Amicus Curiae Brief — DaimlerChrysler Corp. v. Cuno

~ FILED

PS

Nos. 04-1704, io DEC 5 - 2005

CLERK

SUPREME COURT, U.S. |

IN THE

Supreme Court of the Anited States

DAIMLERCHRYSLER CORPORATION, ef ai.,

Petitioners,

Vv.

CHARLOTTE CUNO, ef al.,

Respondents.

WILLIAM W. WILKINS, ef ai.,

Petitioners,

Vv.

CHARLOTTE CUNO, ef al.,

— Respondents.

On Writs of Certiorari to the ~

United States Court of Appeals for the Sixth Circuit

BRIEF OF AMICI CURIAE ALPHAGENICS, INC.,

GREATER BALTIMORE TECHNOLOGY COUNCIL, MbDBIo,

INC., TECHNOLOGY COUNCIL OF MARYLAND, UPSTATE

VENTURE ASSOCIATION OF NEW YORK, INC., AND 20/20

GENESYSTEMS, INC. INSUPPORT OF PETITIONERS

FREDERICK A. PROVORNY

Counsel of Record

University of Maryland School of Law

500 W. Baltimore Street

Baltimore, Maryland 21201-1786

(410) 706-1190

Dated: December 5, 2005

TABLE OF CONTENTS

STATEMENT OF PARTIES SUPPORTED BY THIS

SPIE enrtanicocssicnsissncinsetiesatiiaininiesdiatenieadnenianniinitipensaitiesenaninn |

IDENTITY AND INTEREST OF AMICI CURIAE.............. ]

SUMMARY OF ARGUMENT .............ccssssesssssssesseessenseees 3

Pen eee act a0 Sean oer 6

I. Respondents Do Not Have Standing to Challenge

Ohio’s Investment Tax Credit................ccsescesserseeeeseeeseees 6

A. Respondents Have Not Suffered an Injury In Fact. ... 6

B. Respondents Are Not Within the Zone of Interests

z Protected by the Commerce Clause. .................0.0000+ 8

C. Any Redress of Respondents’ Alleged Injuries is

II uieocrncesinrsbninstetcinithaciapmninsiniinesiionant 9

II. Ohio’s Investment Tax Credit Is Compatible with the

Commerce Clause Because It Is a Non-

Discriminatory Initiative to Encourage Investment in

A. The Court of Appeals Misapplied the Decisions of

this Court in Invalidating Ohio’s Investment Tax

B. The Dormant Commerce Clause Does Not

Foreclose Ohio’s Investment Tax Credit or Any

Similar Tax Credit Legislation.....................:ccseceeees 14

Ill. Affirmance of the Decision of the Court of Appeals

Will Interfere with the Ability of States to Enhance

Their Economic Prospects, Promote Innovation, and

Encourage Investment in Their Technology Sectors. .... 15

A. Entrepreneurs and Emerging Businesses in the

Technology Sector ‘Will Suffer from the

Instability in the Capital Markets that Will Ensue

from Affirmance of the Decision Below. ................ 15

B. Invalidating Ohio’s Investment Tax Credit and

Similar Statutes in Other States Will Not Level

the Playing Field but Instead Will Siphon

Investment to Countries that Offer Such

ETE ESSLE NESE TS SEDO es CONSE OMNIS EROS PON SO 18

CE Ae eccetncsccessesensescosennsccernsesanapecaemnapsnancapemenantemnsien 22

eee

TABLE OF AUTHORITIES

Cases

Allen v. Wright,

Sy See eT ciniiainscertaisiictuhingetinsidstniniatinieiienentitsiain 6

Associated Data Processing Service Organizations v.

a, re re CPD cociecevenssmneccvensascesinenntatenoennete 6,7

Bacchus Imports v. Dias,

4GB U.S. 263 (19B4)....cccccscescreccercereressesseseseees einilies 8,12, 13

Boston Stock Exchange v. State Tax Commission,

See ccticinentecinstvniniiabiaemmnnnividintennens passim

City of Toledo v. Kim's Auto & Truck Service, Inc.,

No. L-02-1318 (Ohio Ct. App. Oct. 17, 2003) .............00 8

Complete Auto Transit v. Brady,

ited cicieerncihenenitneanitnenssmnntnanissiatibeitciniatiin 1]

Cuno v. DaimlerChrysler Corp.,

386 F.3d 738 (6th Cir. 2004) 0... ceeceeeeeees 11, 12, 14,17

DaimlerChrysler Corp. v. Cuno,

I TITTI sith chiibndcntehideienntaleniennnniatinietintianniciess 6

Day-Brite Lighting, Inc. v. Missouri,

a ITT cititneapneeennnniniocioemnenemumegpnnidtaiamaites 5

Dennis v. Higgens,

a TI cere enrtinntetlncincinieeidiniioe 8

Gibbons v. Ogden,

BS UB. BH Wet.) F CECB) cscsccsccsncccccosecessesscessncsscescnscsees 7

GMC v. Tracy,

Ns TTT nich thsicsasinnesibhciminsintanetahantiniieinbendsnaaii il

Hughes v. Alexandria Scrap Corp.,

Ss UNIT isiinsendodenistihanigmenctnsiienininliipilaatnstiaiaiin 14

Kim's Auto & Truck Service, Inc. v. City of Toledo, Ohio,

a a ceatcpansimntccnentinanciteiiiciseieantilia 8

Linda R.S. v. Richard D.,

ee ccd diessnncitncicniscaienittinnnrtapiniianntinoanedis 10

Lujan v. Defenders of Wildlife,

a TIT tasiccnieiinianicttencideemmninemuanengenentece 6, 7,9

Metropolitan Life Insurance Co. v. Ward,

3, AR RAIRREDR IS See hy oSSEAEA y aera 12

iv

Reeves, Inc. v. Stake,

SF Ce, Sa Ce cccenceccennsencesnesmnscersecinntiiainniiiiemmimandiin 5

Simon v. Eastern Kentucky Welfare Rights Organization,

SD Ee. Fe Ca re ecrsireevssinesiinsinisnenercnnntiisitatinsuniiiaiidiciiaiass 9

State ex rel. Ohio Acad. of Trial Lawyers v. Sheward,

86 Ohio St. 3d 451, 715 N.E.2d 1062 (1999)... 10

Toledo v. Kim’s Auto & Truck Serv., Inc.,

101 Ohio St. 3d 1469, 804 N.E.2d 42 (2004)... 8

Warth v. Seldin, 7

ES Be Oi Pee tcrecxcesicincerrscinnincniepnititginenniaiaiaaaiai 6

West Lynn Creamery v. Healy,

PE Se Re i iccereecinchintinicnnenenemtnnnsnntintan 9,12

Westinghouse Electric Corp. v. Tully,

GB CE, Be Cr i evetesstessincnscnnstvsennentinnntimaatabiniiittianiaa 11

Zobel v. Williams,

457 U.S. 55 (1982)........ccccccceereeees capes tnalistiaeintanesistaiadiaimaes 12

Constitutional Provisions

CE Cree. 00. F, 6 GED ecrecntcsnerinssnressciititipscnencincitnansiai 10

13 4s £ § § © | See ase 10

Statutes

OE : EAD GD, Fi cececnscscctsnicnseesapictrcniiniansenniiinpininiaiil 2

SESS IY. Cath, © cccrencenetiosecnninnsiinniniceninnneill 3

ALA. CODE § 41-23-24(a) (2000)..........:cccseseeeeesesseeseesenenees 18

ARIZ. REV. STAT. ANN. § 43-1168 (Supp. 2005) .............00 18

CONN. GEN. STAT. ANN. § 12-217e (West 2000)...........000 19

HAw. REV. STAT. ANN. § 235-110.9 (LexisNexis Supp.

SED -vsccscveessesennsiiiniiansnnsetiemmmmeniiiicuiaid iene 17

MD. Cope. ANN., TAX-GEN. § 10-725 (LexisNexis Supp.

FOP nsisccscenesescvsmsssiptiaininenttinaiiaahinaiisimmciaiaiiniddediaatiiiaiae 17, 19

ME. REV. STAT. ANN. tit. 10 § 1100-T (Supp. 2005)........... 17

Mo. ANN. STAT. § 135.400-33 (West 2000 & Supp. 2005). 19

OHIO REV. CODE ANN. § 5733.33 (West 2005) ............0 6, 22

VA. CODE ANN. § 58.1-339.4 (2004 & Supp. 2005)............. 17

VT. STAT. ANN. tit. 32, § 5930k (Supp. 2005) ..............cce00 17

W. VA. CODE § 11-13C-72 (2003) ....ccccesscssvesessueseseessesersssees 17

Other Authorities

COUNCIL ON COMPETITIVENESS: INNOVATE AMERICA,

NATIONAL INNOVATION INITIATIVE REPORT (2004) ........ 20

David V. Daubaras, Scientific Research & Experimental

Development, TAX EXECUTIVE, Nov. 1, 2004 ............... 21

Denis Lajoie, Canada's Scientific Research and

Experimental Development Program is in a State of

Continuous Improvement with a Number of Recent

Evolutions, CA MAGAZINE, Aug. 1, 2005 ........:.cccceeeeees 21

Economist Intelligence Unit, Country Commerce South

Korea 2004/2005 Main Report, COUNTRY COMMERCE,

in a Tsp irtainlseelhdeiddinhiptiemainegeieenesteseneadianantenioncrcation 21

Economist Intelligence Unit, Country Commerce Taiwan,

Incentives: Regional Incentives, COUNTRY COMMERCE,

BE At iccideniciinsicsiatiienianncensinteditzemtpumsesemcenesnessetnccees 21, 22

Jim Hopkins, Venture capital 101: Entrepreneur courses

increase, USA TODAY, Jann. 5, 2004 .........ccccccceccseseeereeeeees 4

Jitendra Uttam, Convergence of Finance, Technology and

Entrepreneurship: The Role of Liberal Financial

System in the Making of India's New Economic Growth

Regime, JOURNAL OF INTERNATIONAL AND AREA

eS a 4

John Torinus, State needs daring measures to get new

businesses up, running, JOURNAL SENTINEL

(Milwaukee), Sept. 20, 2003..........cccccccorsorserseceescsscescescess 15

Letter, dated April 28, 2005, from J. Joseph Curran, Jr.,

Maria Minniti & William D. Bygrave, Global

Entrepreneurship Monitor, National Entrepreneurship

Assessment ¢ United States of America, 2003

Emecutive Repost (2004)......cccccccorecscscesesvesscesessecsecsessessees 16

NASVF NetNews,

http://www.nasvf.org/web/netnews. nsf ................00c00ee 17

Northeastern School of Law Faculty website profile of

ee ecninestncitntienicncncscsiteserntennnsenemnesetecninnecccseneses 4

Peter D. Enrich, Saving the States from Themselves:

Commerce Clause Constraints on State Tax Incentives

for Business, 110 HARV. L. REV. 377 (1996)..........cccc0eee00e 7

PHIL PSILOS, ET AL., A GOVERNOR'S GUIDE TO

STRENGTHENING STATE ENTREPRENEURSHIP POLICY

Scotiabank - Investment Tax Credit Loan, at

http://www.scotiabank.com/cda/contenv/0, ! 608,CID36

Oe atitcicnrencccsnisennineceanietnemeniipmmnteemace 18

Tom Still, Investment tax credit bill is a good start, but

Wisconsin must confront other barriers to capital

BO 8 Ce 16

William D. Bygrave & Stephen A. Hunt, GEM Financing

eee 16

Record

IE, Fiitennncccinittanterensneaptnieenensintinitenmnnepinmenen 7

IIE Be venevesevenittincintnnnicesedspeanasescsninmensannmenicsenstintinmnantin 7

Nos. 04-1704, 04-1724

IN THE

Supreme Court of the United States

DAIMLERCHRYSLER CORPORATION, ef al.,

Petitioners,

Vv

CHARLOTTE CUNO, ef ai.,

Respondents.

WILLIAM W. WILKINS, ef ai.,

Petitioners,

Vv

CHARLOTTE CUNO, ef al.,

Respondents.

On Writs of Certiorari to the

United States Court of Appeals for the Sixth Circuit

BRIEF OF AMICI CURIAE A.PHAGENICS, INC.,

GREATER BALTIMORE TECHNOLOGY COUNCIL, MpBio,

INC., TECHNOLOGY COUNCIL OF MARYLAND, UPSTATE

VENTURE ASSOCIATION OF NEW YORK, INC., AND 20/20

GENESYSTEMS, INC. IN SUPPORT OF PETITIONERS

STATEMENT OF PARTIES SUPPORTED BY THIS

BRIEF

This Brief amicus curiae is filed in support of the

Petitioners.’ The opinion of the United States Court of

Appeals for the Sixth Circuit (the “Court of Appeals”) is

reported at 386 F.3d 738 (6th Cir. 2004). Petitioners

DaimlerChrysler Corporation and Wilkins, et al., have

consented to the filing of this Brief pursuant to letters of

Consent to the Filing of Amicus Briefs in Support of Either

Party lodged with the Clerk on October 24, 2005.

Respondents have consented to the filing of this Brief

pursuant to a letter of consent on file with the Clerk.

IDENTITY AND INTEREST OF AMICI CURIAE

The amici include associations of companies and

other interested groups engaged in _ bioscience-based

businesses and high technology and those comprised of

potential investors in such enterprises. The membership of

the Technology Council of Maryland and the Greater

Baltimore Technology Council includes not only publicly

traded multinational companies but also companies in

technology incubators engaged in cutting-edge innovation in

fields such as biotechnology, information technology,

software, nanotechnology, and advanced materials. The

mission of the nonprofit MdBio, Inc. is to unify, empower

and advance Maryland’s bioscience industry, promoting

' In accordance with rule 37.6, Counsel for the amici states that no

counsel for any party has authored this brief in whole or in part, and no

person or entity, other than the amicus, has made a monetary contribution

to the preparation of this brief. University of Maryland School of Law

students David Blazina, Aimée Drouin, Oliver Edwards, Kristine

Grigorian, Joanne Hawana, Phillip Heller, James Knight, Winston

Martindale, Enyinnaya Obi, Kelley Walsh, and Yue Zhu, student

attorneys at the Maryland Intellectual Property Legal Resource Center,

assisted in the preparation of this Brief.

corporate and economic development. AlphaGenics, Inc. and

20/20 Genesystems, Inc. are two emerging technology .-

companies located at the Maryland Technology Development

Center in Rockville, Maryland.

Maryland enacted the Biotechnology Investment

Incentive Act in 2005. This Act provides limited income tax

credits to investors in Maryland biotechnology companies.

2005 Md. Laws ch. 99. On April 28, 2005, the Attorney

General of Maryland wrote to the Governor stating that the

then-proposed legislation might violate the Commerce

Clause.’ Although the letter asserted that the decision of the

Court of Appeals in this action was “not relevant to the issues

raised by House Bill 664” as it then existed,’ it also declared,

“The Cuno case is the most far-reaching . . . in that it reaches

tax credits available to out-of-state companies based on

activities and job creation in the State... .”* The Attorney

General’s letter raises the distinct possibility that the decision

of the Court of Appeals could result in invalidating the

Maryland statute even if the Legislature addressed the issues

the letter identified. This prospect has had an unsettling

effect on the investment climate for early-stage

biotechnology companies in Maryland.

Fledgling biotechnology companies experience

enormous cash “burn rates” and encounter lengthy delays to

commercialization because of the need to obtain patent

protection and regulatory approvals. The decision of the

Court of Appeals has cast a substantial cloud over the tax

incentives that Maryland and most other states use to enhance

their economic futures and promote innovation by nurturing

their home-grown emerging technology companies and

? Letter, dated April 28, 2005, from J. Joseph Curran, Jr., Attorney

General of Maryland, to Governor Robert L. Ehrlich (attached as

Exhibit).

? Jd. at 3, note 3.

* Id.

reducing the risk to potential investors. There is a substantial

probability that the uncertainty engendered by the decision

below will exacerbate the already difficult task of emerging

yet fragile enterprises such as AlphaGenics and 20/20 to raise

capital from the private equity markets. :

The Upstate Venture Association of New York, Inc.

(“UVANY”) is a group whose membership includes venture

capital firms, private equity investors and financial

institutions from New York and other states interested in

promoting deal flow and investment in technology companies

across New York. UVANY has member firms that have

already invested or are considering investing in such

companies.

In 2005, New York enacted a refundable research and

development tax credit. 2005 N.Y. Laws ch. 61.. UVANY is

concerned that affirmance of the decision of the Court of

Appeals will put the New York development tax credit and

other tax measures designed to assist early-stage technology

companies in New York at serious risk.

SUMMARY OF ARGUMENT

Innovation is expensive, and funding is its life-blood.

Without resources to allow emerging technology companies

to press forward with the development of new products and

services to meet important societal needs, entrepreneurship

and the engine for job creation it represents would be dealt a

severe blow. Maintaining the lead that the United States

currently enjoys in technology innovation against growing

foreign competition is an important national priority. Many

states, including Maryland and New York, have staked their

economic futures and invested vast sums in achieving and

maintaining leadership in this increasingly vital sector of the

economy. Entrepreneurship has become an important

component of business, engineering, and other academic

programs,’ and venture capital and angel investing can now

be found in many developed and developing countries.°

Against this backdrop of increasing interest in and

support for technology commercialization, and the emerging

companies at the forefront of these efforts, Respondents’ suit

represents a frontal assault on all state tax credit mechanisms

used for economic development purposes. In the words of

one of the architects of this action, it represents

“pathbreaking litigation to combat corporate welfare.”

However, in attacking a non-discriminatory economic

development program used by the vast majority of states, this

“pathbreaking litigation” suffers from two fatal flaws.

As an initial proposition, but one that disposes of this

action completely, Respondents, with their attenuated

interests and hypothetical and speculative injuries and

unlikelihood of obtaining redress by a favorable decision,

lack standing under Article III to avail themselves of the

judicial power of the United States to challenge the Ohio

statute.

Secondly, even if this Court were to find that any of

the Respondents has standing, Respondents ask this Court to

stray from its traditional case-by-case analysis of dormant

Commerce Clause cases in at least two ways: First, the

* See, e.g., Jim Hopkins, Venture capital 101: Entrepreneur courses

increase, USA TODAY, Jan. 5, 2004 (Ewing Marion Kauffman

Foundation recently awarded $25 million to eight U.S. universities

pledging to spread entrepreneurship education beyond business

classrooms), at 1B, available at 2004 WLNR 6209380.

® See, e.g., Jitendra Uttam, Convergence of Finance, Technology and

Entrepreneurship: The Role of Liberal Financial System in the Making of

India's New Economic Growth Regime, JOURNAL OF INTERNATIONAL AND

AREA STUDIES, § 6 (June 1, 2005), available at 200S WLNR 14739829.

” Northeastern School of Law Faculty website profile of Peter D. Enrich

at http://www.slaw.neu.edu/faculty/f_enrich.htm, iast viewed Nov. 23,

2005.

Respondents are asking this Court to act as a super-

legislature to judge the wisdom of state tax credits as

economic development incentives. Although this subject is

open to debate, this Court has stated repeatedly that the state

Legislatures are the proper forums to make such decisions.

See, e.g., Day-Brite Lighting, Inc. v. Missouri, 342 U.S. 421,

423 (1952) (concluding “{o]Jur recent decisions make plain

that we do not sit as a super-legislature to weigh the wisdom

of legislation nor to decide whether the policy which it

expresses offends the public welfare.”). Indeed, the rationale

behind this action runs counter to the notion this Court has

expressed numerous times that the states are laboratories and

should be given wide latitude to fashion innovative programs

that meet their particular needs. See, e.g., Reeves, Inc. v.

Stake, 447 U.S. 429, 441 (1980) (holding “[i]t is one of the

happy incidents of the federal system that a single

courageous State may, if its citizens choose, serve as a

laboratory, and try novel social and economic experiments

without risk to the rest of the country.”).

Notwithstanding these fatal defects in Respondents’

strategy, the mere fact that they have brought this suit

inevitably raises serious questions about the legal status of

state tax credit programs and coniributes to an environment

of uncertainty among entrepreneurs and investors alike. To

the extent that this atmosphere increases the risk of failure to

fragile emerging companies, innovation will suffer.

The interests of the members of amici associations

that are large companies have been expressed persuasively in

the Briefs for Petitioners and in other amicus Briefs. This

Brief, therefore, will concentrate on the unique

considerations of the emerging technology community.

Nevertheless, all members of the amici associations benefit

from the presence in their states of vibrant, well-funded

emerging technology companies.

ARGUMENT

I, Respondents Do Not Have Standing to

Challenge Ohio’s Investment Tax Credit.

This Court, sua sponte, directed the parties to brief

and argue, “Whether respondents have standing to challenge

Ohio’s investment tax credit, OHIO REV. CODE ANN. §

5733.33.” DaimlerChrysler Corp. v. Cuno, 126 S. Ct. 36

(2005). Thus, this Court has made standing a critical

threshold question in deciding this action.

Under Article III, standing emanates from the “case

or controversy” requirement and the separation of powers.

Allen v. Wright, 468 U.S. 737, 750 (1984) (quoting Warth v.

Seldin, 422 U.S. 490, 498 (1975)). The federal courts may

exercise power “only when adjudication is ‘consistent with a

system of separated powers and [the dispute is one]

traditionally thought to be capable of resolution through the

judicial process.’” Allen, 468 U.S. at 752 (alteration in

original); see Lujan v. Defenders of Wildlife, 504 U.S. 555,

559-60 (1992). To establish standing under Article III,

Respondents must demonstrate that they have suffered an

injury in fact, that they are within the zone of interests

protected by the Commerce Clause, and that it is likely that a

favorable decision will provide redress to Respondents.

Respondents fail under all three prongs. Associated Data

Processing Serv. Orgs. v. Camp, 397 U.S. 150, 154 (1970);

Lujan, 504 U.S. at 561.

A. Respondents Have Not Suffered an Injury

In Fact.

First, each of the Respondents must show that he or

she has suffered an “injury in fact, economic or otherwise,”

caused by the Ohio investment tax credit that would

constitute an invasion of a “concrete and particularized”

legally protected interest. Associated Data Processing, 397

U.S. at 152; Lujan, 504 U.S. at 560. Respondents claim

injury as taxpayers because the Ohio investment tax credit

has purportedly led (or will lead) to a reduction in funding for

the City of Toledo and the local school systems. Compl. {

22. However, the Commerce Clause does not eclipse ‘the

reserved power of the states to tax for the support of their

own governments and to deploy resources within the states as

their legislatures deem necessary. Gibbons v. Ogden, 22 U.S.

(9 Wheat.) 1, 42 (1824). Respondents merely contend that

they are injured by the investment tax credit, but in vague,

hypothetical, and generalized ways. Their Complaint does

not allege any particularized injury necessary to establish a

basis for standing.®

Significantly, Peter Enrich, who briefed and argued

the case on behalf of the Respondents in the Court of

Appeals, has conceded that taxpayers bringing these types of

claims against state tax incentives would have only an

“attenuated” interest in the outcome of such litigation. Peter

D. Enrich, Saving the States from Themselves: Commerce

Clause Constraints on State Tax Incentives for Business, 110

HARV. L. REV. 377, 413 (1996). (“Whereas a business

plaintiff can claim a direct and particularized interest in the

outcome . . . the citizen/taxpayer plaintiff's interest is more

attenuated.”)’

* The Michigan Respondents claim injury in fact because of some

possibility that absent the Ohio investment tax credit, OHIO REV. CODE

ANN. § 5733.33, the Petitioner might have located its factory in

Michigan. Compl. § 42. Michigan Respondents have no nexus with

Ohio. The Michigan Respondents’ alleged injury is entirely speculative

and even less particularized than the injury alleged by the Ohio

Respondents.

* Respondent Kim’s Auto and Truck Service, Inc. claims injury in fact by

alleging that without Ohio’s investment tax credit, the Petitioner would

not have expanded its Toledo plant. Compl. 4 41. This Respondent’s

business was displaced because of the expansion. However, a jury

awarded Kim’s $104,000 as compensation in Kim’s takings case against

B. Respondents Are Not Within the Zone of

Interests Protected by the Commerce

Clause.

Even assuming arguendo that Respondents had

sustained an injury in fact, the second prong of the standing

standard rests on whether the investment tax credit

“provision [was] intended to benefit the putative plaintiff.”

Dennis v. Higgens, 498 U.S. 439, 449 (1991). Respondents

allege that the Ohio investment tax credit violates the

dormant Commerce Clause. However, the “very purpose of

the Commerce Clause was to create an area of free trade

among the several States.” Boston Stock Exch. v. State Tax

Comm'n, 429 U.S. 318, 328 (1977). “The [Commerce]

Clause was intended to benefit those who . . . are engaged in

interstate commerce.” Dennis, 498 U.S. at 449. Respondents

do not allege that they are engaged in interstate commerce.

The Commerce Clause does not permit states to enact taxes

that “discriminate[] against interstate commerce . . . by

providing a direct commercial advantage to local business.”

Bacchus Imps. v. Dias, 468 U.S. 263, 268 (1984) (ellipsis in

original) (quoting Boston Stock Exch., 429 U.S. at 329). “For

over 150 years, our cases have rightly concluded that the

imposition of a differential burden on any part of the stream

of commerce — from wholesaler to retailer to consumer — is

invalid, because a burden placed at any point will result in a

the City of Toledo. City of Toledo v. Kim’s Auto & Truck Service, Inc.,

No. L-02-1318, 2003 WL 22390102 (Ohio Ct. App. Oct. 17, 2003).

Kim’s appealed to the Ohio Court of Appeals, which rejected Kim’s

“public use” argument and affirmed the jury award. /d The Supreme

Court of Ohio and then this Court denied further review. Toledo v. Kim's

Auto & Truck Serv., Inc., 101 Ohio St. 3d 1469, 804 N.E.2d 42 (2004);

Kim's Auto & Truck Service, Inc. v. City of Toledo, Ohio, \25 S. Ct. 2988

(2005). Kim’s has fully litigated its takings case and has thus obtained

complete relief for any injury. Even if this Court were to grant the relief

the Respondents seek, Kim's business would not be restored to its

previous location and status.

disadvantage to the out-of-state producer.” West Lynn

Creamery, Inc. v. Healy, 512 U.S. 186, 202 (1994).

Unlike Respondents, the plaintiffs who challenged the

New York stock transfer tax in Boston Stock Exchange had

“assert[ed] their right under the Commerce Clause to engage

in interstate commerce free of discriminatory taxes on their

business and they alleg[ed] that the transfer tax indirectly

infringes on that right.” Boston Stock Exch., 429 U.S. at 321.

The stock transfer tax was within the “zone of interests”

protected by the Commerce Clause because the differential

cost of the tax depended on the geographic location of the

stock exchange as well as the location of the owner of the

stock. Jd. The Ohio investment tax credit is available and

equally applied to both in-state and out-of-state businesses.

Because Respondents have no connection with the stream of

commerce, they do not fall within the zone of interests

protected by the Commerce Clause.

C. Any Redress of Respondents’ Alleged

Injuries is Purely Speculative.

Finally, to establish standing under Article III,

Respondents must demonstrate that their injury will “likely

be redressed by a favorable decision.” Simon v. Eastern Ky.

Welfare Rights Org., 426 U.S. 26, 38 (1976). Even if this

_ Court were to affirm the decision of the Court of Appeals,

there is no assurance that the allegedly adverse consequences

emanating from the tax credit would be _ remedied.

Respondents have suffered no injury in fact, do not fall

within the zone of interest protected by the Commerce

Clause, and any chance of redressability appears speculative

at best.

At a constitutional minimum, Respondents need to

establish all three elements of standing before the merits are

reached. Lujan, 504 U.S. at 560. In fact they are able to meet

10

none of them. Because standing in the constitutional sense is

an essential prerequisite for the exercise of federal judicial

power under Article III, the absence of standing by the

Respondents is sufficient in itself for this Court to reverse the

judgment of the Court of Appeals and direct that this action

be dismissed.'° Linda R.S. v. Richard D., 410 U.S. 614, 616

(1973).

II. Ohio’s Investment Tax Credit Is Compatible

with the Commerce Clause Because It Is a

Non-Discriminatory Initiative to Encourage

Investment in the State.

If this Court determines that any of the Respondents

has standing to challenge the Ohio investment tax credit, this

Court will address the merits of the decision of the Court of

Appeals that held that the tax credit violates the dormant

Commerce Clause. For the reasons that follow, that decision

is wrong and should be reversed.

A. The Court of Appeals Misapplied the

Decisions of this Court in Invalidating

Ohio’s Investment Tax Credit.

The Constitution grants Congress the exclusive right

to regulate interstate and foreign commerce. U.S. CONST. art.

I, § 8, cl. 3. This Court has interpreted the negative or

“dormant” portion of the Commerce Clause to limit a state’s

"© Ohio’s standards for conferring standing follow those that this Court

has enunciated for the federal courts. See, e.g., State ex rel. Ohio Acad. of

Trial Lawyers v. Sheward, 86 Ohio St. 3d 451, 469-70, 715 N.E.2d 1062,

1081 (1999), (“In order to have standing to attack the constitutionality of

a legislative enactment, the private litigant must generally show that he or

she has suffered or is threatened with direct and concrete injury in a

manner or degree different from that suffered by the public in general,

that the law in question has caused the injury, and that the relief requested

will redress the injury.”). It is thus apparent that Respondents lacked

standing to bring this suit in the Ohio courts, as they had done originally.

1]

ability to regulate interstate commerce. A state tax is allowed

only when the “tax is applied to an activity with a substantial

nexus with the taxing State, is fairly apportioned, does not

discriminate against interstate commerce, and is fairly related

to the services provided by the State.” Complete Auto

Transit v. Brady, 430 U.S. 274, 279 (1977). Although the

dormant Commerce Clause does not prohibit a state from

regulating business within the state, it does restrict a state

from engaging in economic protectionism such as unfair

taxation of out-of-state transactions.

This Court has repeated consistently that the

Commerce Clause constrains a state from regulating

commerce in a way that creates barriers to commerce outside

the state. See, e.g., GMC v. Tracy, 519 U.S. 278, 287 (1997).

Yet this Court has also been careful not to tie the hands of

states in exercising their taxing powers to promote in-state

economic development or to provide special incentives to

investment in disadvantaged areas or to targeted sectors of

the economy. “We have acknowledged that the delicate

balancing of the national interest in free and open trade and a

State's interest in exercising its taxing powers requires a case-

by-case analysis and that such analysis has left ‘much room

for controversy and confusion and little in the way of precise

guides to the States in the exercise of their indispensable

power of taxation.””. Westinghouse Elec. Corp. v. Tully, 466

U.S. 388, 403 (1984) (quoting Boston Stock Exch., 429 U.S.

at 329).

The absence of a precise guide and the adoption by

this Court of a careful case-by-case analysis is manifest in the

cases the Court of Appeals has cited in its opinion. See Cuno

v. DaimlerChrysler Corp., 386 F.3d 738, 744-45 (6th Cir.

2004). The Court of Appeals relied heavily on Boston Stock

Exchange, in which this Court declared that a New York

statute that imposed a greater tax liability on out-of-state

stock transactions violated the Commerce Clause. While

12

holding that the New York statute unduly burdened interstate

commerce, this Court was careful to state, “[ojur decision

today does not prevent the States from structuring their tax

systems to encourage the growth and development of

intrastate commerce and industry.” 429 U.S. at 336. This

Court emphasized that a state tax credit must be

nondiscriminatory by stating, “[w]Je hold only that in the

process of competition no State may discriminatorily tax the

products manufactured or the business operations performed

in any other State.” /d. at 337.

Indeed, this Court has been careful not to limit a state

in assisting the growth of in-state industry and commerce.

Lower tax rates have been specifically mentioned as

permitted incentives: “it is undisputed that States may try to

attract business by creating an environment conducive to

economic activity, as by maintaining good roads, sound

public education, or low taxes.” West Lynn Creamery, Inc. v.

Healy, 512 U.S. 186, 199 (1994); see also Zobel v. Williams,

457 U.S. 55, 67-68 (1982) (Brennan, J., concurring) (“a

State may make residence within its boundaries more

attractive by offering direct benefits to its citizens in the form

of public services, lower taxes than other States offer, or

direct distributions of its munificence.”); id. at 72, note 1

(O’Connor, J., concurring) (“a State might enact a tax credit

for citizens who contribute to the State's ecology by building

alternative fuel sources or establishing recycling plants.”);

Bacchus Imps., 468 U.S. at 271 (“[nJo one disputes that a

State may enact laws pursuant to its police powers that have

the purpose and effect of encouraging domestic industry.”);

Metro. Life Ins. Co. v. Ward, 470 U.S. 869, 878 (1985) (per

curiam) (restating that promotion of local industry is a

legitimate state interest in the Commerce Clause).

Nevertheless, the Court of Appeals failed to address this

point, focusing instead only on the permissibility of direct

subsidies to businesses. Cuno, 386 F.3d at 746.

13

The purpose of the Commerce Clause is not to limit a

state’s ability to effect policies to promote industry and

economic growth within the state, but rather to limit a state’s

ability to affect interstate commerce by discriminatory

taxation. The language and concept of burdened and

benefited parties is derived from Bacchus Imps., 468 U.S. at

273. The Court of Appeals quoted from Bacchus Imports in

support of its decision: “The determination of

constitutionality does not depend upon whether one focuses

upon the benefited or the burdened party.” /d at 273.

However, this quotation by the Court of Appeals omitted the

next sentence—one which provides a limit to that

determination of constitutionality: “A discrimination claim,

by its nature, requires a comparison of the two

classifications.” /d at 273. A comparison allows

investigation into one of the factors articulated in Complete

Auto Transit, the discriminatory effect on _ interstate

commerce of a tax statute.

Unlike the New York stock transfer tax in Boston

Stock Exchange, which unduly burdened out-of-state

transactions, the Ohio investment tax credit benefits all

transactions taking place within Ohio. The Court of Appeals

did not compare the benefited and burdened parties. Rather,

it simply reached a categorical conclusion that tax credits

involve regulation of interstate commerce, and thus violate

the dormant Commerce Clause. This comparison, which the

Court of Appeals failed to make, is crucial for emerging

technology companies because they are legitimate

beneficiaries of direct or indirect in-state economic

development incentives to promote their growth and

prosperity and to create jobs.

14

B. The Dormant Commerce Clause Does Not

Foreclose Ohio’s Investment Tax Credit or

Any Similar Tax Credit Legislation.

Boston Stock Exchange does not contemplate a

prohibition on tax incentives as broad as the Court of

Appeals adopted. Boston Stock Exchange explicitly states

that the decision should not be interpreted to invalidate state

tax incentives encouraging intrastate economic development.

See 429 U.S. at 336.

The key distinction between the tax strategies

invalidated in Boston Stock Exchange, Bacchus, and

Westinghouse and that employed by Ohio is the presence of

burdens on out-of-state business and activities in the cited

cases, and the absence of such burdens in this action. The

Court of Appeals stated that Ohio’s. investment tax credit

burdened interstate commerce by “coercing” companies to

remain in Ohio. See Cuno, 386 F.3d at 746, note 1.

However, the Court of Appeals did not—and could not—

substantiate any burdensome effect because “coercion”

cannot be found: the investment tax credit operates only

prospectively. Indeed, Justice Stevens has written, “[nJor, in

my judgment, does [the Commerce] Clause inhibit a State's

power to experiment with different methods of encouraging

local industry. Whether the encouragement takes the form of

a cash subsidy, a tax credit, or a special privilege intended to

attract investment capital, it should not be characterized as a

‘burden’ on commerce.” Hughes v. Alexandria Scrap Corp.,

426 U.S. 794, 816 (1976) (Stevens, J., concurring). The

investment tax credit is a method that Ohio has adopted to

promote economic development and to encourage investment

and job creation in economically disadvantaged areas such as

Toledo. It does not burden out-of-state business.

i:

lil. Affirmance of the Decision of the Court of

Appeals Will Interfere with the Ability of

States to Enhance Their Economic Prospects,

Promote Innovation, and Encourage

Investment in Their Technology Sectors.

A. Entrepreneurs and Emerging Businesses in

the Technology Sector Will Suffer from the

Instability in the Capital Markets that Will

Ensue from Affirmance of the Decision

Below.

Start-up and early-stage companies are engines of

growth and provide great potential for local and regional

economies. Nearly 70 percent of economic growth is

attributed to such companies, and they are responsible for

creating two-third of all new jobs.’

Although start-up and early-stage companies are

critical for economic growth, they encounter substantial

difficulty obtaining funding. Good business ideas often are

unfulfilled because the entrepreneur cannot increase the

initial $5,000 to $500,000.'2 Early funding usually comes

from family and friends and is usually insufficient to keep the

business running until additional sources can be identified

and convinced to invest.

In contrast, the source of funding least available to

start-up and early-stage companies is institutional venture

capital. Institutional investors typically do not invest in such

companies, generally because it is no: financially feasible to

'! PHIL PSILOS, ET AL., A GOVERNOR'S GUIDE TO STRENGTHENING STATE

ENTREPRENEURSHIP POLICY 4, 6 (2004), available at http://preview nga.

org/Files/pdf/0402GOVGUIDEENTREPRENEUR. pdf.

'2 John Torinus, State needs daring measures to get new businesses up,

running, JOURNAL SENTINEL (Milwaukee), Sept. 20, 2003, at P03,

available at http://www jsonline.com/bym/news/sep03/171158.asp.

16

make investments of the size these companies require.'? For

example, the University of Wisconsin Foundation has more

than $1 billion in assets under management but does not

invest directly in companies."

In 2003, the total institutional investment in

entrepreneurial ventures totaled $18.2 billion, but only $304

million of that went to seed and start-up stage companies.»

Fewer than one in every ten thousand start-up co ies

received its initial financing from venture capital firms.'°

Angel investors play an important role in funding

companies in phases between individual and institutional

investment.'’ Angel investors, individuals having substantial

personal assets and a desire to invest in local start-up

_ businesses, are increasingly recognized as a , Titical

component to a state’s entrepreneurial community '* More

than 300,000 angel investors were estimated to have invested

approximately $30 billion in 2002 in over 50, 000 deals, far

outpacing the institutional venture capital market.'®

For early-stage companies, location decisions are

based on factors such as family considerations, access to

faculty, facilities, and other resources of affiliated research

'3 Tom Still! Investment tax credit bill is a good start, but Wisconsin must

confront other barriers to capital formation (Apr. 21, 2004), at http://

wistechnology. .com/article.php?id=77 1.

Id.

'S Maria Minniti & William D. Bygrave, Global Entrepreneurship

Monitor, Nationa] Entrepreneurship Assessment * United States of

America, 2003 Executive Report 7 (2004), available at http://www.

gemconsortium. .org/download.asp?fid=355.

* William D. Bygrave & Stephen A. Hunt, GEM Financing Report 2004

20 (2005), available at http://www.gemconsortium.org/download.asp?

fid=365.

'” PSILOS, supra note 11, at 27.

18 Id

19 Id

17

institutions, suitable and affordable space, availability of

skilled managers and workers, and eligibility for business

assistance and economic development incentives. Even a

cursory review of the weekly electronic newsletter of the

National Association of Seed and Venture Funds” reveals

that nowhere is the variety of economic development models

and the importance of states’ ability to experiment with

different incentives to attract individual and institutional

investment more evident than in the emerging technology

sector.

The types of tax credits that are most beneficial to

emerging technology companies are those that are

refundable, those that -can be carried forward to periods in

which the company can reasonably expect to offset them

against taxable income, or those that provide an indirect

benefit by reducing the risk to potential investors and thus

facilitating the ability to obtain funding. In that sense, such

tax credits, as well as the Ohio investment tax credit, are the

functional equivalents of subsidies. Even the Court of

Appeals acknowledged that subsidies are consistent with the

Commerce Clause. Cuno, 386 F.3d at 742.

An increasing number of states, including Maryland,

offer tax credits to angel and institutional investors. See, e.g.,

Mp. CODE ANN., TAX-GEN. § 10-725 (LexisNexis Supp.

2005). Virginia, Maine, Vermont and West Virginia offer

credits of up to 50 percent of investments subject to certain

limitation. VA. CODE ANN. § 58.1-339.4 (2004 & Supp.

2005), ME. REV. STAT. ANN. tit. 10 § 1100-T (Supp. 2005),

VT. STAT. ANN. tit. 32, § 5930k (Supp. 2005), W. Va. Cope

§ 11-13C-7a (2003). Hawaii offers to qualifying high-

technology businesses a tax credit which can cumulate over

five years to 100 percent of an investment. HAW. REV. STAT.

ANN. § 235-110.9 (LexisNexis Supp. 2005).

0 NASVF NetNews, at http://www.nasvf.org/web/netnews.nsf.

18

Tax credits can confer benefits to emerging

technology companies in addition to encouraging angel and

institutional investment. Refundable investment and R&D

tax credits such as those enacted by New York in 2005, may

assist start-up and early-stage companies in obtaining bank

loans. For example, Canadian banks are willing to lend to

start-up companies using their refundable investment tax

credit as collateral.”' Such loans can be made for up to 75

percent of the federal refundable investment tax credit.”

State tax investment incentives are thus crucial in

helping local start-up and early-stage businesses, and play an

important role in creating future economic growth and new

jobs. In addition, because start-up companies are important

sources of new ideas and technologies, state tax investment

incentives such as Ohio’s investment tax credit promote

innovation. This is critical for the future of not only Ohio but

of the United States as a whole.

B. Invalidating Ohio’s Investment Tax Credit

and Similar Statutes in Other States Will

Not Level the Playing Field but Instead

Will Siphon Investment to Countries that

Offer Such Incentives.

Like Ohio’s tax incentive, most state tax credit

incentives restrict the tax credit to the in-state activities.

Alabama, for example, provides an income tax credit for new

investment in Alabama, ALA. CODE § 41-23-24(a) (2000);

Arizona provides an income tax credit for taxpayers who

increase in-state research activities, ARIZ. REV. STAT. ANN. §

43-1168 (Supp. 2005); Connecticut provides an income tax

credit for investing in certain new manufacturing facilities in

*" Scotiabank - Investment Tax Credit Loan, at http://www.scotiabank.

com/cda/contenv/0, 1608,CID361_LIDen,00.htm! (last visited Nov. 29,

2005).

2 Id.

19

Connecticut, CONN. GEN. STAT. ANN. § 12-217e (West

2000); Missouri provides an income tax credit for investing

in small business in Missouri, MO. ANN. STAT. § 135.400-33

(West 2000 & Supp. 2005); and Maryland provides an

income tax credit for investing in biotechnology companies,

MD. CODE. ANN., TAX-GEN. § 10-725 (2005).

As already discussed, the decision of the Court of

Appeals will result in the unintended consequence of

impeding innovation among early-stage companies and

impacting on entrepreneurship. Moreover, it will influence

the location of facilities and operations by those technology

companies that achieve profitability. Many nations and their

political subdivisions already offer tax credits that are more

attractive than the Ohio investment tax incentive struck down

by the Court of Appeals. Such countries are already

attracting American companies because of these incentives.

This Court should consider the effects of restricting state tax

credit incentives on the future competitiveness of the United

States.

The United States now faces robust competitive

challenges from China, Canada, India, Ireland, Taiwan,

South Korea, Singapore, and other countries. These

countries see their futures tied directly to becoming

powerhouses in technology and innovation, primarily at the

expense of the United States. Therefore, states must be

permitted to develop programs with a keen awareness of the

efforts being made by other countries to compete for

technology, facilities, and jobs. The Council on

Competitiveness examined foreign incentive packages as part

of the National Innovation Initiative (“NII”). The NII called

upon “(mJore than 400 leaders and scholars from universities,

corporations, professional societies, industry associations,

20

and government.””> The NII’s final report, “Innovate

America,” states that “America’s [collective] challenge is to

unleash its innovation capacity.... At a time when macro-

economic forces and financial constraints make innovation-

driven growth a more urgent imperative than ever before.””*

The NII outlined the “unprecedented acceleration of global

change . . . fierce competition from countries that seek an

innovation-driven future for themselves.””> One of the

necessary solutions the NII proposed is that the Government

should increase the availability of early-stage risk capital

with tax incentives, expanded angel networks, and state and

private seed capital funds.”

The NII Report warned that “Sweden, Finland, Israel,

Japan, and South Korea each spend more on R&D as a share

of GDP than the United States.’’ “China overtook the

United States in 2003 as the top global recipient of foreign

direct investment.”* “Only six of the world’s 25 most

competitive information technology companies are based in

the United States; 14 are based in Asia.”””

States wishing to enhance the economic welfare of

their citizens must consider innovative incentive packages for

technology companies and potential investors in light of

incentives offered by foreign competitors. “The government

of Canada is modifying the [Scientific Research &

Engineering Development] credit mechanism to make it more

attractive to foreign investors on an after-tax basis, taking

account of the foreign investor's home country tax laws in

23 COUNCIL ON COMPETITIVENESS, INNOVATE AMERICA: NATIONAL

INNOVATION INITIATIVE REPORT 13 (2004).

4 Id. at 5.

3 Id

° Id. at 35-36.

2? Id. at 12.

8 Id

? Id.

21

order to increase investment in Canadian-based R&D,

without reducing the government's net tax revenues.””° This

change, which is still draft legislation, should help a number

_ of venture capital funded high-tech start-ups.*’

South Korea’s 2004 tax reform included several

measures to boost corporate investment, including a

reduction in the alternative minimum tax rate for small and

medium-sized enterprises, and an extension and i increase in

the temporary investment tax credit for capital spending.”

Firms investing at least NT$25 million and increasing

employment by at least 50 persons in underdeveloped

Taiwanese regions are eligible for a tax credit equal to twenty

percent of new investment.”? Alternatively, they may choose

not to pay corporate income tax for the specific year the

investment is approved.”

* David V. Daubaras, Scientific Research & Experimental Development,

TAX EXECUTIVE, Nov. 1, 2004, at § 15, available at 2004 WLNR

16849433.

*! Denis Lajoie, Canada's Scientific Research and Experimental

Development Program is in a State of Continuous Improvement with a

Number of Recent Evolutions, CA MAGAZINE, Aug. 1, 2005 available at

2005 WLNR 13911470.

2 Economist Intelligence Unit, Country Commerce South Korea

2004/2005 Main Report, COUNTRY COMMERCE, July 30, 2004, available

at 2004 WLNR 13972426.

> Economist Intelligence Unit, Country Commerce Taiwan, Incentives:

Regional Incentives, COUNTRY COMMERCE, July 30, 2004, available at

2004 WLNR 15862193.

** Taiwan also offers specialized industrial parks in which, for example,

companies may enjoy a five-year tax holiday, import-duty exemption, and

a 20% ceiling on corporate income tax for investments in the manufacture

of precision instruments, machinery and electronics. Also, a special 15%

investment-tax credit, which may be deferred for up to four years, is

available to companies undergoing capital expansion. More than 375

companies have commenced operations in one such park including 159

integrated-circuit manufacturers, 54 telecommunications firms, 60 opto-

electronics firms, 57 computer and peripherals makers, 27 biotechnology

‘ companies, and 2! precision-machinery manufacturers. Fifty-seven are

22

As related to early-stage technology companies, state

tax credit incentives to promote in-state R&D, investment

and job creation in the technology sector are the opposite of

“corporate welfare.” These incentives do not discriminate

against interstate commerce and are essential to promote

innovation and enhance the long-term economic growth not

only of each state but also the entire United States. Such

incentives are at the very core of what the Commerce Clause

was intended to create: an economic union of the states in

which the success of each benefits all. See Boston Stock

Exch., 429 U.S. at 328. The decision of the Court of

Appeals, which reached the opposite conclusion, is plainly

wrong and should be reversed.

CONCLUSION

For the foregoing reasons, the judgment of the Court

of Appeals holding that the Ohio investment tax credit, OHIO

REV, CODE ANN. § 5733.33, violates the Commerce Clause

should be reversed and the action dismissed.

Respectfully Submitted.

FREDERICK A. PROVORNY

Counsel of Record

University of Maryland School of Law

500 W. Baltimore Street

Baltimore, Maryland 21201-1786

(410) 706-1190

Dated: December 5, 2005

foreign companies including Royal Philips Electronics, Mitsubishi, Shin-

Etsu Optoelectronics, Taisil Electronic Materials, Hewlett-Packard,

Motorola, Logitech, and Siemens. Economist Intelligence Unit, supra

note 33.

EXHIBIT

"euvwt

Ronrur A. Zannocn

}. Josapn Cunnan. Jn Assistane Artornev General

arroansy Genesat . ~ Counsel w ave Genernl Assembly

Downs Hui Starow . Bonrs A. Kirnxiann

Nepery Anumey Gener ae Katnarn M. Rows

Sa Ce

Tue AtrorNey GENERAL OF MaRYLAND

Orricz or Counsel. To THe Genera ASSEMBLY

April 28, 2005

The Honorable Robert L. Ehrlich, Jr.

Governor of Maryland a

State House

Annapolis, Marylund 21401-1991

Re: House Bill 664

Dear Governor Ehrich:

We have reviewed House Bill 664, “Biotechnology Investment Incentive Act,” which

was signed April 26", for constitutionality and legal sufficiency. We write to discuss

significant Commerce Clause issues raised by the bill.’

House Bill 664 provides a credit against State income tax for large investments made

in qualified Maryland biotechnology companics. In order to qualify, a biotechnology

company must have its headquarters and base of operations in Maryland. The tax credit

allowed is 50% of the investment, up to $50,000 for an individual, $250,000 for a

corporation, and $250,000 for a qualificd Maryland venture capital firm. If the tax credit

exceeds the tota! tax otherwise paysble, the investor may claum a refund in the amount of the

interest. Avuilability of the refund is dependent on the appropriation of money to the

biotechnology investment tax credit reserve fund? A system is set up whereby the

Department of Business and Economic Development issues an initial tax credit certificate

on 8 first come first served basis to investors intending to invest ina Maryland biotechnology

company. Such certificates may be issued only to the extent that moncy is available in the

reserve fund. Thus, investors know whether the credit will be svailable et the time thet the

invesument its made.

' This letter confirms and explains oral advice given April 25, 2005.

? While the bill purports to require that the Governor maks an appropriation to this fund, it

does not specify an amount, or set a formule by which an amount can be determincd. As a result,

the Governor has the discretion not to make any appropriation for this purpose.

10¢ Loaistamve Samvices Buitomea - go Sere Crmcur . AWNAPOLM, MARYLAMD 11491-1992

410-946-5600 - 301-970-4600 - Fax a10-y46-360: - TDD 410-946-5401 - 301-970-5408

The Honorable Robert L. Ebriich, Jr.

April 28, 2005

Page 2

The Commerce Clause of the United States Constitution provides that Congress has

the power to “regulate Commerce ... among the several States.” United States Constitution,

Article I, § 8, clause 3. Although stated as a grant of power to Congrcss, the Clause has long

been understood to prohibit state interference with interstate commerce. H.P. Hood and

Sons, inc. v. Du Mond, 336 U.S. 525, 535 (1949). Such interference can arise from state

taxation. A State tax will be upheld where it is applied to an activity with a substantial nexus

with the taxing state, is fanty apportioned, does not discriminate against interstate commerce,

and is fairly related to services provided by the slate. Complete Auto Transit v. Brady, 430

U.S. 274(1977). House Bill 664 raises issues under the third of thesc factors: discrimination

against interstate commerce.

In Boston Stock Exchange v. State Tax Commission, 429 U.S. 318 (1977), the

Supreme Court examined the issue of whether a New York statute taxing securities

transactions more heavily ifthey involved an out-of-state sale violated the Commerce Clause.

The Court concluded that it did, stating that one of the “fundamental principles” of

pr pth ne mc apne ga “impose a tax which discriminates

against interstate commerce . . . by providing a dircct commercial advantage to local

business.” /d. at 329. The Court found that the differential taxation meant that the choice

of stock exchange by persons engaging in large transactions would not be made solely on the

basis of nontax critcria. As a result, it acted to give the New York exchange a direct

commercial advantage in violation of the Commerce Clause.

More recently, in Fulton Corporation v. Faulkner, 516 U.S. 325 (1996), the Court

considered a North Carolina statute that imposed a tax on the value of corporate stock owned

by State residents, vyth the amount of the tax varying depending on the exposure of the

corporation to the State's income tax. The practical effect was that the tax was low or

nonexistent on corporations in the State and significantly higher with respect to corporations

that did little or no business in the State. The Court found that the tax facially discrnzinated

agaist interstate commercc, in that it favored “domestic corporations over their foreign

competitors in raising capital arnong North Carolina residents and tends, at least, to

discourage domestic corporations from plying their trades in interstate commerce.”

Cases from lower courts have reached similar conclusions. In Smith v. New

Hampshire Dept. of Revenue Admin., 692 A.2d 486 (N.H. 1997) cert. denied 538 U.S. 1025

(2003), the Court held that an exemption for interest and dividend income from investment

ip State financial inst:tutions violated the Commerce Clause. Most recently, in Cuno v.

DatmlerChrysler, Inc., 386 F.3d 738 (6" Cir. 2004), the Sixth Circuit held that a tax credit

for purchases of ncw manufacturing machinery and cquipment if the new machinery or

The Honorubie Roben L. Ehrlich, Jr.

Apr} 28, 2005

Page 3

equipment was installed in Ohio violated the Commerce Clause. This cuse is being appealed

10 the Supreme Coun (Petition for Ceniorari Filed Apr 18, 2005) but the Court has not made

a decision whether to take the case.’

While none of the cases above are precisely analogous to House Hill 664, it is our

view that that bill, which provides a direct commercial advantage to local business, and

favors domestic business in raising capital, raises similar significant Commerce Clause

issuzs. Therefore, we would recommend that altcrnate sppruaches be constdered at a futurc

legislative session.

Very truly yours,

J é J. Joseph Curran, Jr.

Attomey General

JIC Jr/ KMR/kmr

hb664.wpd

cc: Kenneth H. Masters

Secretary of State

Karl Aro

? The Cuno case is the most far-reaching of these cascs, in that it reaches tax credits available

to oul-of-state companies based on activities and job creation in the State, and the broad reach of the

case bas been questioncd. See Gillis, Sixth Circui: Bans Ohio Tax Credit Under the Commerce

Clause, 101 J. Tax'n 359, 2004 WL 2801135 (December 2004). Whether this extension of the

Supreme Court cases is correct, however, is not relevant to the issues raised by House Bil) 664.