A case that IAMU has been following for several years was decided last week by the Iowa Supreme Court. In the case of LSCP, LLLP vs. Courtney Kay-Decker, Director, Iowa Department of Revenue (No. 14-0494), the Iowa Supreme Court upheld Iowa’s natural gas replacement tax system as constitutional under both the federal and state constitutions.
Loss of the case at the Iowa Supreme Court will likely result in a stronger push at the Capitol to change the replacement tax law during this legislative session. IAMU is a member of the Utility Replacement Tax Task Force which made a recommendation this Fall to the legislature that the current natural gas replacement tax system should remain unchanged. The Task Force concluded that the replacement tax system is working for all parties and fulfilling the purposes for which the law was created.
Little Sioux Corn Processors (LSCP) is an ethanol plant located near Marcus, IA. It is not connected to a local distribution company but connects directly to an interstate pipeline and consumes millions of therms of natural gas each year. It is required to pay the natural gas replacement tax rate of the natural gas competitive service area (CSA) in which it is located. When the utility replacement tax legislation went into effect in 1999, the purpose was to impose a rate that was designed to replace the tax that had been collected prior to that time. For municipal natural gas utilities who paid little to no property taxes – the amount of tax to replace was in many cases zero. This results in per therm delivery tax rates that are different throughout the state.
LSCP alleged that Iowa’s natural gas replacement tax violated the equal protection clause of both the state and federal constitutions. Specifically, it alleged the tax was unconstitutional because it required LSCP to pay a different tax rate than other similarly situated ethanol plants, comparing its rate in Marcus, Iowa with the rate of a plant located in Emmetsburg. In addition, it alleged that the tax system violated the Dormant Commerce Clause because it penalized consumers purchasing natural gas from out of state suppliers. The argument was that local distribution companies can allocate the replacement tax burden among their customers, resulting in lower rates for users with higher volumes than LSCP.
The court said the general rule when evaluating a federal constitutional violation is whether the legislature had a “plausible policy reason for the classification” or a rational basis for the differences in treatment. For state constitutional violations a similar analysis is used. For purposes of analysis, the court determined that LSCP and other ethanol plants were similarly situated taxpayers. The court is then required to examine the legitimacy of the end to be achieved and then scrutinize the means used to achieve that end. The court concluded that the “legislature could have rationally believed the replacement tax regime – switching to an excise tax and imposing that tax on directly connected customers at rates prevailing within the CSA where they are located – was rationally related to its goals.” (at p.23).
Under the Courts analysis of the Dormant Commerce Clause, the Court determined that the tax has a “nexus” to Iowa, was fairly apportioned and fairly related to services in the State. The Court found that the tax system did not directly nor did it in effect discriminate against interstate commerce.
Little Sioux Corn Processors (LSCP) is an ethanol plant located near Marcus, IA. It is not connected to a local distribution company but connects directly to an interstate pipeline and consumes millions of therms of natural gas each year. It is required to pay the natural gas replacement tax rate of the natural gas competitive service area (CSA) in which it is located. When the utility replacement tax legislation went into effect in 1999, the purpose was to impose a rate that was designed to replace the tax that had been collected prior to that time. For municipal natural gas utilities who paid little to no property taxes – the amount of tax to replace was in many cases zero. This results in per therm delivery tax rates that are different throughout the state.
LSCP alleged that Iowa’s natural gas replacement tax violated the equal protection clause of both the state and federal constitutions. Specifically, it alleged the tax was unconstitutional because it required LSCP to pay a different tax rate than other similarly situated ethanol plants, comparing its rate in Marcus, Iowa with the rate of a plant located in Emmetsburg. In addition, it alleged that the tax system violated the Dormant Commerce Clause because it penalized consumers purchasing natural gas from out of state suppliers. The argument was that local distribution companies can allocate the replacement tax burden among their customers, resulting in lower rates for users with higher volumes than LSCP.
The court said the general rule when evaluating a federal constitutional violation is whether the legislature had a “plausible policy reason for the classification” or a rational basis for the differences in treatment. For state constitutional violations a similar analysis is used. For purposes of analysis, the court determined that LSCP and other ethanol plants were similarly situated taxpayers. The court is then required to examine the legitimacy of the end to be achieved and then scrutinize the means used to achieve that end. The court concluded that the “legislature could have rationally believed the replacement tax regime – switching to an excise tax and imposing that tax on directly connected customers at rates prevailing within the CSA where they are located – was rationally related to its goals.” (at p.23).
Under the Courts analysis of the Dormant Commerce Clause, the Court determined that the tax has a “nexus” to Iowa, was fairly apportioned and fairly related to services in the State. The Court found that the tax system did not directly nor did it in effect discriminate against interstate commerce.
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