Diversified Ingredients v. Joseph Testa
2017 U.S. App. LEXIS 1110
| 8th Cir. | 2017Background
- Diversified Ingredients, a Missouri corporation, sold goods negotiated and shipped from outside Ohio to customer-directed destinations in Ohio; it had no Ohio employees and was not registered in Ohio.
- Ohio’s Commercial Activity Tax (CAT) is an annual tax on the privilege of doing business, imposed on gross receipts sitused to Ohio when the purchaser receives the property in Ohio; the CAT excludes receipts barred by the U.S. Constitution or federal law.
- In a preliminary audit, Ohio’s Department of Taxation assessed Diversified for unpaid CAT, penalties, and interest totaling $561,448.00.
- Diversified sued the Ohio Tax Commissioner in federal district court seeking a declaratory judgment that the Interstate Income Act (IIA), 15 U.S.C. § 381, deprives Ohio of jurisdiction to tax these out-of-state sales and an injunction barring collection.
- The district court dismissed for lack of subject matter jurisdiction under the Tax Injunction Act (TIA), 28 U.S.C. § 1341; Diversified appealed to the Eighth Circuit.
- The Eighth Circuit affirmed, holding the TIA divested the federal court of jurisdiction and that the IIA does not confer exclusive federal jurisdiction precluding state-court review.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether federal courts have jurisdiction to enjoin Ohio’s CAT assessment under the IIA | IIA creates federally conferred tax immunity and (plaintiff says) exclusive federal jurisdiction to enforce that immunity | TIA bars federal injunctive relief where state courts provide a plain, speedy, efficient remedy; IIA does not confer exclusive federal jurisdiction | Dismissal for lack of subject-matter jurisdiction under the TIA affirmed |
| Whether the IIA preempts Ohio’s authority to impose the CAT on Diversified’s transactions | IIA restricts state taxation of out-of-state sales even if tax is on gross receipts, not net income | State courts may adjudicate IIA claims; IIA does not strip state courts of jurisdiction | IIA is a federal rule of decision but does not bar state-court adjudication; federal review remains possible on appeal |
| Whether Ohio law’s statement that CAT is “not subject to” IIA removes the TIA remedy in state court | Diversified: Ohio’s statutory language defeats the availability of a “plain” state remedy under the TIA exception | Testa: Ohio’s appeal procedures provide a plain, speedy, efficient remedy despite legislative language | Ohio’s appellate process suffices for TIA purposes; the statutory statement is procedural and not dispositive |
| Whether prudential comity independently required abstention in federal court | Plaintiff argued federal resolution necessary to prevent disruption of interstate commerce | Defendant relied on comity and the risk of interfering with state tax administration | Court declined to decide comity separately because TIA jurisdictional bar was dispositive |
Key Cases Cited
- Wisconsin Dept. of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (Supreme Court) (IIA context and limits on state net-income taxation of interstate sales)
- Levin v. Commerce Energy, Inc., 560 U.S. 413 (Supreme Court) (federal-court restraint to avoid disrupting state tax administration)
- Rosewell v. LaSalle Nat. Bank, 450 U.S. 503 (Supreme Court) (TIA transfers tax-injunction relief to state courts)
- Tafflin v. Levitt, 493 U.S. 455 (Supreme Court) (presumption of concurrent state-court jurisdiction to adjudicate federal claims)
- California v. Grace Brethren Church, 457 U.S. 393 (Supreme Court) (TIA deprives district courts of jurisdiction to enjoin state tax enforcement)
- Arkansas v. Farm Credit Servs. of Central Ark., 520 U.S. 821 (Supreme Court) (TIA limits federal jurisdiction over state tax disputes)