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The 4th Circuit held this week that a federal district court has jurisdiction over a case challenging a local carbon tax, even though the Tax Injunction Act generally deprives federal courts of jurisdiction in state or local tax controversies. This case should be very helpful to companies challenging a local tax that is in the nature of a punitive regulatory fee, especially where the tax is structured to apply to a single company.
This case, GenOn Midatlantic, L.L.C. v. Montgomery County, No. 10-1882 (5th Cir. June 20, 2011), involves a Montgomery County, Maryland “tax” on carbon emissions. The county imposed a tax at the rate of $5 per ton of carbon dioxide emitted, but the tax only applies to companies that emit more than 1 million tons of carbon annually. If the 1 million ton annual threshold is reached, then the tax applies to the first ton emitted.
GenOn operates an electrical generating facility in the county. GenOn's plant is the only plant in the county that would likely reach the 1 million ton annual threshold, so the tax essentially applied to this single company. GenOn determined that this tax could not be passed on to its customers.
GenOn brought an action in federal district court to enjoin enforcement of this carbon emissions tax. The district court ruled that it did not have jurisdiction, pursuant to the Tax Injunction Act, and dismissed the case.
The Tax Injunction Act (28 USC 1341) says that the federal courts do not have jurisdiction to hear state or local tax controversies if there is a speedy and efficient remedy is offered by the state court system. However, the 4th Circuit ruled that in a case like this one, where the “tax” is a punitive regulatory fee, that only applies to a single company, that the Tax Injunction Act should not be used to make the federal courts unavailable to protect companies against local discrimination, and concluded that GenOn's challenge could be heard by the federal district court.
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