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SCALLOP CORP. v. TULLY

September 3, 1982

SCALLOP CORPORATION, Plaintiff,
v.
JAMES H. TULLY, JR., THOMAS H. LYNCH, and FRANCIS KOENIG, constituting the New York State Tax Commission; ROBERT ABRAMS, Attorney General of the State of New York; and JAMES L. LaROCA, Commissioner of the New York State Energy Office, Defendants



The opinion of the court was delivered by: MCCURN

MEMORANDUM-DECISION AND ORDER

 NEAL P. McCURN, D.J.

 In June 1980, New York State enacted a two percent tax on the gross receipts of oil companies attributable to revenues derived from their in-state activities. New York Tax Law § 182 (McKinney Supp. 1981). In an effort to insure that the tax would be borne by the oil companies rather than by consumers, the New York Legislature included a so-called "anti-passthrough" provision which prohibited the oil companies from including the cost of the new tax in the sales price of products sold in New York State. Id., § 182(11) (a). The Act further provided that if the anti-passthrough provision were declared invalid or its enforcement enjoined by a court of competent jurisdiction, and after exhaustion of all further judicial review, the Act would self-destruct and cease to exist on the tenth day thereafter. See 1980 N.Y. Laws, ch. 272 §§ 5, 12(a), (b). Finally, the Act contained a proviso to the effect that all tax liabilities, including interest and penalties, which accrued prior to the date on which the Act ceases to exist under the self-destruct clauses, "may be enforced as fully and to the same extent as if such act had continued in effect." Id., § 12(d).

 In an earlier challenge to the new Act, *fn1" this Court held that the anti-passthrough provision amounted to a price control which conflicted with, and was preempted by the Emergency Petroleum Allocation Act (EPAA) 15 U.S.C. § 751 et seq., by virtue of the Supremacy Clause of the United States Constitution. This Court's judgment declaring invalid and enjoining enforcement of the anti-passthrough provision was entered on September 19, 1980, but the effect of the judgment has been stayed since that date by orders entered in this Court and in the appellate courts which have been asked to review our judgment. Under the terms of the Act, of course, these judicial stays effectively precluded the Act's self-destruct mechanism from taking effect and arguably permitted the oil companies' tax liabilities to continue to accrue to the same extent as if the judgment had never been entered. See 1980 N.Y. Laws ch. 271 § 12(d).

 It was this curious state of affairs that gave rise to the present lawsuit. In the Spring of 1981, the New York State Department of Taxation and Finance issued to plaintiff Scallop Corp. a Statement of Audit Adjustment and Notice of Deficiency in the amount of $7,480,988 plus interest and penalties, reflecting the Department's calculation of Scallop's accrued tax liability under the Act for the period January 1 through December 31, 1980. Scallop responded by submitting a Petition for Redetermination of the Deficiency with the New York State Tax Commission and by filing this action for a declaratory judgment that the Act is unconstitutional to the extent that it imposes tax liability during the period when oil companies were prevented from including the cost of the tax in the sale price of products sold in New York. Relying on this Court's earlier invalidation of the anti-passthrough provision, Scallop claims that New York's effort to collect the gross receipts tax for the period during which the anti-pass through provision operated as an invalid price control is equally inconsistent with, and therefore preempted by the EPAA, and void under the Supremacy Clause.

 This matter is before the Court on the defendants' motion, pursuant to Rule 12(b) (6), for an order dismissing the complaint on the ground that The Tax Injunction Act, 28 U.S.C. § 1341 deprives this Federal court of jurisdiction to entertain plaintiff's challenge to New York's Tax Act. Also before the Court is plaintiff's motion for summary judgment pursuant to Rule 56 of the Fed. R. Civ. P., for the declaratory relief described in the preceding paragraph. Because we hold that the Tax Injunction Act applies to this case and precludes us from exercising jurisdiction, we today dismiss the complaint without considering the merits of plaintiff's motion for summary judgment. We will assume familiarity not only with this Court's earlier opinion in Mobil Oil v. Tully, but also with the opinions of the appellate courts cited in footnote one.

 The complaint in this action seeks a declaratory judgment that the "New York Tax Law § 182 . . . is unconstitutional on the ground that that statute conflicts with and is preempted by the (EPAA) and regulations promulgated pursuant thereto." Complaint para. 1. The State defendants contend that because such a judgment would invalidate § 182 of the New York Tax Law and because the courts of New York provide an adequate forum for resolution of Scallop's constitutional challenge, the complaint must be dismissed under the Tax Injunction Act, 28 U.S.C. § 1341.

 The Tax Injunction Act provides:

 
"The district court shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the Courts of such State.

 28 U.S.C. § 1341. The Act, which has its roots in federal equity practice, principles of federal-state comity and "the imperative need of a State to administer its own fiscal operation," Tully v. Griffin, 429 U.S. 68, 73, 50 L. Ed. 2d 227, 97 S. Ct. 219 (1976), "prohibits a federal district court, in most circumstances, from issuing an injunction enjoining the collection of state taxes," California v. Grace Brethren Church, 457 U.S. 393, 102 S. Ct. 2498, 2508, 73 L. Ed. 2d 93 (1982). Indeed, prior to the enactment of § 1341, the Supreme Court had recognized the need for federal court restraint in state tax matters where the plaintiff's state remedies were plain, adequate and complete, and this was so even where the federal complaint raised a constitutional challenge to the state tax scheme. See e.g., Matthews v. Rodgers, 284 U.S. 521, 525-26, 76 L. Ed. 447, 52 S. Ct. 217 (1932) ("the mere illegality or unconstitutionality of a state or municipal tax is not in itself a ground for equitable relief in federal court."); First National Bank v. Board of County Commissioners, 264 U.S. 450, 68 L. Ed. 784, 44 S. Ct. 385 (1924) (Fourteenth Amendment challenge assessment of state taxes barred by parties' failure to exhaust their available state remedies); accord, Boise Artesian Water Co. v. Boise City, 213 U.S. 276, 53 L. Ed. 796, 29 S. Ct. 426 (1909). Moreover, the Supreme Court has recently reaffirmed the continuing vitality of the comity principle on which the Tax Injunction Act is patterned, by holding that this principle, standing alone, bars federal courts from granting damages under 42 U.S.C. § 1983 to redress the allegedly unconstitutional administration of a state tax system. Fair Assessment in Real Estate Ass'n v. McNary, 454 U.S. 100, 102 S. Ct. 177, 70 L. Ed. 2d 271 (1981); see also, Great Lakes Dredge & Dock Co. v. Huffman, 319 U.S. 293, 63 S. Ct. 1070, 87 L. Ed. 1407 (1943) (principle of comity bars federal courts from entering declaratory judgments as to the constitutionality of state tax laws).

 The State defendants contend, and the plaintiff does not seriously dispute that suits for declaratory judgments come within the bar imposed by the Tax Injunction Act. In any event, subsequent to the hearing on the motions before us, the Supreme Court had occasion to address this very question and held that "the Act also prohibits a district court from issuing a declaratory judgment holding state tax laws unconstitutional." California v. Grace Brethren Church, supra, 102 S. Ct. at 2508. Accordingly, we conclude that the declaratory relief sought by Scallop is barred by the Tax Injunction Act unless, as Scallop asserts, there is no "plain, speedy and efficient remedy in the courts of New York State.

 I.

 Scallop first argues that the Tax Injunction Act does not apply in this case because there is in fact no state remedy for the claim it asserts. In disputing the existence of any state court remedy, Scallop correctly notes that Congress provided for exclusive federal jurisdiction over "cases or controversies arising under (the EPAA) or under regulations or orders issued thereunder. . . ." Economic Stabilization Act of 1970, 12 U.S.C. § 1904 note, as incorporated by reference in § 5(a) of the EPAA, 15 U.S.C. § 754(a). *fn2" Scallop then characterizes its preemption challenge to section 182 of the N.Y. Tax Law as one which "arises under" the EPAA, and urges this Court to conclude that because the present action comes within the exclusive federal jurisdiction of § 211(a), it follows that there exists no state remedy within the meaning of the Tax Injunction Act. Put differently, Scallop contends that the exclusive jurisdiction provision of the EPAA amounts to an implied repeal of the Tax Injunction Act with respect to the type of preemption claims raised here. *fn3"

 The State defendants, on the other hand, argue first that § 211(a) was intended to provide exclusive jurisdiction only for the express causes of action established by Congress in sections 209 and 210 of the ESA, which were incorporated into the EPAA, neither of which encompass the type of preemption claim being ...


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