                      January 9, 1989




Honorable Bob Bullock       Opinion   NO.   JM-1003
Comptroller of Public
   Accounts                 Re: Whether foreign-produced or
L.B.J. State Office Bldg.   foreign-acquired alcohol guali-
Austin, Texas   78774       fies for a credit claimed by a
                            distributor    on   a   gasoline/
                            alcohol mixture under section
                            153.123 of the Tax Code and re-
                            lated 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 contain-
ing 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   construc-
tion 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 Eneroy
co. of Indiana v. Limbach. Tax Comm'r of Ohio, 108 S.Ct.
1803 (1988) [hereinafter New Enercy].

     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.



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Honorable Bob Bullock - Page 2        (JM-1003)




     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 specifica-
;$s   of subsection   (e), except as provided in subsection
    . 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 subdivi-
        sion, no mixture that contains alcohol that
        was mented      or distilled In another     state
        is eligible for a credit on its first sale or
        use in the        state.   If the     comptroller
        certifies    that mother      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 exemotion.
        credit. or refund allowance        applies to a
        mixture that includes alcohol       fermented   or
        distilled    in Texas, and if the         alcohol
              nted r dista.J.led in the other state
        meets    th:    specifications     provided
        Subdivisions (l), (2), and (3) of Subsecti%
         (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 stat or in T x
        and the other state .     However,eif a mix:uZZ
        of alcohol ferm nt d or istilled in another
        state and gas%iEe        guzlifies 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)         pro-
        vided bv the state
                         . . in which    the al ho1 was
        Permented or distilled.      (Bmphasis Ezded.)

     You ask:

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




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Honorable Bob Bullock - Page 3    (JM-10.03)




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 B&$ 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. 5 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 V~egative~~ aspect of the
        t;z;~e    Clause prohibits   economic protec-
                  -- that is, regulatory      measures
        designed to benefit in-state economic   inter-
        ests by burdening out-of-state    competitors.
        Thus, state statutes that clearly discrimin-
        ate against interstate commerce are routinely
        struck down, unless the discrimination       is
        demonstrably   justified by a valid      factor
        unrelated           economic    protectionism.
        (Citations om&ed.)


                                  -

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Honorable Bob Bullock - Page 4    (JM-1003)




New Energy suora 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 discrim-
        inates against interstate commerce by showing
        that it advances   a legitimate local purpose
        that cannot be adequately served by reason-
        able nondiscriminatory alternatives.   This is
        perhaps just another way of saying that what
        may appear to be a "discriminatoryw 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 Enerov was both anticipated,     see. e a.        er
publisher Indus.. Inc., 457, So.Zd 1374 (Fla: 1684v   Arch&
Daniels Mid1 nd Co. v. State ex rel. Al&&    315 N.W.2d  597
(Minn. 1982): and, of course, has been followed.  Se ,   a
Russell Stewart Oil Co. v. State of Illinois, 529 N.i.2: 48;
(Ill. 1988).

     We conclude that, on the basis of New Em,      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    Constitu-
tion. 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.



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

      2.   Subsection   (b)(5) of section 153.123 declares:
                                           (Footnote Continued)




                                 p. 5154
Honorable Bob Bullock - Page 5      (JM-1003)




                        SUMMARY

           Under the rule set out in pew Enerov Co.
        Qf Ind. v. L&p&&,   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.




(Footnote Continued)

           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, S 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, 5 2, at 2216.            If the     language
introducing   the 1987     amendatory provisions    had    read:
I'Subsection (b), Section 153.123, Tax Code, as amended,      is
amended to read . . .,'Iwe 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:     %ubdivisions   (l), (2), (3),
and (4), Subsection     (b), Section 153.123, Tax Code, as
amended, are amended to read . . . .'I We have found nothing
in the .legislative history of the 1987 amendment    indicating
that the legislature intended to repeal subdivision (5) of
subsection (b).




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Honorable Bob Bullock - Page 6     (JM-1003)




                                     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




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