Skip to content

Does the Sixth Circuit’s DirecTV Opinion Reveal Tension Over the Cuno Decision?

3 min readBy: Chris Atkins

Remember the Cuno case? That was the case where the federal Sixth Circuit Court of Appeals struck down Ohio’s investment taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. credit–available to any company that made a physical investment in Ohio–as discrimination against interstate commerce. In striking down Ohio’s credit, the Sixth Circuit adopted an “economic effect” test suggested by the plaintiffs:

“(T)he economic effect of the Ohio investment tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. is to encourage further investment in- state at the expense of development in other states and…the result is to hinder free trade among the states.” (quoting Boston Stock Exchange, 429 U.S. 318, 336 (1977))

We (along with others) set aside our policy arguments against tax incentives (which we make annually in our State Business Tax Climate Index) to argue that such an “economic effect” test would essentially mandate state tax uniformity, to the detriment of pro-growth state tax reform, and that state legislatures were better suited than courts to weigh the competing arguments for and against incentives like Ohio’s investment tax credit. We outlined our arguments in several policy reports (here and here) as well as two amicus briefs in the U.S. Supreme Court (here and here).

The U.S. Supreme Court unanimously reversed the Sixth Circuit. Because the Supreme Court’s ruling rested on standing grounds, however, the Sixth Circuit’s “economic effect” test was still technically undisturbed.

A recent ruling by the Sixth Circuit, however, calls into question the continuing vitality of Cuno’s “economic effect” test. On May 31, the Sixth Circuit Court of Appeals issued its opinion in the case of DirecTV v. Kentucky, a case where the plaintiffs (satellite television companies) challenged a number of Kentucky tax statutes and regulations as discrimination against interstate commerce.

The Sixth Circuit ultimately sided with Kentucky, but the most interesting part of the opinion is a paragraph near the end:

“We must be cautious about applying the dormant Commerce Clause in cases that do not present the equivalent of a protective tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. . States must be allowed, and even encouraged, to work ‘to attract business by creating an environment conducive to economic activity.’ Applying the dormant Commerce Clause to invalidate Kentucky’s revenue statute in this case would dramatically increase the clause’s scope and limit states’ ‘right to experiment with different incentives to business,’ Alexandria Scrap, 426 U.S. at 817 (Stevens, J., concurring), or to implement ‘effective and creative programs for solving local problems.’

Note the insistence that states must be allowed to create “an environment conducive to economic activity”, which seems to be a nearly direct repudiation of the “economic effect” test used by the Sixth Circuit in the Cuno case, which would strike down all state tax laws that made a particular state more attractive than other states for economic investment. Several justices of the U.S. Supreme Court, including Chief Justice Roberts and Justices Scalia and Souter, seemed to have similar concerns over such a rule during oral arguments in the Cuno case.

While we cannot say that the Sixth Circuit judges in Cuno had a change of heart, since none of the judges on the Echostar panel were on the Cuno panel, those of us who monitor and comment on tax law will be well served to keep a watch on the continued development of Commerce Clause law in the Sixth Circuit.