Could Texas deny its gasohol fuel tax credit to fuel blended with alcohol produced in other states?

Texas AG Opinion JM-1003: Was Texas' Gasohol Tax Credit Reciprocity Rule Constitutional?

Plain-English summary

In the 1980s Texas, like a lot of states, tried to encourage fuel blended with alcohol (gasohol) by giving distributors a tax credit. But the credit came with a catch built into Tax Code section 153.123. If the alcohol in the blend was made in another state, the distributor got the credit only if that other state returned the favor with an equivalent tax break for blends made with Texas alcohol. This is called a reciprocity rule, and it is a common way for a state to reward its own producers and pressure other states. The Comptroller asked the Attorney General whether that rule could survive after the U.S. Supreme Court, earlier in 1988, struck down an almost identical Ohio provision.

The Attorney General said it could not. The controlling case was New Energy Co. of Indiana v. Limbach, where the Supreme Court invalidated Ohio's ethanol tax-credit reciprocity provision as a violation of the Commerce Clause. The Court explained that the Commerce Clause does not just let Congress regulate interstate commerce; it also stops states from discriminating against it. That "negative" side of the clause bars economic protectionism, meaning rules designed to help in-state businesses by burdening out-of-state competitors. A statute that plainly discriminates against interstate commerce is almost always struck down unless the state can show it serves a legitimate local purpose that no reasonable nondiscriminatory alternative could achieve, and the Court said that bar is set high. Ohio could not clear it, and Texas' provision was substantively the same.

Because the Texas and Ohio provisions worked the same way, the Attorney General concluded a Texas court would reach the same result and hold section 153.123(b)(4) unconstitutional. That left one more wrinkle. Back in 1983 the legislature had added a non-severability clause, subsection (b)(5), which says that if any part of section 153.123 is held unlawful, the whole section falls. So the unconstitutional reciprocity rule did not just get carved out; it took the entire gasohol credit down with it. That is why the Attorney General did not bother answering the Comptroller's other question, about whether alcohol made in foreign countries qualified for the credit. With the whole section invalid, the point was moot. The opinion also noted that New Energy had been foreshadowed by state courts in Florida and Minnesota and already followed in Illinois.

Currency note

This opinion was issued in 1989. 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.

The Texas motor-fuels tax has been substantially rewritten since 1989. The gasoline/alcohol mixture credit in Tax Code section 153.123, including the reciprocity and non-severability provisions discussed here, was later repealed as part of the recodification of the motor-fuels tax into chapter 162 of the Tax Code. The constitutional principle the opinion applied, that a state tax credit conditioned on reciprocity discriminates against interstate commerce, remains good law under New Energy Co. of Indiana v. Limbach and the broader dormant Commerce Clause doctrine. Anyone dealing with a motor-fuels tax credit or a reciprocity-style tax incentive today should consult the current Tax Code and current Commerce Clause case law rather than the 1989 section numbers here.

Who this opinion affected (as of 1989)

Fuel distributors: The opinion signaled that the gasohol tax credit in section 153.123 could not be enforced, because its reciprocity condition was unconstitutional and the non-severability clause pulled the whole credit down with it.

The Comptroller of Public Accounts: The opinion answered the constitutional question and told the Comptroller that the reciprocity rule he had been applying could not survive a court challenge, mooting the separate question about foreign-produced alcohol.

The Texas Legislature: The opinion flagged that the credit statute, as written, was unconstitutional and would need to be revised if the state wanted to keep any gasohol incentive.

Common questions

Could Texas give a gasohol tax credit only for fuel made with Texas alcohol or alcohol from cooperating states?
No. In this opinion the Attorney General concluded that this reciprocity condition in Tax Code section 153.123(b)(4) discriminated against interstate commerce and violated the Commerce Clause, following the U.S. Supreme Court's decision in New Energy Co. of Indiana v. Limbach.

What is wrong with a reciprocity rule under the Commerce Clause?
The Commerce Clause bars economic protectionism, meaning state laws that benefit in-state businesses by burdening out-of-state competitors. Conditioning a tax credit on whether another state gives Texas producers an equivalent break is exactly that kind of protectionism.

Did only the reciprocity provision fall, or the whole credit?
The whole credit. Section 153.123 contained a non-severability clause (subsection (b)(5)) providing that if any part of the section is held unlawful, the entire section has no force and effect. So invalidating the reciprocity provision invalidated the entire section.

Why didn't the opinion answer the question about foreign-made alcohol?
Because the non-severability clause made the whole section unconstitutional, the Attorney General did not need to construe whether alcohol made in foreign countries qualified for the credit.

Background and statutory framework

Chapter 153 of the Tax Code governed state taxes on motor fuels, and subchapter B covered the gasoline tax. Section 153.123 conferred a tax credit on distributors of certain gasoline/alcohol mixtures and contained a reciprocity provision in subsection (b)(4). Subsection (a) permitted the credit for every qualifying mixture except as provided in subsection (b); subsection (b)(4) limited the credit for mixtures containing alcohol fermented or distilled in another state to cases where the comptroller certified that the other state provided an equivalent exemption, credit, or refund for mixtures using Texas alcohol, and capped the Texas credit at the amount the other state allowed.

The controlling authority was New Energy Co. of Indiana v. Limbach, 108 S. Ct. 1803 (1988), in which the U.S. Supreme Court held that an Ohio ethanol tax-credit reciprocity provision (Ohio Rev. Code Ann. § 5735.145(B) (1987)), substantively identical to section 153.123(b)(4), violated the interstate Commerce Clause. The Court explained that the Commerce Clause not only grants Congress authority to regulate interstate commerce but also directly limits the states' power to discriminate against it, and that this negative aspect prohibits economic protectionism, that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors; statutes that clearly discriminate against interstate commerce are routinely struck down unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism (New Energy, 108 S. Ct. at 1807). The Court added that a State may validate such a statute only by showing it advances a legitimate local purpose that cannot be served by reasonable nondiscriminatory alternatives, and that the standards for such justification are high (id. at 1810), relying on Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978), and Hughes v. Oklahoma, 441 U.S. 322, 337 (1979). New Energy had been anticipated (see, e.g., Miller v. Publicker Industries, Inc., 457 So. 2d 1374 (Fla. 1984); Archer Daniels Midland Co. v. State ex rel. Allen, 315 N.W.2d 597 (Minn. 1982)) and followed (Russell Stewart Oil Co. v. State, 529 N.E.2d 484 (Ill. 1988)).

The Attorney General concluded that, on the basis of New Energy, a court would hold the Texas reciprocity provision unconstitutional. A 1983 amendment had added a specific non-severability provision in subsection (b)(5), declaring that the provisions of section 153.123 are not severable and that if any portion is held unlawful or unconstitutional, the entire section has no force and effect (Acts 1983, 68th Leg., ch. 287, § 1). The opinion addressed a publisher's annotation suggesting subsection (b)(5) had been impliedly repealed by 1987 amendments: because the 1987 amendment (Senate Bill 522) amended only subdivisions (1) through (4) of subsection (b), and nothing in the legislative history showed an intent to repeal subdivision (5), the non-severability provision remained in force. Invalidating the reciprocity clause therefore invalidated the entire section, and the Attorney General did not reach the Comptroller's separate question about foreign-produced or foreign-acquired alcohol.

Citations

Statutory authority:

• Tax Code § 153.123 (tax credit for gasoline/alcohol mixtures); § 153.123(b)(4) (reciprocity provision); § 153.123(b)(5) (non-severability provision)
• Ohio Rev. Code Ann. § 5735.145(B) (1987) (Ohio ethanol credit reciprocity provision, struck down in New Energy)

Cases:

• New Energy Co. of Indiana v. Limbach, 108 S. Ct. 1803 (1988)
• Philadelphia v. New Jersey, 437 U.S. 617 (1978)
• Hughes v. Oklahoma, 441 U.S. 322 (1979)
• Miller v. Publicker Industries, Inc., 457 So. 2d 1374 (Fla. 1984)
• Archer Daniels Midland Co. v. State ex rel. Allen, 315 N.W.2d 597 (Minn. 1982)
• Russell Stewart Oil Co. v. State, 529 N.E.2d 484 (Ill. 1988)

Related opinions:

• None cited.

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-1003
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1989/jm1003.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor OCR errors may remain; the linked PDF is authoritative.

January 9, 1989

Honorable Bob Bullock
Comptroller of Public Accounts
L.B.J. State Office Bldg.
Austin, Texas 78774

Opinion No. JM-1003

Re: Whether foreign-produced or foreign-acquired alcohol qualifies for a credit claimed by a distributor on a gasoline/alcohol mixture under section 153.123 of the Tax Code and related questions (RQ-1509)

Dear Mr. Bullock:

Chapter 153 of the Tax Code governs state taxes on motor fuels; subchapter B of chapter 153 sets forth the provisions regarding the tax on gasoline. Section 153.123 of the code confers a tax credit on distributors of certain gasoline/alcohol mixtures, as defined in the section, and contains a reciprocity provision, which denies the tax credit to distributors of gasoline/alcohol mixtures containing alcohol fermented or distilled in states not conferring equivalent tax benefits to distributors whose mixtures contain Texas-produced alcohol.

First, you ask about the proper construction of section 153.123, specifically whether your long-standing construction of subsection (b) is correct, which denies the credit to distributors of gasoline/alcohol mixtures whose alcohol is fermented or distilled in foreign countries. Second, you ask whether the reciprocity provision set out in subsection (b)(4) of the section is constitutional under the rule of the recent United States Supreme Court decision, New Energy Co. of Indiana v. Limbach, Tax Comm'r of Ohio, 108 S. Ct. 1803 (1988) [hereinafter New Energy].

We conclude that a court addressing this issue would follow the rule in New Energy and would hold that the reciprocity provision set forth in subsection (b)(4) of section 153.123 violates the interstate commerce clause of the United States Constitution. Because of our answer to your second question, we need not address your first question.

Subsection (a) of section 153.123 of the Tax Code permits the granting of a tax credit to distributors of every gasoline and alcohol mixture that meets the specifications of subsection (e), except as provided in subsection (b). Subsection (b)(4) sets forth a reciprocity clause, limiting the grant of such tax credits to distributors of a mixture containing alcohol fermented or distilled "in another state" that itself provides an equivalent tax benefit for mixtures containing alcohol fermented or distilled in Texas. Subsection (b)(4) of section 153.123 of the Tax Code provides the following:

(4) Except as provided in this subdivision, no mixture that contains alcohol that was fermented or distilled in another state is eligible for a credit on its first sale or use in the state. If the comptroller certifies that another state provides an exemption from that state's taxes applicable to gasoline or a credit or refund for taxes collected or an amount in lieu of taxes collected on a mixture of gasoline and alcohol, and if the other state's exemption, credit, or refund allowance applies to a mixture that includes alcohol fermented or distilled in Texas, and if the alcohol fermented or distilled in the other state meets the specifications provided in Subdivisions (1), (2), and (3) of Subsection (e) of this section, then the specifications for the mixture for which credits shall be made shall include . . . alcohol fermented and distilled in the other state or in Texas and the other state. However, if a mixture of alcohol fermented or distilled in another state and gasoline qualifies under this subsection for a credit, the amount of the credit under this section for the mixture may not exceed the amount of the exemption, credit, or refund (stated in or converted to cents for each gallon of the mixture) provided by the state in which the alcohol was fermented or distilled. (Emphasis added.)

You ask:

Does Texas Tax Code Section 153.123(b)(4) violate the Commerce Clause of the Constitution of the United States?

We answer your question in the affirmative.

This year, in a case involving a state ethanol tax credit statute containing a reciprocity provision substantively identical to that contained in subsection 153.123(b)(4) of the Tax Code, the United States Supreme Court held that an Ohio ethanol tax credit provision violated the interstate commerce clause of the United States Constitution and was therefore unconstitutional.

In New Energy, the following reciprocity provision, which was set forth in an Ohio tax statute conferring tax benefits in certain circumstances, was challenged:

The qualified fuel otherwise eligible for the qualified fuel credit shall not contain ethanol produced outside Ohio unless the tax commissioner determines that the fuel claimed to be eligible for credit contains ethanol produced in a state that also grants an exemption, credit or refund from such state's motor vehicle fuel excise tax or sales tax for similar fuel containing ethanol produced in Ohio; provided however, that such credit shall not exceed the amount of the credit allowable for qualified fuel containing ethanol produced in Ohio.

OHIO REV. CODE ANN. § 5735.145(B) (1987).

The Court concluded that the Ohio statute violated the interstate commerce clause of the U.S. Constitution:

It has long been accepted that the Commerce Clause not only grants Congress the authority to regulate commerce among the States, but also directly limits the power of the States to discriminate against interstate commerce. This "negative" aspect of the Commerce Clause prohibits economic protectionism -- that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors. Thus, state statutes that clearly discriminate against interstate commerce are routinely struck down, unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism. (Citations omitted.)

New Energy, supra at 1807. The court concluded that there was no such valid factor in this instance:

Our cases leave open the possibility that a State may validate a statute that discriminates against interstate commerce by showing that it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives. This is perhaps just another way of saying that what may appear to be a "discriminatory" provision in the constitutionally prohibited sense -- that is, a protectionist enactment -- may on closer analysis not be so. However it be put, the standards for such justification are high.1

Id. at 1810. The United States Supreme Court decision in New Energy was both anticipated, see, e.g., Miller v. Publicker Industries, Inc., 457 So. 2d 1374 (Fla. 1984); Archer Daniels Midland Co. v. State ex rel. Allen, 315 N.W.2d 597 (Minn. 1982), and, of course, has been followed. See, e.g., Russell Stewart Oil Co. v. State of Illinois, 529 N.E.2d 484 (Ill. 1988).

We conclude that, on the basis of New Energy, a court presented with the issue would conclude that the Texas reciprocity provision of subsection (b)(4) of section 153.123 of the Tax Code unconstitutionally violates the interstate commerce clause of the United States Constitution. Because of a 1983 amendment including a specific non-severability provision which has the effect of invalidating the entire statute if any part thereof is declared unconstitutional,2 we need not address your first question.

[Footnote 1: The Court relied upon two fairly recent cases as precedent: Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978) ("[W]here simple economic protectionism is effected by state legislation, a virtually per se rule of invalidity has been erected.") and Hughes v. Oklahoma, 441 U.S. 322, 337 (1979) ("[F]acial discrimination by itself may be a fatal defect [and] [a]t a minimum . . . invokes the strictest scrutiny.")]

[Footnote 2: Subsection (b)(5) of section 153.123 declares: The provisions of Section 153.123, Tax Code, are not severable. If any portion of Section 153.123, Tax Code, is held to be unlawful or unconstitutional, the entire section shall have no force and effect. Acts 1983, 68th Leg., ch. 287, § 1, at 1425. A close reading of the statutory supplement to Volume 2 of the Tax Code published by West Publishing Company would lead one to assume that subsection (b)(5) was impliedly repealed by the 1987 amendments to the section. However, such was not the case. The specific nonseverability provision in section 153.123 was included as subdivision (5) of subsection (b) in 1983. Acts 1983, 68th Leg., ch. 287, § 1, at 1428. Subsection (b) was next amended in 1987, when Senate Bill No. 522 amended subdivisions (1) through (4) of that subsection. However, subdivision (5) was not amended; it remains unchanged from its original enactment. Acts 1987, 70th Leg., ch. 552, § 2, at 2216. If the language introducing the 1987 amendatory provisions had read: "Subsection (b), Section 153.123, Tax Code, as amended, is amended to read . . .," we would agree with the editors of West Publishing Company that the 1987 amendment to subsection (b) effectively replaced the entire subsection. Instead, the language reads: "Subdivisions (1), (2), (3), and (4), Subsection (b), Section 153.123, Tax Code, as amended, are amended to read . . . ." We have found nothing in the legislative history of the 1987 amendment indicating that the legislature intended to repeal subdivision (5) of subsection (b).]

SUMMARY

Under the rule set out in New Energy Co. of Ind. v. Limbach, 108 S. Ct. 1803 (1988), we conclude that a court would hold that the tax credit reciprocity provision set forth in subsection (b)(4) of section 153.123, Tax Code, violates the interstate commerce clause of the United States Constitution and is unconstitutional.

JIM MATTOX
Attorney General of Texas

MARY KELLER
First Assistant Attorney General

LOU MCCREARY
Executive Assistant Attorney General

JUDGE ZOLLIE STEAKLEY
Special Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Jim Moellinger
Assistant Attorney General