Ohio Public Law Alert; US Supreme Court Vacates Cuno Decision for Lack of Standing

    View Authors May 2006
    On May 15, 2006, the US Supreme Court decided DaimlerChrysler Corp. et al. v. Cuno et al., in which the Court vacated, in part, the judgment of the US Court of Appeals for the Sixth Circuit holding the investment tax credit against Ohio's franchise tax liability to be unconstitutional.

    In Cuno, the Sixth Circuit had ruled in 2004 that the Ohio investment tax credit, granted to DaimlerChrysler to encourage it to locate a manufacturing facility in Ohio, is unconstitutional because it violates the Commerce Clause. The court reasoned that incentives offered to encourage further investment in Ohio, at the expense of development in other states, are a discriminatory burden upon economic activity outside the state.

    DaimlerChrysler petitioned the US Supreme Court for certiorari to review the invalidation of the investment tax credit. The Court granted certiorari and on May 15 ruled that the state taxpayers, who were the plaintiffs in the case, did not have federal standing – they did not suffer a sufficiently clear injury from the granting of the tax credit – to challenge the tax credit in federal court, and, consequently, the Sixth Circuit erred by considering the claims on the merits. The Supreme Court vacated the portion of the Sixth Circuit judgment that invalidated the investment tax credit – thus it is no longer judicial precedent – and remanded that part of the case for dismissal of the taxpayers' challenge. As a result of its ruling on standing, however, the Court did not rule on the merits of the Commerce Clause claim.

    The Court did not review the part of the lower court's decision that upheld Ohio's property tax exemptions, which was the subject of a separate certiorari petition by the taxpayer plaintiffs. However, a week later, on May 22, 2006, the Court announced that it was denying certiorari with respect to that part of the case. As a result, the Court has left undisturbed the portion of the Sixth Circuit judgment that sustained the constitutionality of the property tax exemption. That part of the Sixth Circuit decision remains as binding judicial precedent for federal courts, although not necessarily for state courts, in Ohio, Michigan, Kentucky and Tennessee.

    Although the Ohio investment tax credit remains constitutional after the Supreme Court's ruling in Cuno, the battle over this Commerce Clause issue is likely to continue. Because its ruling on the federal standing issue effectively denied the federal courts of jurisdiction over the Cuno litigation, the US Supreme Court did not provide any indication in its opinion of how it would rule on the merits. The interest groups behind this case have announced that they plan to pursue this litigation in the state courts, which are not bound by federal court rulings on standing issues and have much less stringent standing requirements of their own. It is difficult to predict how the state courts will ultimately rule on the Commerce Clause issue, although such a challenge to the Ohio investment credit may now be more difficult in light of the change in Ohio law referenced below. A future state court decision in such a case brought by taxpayer plaintiffs would likely not be reviewable by the US Supreme Court, because the Court does not have appellate jurisdiction over cases where the plaintiffs lack federal standing.

    It should be noted that the Ohio tax credit may no longer be the most appropriate target for a constitutional challenge, as it has been replaced, in response to the Sixth Circuit ruling, by an investment grant program in Ohio. Regardless of which tax incentive is challenged, there is sure to be more litigation activity in this area, perhaps in other states within the Sixth Circuit, Michigan, Tennessee and Kentucky.