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Jamie C. Yesnowitz
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The Kentucky Supreme Court dismissed claims brought by a Kentucky taxpayer against the state of Ohio and the Ohio Tax Commissioner, finding that the U.S. Constitution permits states to retain their sovereign immunity from private suits brought in the courts of another state.1
Further, the Court dismissed claims brought against the Commissioner in his personal capacity based on the principle of comity.
The taxpayer, Great Lakes Minerals, LLC (“Great Lakes”) processes minerals which are sold directly from its Kentucky plant location. Between 2009 and 2016, Great Lakes did not, directly or indirectly, deliver products to Ohio destinations and had no physical presence in the state. However, the Ohio Department of Taxation determined that Great Lakes sold over $104 million of minerals to taxpayers with Ohio addresses during that time and issued a commercial activity tax (CAT) assessment. Great Lakes paid a portion of the assessment but petitioned for reassessment with the state. Subsequently, Great Lakes brought suit against the Department and its Commissioner in both his official and individual capacities.
Specifically, Great Lakes brought suit in Greenup Circuit Court seeking: (i) a declaratory judgment that it is not subject to Ohio's CAT; (ii) monetary relief from the Commissioner for the forced collection of taxes not owed, in violation of the Ohio and United States Constitutions; and (iii) a determination pursuant to Kentucky Rules of Civil Procedure Sec. 60.03 that it would be inequitable to require Great Lakes to defend an action in a foreign state. Ohio sought to dismiss Great Lakes' complaint on the grounds of sovereign immunity, qualified immunity, comity, lack of personal jurisdiction, and failure to exhaust administrative remedies.
The Greenup Circuit Court denied Ohio's motion to dismiss, and Ohio appealed to Kentucky’s Court of Appeals. Ohio then sought to transfer jurisdiction over that appeal to the Kentucky Supreme Court, which was granted. The Court delayed hearing the appeal pending the U.S. Supreme Court decision in Franchise Tax Board of California v. Hyatt (Hyatt III)
The origins of the Hyatt
decision date back to 1993, the year in which the California Franchise Tax Board (FTB) began an expansive residency audit of Gilbert P. Hyatt, an inventor and long-time California resident who moved to Nevada in 1991 and claimed that state as his primary place of residence. Upon audit, the FTB found Hyatt to be a California resident in 1991 and 1992, years in which Hyatt claimed Nevada as his primary residence. Not only did Hyatt protest the audit, but he also claimed that the FTB’s methods were so intrusive that he sued in Nevada state court for torts he alleged that the agency committed during the audit. Roughly two decades of litigation followed, with three separate issues appealed to and reaching the U.S. Supreme Court.
The central issue before the Court in the first two appeals was how much immunity the FTB should receive from the Nevada state court system. In the first appeal, the Nevada Supreme Court rejected the FTB’s argument that the Full Faith and Credit Clause of the U.S. Constitution3
required Nevada courts to apply California law to immunize the state agency from liability. The Nevada Supreme Court instead held that general principles of comity entitled the FTB only to the same immunity that Nevada law afforded Nevada agencies. The Court affirmed, holding that the Full Faith and Credit Clause did not prohibit Nevada from applying its own immunity law.4
In the second appeal, the U.S. Supreme Court found that the Full Faith and Credit Clause required Nevada courts to grant the FTB the same immunity that Nevada agencies enjoy.5
On appeal to the U.S. Supreme Court for a third time, the sole question before the Court was whether the Court’s 1979 decision in Nevada v. Hall
the seminal U.S. Supreme Court case that denies states sovereign immunity from private lawsuits filed in the courts of another state, should be overruled.7
In Hyatt III
, the Court agreed that it should, reasoning that: (i) in the original Nevada v. Hall
decision, the majority of the Court held that nothing implicit in the Constitution requires states to adhere to the sovereign immunity that prevailed when the Constitution was adopted, and concluded that the creators of the Constitution assumed that comity would provide protection against the possibility of one state attempting to assert jurisdiction over the courts of another; and (ii) the Nevada v. Hall
majority, in attempting to interpret the intent behind the adoption of the Full Faith and Credit Clause, did not adequately take into the account the changes the Constitution itself would have on the states’ relationships with each other.
In the wake of the Hyatt III
decision, the Kentucky Supreme Court considered the Great Lakes dispute. Accordingly, Ohio argued that it was protected by sovereign immunity under Hyatt III
and the Commissioner argued the same, for all motions against him in both his official and individual capacity. In contrast, Great Lakes attempted to distinguish the case from Hyatt III
because while Hyatt sought a monetary award of damages from California, Great Lakes only sought monetary damages against the Commissioner in his individual capacity and declaratory, injunctive, and equitable relief against Ohio and the Commissioner in his official capacity. As such, Great Lakes reasoned, Hyatt II
was the controlling authority. The Kentucky Supreme Court disagreed, ruling that the U.S. Supreme Court in Hyatt III
made no distinction between claims seeking monetary damages and claims seeking other types of relief, and reversed the Greenup Circuit Court’s denial of Ohio’s motion to dismiss.
The Kentucky Supreme Court also reversed the Greenup Circuit Court’s denial of dismissal against the Commissioner acting in his official capacity based on the precedent set in Kentucky v. Graham
, the U.S. Supreme Court held that an “official-capacity” suit essentially is treated as a suit against the governmental entity, not the official, if the entity receives notice of the suit and has an opportunity to respond. In this matter, the suit against the Commissioner in his official capacity was tantamount to a suit against Ohio itself. Therefore, the Kentucky Supreme Court concluded that the Commissioner, in his official capacity, was entitled to the same sovereign immunity protecting the state of Ohio.
Finally, the Court ruled that establishing personal liability against the Commissioner would require showing that the Commissioner, “acting under color of state law,” depriving Great Lakes of a federal right. This would require analyzing the Commissioner’s actions as well as interpreting Ohio tax law. Given that such a determination would ultimately turn on Ohio law, the Court dismissed the motions against the Commissioner in a personal capacity based on the doctrine of comity. Specifically, the Court noted that the comity doctrine "is one of deference and respect among tribunals of overlapping jurisdiction; in accordance with comity, the courts of one state or jurisdiction give effect to the laws and judicial decisions of another, not as a matter of obligation but out of deference and respect."
The Kentucky Supreme Court’s ultimate decision not to apply Ohio law in determining whether Ohio’s commissioner could be held personally liable is not surprising. State courts are often reticent to opine on issues involving out-of-state taxes. For example, a Virginia Circuit Court judge recently dismissed a case brought by a Virginia taxpayer challenging the applicability of Massachusetts’ 2017 remote seller nexus standards for sales and use tax purposes. Specifically, the judge found a lack of jurisdiction based on the absence of sufficient contact.9
The application of comity in the field of state taxation has garnered renewed interest in recent years, in part due to the trilogy of Hyatt
cases. As evidenced by the unanimous, 4-4, and 5-4 decisions of the Court on Hyatt I
, Hyatt II
and Hyatt III
, respectively, determining when comity may apply is often difficult to ascertain. Comity provides for separate political entities to mutually recognize each other’s legal landscape, and supports a multi-jurisdictional tax landscape that promotes reciprocity out of deference and mutuality of interest. In the area of state taxation, this principle is directly reflected in taxes-paid-to-other-states credits, and indirectly reflected in the states’ efforts to develop more similar regimes with some level of uniformity. As non-traditional tax regimes evolve, as in Ohio with respect to the CAT, the notion and benefits of reciprocity and comity between Ohio and more “typical” income tax states become blurrier and abstract. At the same time, as more states tend to move towards a broader tax base and lower tax rate, the notions of comity and reciprocity will likely play an increasingly important role in state tax jurisprudence.
In the meantime, Ohio is likely to continue applying its statutory CAT factor presence nexus rules which do not require physical presence. The Ohio Court of Appeals recently affirmed an administrative ruling that an out-of-state corporation with no physical presence in Ohio is subject to the Ohio Commercial Activity Tax (CAT) because the corporation exceeded the CAT’s Ohio $500,000 bright-line receipts factor.10
Great Lakes, having failed in its attempt to gain relief from the Kentucky court system from imposition of Ohio’s CAT nexus rules, is unlikely to achieve a different result by taking up the matter directly with Ohio.
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