose. . . . The
question is whether these legitimate goals are rationally served by [the]
legislative scheme . . . .”). We now turn to that question.
When applying the rational basis test, we uphold a classification
against an equal protection challenge statute if it is rationally related to
at least one legitimate state interest. See City of Coralville, 750 N.W.2d
at 530 (“[W]e will sustain a legislative classification if it is rationally
related to a legitimate state interest.” (Emphasis added.)). Thus, if we
determine rate variation based on the taxpayer’s geographic location is a
rational classification made in furtherance of any legitimate state
interest, we will uphold the replacement tax framework against LSCP’s
challenge.
Under the Iowa Constitution, we determine whether a classification
rationally furthers a legitimate state interest by evaluating whether the
classification features “extreme degrees of overinclusion and
underinclusion in relation to any particular goal.” Bierkamp, 293 N.W.2d
at 584; see also RACI II, 675 N.W.2d at 10. If a classification involves
extreme overinclusion or underinclusion “in relation to any particular
goal, it cannot [reasonably] be said to . . . further that goal.” Bierkamp,
293 N.W.2d at 584. Although LSCP does not expressly raise its
challenges in terms of extreme over- or underinclusiveness, its assertions
can be characterized under that framework. For example, LSCP
implicitly asserts the replacement delivery tax regime is both
overinclusive and underinclusive because LSCP and other directly
connected consumers are shoehorned into the system, while preexisting
directly connected consumers are exempt. In particular, LSCP contends
the replacement tax regime is overinclusive—sweeping in taxpayers that
should not be subject to it—because the rate in LSCP’s CSA is based on
22
historic property values LSCP cannot control; because LSCP cannot
affect its own replacement tax rate; and because LSCP cannot pass tax
costs to customers through a tariff.
We conclude none of these assertions identifies a classification that
is extremely overinclusive and underinclusive. The 1998 session law
enacting the replacement tax stated in part that the legislature wanted to
ensure fairness in the electricity and natural gas markets. See 1998
Iowa Acts ch. 1194, §§ 1, 3. For example, the legislature found “a single
statewide delivery tax rate would unfairly increase tax costs for some
taxpayers while reducing costs for others.” Id. § 1. Thus, to prevent an
unjust result, the legislature created geographic CSAs and developed a
formula that would make any changes in tax liability much less drastic
compared to the previous system than a single statewide tax rate would
be. Similarly, the legislature wanted to remove tax costs as a factor in
the competitive market for natural gas service. See id. § 3. Perhaps it
was concerned a natural gas supplier could exploit the ad valorem
system by locating in a low tax state and maintaining little or no property
in Iowa, yet directing substantial service toward Iowa. Additionally, the
legislature may have decided to avoid a potential loophole for consumers
connecting directly to a pipeline after January 1, 1999, if the delivery tax
did not apply to them—a loophole that would make tax costs a factor in
location and bypass decisions. In other words, while the legislature
created an exemption for “grandfathered” directly connected consumers
and subjected future directly connected consumers to a tax rate they
cannot control, we conclude these features of the classification are
neither overinclusive nor underinclusive to an extreme degree. No
constitutional violation results unless “a classification involves extreme
23
degrees of overinclusion and underinclusion in relation to any particular
goal.” Bierkamp, 293 N.W.2d at 584 (emphasis added).
We conclude the legislature could have rationally believed 8 the
replacement tax regime—switching to an excise tax and imposing that
tax on directly connected consumers at rates prevailing within the CSA
where they are located—was rationally related to its goals. The
replacement delivery tax may not create uniform results, but “the law
operates uniformly in the constitutional sense.” Cook, 233 Iowa at 519,
10 N.W.2d at 10. It does not violate article I, section 6 of the Iowa
Constitution.
B. Dormant Commerce Clause. In KFC Corp. v. Iowa Department
of Revenue, we explained the background of the dormant Commerce
Clause:
The United States Constitution expressly authorizes
Congress to “regulate Commerce . . . among the several
States.” U.S. Const. art. I, § 8, cl. 3. Since the nineteenth
century, the United States Supreme Court has interpreted
the Commerce Clause as more than merely an affirmative
grant of power, finding a negative sweep to the Clause as
8In Bierkamp, we explained “changes in underlying circumstances may vitiate
any rational basis.” Bierkamp, 293 N.W.2d at 581. Further, “the passage of time may
call for a less deferential standard of review as the experimental or trial nature of
legislation is less evident.” Id.; see also State v. Groves, 742 N.W.2d 90, 93 (Iowa 2007)
(“[W]hen applying a rational basis test under the Iowa Constitution, changes in the
underlying circumstances can allow us to find a statute no longer rationally relates to a
legitimate government purpose.”). LSCP relies on our statement in Bierkamp and
contends while there may originally have been a rational basis between some ends and
the means used to achieve them, that basis no longer exists—and we can properly
determine the relation using a present-day viewpoint rather than a retrospective one.
However, we have never applied the Bierkamp reevaluation standard to an equal
protection claim involving a tax statute. See Qwest Corp., 829 N.W.2d at 562 & n.7.
Further, we have stated the standard generally applies when the changed
circumstances are developing legal trends—not simply a look back in time to verify
whether the legislature actually accomplished its goals. Qwest Corp., 829 N.W.2d at
562 n.7. “There have been no [major] developments of which we are aware in . . . tax
jurisprudence.” Id. Accordingly, we decline to apply the Bierkamp reevaluation
standard in this case.
24
well. See Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 448–
49, 6 L. Ed. 678, 688–89 (1827); Gibbons v. Ogden, 22 U.S.
(9 Wheat.) 1, 72–78, 6 L. Ed. 23, 70–78 (1824). As a result,
the Supreme Court has applied the “negative” or “dormant”
Commerce Clause to limit state taxation powers
notwithstanding the absence of congressional legislation.
KFC Corp. v. Iowa Dep’t of Revenue, 792 N.W.2d 308, 313 (Iowa 2010).
In short, the dormant Commerce Clause “limits the power of the states to
erect barriers against interstate trade.” Iowa Auto. Dealers Ass’n v. Iowa
State Appeal Bd., 420 N.W.2d 460, 462 (Iowa 1988).
The Supreme Court has further explained the “dormant” aspect of
the Commerce Clause: “The negative or dormant implication of the
Commerce Clause prohibits state taxation . . . that discriminates against
or unduly burdens interstate commerce . . . .” Tracy, 519 U.S. at 287,
117 S. Ct. at 818, 136 L. Ed. 2d at 773. In this context, the term
“discrimination” means “differential treatment of in-state and out-of-state
economic interests that benefits the former and burdens the latter.” Or.
Waste Sys., Inc. v. Dep’t of Envtl. Quality, 511 U.S. 93, 99, 114 S. Ct.
1345, 1350, 128 L. Ed. 2d 13, 21 (1994); accord NextEra Energy Res. LLC
v. Iowa Utils. Bd., 815 N.W.2d 30, 48 (Iowa 2012). Before evaluating
whether chapter 437A discriminates against or unduly burdens
interstate commerce, however, we must first determine whether LSCP
has standing to raise this dormant Commerce Clause challenge.
1. Standing to raise a dormant Commerce Clause claim. Usually,
parties asserting dormant Commerce Clause challenges are out-of-state
entities subjected to an allegedly discriminatory regulation. See, e.g.,
Hunt v. Wash. State Apple Adver. Comm’n, 432 U.S. 333, 339, 97 S. Ct.
2434, 2439, 53 L. Ed. 2d 383, 391 (1977) (noting the Washington
plaintiff challenging a North Carolina regulation brought suit in North
Carolina federal court); Complete Auto Transit, Inc. v. Brady, 430 U.S.
25274, 275–76, 97 S. Ct. 1076, 1077, 51 L. Ed. 2d 326, 328–29 (1977)
(noting the plaintiff was a Michigan company challenging a Mississippi
tax assessment); KFC Corp., 792 N.W.2d at 310 (noting the plaintiff was
“a Delaware corporation with its principal place of business in Louisville,
Kentucky” that owned no properties in Iowa). The Department asserts
because LSCP is not an out-of-state entity allegedly subjected to
discriminatory treatment under chapter 437A, it has no standing to
challenge the statute under the dormant Commerce Clause.
However, “cognizable injury from unconstitutional discrimination
against interstate commerce does not stop at members of the class
against whom a State ultimately discriminates.” Tracy, 519 U.S. at 286,
117 S. Ct. at 818, 136 L. Ed. 2d at 772. In Tracy, a case also involving
tax on natural gas, the Supreme Court stated customers of the class
subjected to discrimination “may also be injured, as . . . where the
customer is liable for payment of the tax and as a result presumably
pays more for the gas it gets from out-of-state producers and marketers.”
Id. Further, at least two other Supreme Court cases have demonstrated
that in-state plaintiffs are not precluded from raising dormant Commerce
Clause challenges. See W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186,
190–91, 114 S. Ct. 2205, 2209–10, 129 L. Ed. 2d 157, 165 (1994) (noting
the plaintiffs were Massachusetts milk dealers asserting a monthly
premium payment distributed only to in-state farmers violated the
dormant Commerce Clause); Bacchus Imps., Ltd. v. Dias, 468 U.S. 263,
267, 104 S. Ct. 3049, 3053, 82 L. Ed. 2d 200, 206–07 (1984) (concluding
in-state liquor wholesalers had standing to challenge Hawaii’s liquor tax,
in part because they were “entitled to litigate whether the . . . tax has
had an adverse competitive impact on their business”).
26
We assume, without deciding, that LSCP has standing in this case.
We do so because we conclude even if LSCP has standing, the
replacement delivery tax framework does not violate the dormant
Commerce Clause. Cf. Qwest Corp., 829 N.W.2d at 561–62 (assuming
equal protection plaintiffs were similarly situated because their claims
failed on the merits). We now explain why that is so.
2. The Complete Auto Transit test. In Complete Auto Transit, the
Supreme Court stated a tax can survive a Commerce Clause challenge
“when the tax is applied to an activity with a substantial nexus to the
taxing State, is fairly apportioned, does not discriminate against
interstate commerce, and is fairly related to the services provided by the
State.” Complete Auto Transit, 430 U.S. at 279, 97 S. Ct. at 1079, 51 L.
Ed. 2d at 331. We must evaluate whether each of these requirements is
met.
“Substantial nexus” means more than “a proxy for notice”—its
meaning in due process cases. See Quill Corp. v. North Dakota, 504 U.S.
298, 313, 112 S. Ct. 1904, 1913–14, 119 L. Ed. 2d 91, 107 (1992).
Nonetheless, the replacement tax on natural gas delivery clearly has a
nexus to Iowa because it involves taxation of natural gas delivered into
Iowa for consumption here. See KFC Corp., 792 N.W.2d at 328
(concluding the Department could tax an out-of-state company’s
“revenue earned . . . from the use of its intangibles by franchisees located
within the State of Iowa”).
A tax is fairly apportioned when a state only taxes its fair share of
the property or activity. See Okla. Tax Comm’n v. Jefferson Lines, Inc.,
514 U.S. 175, 184–85, 115 S. Ct. 1331, 1338, 131 L. Ed. 2d 261, 271
(1995). A fairly apportioned tax must be both internally and externally
consistent. Id. at 185, 115 S. Ct. at 1338, 131 L. Ed. 2d at 271–72.
27
Internal consistency occurs when every other state could adopt the same
tax without placing “interstate commerce at a disadvantage as compared
with commerce intrastate.” Id. External consistency occurs if a state
does not tax anything “beyond that portion of value fairly attributable to
economic activity within the taxing state.” Id. at 185, 115 S. Ct. at 1338,
131 L. Ed. 2d at 272. These two requirements are somewhat related
because if a state achieves external consistency, any other state could
adopt the same regime without overburdening interstate commerce.
Here, Iowa only taxes activity within the state—natural gas delivered into
Iowa. Accordingly, we conclude the replacement tax is fairly
apportioned.
A tax is fairly related to services when it “is assessed in proportion
to a taxpayer’s activities or presence in a State.” Commonwealth Edison
Co. v. Montana, 453 U.S. 609, 627, 101 S. Ct. 2946, 2958, 69 L. Ed. 2d
884, 900 (1981); see also Moorman Mfg. Co. v. Bair, 254 N.W.2d 737, 750
(Iowa 1977). When this occurs, “the taxpayer is shouldering its fair
share of supporting the State’s” services such as police and fire
protection. Commonwealth Edison Co., 453 U.S. at 627, 101 S. Ct. at
2958, 69 L. Ed. 2d at 900. In Commonwealth Edison Co., the Supreme
Court concluded a Montana tax on coal mining satisfied this element
because it was “measured as a percentage of the value of the coal taken.”
Id. at 626, 101 S. Ct. at 2958, 69 L. Ed. 2d at 900. The tax was related
only to the coal mined in Montana, and here the replacement tax is
related only to the natural gas delivered in Iowa. We conclude the tax is
fairly related to services provided by the State.
We now turn to the question of whether the tax is discriminatory.
3. Differential treatment amounting to discrimination. A
discriminatory regulation can be directly and facially discriminatory or
28
have discriminatory effect. See Brown-Forman Distillers Corp. v. N.Y.
State Liquor Auth., 476 U.S. 573, 579, 106 S. Ct. 2080, 2084, 90 L. Ed.
2d 552, 559–60 (1986); Iowa Auto. Dealers Ass’n, 420 N.W.2d at 462.
We address each of these features of discrimination in turn.
A regulation that directly discriminates against out-of-state
economic interests is relatively easy to spot. Regulations or statutes that
are per se discriminatory often make the distinction between in-state and
out-of-state interests expressly. See, e.g., Camps Newfound/Owatonna,
Inc. v. Town of Harrison, 520 U.S. 564, 568, 117 S. Ct. 1590, 1594, 137
L. Ed. 2d 852, 859 (1997) (discussing a Maine statute that expressly
provided fewer tax benefits to charities serving non-Maine residents than
to charities serving Maine residents); Fulton Corp. v. Faulkner, 516 U.S.
325, 333, 116 S. Ct. 848, 855, 133 L. Ed. 2d 796, 806 (1996) (finding
facially discriminatory a North Carolina tax regime that expressly “taxes
stock only to the degree that its issuing corporation participates in
interstate commerce”); Chem. Waste Mgmt., Inc. v. Hunt, 504 U.S. 334,
338–39, 112 S. Ct. 2009, 2012, 119 L. Ed. 2d 121, 129–30 (1992)
(describing an Alabama statute that expressly imposed an additional
hazardous waste disposal fee only on hazardous waste originating
outside Alabama). Iowa’s replacement tax on natural gas delivery does
not make an express distinction because it applies to all therms of
natural gas delivered within the state, regardless of whether the gas goes
directly from an interstate pipeline to a consumer or is first routed
through an LDC. Accordingly, the natural gas delivery tax does not
directly discriminate against interstate commerce.
“A state law is discriminatory in effect when, in practice, it affects
similarly situated entities in a market by imposing disproportionate
burdens on out-of-state interests and conferring advantages upon in-
29
state interests.” Family Winemakers of Cal. v. Jenkins, 592 F.3d 1, 10
(1st Cir. 2010). In Family Winemakers, the similarly situated entities
were wine producers and the relevant market was the market for wine
sales in Massachusetts. See id. at 4. “ ‘Small’ ” wineries were allowed to
sell “in three ways: by shipping directly to consumers, through
wholesaler distribution, and through retail distribution.” Id. “ ‘Large’ ”
wineries—none of which were located in Massachusetts—could not sell to
retailers at all, and could only choose either to ship directly to consumers
or to contract with a wholesaler. Id. The First Circuit Court of Appeals
held the distinction between types of wineries and the distribution
networks they were permitted to utilize “significantly alter[ed] the terms
of competition” between in-state and out-of-state entities. Id. at 11.
Here, LSCP asserts the relevant market is for the consumption of
natural gas, and the similarly situated entities are all consumers within
the same CSA as LSCP—especially those that receive natural gas from an
LDC. LSCP asserts because the LDC passes on its replacement tax
burden to consumers at varying rates, the replacement tax’s effect—
when imposed on a directly connected consumer—is to incentivize
contracting with an LDC and discourage direct connections, which by
definition facilitate interstate transactions. LSCP analogizes to the
relationship between sales tax and use tax, and contends the two must
be equal. See Associated Indus. of Mo. v. Lohman, 511 U.S. 641, 648,
114 S. Ct. 1815, 1821, 128 L. Ed. 2d 639, 647 (1994) (finding Missouri’s
tax scheme that imposed an additional use tax only on out-of-state goods
“r[an] afoul of the basic requirement that . . . the burdens imposed on
interstate and intrastate commerce must be equal”). LSCP asserts
section 437A.5(1) creates the functional equivalent of a sales tax, and
section 437A.5(2) establishes the functional equivalent of a use tax—
30
because LDCs subject to section 437A.5(1) engage in in-state delivery,
and directly connected consumers subject to section 437A.5(2) engage in
transactions with out-of-state suppliers. Citing the Lohman rule, LSCP
contends section 437A.5 provides LDC customers with what LSCP terms
“a disguised Replacement Tax rate reduction” because LDCs are allowed
to pass on their tax burden to their customers at varying rates.
We conclude LSCP’s reliance on Lohman is misplaced. In Lohman,
Missouri imposed “an ‘additional use tax’ of 1.5% on the privilege of
storing, using, or consuming within the State any article of personal
property purchased outside the State.” Id. at 644, 114 S. Ct. at 1819,
128 L. Ed. 2d at 645. No statewide sales tax accompanied this
additional use tax, but political subdivisions had discretion to impose
additional sales taxes. Id. Thus, sales tax and use tax could be equal
under the statutory scheme, but only if a political subdivision exercised
its discretion to impose additional sales tax and fixed its additional sales
tax at 1.5 percent. See id. By contrast, in this case, the replacement tax
begins from a point of equivalence. Sections 437A.5(1) and (2) expressly
impose the same tax on both LDCs and directly connected consumers.
Iowa Code § 437A.5(1)–(2). Thus, the natural gas replacement tax is
wholly unlike the scheme at issue in Lohman, and the discretion LDCs
have to allocate their tax burden is wholly unlike the Missouri localities’
discretion to create (or avoid creating) a tax burden in the first place.
Further, we conclude LSCP has misidentified the entities to which
it is similarly situated for dormant Commerce Clause purposes. It is true
that LSCP and LDC customers both consume natural gas. But the tax
LSCP is challenging applies to the delivery of gas. An LDC’s customers
receive but do not deliver gas. Thus, LSCP is not similarly situated to
LDCs’ customers, but to LDCs themselves. Put another way, the tax is
31
imposed on entities obtaining gas from an interstate pipeline, not all
entities obtaining gas from any source. To adapt a colloquialism,
equating LSCP with the customers of LDCs in this context is like
comparing apples to cantaloupes. See Hunt, 432 U.S. at 336, 97 S. Ct.
at 2438, 53 L. Ed. 2d at 389–90; Pike v. Bruce Church, Inc., 397 U.S. 137,
139, 90 S. Ct. 844, 845–46, 25 L. Ed. 2d 174, 176–77 (1970).
A comparison of LSCP and any LDC wishing to provide service in
the same CSA reveals there is no differential tax rate between them. See
Iowa Code § 437A.5(2) (imposing upon directly connected consumers a
tax “at the rates prescribed under subsection 1”—the same rate that
applies to LDCs). The statutory framework exacts no penalty for
participating in interstate commerce. Indeed, LDCs are participating in
interstate commerce to the same extent—and subject to the same taxes—
as directly connected natural gas consumers. An LDC is free to pass its
tax burden on to customers, but it ultimately remains liable for the
entire amount; the LDC itself is not subject to any rate reduction,
disguised or otherwise. Further, LSCP can pass on the tax costs through
the price of its product, just as LDCs do.
We conclude the replacement tax framework does not have a
discriminatory effect on interstate commerce. Accordingly, the Complete
Auto Transit test is satisfied and the tax as a whole does not violate the
dormant Commerce Clause.
4. Extraterritoriality. Under the extraterritoriality doctrine, “a
statute that directly controls commerce occurring wholly outside the
boundaries of a State” is invalid. Healy v. Beer Inst., 491 U.S. 324, 336,
109 S. Ct. 2491, 2499, 105 L. Ed. 2d 275, 288 (1989). “The critical
inquiry is whether the practical effect of the regulation is to control
conduct beyond the boundaries of the State.” Id.32
LSCP raises the extraterritoriality doctrine, but focuses on different
language from Healy: the effect that “would arise if not one, but many or
every, State adopted similar legislation.” Id. LSCP summarizes its
extraterritoriality argument this way:
[LSCP]’s complaint is not that its therms are taxed more
than once. Its complaint is that its therms are taxed more.
If every state would adopt the Iowa Replacement Tax regime,
and allow its LDCs to discount rates for large general service
customers, while requiring their taxing authorities to
demand the full rates from residents bypassing their LDCs,
then all residents of all states would be rewarded for buying
locally by saving taxes, thereby impeding interstate
commerce.
As we have explained in our analysis of discriminatory effect, however,
LSCP’s therms are not taxed more than those an LDC delivers to
customers. The Department still demands full rates from LDCs, but
LDCs have the option to pass some of those costs on to consumers.
Further, the replacement tax does not violate the rule announced
in Healy because it does not regulate conduct occurring “wholly outside
the boundaries of a State.” Id. at 336, 109 S. Ct. at 2499, 105 L. Ed. 2d
at 288 (emphasis added). Because the replacement tax only applies
when natural gas is delivered into Iowa, it does not violate the
extraterritoriality doctrine.
C. Limitations Period for Tax Refund Claims. “[C]ourts have a
duty to avoid constitutional questions when [the] merits of a case may be
fairly decided without facing such questions.” Moorman Mfg. Co., 254
N.W.2d at 749; see also Salsbury Labs. v. Iowa Dep’t of Envtl. Quality,
276 N.W.2d 830, 837 (Iowa 1979) (“Avoidance of constitutional issues
except when necessary for proper disposition of [a] controversy is a
bulwark of American jurisprudence.”); City of Des Moines v. Lohner, 168
N.W.2d 779, 782 (Iowa 1969) (“We do not consider constitutional
33
questions unless it is necessary for the disposition of the case.”).
Because we have concluded the replacement tax regime is constitutional
and LSCP is not entitled to receive a refund, we do not reach the
question whether the different limitations period for refund claims based
on constitutional objections is itself constitutional. See Hawkeye Land
Co. v. Iowa Utils. Bd., 847 N.W.2d 199, 209 (Iowa 2014); Lohner, 168
N.W.2d at 782.
V. Conclusion.
A rational basis exists for the variable excise tax imposed on the
delivery of natural gas under section 437A.5. Accordingly, we affirm the
district court’s determination that LSCP has failed to establish a violation
of the Fourteenth Amendment of the United States Constitution or
article I, section 6 of the Iowa Constitution. We also affirm the district
court’s determination that the natural gas delivery tax framework does
not obstruct interstate commerce or discriminate against it in violation of
the dormant Commerce Clause.
AFFIRMED.
All justices concur except Zager, J., who takes no part.