Can Tennessee impose a new fuel surcharge and per-mile fee on trucks but give a tax credit only to in-state motor carriers?

Subject

Opinion No. 15-21, Constitutionality of SB 354 -- Public Highway Maintenance Act of 2015, March 16, 2015

Plain-English summary

A 2015 Senate bill, SB 354, would have added two new charges on motor carriers using Tennessee roads: a 13-cent-per-gallon surcharge on diesel fuel, and a 2.85-cent-per-mile highway maintenance fee on commercial vehicles weighing more than 59,999 pounds. To soften the blow on local trucking companies, the bill let motor carriers domiciled in Tennessee use those amounts as a credit against their franchise and excise taxes paid to the state. Out-of-state motor carriers operating in Tennessee would have paid the surcharge and the fee without any credit.

The AG said this was unconstitutional in two ways. First, it violated the dormant Commerce Clause, because the credit was facially discriminatory: it gave in-state carriers a direct economic advantage over out-of-state competitors. The Supreme Court has called such schemes "virtually per se invalid" and struck them down on the same logic in Armco Inc. v. Hardesty, 467 U.S. 638 (1984), which invalidated a West Virginia gross receipts tax that exempted in-state manufacturers. Second, the credit also violated the Fourteenth Amendment's Equal Protection Clause under Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869 (1985): a state cannot tax foreign corporations at a higher rate solely because of their residence, and "promotion of domestic business" by discriminating against out-of-state competitors is not a legitimate state purpose.

Currency note

This opinion was issued in 2015. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

SB 354 would have created the Public Highway Maintenance Act of 2015. Two key features: a 13-cent surcharge on each gallon of diesel used to operate on Tennessee public highways, and a 2.85-cent-per-mile maintenance fee on heavy commercial vehicles. Tennessee-domiciled motor carriers would have offset those amounts against their franchise and excise tax liability; non-Tennessee carriers would not have received the credit. Both groups of carriers were subject to Tennessee's franchise and excise taxes when operating in the state.

The dormant Commerce Clause is the negative implication of Article I, § 8, cl. 3 (Granholm v. Heald, 544 U.S. 460 (2005); Oregon Waste Sys., 511 U.S. 93 (1994)). Facially discriminatory state laws are "virtually per se invalid" (Fulton Corp. v. Faulkner, 516 U.S. 325 (1996)). The Armco case is on all fours: a state cannot exempt in-state actors from a tax it imposes on out-of-state competitors engaged in the same activity.

The Equal Protection Clause argument tracks Metropolitan Life v. Ward and Allied Stores v. Bowers: a state may not impose a higher tax burden on out-of-state corporations purely because they are out of state, where the only purpose is to favor in-state business.

Common questions

Did SB 354 ever pass?
The AG opinion addressed the proposed bill. Whether it passed in some other form, or was abandoned, is a question of legislative history; subsequent legislation may have addressed road funding differently.

Why isn't this just a fee for using Tennessee roads?
The fuel surcharge and maintenance fee themselves are not the problem. Tennessee can charge users for road use, and similar user-fee structures exist in many states. The problem was the credit, which neutralized the charge for in-state carriers while leaving it in place for out-of-state ones. That converted a neutral user fee into discriminatory protection for local industry.

Could the bill be fixed?
In principle yes. The constitutional problem was the residency-based credit, not the underlying fees. A version of the bill with no residency-based credit, or with a credit that extends to all motor carriers paying Tennessee franchise and excise taxes regardless of domicile, would not have the same Commerce Clause defect. The AG did not offer drafting advice, just legal analysis.

Citations

Key authorities: Armco Inc. v. Hardesty, 467 U.S. 638 (1984); Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869 (1985); Granholm v. Heald, 544 U.S. 460 (2005); Oregon Waste Sys., 511 U.S. 93 (1994); Fulton Corp. v. Faulkner, 516 U.S. 325 (1996).

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2015/op15-21.pdf

Original opinion text

Constitutionality of SB 354 -- Public Highway Maintenance Act of 2015

Question 1

Does SB 354 discriminate against interstate commerce in violation of Article I, Section 8, Clause 3 of the United States Constitution, referred to as the Commerce Clause, by only providing a tax credit to certain motor carriers domiciled in this state?

Opinion 1

Yes. The credit provisions of SB 354 violate the Commerce Clause because they apply only to motor carriers domiciled in Tennessee and do not apply to motor carriers domiciled in other states.

Question 2

Does SB 354 violate any other provision of the Tennessee Constitution or the United States Constitution?

Opinion 2

Yes. The credit provisions of SB 354 violate the Equal Protection Clause of the U.S. Constitution because they effectively impose a higher tax rate on out-of-state motor carriers solely because of their domicile.

ANALYSIS

Senate Bill 354 proposes legislation that, if enacted, would be known as the Public Highway Maintenance Act of 2015. The act would require motor carriers to pay, in addition to the existing diesel fuel tax, a surcharge of 13¢ per gallon of diesel fuel used to operate on public highways within this state. The act additionally would require motor carriers to pay a highway maintenance fee of 2.85¢ per mile traveled for each commercial motor vehicle weighing in excess of 59,999 pounds. As currently drafted, SB 354 would give motor carriers domiciled in this state a credit for these surcharges and fees against their franchise and excise taxes paid to the state. Senate Bill 354 does not provide a credit to motor carriers not domiciled in Tennessee.

The Commerce Clause vests Congress with the power to regulate commerce among the several states. U.S. Const. art. I, § 8, cl. 3. The United States Supreme Court consistently "has held that, in all but the narrowest circumstances, state laws violate the Commerce Clause if they mandate 'differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.'" Granholm v. Heald, 544 U.S. 460, 472 (2005) (quoting Oregon Waste Sys., Inc. v. Department of Envtl. Quality, 511 U.S. 93, 99 (1994)). "State laws discriminating against interstate commerce on their face are 'virtually per se invalid.'" Fulton Corp. v. Faulkner, 516 U.S. 325, 331 (1996) (quoting Oregon Waste Sys., 511 U.S. at 99).

On its face, SB 354 mandates differential treatment of motor carriers domiciled in Tennessee and those domiciled elsewhere. The proposed act gives motor carriers domiciled in this state a credit against their franchise and excise taxes for the additional surcharges and maintenance fees imposed by the act. This credit is not extended to motor carriers domiciled in other states, although they also are subject to this state's franchise and excise taxes if they operate in Tennessee. As drafted, therefore, the credit provision of SB 354 violates the dormant Commerce Clause. See Armco Inc. v. Hardesty, 467 U.S. 638 (1984) (invalidating West Virginia's wholesale gross receipts tax which exempted in-state, but not out-of-state, manufacturers).

The credit provisions of SB 354 likewise violate the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution. "[T]he Equal Protection Clause forbids a State to discriminate in favor of its own residents solely by burdening 'the residents of other state members of our federation.'" Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 878 (1985) (quoting Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522, 533 (1959)). A "State may not constitutionally favor its own residents by taxing foreign corporations at a higher rate solely because of their residence." Ward, 470 U.S. at 878. The "promotion of domestic business within a State, by discriminating against foreign corporations that wish to compete by doing business there, is not a legitimate state purpose" for purposes of Equal Protection analysis. Id. at 880. Inasmuch as the credit provisions of SB 354 effectively tax out-of-state motor carriers at a higher rate solely because of their domicile, the provisions violate the federal Equal Protection Clause.

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

MARY ELLEN KNACK
Senior Counsel

Requested by:
The Honorable Jim Tracy
State Senator
2 Legislative Plaza
Nashville, Tennessee 37243