State tax incentives after Cuno.

• Author: Monroe, Tracy J.

States have become very competitive in trying to attract new businesses and keep existing ones. To entice them, many states offer tax incentives for the construction or improvement of facilities, purchase of capital equipment or employment of additional staff. In fact, over 80% of the states have some form of investment credit for new investments in property or labor. Such incentives were potentially in jeopardy as a result of an Ohio class-action suit, Charlotte Cuno v. DaimlerChrysler, Inc., 154 FSupp2d 1196 (ND OH 2001).

Background

Facts: Ohio offers several types of incentives for businesses that locate new property in the state. Its manufacturing credit allowed taxpayers a credit against its state income or franchise tax liability of 7.5%-13.5% of the cost of new manufacturing equipment additions that exceeded a base-period threshold. For new taxpayers in the state, the base-period threshold was zero; thus, the taxpayer would receive a credit for all purchases of manufacturing machinery and equipment. Additionally, a taxpayer could receive an abatement of personal property tax on equipment and inventory if it negotiated an enterprise-zone agreement with the local government. As a result of building a new facility near Toledo, DaimlerChrysler was to receive both manufacturing credits and abatements of personal property taxes.

To entice DaimlerChrysler to remain in Toledo and construct a new vehicle-assembly plant near its existing facility, the state granted it approximately $280 million in tax abatements and credits. The plaintiffs were a group of individuals who felt they were damaged by this grant. They contended that the Ohio state income tax credits and the personal property tax abatements discriminated against interstate commerce, by granting preferential treatment to instate investment and activity in violation of the Commerce Clause.

According to Complete Auto Transit v. Brady, 430 US 274, 277 (1977), a state tax violates the Commerce Clause if it:

* Lacks sufficient nexus with the state;

* Discriminates against interstate commerce;

* Is unfairly apportioned; or

* Is unrelated to services provided by the state.

District court's decision: The district court determined that neither the credits nor the abatements violated the Commence Clause, because they did not violate either of the taxation structures that have been previously rejected by the Supreme Court, and they did not discriminate against interstate commence.

The Supreme...