Arizona Public Service Company v. Snead – Oral Argument – February 26, 1979

Media for Arizona Public Service Company v. Snead

Audio Transcription for Opinion Announcement – April 18, 1979 in Arizona Public Service Company v. Snead

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Warren E. Burger:

We’ll hear arguments first this morning in Arizona Public Service Company against Snead.

Mr. McAuliffe, will you proceed whenever you are ready.

Daniel J. McAuliffe:

Mr. Chief Justice and may it please the Court.

I had not contended to present separately the underlying facts of this proceeding nor a description of the proceedings which bring us here, except those maybe pertinent to argument or to questions from the Court.

I would be happy to state the facts separately if the Court so desires, otherwise I will proceed with the argument.

Warren E. Burger:

We will leave that entirely in your hands counsel.

Daniel J. McAuliffe:

I believe that they are adequately set forth in the briefs.

Essentially Mr. Chief Justice and the Court, this is a discrimination case.

It involves the constitutionality of the New Mexico Electrical Energy Tax Act.

Let me explain initially exactly how that energy tax act operates and I think you will understand the discriminatory operation of the tax.

Section 3 of the tax purports to impose a levy on the generation of electricity generated in New Mexico for the states that is on the privilege of generating electricity for sale.

While that appears even handed, Section 9 of the act significantly affects the way that tax operates.

Section 9 is the credit provision and the two pertinent provisions we believe are Sections 9(b) and (c).

Section 9(b) provides that a generator who produces electricity in New Mexico which will be consumed in New Mexico may take energy tax that’s imposed and credit it against a gross receipts tax liability, which it will incur upon the retail sale of the electricity.

Again, that credit provision, Section 9(b), is available and applies only if the electricity is generated and consumed in New Mexico.

Section 9(c) deals with a separate situation, because if you look at the wholesaler of electricity, the local generator for example, who will sell the electricity initially for resale, the Section 9(b) credit is of no assistance to that entity.

The simple reason that the gross receipts tax does not apply to a sale for resale at the wholesale level.

As a result, there is no gross receipts tax liability against which to credit the energy tax assessment.

Section 9(c) takes care of that situation.

Indeed it was included in the act specifically to take care of that situation.

What Section 9(c) provides is that the credit granted by Section 9 will be assigned forward by the wholesale seller which for purposes of argument I will call the generator, generally is – because there is some confusion generated when you try and describe both parties of that transaction, the generator is normally the seller in the wholesale transaction.

The generator assigns that credit forward to the purchaser in the wholesale transaction who is generally the retail seller.

In exchange —

Warren E. Burger:

Within the state or out or can it be either?

Daniel J. McAuliffe:

The credit is assigned for; it’s only with respect to electricity that will be consumed in New Mexico.

Warren E. Burger:

The party who generates the electricity may sell it to wholesaler within the state or without, is that so and —

Daniel J. McAuliffe:

That is correct Mr. Chief Justice, he may.

Again the Section 9(c) credit though will be limited to —

Warren E. Burger:

To just the one —

Daniel J. McAuliffe:

To just the one, where the electricity is eventually consumed in New Mexico.

Daniel J. McAuliffe:

In exchange for the assignment forward of that credit, the generator will eventually receive a monetary reimbursement from the retailer in the amount of any credit actually received by application against the gross receipts tax liability of the retailer.

The net effect of these provisions throughout the course of this litigation has been undisputed.

The energy tax applies only to electricity, which is generated in New Mexico and transmitted to other states for retail sale and consumption.

It collects no revenue whatsoever from electricity which is generated and consumed in the state of New Mexico.

We contend that tax is discriminatory against interstate commerce.

William H. Rehnquist:

But if you look at the overall effect of the tax, the tax structure of New Mexico, New Mexico consumers of electricity may well pay just as much as consumers in other states, isn’t that true?

Daniel J. McAuliffe:

At the consumer level, I am not sure that that’s true Mr. Justice Rehnquist, because then you are talking into account whatever tax maybe applied at the consumption level and the state of consumption.

New Mexico consumers pay a total tax or the total tax if you take it all the way down to the level of consumption in New Mexico is a 4% gross receipts tax imposed by the state.

And when we get to the constitutional argument, our position is that — the state’s position is obviously that saves the energy tax, but our position is that even when you look at the whole scheme of taxation, looking at the treatment of wholesalers you do not have that equality of treatment.

You have a facial equivalence looking at the scheme as a whole, but at the wholesale level there is no New Mexico tax.

William H. Rehnquist:

When you say the wholesale level, you mean sales by the generator to others who in turn sell at retail?

Daniel J. McAuliffe:

Sell for retail, that’s correct Mr. Justice Rehnquist.

The initial aspect of the discrimination issue is that which involves the Tax Reform Act of 1976 which was passed during pendency of this litigation, we have particular reference to Section 2121(a) which is codified as Title 15, United States Code, Section 391.

That statute provides in effect that no state may impose a tax on or with respect to the generation or transmission of electricity which discriminates against out of state producers, generators, wholesales, retailers or consumers.

The statute also defines what is discriminatory and that is, if it imposes a greater tax burden on electricity whether directly or indirectly on electricity, which is generated and transmitted in the interstate commerce.

We believe that the New Mexico electrical energy tax clearly satisfies that definition.

There has never been any dispute that it is a tax on or with respect to the generation or transmission of electricity and it is discriminatory.

It imposes a greater tax burden on electricity which is generated and transmitted to other states, states outside of New Mexico that has never been disputed.

As a matter of fact, the legislative history of this statute we believe confirms that.

Potter Stewart:

Well doesn’t the legislative history show that Federal law was enacted –- was this statute a direct target?

Daniel J. McAuliffe:

Yes it does Mr. Justice Stewart.

Potter Stewart:

Then of course it was amended and your brother on the other side claims that it was during the course it was being amended it was whittled down to being almost meaningless and not to cover the statute.

Daniel J. McAuliffe:

Well, it was not really amended the — let me explain the course of the legislative history.

There was a provision in the Senate Finance Committee, which was reported to the Senate Floor and passed by the Senate.

This was the provision that Senate have managed to move to strike in its entirety.

And that said that — and if the state imposed a higher gross or net tax on electricity then it would be, that was the statutory definition of discrimination with that —

Potter Stewart:

[Inaudible] couple of the other states West Virginia and Washington got disturbed.

Daniel J. McAuliffe:

We have no legislative record of that Mr. Justice Stewart and I don’t believe the state’s briefs cites anything in the legislative record to support that contention.

There was a bill introduced approximately a year before the Tax Reform Act, which would have stricken down all state generation taxes.

There was a hearing held on that Bill in March of 1976 and representatives from the states of West Virginia and Washington appeared and questioned whether –- as a matter of fact I think the reference they used in the hearings was this is an over reaction to the specific situation in Arizona and New Mexico, it goes too far.

Daniel J. McAuliffe:

You are not just striking the discriminatory taxes.

That Bill we have no idea what happened to it.

We then pick up a separate legislative history —

Potter Stewart:

Anyway it was not enacted.

Daniel J. McAuliffe:

It was not enacted; let me get to the Tax Reform Act.

Now the change which was made was when the different versions passed by the House of Representatives and the Senate went to a conference committee and the conference committee changed the language to its present formulation.

The conference committee report both in the House and the Senate says that it is adopting the Senate Amendment.

There is no other explanation for the change and I think without inquiry and speculation of the legislative record, we are entitled to assume that they adopted the intent of the Senate as well and the intent of the Senate at least is reflected in debate was quite clear.

The Senate Finance Committee describes the type of tax they are talking about and it describes on all force the electrical energy tax that was stated in New Mexico.

Senator Domenici appeared at the time the Bill was introduced for debate and moved to strike in its entirety and the exchange between he and Senator Fannin and Senator Goldwater makes perfectly clear that what his concern was that this would reach the New Mexico tax and Senator Domenici’s Amendment was defeated.

So we think the legislative history is quite clear on that one point.

The lower court in affect, we believe disregarded this statute and said that it incorporated a constitutional test.

We submit that’s a very strange reading of it.

The statute refers to not only a tax, it refers to a particular class of taxes, a tax on or with respect to the generation or transmission of electricity.

As I turn then to the constitutional argument, again, the energy tax as we’ve described is discriminatory in its actual operation.

The state contends that although the impact of the —

John Paul Stevens:

Just before you leave the statute, it’s of course you rely primarily on the second sentence of the statute I guess rather than the first?

Daniel J. McAuliffe:

I don’t know, but we say we rely anymore on one sentence than the other because the first sentence —

John Paul Stevens:

I guess the discrimination against the out-of-state manufacturers and there’s no out-of-state manufacturer that is being discriminated against here, isn’t it?

Daniel J. McAuliffe:

According to the state of residence, they’re out-of-state, but the statute —

John Paul Stevens:

But that is not what it means.

Daniel J. McAuliffe:

We would rely on the second — the second sentence contains the test of discrimination —

John Paul Stevens:

And in fact you read that as broadening the first sentence basically.

The first sentence literally just doesn’t apply as I read it.

Daniel J. McAuliffe:

Well, the first sentence says that no state shall discriminate which is in a —

John Paul Stevens:

Against out-of-state manufacturers, producer’s etcetera, but you’re not an out-of-state producer within the meeting of this, are you?

Daniel J. McAuliffe:

I don’t know, the statute doesn’t define what an out-of-state producer is.

I would argue that it refers to a producer who is producing electricity principally for consumption out-of-state.

Potter Stewart:

No, but that is not what it says.

That is not what it says.

Daniel J. McAuliffe:

There are out-of-state manufacturers —

Potter Stewart:

It doesn’t talk about productions for sale out-of-state.

It seems to me, the first sentence would apply to an out-of-state generating plant that was selling electricity into your state and you had higher tax on that electricity than on locally produced electricity and that’s not this case, but the second sentence I would say it does read against.

Daniel J. McAuliffe:

I will review it Mr. Justice Stevens.

Turning then to the constitutional argument, the state’s defense of the statute is that you can’t view the energy tax in isolation that you have to look at the state’s entire scheme of taxation.

Even adopting that as the constitutional test, it does not save the energy tax, because we believe that test involves considerably more than simply looking at tax incidences and tax rates and discovering whether there is some glaring in equality.

If that were the analysis and that is the analysis the state employs, then the Halliburton case would have been decided differently, because in the Halliburton case there was facial tax equivalence between the sales tax and the used tax.

The difficulty in Halliburton was that one component of that facially equivalent tax structure affected a class of taxpayers differently depending upon whether they were involved in the interstate commerce or not that is exactly what happens here when you look at the wholesale transaction.

Again, if the wholesaler sells that electricity for consumption in New Mexico, it will eventually receive a tax, a private tax rebate from the retail seller in the amount of any credit actually received which will wholly erase any energy tax liability.

The interstate wholesaler, the wholesaler who markets that electricity which is consumed in other states receives no such credits and pays the energy tax.

In effect, the interstate transaction is taxed; the intrastate transaction is tax free.

William H. Rehnquist:

Do the opinions below indicate how substantial a portion of the total business, the wholesaling of electricity is?

Daniel J. McAuliffe:

They do not Mr. Justice Rehnquist.

The opinions below do not address the issue of discrimination as wholesalers at all.

In the appendix and our answers to the Bureau of Revenues’ interrogatories reading them together with the affidavits which were submitted in connection with our initial motion for summary judgment, you’ll find the most complete figures available after 1974 and they are only partial, they do not include figures for Southern California Edison.

They indicate that our purchases of wholesale of electricity were approximately four and a half million kilowatt hours of electricity and our sales of electricity were approximately — at the wholesale level were approximately 7.5 million kilowatt hours for a total of 1.2 billion kilowatt hours of electricity.

That is roughly 10 to 12% of the total electricity generated by us in New Mexico that’s the approximate volume of it.

It’s of course going to fluctuate year-by-year depending upon demand and whether particular facilities are online or offline, but I think that’s a fair rough approximation.

Under the Halliburton case, the test is whether the component tax provides equal treatment to in-state and out of state taxpayers similarly situated.

We contend that this tax does not.

When you compare the situation of the wholesaler who sells intrastate with the situation of the wholesaler who sells interstate, there’s no evenhanded treatment.

They are subject to disparate burdens and that is discriminatory and although there has been a significant change in recent years, a reformulation of the test which this court will apply to state taxation and interstate commerce that principle remains unchanged and that is that a state tax may not discriminate against interstate commerce.

We also contend that this tax imposes undue burdens upon interstate commerce.

The state’s response to this is that the tax cannot impose an undue or what used to be called a multiple burden on interstate commerce, because it only applies to the active generation, which only happens in New Mexico, we contend that is a fiction.

As a practical matter, you cannot — at the time electricity is generated in New Mexico, under the state’s own regulations it is subject to a potential credit whether that credit, the potential credit becomes actual or whether it vanishes depends upon a subsequent determination as to the state of consumption.

At the time that that determination is made that electricity is already in the transmission pipeline, if you will, traveling at the speed of light.

The tax is whether it’s phrased a tax on sale or a tax on consumption, liability for that tax, assessment of the amount of that tax that is due cannot be made at the point of generation.

It can only be made at the time that this, that is determined whether that tax is consumed.

So we contend that the tax is perfectly analogous to the tax of Michigan Wisconsin Pipeline versus Calvert.

There the tax was imposed on the taking of gas, taking of natural gas and the principle vice of the tax was that it was imposed on the entire volume of gas taken.

Daniel J. McAuliffe:

This Court has sensibly held that the vice there was on a portion to activities within the state.

This is exactly the same tax.

This is a privilege tax.

This is the tax in what Michigan Wisconsin was.

This is a tax which is imposed on the entire volume of gasoline that is taken, the entire volume of electricity taken outside of the state.

This is just as much a tax on the exit from the borders of New Mexico of electricity as was the tax in Michigan Wisconsin.

William H. Rehnquist:

Are you saying that a state cannot make the generation of electricity a taxable event?

Daniel J. McAuliffe:

No, I’m not Mr. Justice Rehnquist.

What I’m saying is that this tax does not do that because this tax if — this tax does not impose a levy on all generation of electricity and because it credits or exempts certain generation, you cannot determine whether you’re liable for this tax until something after generation happens.

It has to be transformed and transmitted and the place of consumption determined before you know whether this tax is due.

A straightforward generation tax such as was involved in Utah Power & Light, it can be determined at the point of generation whether that tax has to be paid, it can’t be done here.

The State of New Mexico’s Bureau of Revenue concedes that.

One of its regulations that says that energy that’s generated at that point in time are subject to a potential credit.

The act doesn’t refer to any such potential credit concept, but if you’re going to straightforwardly apply this tax then you have to have a potential credit at that point, because at that point the tax is potential, it’s held in abeyance until such time as you determine the place of consumption.

John Paul Stevens:

Mr. McAuliffe you may have covered this, I might have missed it, but does the state give a credit on the gross receipts tax to an out-of-state generator who might sell electricity within the state, for similar tax imposed by the others?

Daniel J. McAuliffe:

Yes, it does that’s Section 9(a).

John Paul Stevens:

9(a) does that.

Daniel J. McAuliffe:

And that — all that provides is that if there is a tax, a generation tax imposed by another state and the energy is transmitted to New Mexico and consumed there, then you’re entitled to take a — if it’s retailed in New Mexico you owe gross receipts tax and you’re entitled to take a credit against gross receipts tax.

John Paul Stevens:

What is the amount of the credit?

Daniel J. McAuliffe:

It’s whatever tax is imposed by the other state.

John Paul Stevens:

Even it was a full 4% then it conceivably they pay no gross receipts tax?

Daniel J. McAuliffe:

I would assume so Mr. Justice Stevens our position is that obviously cannot cure the problem.

That is the same offer of reciprocity that was made in Austin versus New Hampshire.

It is exactly the situation that the Congress was concerned with when they passed the Tax Reform Act that what you would be producing as a taxing or between the states over the subject of electricity.

This is Mr. Chief Justice, in the court exactly what this Court described in the Complete Auto Transit case in the footnote.

This is a privilege tax; it is a tailored privileged tax.

It has to be subjected to strict scrutiny and when it is, it produces the affects which this court has always held are prohibited by the commerce clause.

It discriminates against interstate commerce pure and simply and it transgresses the provisions of the Tax Reform Act of 1976.

Mr. Chief justice, if there are no further questions, I’ll reserve the balance of my time for rebuttal.

Warren E. Burger:

Very well.

Warren E. Burger:

Mr. Unna.

Jan E. Unna:

Mr. Chief Justice and may it please the Court.

The heart of this case is in two issues, the Tax Reform Act, Section 391 and in the Constitutional Case Law.

I want to discuss the Constitutional Case Law first and then turn to the Tax Reform Act provision.

In discussing first, the Constitutional Case Law, I want to weave it in with the actual operation of the tax to show why New Mexico’s tax restructuring with its Electrical Energy Tax Act is clearly non-discriminatory under the case law from this Court.

Before the —

John Paul Stevens:

Are you going to talk about the Constitution, you would agree we would have to decide the statutory problem?

Jan E. Unna:

Yes and I think the statue is the more important issue really.

Before the Electrical Energy Tax Act, which established this generation tax and the tax credit was enacted, the tax on electricity generated in New Mexico, but sent elsewhere to Southern California and Arizona was zero.

There was no tax burden whatsoever on electricity generated and consumed or sent outside the state.

There was however a local tax, a gross receipts over sales tax on electricity sold in New Mexico, a 4% gross receipts tax.

So that if I use Arizona Public Service one of the generators and sellers of electricity elsewhere and export of electricity from New Mexico compare that with Public Service Company which is the largest generator and retailer of electricity in the state, compare their burdens for ease of comparison for illustration purposes.

Arizona Public Service was subject to absolutely no tax burden before this generation tax was passed.

Public Service Company of New Mexico however was subject to a 4% burden.

Then we have the generation tax passed in 1975 with the credit at four-tenths of a mil per kilowatt hour, which works out to a 2%, approximately a 2% tax.

After the Electrical Energy Tax Act, we have Arizona Public Service now subject to a 2% tax burden, generation tax burden, no gross receipts tax burden, because it doesn’t sell its electricity in New Mexico.

John Paul Stevens:

Mr. Unna can I interrupt once more?

Jan E. Unna:

Yes.

John Paul Stevens:

You say no tax burden whatsoever.

Don’t they pay real estate tax and personal property tax and income tax and various other taxes?

Jan E. Unna:

Yes, Mr. Justice, but the burden on electricity per se was zero.

John Paul Stevens:

I see.

Jan E. Unna:

And for purposes at least —

John Paul Stevens:

Well, you want us to look at the total picture or we just look at those on electricity per se.

Jan E. Unna:

Yes, the commodity of electricity as it’s referred to in the case law.

After the Electrical Energy Tax Act is passed, we have public service now subject to a 2% generation tax burden also, but it is allowed to credit this 2% burden against its 4% gross receipts tax liability.

So that its total burden is 4% that is 2% generation tax burden and 4% gross receipt tax minus 2% generation tax producing a total burden of 4%.

So the instate burden, I’m referring to, instate meaning electricity generated, but consumed in New Mexico, the instate burden is 4%, the out of state burden is 2%.

Obviously the burden on electricity, the instate electricity is greater than on the outer state electricity.

I want to emphasize that all generators in New Mexico pay the tax, but it is not true that the tax is applied only to out of state electricity that is electricity generated in New Mexico moving outside the state.

Jan E. Unna:

Public Service Company and everybody in New Mexico pays the tax as well.

They simply are allowed to credit that energy tax, the generation tax against their gross receipts tax liability.

William H. Rehnquist:

Does the record indicate whether Arizona Public Service sells it retail any of its electricity in New Mexico?

Jan E. Unna:

A minor portion is sold to the companies that mines coal at the Four Corners Power Plant and it’s a minuscule amount and basically I think that’s all they sell in New Mexico.

All this electricity from the Four Corners Plant in San Juan Generating Station is two plants is North West New Mexico, all of that basically moves outside the state, except for Public Service Company, New Mexico and El Paso Electric those are two generators who also sell electricity in New Mexico.

There is a small portion of it.

Let me give the Court three hypotheticals, which will I hope illustrate the non-discriminatory aspect of the tax.

In the first hypothetical, assume a state has a 2% generation tax and no other taxes on electricity per se and that’s obviously non-discriminatory because the 2% tax applies to all electricity, no matter where it’s sold.

In the second example, assume that the state later imposes a sales tax of 2%, a flat 2%.

The total tax burden on instate electricity would then be 4% and the total tax burden on out of state electricity would be 2%, only the 2% generation tax.

Obviously, again the burden is greater on instate electricity than on out of state electricity and it’s non-discriminatory.

In the third example, assume that the state had only a sales tax and no generation tax.

It later decides to add a generation tax, but does not want to raise the total tax burden for instate electricity, so it allows that 2% generation tax to be credited against its sales tax and this is not hypothetical at all, this is actually New Mexico’s situation.

The total tax burden on instate electricity is still 4% and the total tax burden on electrify generated, but marketed and sold elsewhere is still 2% and the burden is greater on instate.

John Paul Stevens:

Mr. Unna you omit the possibility that the electricity sold elsewhere maybe subject to a tax elsewhere?

Jan E. Unna:

Under the Constitutional Case Law that’s not relevant, on my reading of it anyway.

The inquiry is to a state’s tax structure ends at the borders of the state that you are looking at —

John Paul Stevens:

But it is true nevertheless?

Jan E. Unna:

What?

John Paul Stevens:

That electricity maybe subject to a tax at the retail level?

Jan E. Unna:

Of course a light burden of such.

Potter Stewart:

And isn’t it also true that so far as New Mexico generators of electricity go, those who generate or that part of the electricity that they generate that is sole inside of New Mexico is not subject to any generation tax and not part of the electricity that the New Mexico generators sell that is sold outside of the state is.

Jan E. Unna:

No, Your Honor it’s not true.

All generators pay the tax.

Potter Stewart:

But those who generate electricity that is sold in New Mexico get to get it back.

Jan E. Unna:

They get the credit against their gross receipts.

Potter Stewart:

They get it all back, don’t they?

Jan E. Unna:

Yes, but they pay a higher tax.

Potter Stewart:

And those who sell electricity that is in turn sold at retail outside of New Mexico don’t get it back?

Jan E. Unna:

Not from New Mexico there is no way we could give it back.

Potter Stewart:

Or from anybody?

Jan E. Unna:

Well, they may get it from Arizona I don’t know.

Potter Stewart:

But as far as New Mexico goes, the net effect is that the sellers of electricity, the wholesale sellers of electricity that in turn is sold instate are not taxed and those who sell electricity that is sold at retail out of state are taxed, isn’t that correct or have I missed something?

Jan E. Unna:

No, you haven’t.

The net effect of it is true, but it’s easy to slide over the fact that instate generators do actually pay this tax, the generation tax.

Warren E. Burger:

Isn’t the net effect the test?

Jan E. Unna:

Then the total tax burden under Constitutional Case Law is —

Potter Stewart:

Not on all the tax payers in the state.

The total tax burden on a single tax payer.

Jan E. Unna:

No, on the commodity of electricity.

Potter Stewart:

That’s by a tax payer.

Well, maybe five different people pay taxes with respect to the commodity of electricity, but you have to measure it by its affect on a tax payer, don’t you?

Jan E. Unna:

I’m not sure that the case law says that you couldn’t add up the total tax burden on different tax payers so long as it’s on the commodity of electricity.

You don’t have to have one single as I read Public Utilities District Number 2, the 73 case Alaska versus Arctic Maid, involving fishing in local canneries, it doesn’t say that you have to have one tax payer and compare the burden on one tax payer.

You add up to total tax burden on the commodity is, in Alaska versus Arctic Maid as 61 case it was fish, Local canneries versus one other state or interstate transaction.

You don’t have to have just one tax payer.

As far as the record goes here with respect to wholesale sales however, there is no factual record, for example that there is any instate generator like public service company that even makes a wholesale sale.

As far as what is being argued by the other side is that’s basically an after thought, because the record has no facts even to show that there is even a wholesale.

I presume, I don’t have the facts either, but there are -–

Thurgood Marshall:

And we need to look that — the gas that sold in New Mexico?

Jan E. Unna:

Of the electricity?

Thurgood Marshall:

Yes.

Jan E. Unna:

Yes, I think that the way we have a tax structure that we have is –-

Thurgood Marshall:

How would you tax it?

Jan E. Unna:

The way we have Your Honor.

Thurgood Marshall:

You say you give it back.

Jan E. Unna:

Well–

Thurgood Marshall:

Well, you can’t get the money back from Arizona?

Jan E. Unna:

No, we have no control —

Thurgood Marshall:

Because you never give the money to Arizona?

Jan E. Unna:

No.

Thurgood Marshall:

So you couldn’t give it, Arizona couldn’t give it back?

Jan E. Unna:

Well, Arizona is free to do whatever it wants to but —

Thurgood Marshall:

But here I just don’t understand I think probably state free in saying that there is no difference?

Jan E. Unna:

Well, under the Constitution —

Thurgood Marshall:

I mean when you end up, at the end of the year there is a difference?

Jan E. Unna:

The total tax burden on electricity is 4% interstate, the total tax —

Thurgood Marshall:

The difference at the end of the year?

Jan E. Unna:

I am sorry.

Thurgood Marshall:

Is there a difference at the end of the year between the electricity sold to Arizona and electricity sold in New Mexico?

Jan E. Unna:

Yes.

Thurgood Marshall:

Is there a difference in the tax paid?

Jan E. Unna:

Yes, the tax burden on instate electricity that’s sold in New Mexico is twice the burden on electricity that is generated and sold in Arizona.

Potter Stewart:

But if you add by two different tax payers.

Jan E. Unna:

Yes, I see what was your question —

Thurgood Marshall:

I’m talking about generator as I am talking to, doesn’t he pay less if he sells his electricity in New Mexico?

Jan E. Unna:

No, he pays more Your Honor.

He pays a 2% generation tax and he pays in effect 2% gross receipts tax and that’s 4%, yes he does.

Potter Stewart:

The generator pays a 2% generation tax that he gets back if the electricity is ultimately sold inside the state, isn’t right?

Jan E. Unna:

Yes Your Honor but he gets it back against his sales tax reverse receipts tax which he also pays, that’s a 4% tax rate.

Potter Stewart:

I don’t think the generator for sale in wholesale is subject to gross receipt tax?

Jan E. Unna:

Well, there is no factual record Your Honor.

Potter Stewart:

But isn’t that correct?

Jan E. Unna:

I’m taking —

Potter Stewart:

Isn’t that correct as a matter of Arizona Law or I misunderstood that too?

Jan E. Unna:

What Your Honor?

Potter Stewart:

That a sale by the generator at wholesale is not subject to the gross receipts tax?

Jan E. Unna:

A sale by a New Mexico generator is not subject to the gross receipts tax.

Potter Stewart:

Yes, is that correct?

Jan E. Unna:

Yes.

Warren E. Burger:

The net result of the transaction is that the electricity each kilowatt hour, it goes outside of the state pays a higher tax after the refund is when adjusted, then that consumed within the stages, is that not correct?

Jan E. Unna:

It’s not correct, I think the net result of, for purposes of the constitutional case law is that a higher tax is paid on instant electricity.

Warren E. Burger:

No because we get what it’s for, let’s just talk about the mathematics of it.

Jan E. Unna:

Alright.

Warren E. Burger:

Does each kilowatt hour which goes across the borders of the state and into another place, ultimately pay a higher tax than that consumed within the state?

Jan E. Unna:

No, Your Honor, it’s doesn’t.

The electricity generated in New Mexico and sent to Arizona pays the 2% generation tax.

Electricity generated in New Mexico and consumed in New Mexico pays the 2% generation tax.

That 2% generation tax is then credited against the 4% gross receipts tax.

So that ultimately the total burden on instate electricity is 4%, the total burden on outer state electricity is 2% and under the Constitutional Case Law that and equivalence of the taxation rule under the Public Utilities District Number 2 case, Alaska versus Arctic Maid and The South Carolina Power case, the relevant inquiry is at the borders, stops at the borders of the state that you are looking at.

You don’t waive sister state burdens into the equation.

John Paul Stevens:

Isn’t that correct that before the generation tax was paid there was 4% gross receipts tax.

That’s all there was and then Arizona decided that it wanted to — New Mexico, wanted to get some money out of the generation so that they are placing a tax either two plants in the Four Corners, one sells entirely within the state, one sales entirely without the state.

The entire burden of the new tax falls on the plant itself outside the state, isn’t not, doesn’t not?

Jan E. Unna:

That’s true.

There is an additional burden as a result of the Electrical Energy Tax Act and that additional burden isn’t shared by instate electricity.

The instate —

John Paul Stevens:

So if the two power plants I described just one of them would really bear the entire burden of the new tax.

One sells out of state one sells only instate.

Jan E. Unna:

That’s right.

John Paul Stevens:

Yeah.

Jan E. Unna:

There is additional tax burden that’s not shared by instate electricity, but the relevant — that is not the test under the Constitutional Case Law.

That Constitutional Case Law test is whether there is a greater tax burden on the outer electricity than on the instate electricity and the out of state electricity has moved basically from 0 to 2%, they weren’t paying any tax before.

William H. Rehnquist:

Or is your position basically that New Mexico’s tax is not all that different from the used tax that states devised in the 1930’s to make up for a lost revenue in the situation if they couldn’t get by sales tax?

Jan E. Unna:

That’s basically it, yes.

In those cases those are equivalent taxes of 4% use tax and 4% sales tax.

Here the tax burden is even greater on instate electricity; it’s 4% versus 2%.

The equivalents of taxation rule allows the state to do exactly what New Mexico has done in restructuring it’s taxation with respect to electricity.

Harry A. Blackmun:

Perhaps I am wrong, but isn’t the distinction really on what one looks at if it one looks at the energy tax in isolation and it’s discriminatory.

If one looks at the entire burden according to your approach it’s non discriminatory.

Jan E. Unna:

Your Honor the case law is very clear.

You are not look at as I read the cases one is not to look at the tax in isolation, one is to add up the total tax burden.

Byron R. White:

How about just looking at wholesalers now?

How about looking at the entire tax burden on wholesalers of energy?

Jan E. Unna:

Well, if you look solely at the tax burden on a generator and a wholesaler.

All generators, wholesalers pay the tax, the instate generator and wholesaler actually pays the tax too.

Byron R. White:

Well, I know but he doesn’t, he pays it but he hasn’t given back.

He gets, given back to it–

Thurgood Marshall:

That’s true.

Byron R. White:

So in net affect —

Potter Stewart:

He doesn’t pay —

Jan E. Unna:

— he doesn’t pay it.

He doesn’t pay it and you can look around all you want to and he doesn’t pay gross receipts tax.

But he does, he actually pays it, but then gets a credit on an even higher tax for instate electricity.

Byron R. White:

The wholesaler does?

Jan E. Unna:

Yes.

Potter Stewart:

That higher tax is imposed on the ultimate consumer.

Jan E. Unna:

No, not in our state Your Honor.

It’s imposed on the same public service company or the retailer of electricity, the legal incidence of the tax is on the seller —

Potter Stewart:

On a retail seller?

Jan E. Unna:

Yes.

Potter Stewart:

But not there for on the wholesaler or on the generator?

Jan E. Unna:

Of the gross receipts, no, that’s true.

Byron R. White:

Well, so are there any wholesalers of electricity in New Mexico?

Jan E. Unna:

The record is silent as to whether there is any wholesale selling of electricities.

Most of it, I submit from my experience as a consumer in New Mexico is well is not in the paper —

Harry A. Blackmun:

The people who retail or generate?

Jan E. Unna:

Mostly electricity where I come from is sold by public service company, New Mexico.

Byron R. White:

Well, I know, but – what if there were a generator of electricity in New Mexico who was a wholesaler and sold to retailers in New Mexico of electricity.

What if there was one of those in New Mexico?

Jan E. Unna:

Yes, what about it?

Byron R. White:

Well, what about it, I mean he would, he would get forgiven his energy tax.

Jan E. Unna:

Well, the only purpose of the mandatory credit in the forgiveness of paying back of the generation —

Byron R. White:

No, but he wouldn’t never pay any gross receipts tax.

Jan E. Unna:

He paid the generation tax.

Byron R. White:

Alright, he’d get it back.

Jan E. Unna:

He would get it back against —

Byron R. White:

Well, so he wouldn’t pay, and he wouldn’t pay any gross receipts tax.

If there was such a person as I’m talking about?

Jan E. Unna:

Yes, that’s, that’s speculative.

There is nothing in the record to indicate that there is such a person.

Byron R. White:

Well, isn’t it because, it is natural do assume that there isn’t?

Jan E. Unna:

No, but the record is silent, it wasn’t a point that was developed by the utilities in this case.

It was never tried to the lower court to the trail court, but the case wasn’t tried, but the case was submitted on cross motions for summary judgment.

But there is no factual information on a discrimination against wholesalers.

To me, my way of thinking would be the argument about discrimination against wholesalers assumes the very proposition of discrimination that we are arguing about because they would have you assume that the tax burden on instate generators is zero and there is still a 4% gross receipts tax burden that’s not the case.

The tax burden on instate generators is in fact still 2%.

There is an equivalent tax burden on generators and then we then have in effect only lowered our gross receipts tax.

Thurgood Marshall:

[Inaudible] one point, but that 2% he can’t get back from anybody.

Jan E. Unna:

The out-of-state?

Thurgood Marshall:

Yeah, they are —

Jan E. Unna:

He can’t get back from New Mexico.

Thurgood Marshall:

That’s right.

Harry A. Blackmun:

Mr. Unna, could I focus on Section 391 a minute?

Jan E. Unna:

Yes, Your Honor.

Harry A. Blackmun:

When that came out of the Senate, is there any question that it concededly was aimed to invalidate New Mexico’s tax?

Jan E. Unna:

There is no question that it is aimed at invalidating New Mexico’s tax and —

Harry A. Blackmun:

Well, then what’s legislative history is there in connection with statute to suggest that the Congress adoption of the phrase “greater tax burden” signaled to design to shift the focus of the discrimination inquiry into state tax system as a whole?

Jan E. Unna:

I don’t know that the Senate Finance — the Senate Finance Committee version, there was a great difference I think in, well not a great difference, there was difference between the Senate Finance Committee version and the greater tax burden version.

In my view the proponents of the test had problems in that they couldn’t invalidate West Virginia’s tax structure with respect to electricity or —

Harry A. Blackmun:

This was the barrier when West Virginia was —

Jan E. Unna:

Yes, and they would have lost their whole test of discrimination to invalidate New Mexico’s tax.

If they would have heard Washington, West Virginia —

Harry A. Blackmun:

And you think because of the West Virginia barrier, you had a completely different result then, as to New Mexico then when it left the senate?

Jan E. Unna:

No, I think they had to water down the tests so substantially however, that it resulted in a restatement of the case law and the test of discrimination in the second part of Section 391, I think makes that very clear.

It speaks —

Harry A. Blackmun:

Then New Mexico’s benefits accordingly?

Jan E. Unna:

Of course if it’s a restatement then our tax is constitutional and if it’s a restatement under the constitutional case law there is no question that New Mexico’s tax structure would survive in time.

William H. Rehnquist:

Does it make some difference in this case whether the business of generating and selling electrical energy is setup like the grocery business where you have three levels, manufacture at least — manufacture, wholesale and retail or whether there is some difference between the two?

Jan E. Unna:

No, I don’t think it makes any difference.

I don’t quite understand the thrust of your question.

William H. Rehnquist:

Well, my thought is that our cases have said that the practicalities influence a great deal whether a tax is discriminatory or not and who bears the burden and that’s sort of a thing.

And if in fact the concept of someone who wholesales electricity does not loom large in the business of the generation, distribution of electrical energy, it — does that — should that play any part in our decision as compared to a situation where there are three identifiable tiers, a manufacturer or wholesaler and retailer?

Jan E. Unna:

Well, I think that wholesaling doesn’t play a large part in the distribution of electricity.

They are in the record in response to our interrogatory.

There is — there is some — are some answers about wholesaling of electricity amongst the plaintiffs and amongst instate utilities, but those were economy interchanges simply one, one utility is — gets low and needs more electricity it takes some more of one of the others as part of the, in part of the power pool, but there is no record here basically on wholesaling of electricity and to my knowledge basically we have instate generators who also retail and so —

William H. Rehnquist:

Do you have REA in your state?

Jan E. Unna:

No, we don’t in my knowledge.

There are some federal power lines but not — the REA to my knowledge is not in our state.

Warren E. Burger:

I have the impression that in your brief you had argued somewhere and I can’t put my finger on it now that the producing states has to suffer all the environmental disadvantages of presumably coal or oil whatever is used, produce it or that’s atomic to all those risks necessary whatever they are and did that justify a different treatment for the electrical energy which was exported where the consumers would not have to suffer and be subject to these environmental disadvantages, am I right that you’ve argued that?

Jan E. Unna:

No, I have not argued a constitutional, a case law discrimination been —

Warren E. Burger:

Is there something like that in your brief?

Potter Stewart:

On page 35 in your brief.

Jan E. Unna:

We have argued that consistently the utilities raised below at the trail level that their rights, Fourteenth Amendment due process rights were being violated by this tax which raised a question.

Warren E. Burger:

Let’s stay on my question if you don’t mind counsel.

Jan E. Unna:

Sure.

Warren E. Burger:

Do you argue that the State in which the generator is located puts up with a lot of burdens that the consuming State or the Republic of Mexico doesn’t have to suffer?

Jan E. Unna:

Oh, yes.

Warren E. Burger:

And if so, why that would appear to me that you are undertaking to justify a differential treatment between instate and outstate consumption?

Jan E. Unna:

I’m not saying we can discriminate because there is so much pollution there.

Warren E. Burger:

Then what’s the argument for?

Jan E. Unna:

Well, to show annexes with the taxing state that there were a tremendous amount of costs and benefits to the utilities as a result of having their plants in the North West corner of New Mexico, just to set the case in context.

It was submitted on cross motions for summary judgment and we wanted to make sure that it was well established at the trail level that there was nexus sufficient for taxing purposes.

John Paul Stevens:

Mr. Unna, may I ask you question about the legislative history of the statute with specific reference to West Virginia?

Do I correctly understand that the difference between the West Virginia generating tax and the tax that we have before us here is in West Virginia there was no credit against on any gross receipts tax?

Jan E. Unna:

No, your are correct.

The West Virginian, it’s a tax on the gross proceeds of electricity.

John Paul Stevens:

I see.

Jan E. Unna:

Which and there was fear that the Senate Finance Committee version of higher gross in that tax would sweep up West Virginia’s tax and incur the wrath senate burden and so on.

The tax then was —

John Paul Stevens:

The theory was based on the fact that the total tax burden — you taken into accrued taxes imposed by neighboring states on the retail sale, at least of the idea.

West Virginia had no gross receipts tax.

Jan E. Unna:

Well, now I think the fear was simply using the word gross.

John Paul Stevens:

I see.

Jan E. Unna:

Gross, it would have up swept up gross proceeds tax.

It would have set the burden is higher.

The test was significantly changed though to put in the greater tax burden language on electricity and that’s straight out of the case law, that’s the case law test.

John Paul Stevens:

The significant difference between West Virginia and New Mexico is the absence in that State of the credit against —

Jan E. Unna:

Yes, yes, but the higher gross or net tax language seem to focus on a credit situation such as New Mexico’s and look at a generation tax in isolation and then when that language has abandoned, higher gross or net tax, you go, we move to straight to the greater tax burden test which is precisely the constitutional test and that’s why I say it’s a restatement.

John Paul Stevens:

Taking the analogies there further, go back to my hypothetical of two power plants in the Four Corners area, one selling out of state, one selling instate.

If you had followed, if you had done what West Virginia did both would have paid the 2% tax without any credit?

Jan E. Unna:

Yes, I think west Virginia had a tax on the different level of distribution but under the total tax burden test that wouldn’t make any difference and so I think I’m not sure also I’m not familiar with West Virginia’s tax situation exactly but I think the rate of taxes for the two different plants were slightly different Your Honor.

I think that instate burden was greater than that is using your two plants example the one plant producing instate electricity would have been at a higher tax burden than the one going outside the state.

John Paul Stevens:

Was that because there’s another tax in additional to generating —

Jan E. Unna:

Yeah there were — I think there were two tax statutes there involved but that’s also our case in that sense.

The difference between the senate finance committee version and the final form of the test, the greater tax burden test is significant because that’s the operative’s test of discrimination under Section 391 and if you’ve changed the test of the discrimination you’ve changed the whole ballgame as far as discrimination goes.

So, it is also important in the legislative history of Section 391 that nowhere does it repudiate the constitutional case law test of discrimination, so we end up with two tests of discrimination existing side by side supposedly one in 391 is a new test but its language is couched in terms of the constitutional case law test.

Moreover it doesn’t repudiate the constitutional case law test.

Potter Stewart:

In your argument this statute is meaningless and unnecessary is that correct or if it doesn’t add or subtract anything from the Constitution?

Jan E. Unna:

It’s still a legislation Your Honor, but that’s all politically the utilities were able to accomplish them and that’s set forth clearly I think in pages 85 through 88 of the appendix where Arizona Public Services Council writes directly to Senator Fannin proposing the greater tax burden test to get around West Virginia and the strategy is made very clear at the end of page 88 and he says, finally its imperative that a clear legislative history be made, without it we could dream up another dozen arguments.

Jan E. Unna:

So they knew that they had innocuous test basically that restated the case law and so they wanted to make legislative history.

Harry A. Blackmun:

Of course isn’t that all the legislative history you have, those two letters?

Jan E. Unna:

No there is legislative history about the discriminatory nature of New Mexico’s tax.

Harry A. Blackmun:

Yes but beyond the senate aren’t those two letters all the legislative history you have?

Once the bill came out of the Senate, once in the House and in the conference you have two letters, no more.

Jan E. Unna:

I think basically that’s all we have and I think that’s —

Harry A. Blackmun:

Isn’t that pretty thin legislative history to support your view, when it was so clear in the Senate side that the bill was aimed at the New Mexico tax?

Jan E. Unna:

Well it was so clear but it related to a different test of discrimination Your Honor, it related to higher gross or net tax that’s a substantially different.

Harry A. Blackmun:

Exactly.

Jan E. Unna:

The Senate Finance Committee —

Harry A. Blackmun:

Then how did it over come, how was it overcome, by those two letters?

Jan E. Unna:

The test was changed and none of the official legislative history relates to the second test, the greater tax burden test and that’s the crucial test that we have here.

So, all of the legislative history is irrelevant to the final test that was enacted.

Thank you.

Warren E. Burger:

Very well.

You’ve have anything further Mr. McAuliffe?

Daniel J. McAuliffe:

Thank you Mr. Chief Justice, a few very brief points.

Mr. Justice Blackmun let me clarify one thing, they do not have those two letters after the Bill leaves the Senate.

Those two letters are both at least a month and half prior to the debate on the Senate floor, the letters in the appendix.

The State asks us to entertain several assumptions as a basis for justifying the tax.

The first is that we should assume that there are no wholly intrastate New Mexico wholesalers.

The problem with that may it please the Court, is that if there are no holding New Mexico intrastate wholesalers then why is Section 9 (c) in the act and in our legislative, our treatment of the legislative history before the state legislature, it’s very clear which is set forth in our opening brief that what they were concerned with was the fact that an intrastate wholesaler, which plenty of them exist could not take advantage of the Section 9 (b) credit.

So, obviously the New Mexico legislature was legislating to take care of a specific situation which did in fact exist.

The second assumption they ask us to entertain is that New Mexico has in fact passed some different tax that they have in effect reduced their sales tax to 2% and imposed the generation tax even handedly.

I think we’ve adequately shown that that is not in fact what they’ve done and we cannot save this tax of by referring to some hypothetical tax which New Mexico might have enacted but concededly did not.

The final assumption is that the constitutional case law establishes an equivalence of tax rule.

I think that is an over statement in –

Byron R. White:

Let me ask you just the matter of fact take the public service company is that the name of the one the companies in New Mexico —

Daniel J. McAuliffe:

Public Service Company of New Mexico, that’s correct.

Byron R. White:

It generates and it sells at retail.

Daniel J. McAuliffe:

Yes, that’s correct Mr. Justice.

Byron R. White:

Now, when it gets all through with paying its gross receipts tax and its generating tax, whatever you call it, it is paying how much?

Daniel J. McAuliffe:

4%.

Byron R. White:

It pays 4%?

Daniel J. McAuliffe:

I’m assuming that it pays the gross receipts tax I’m not sure whether it pays it or whether it just collects it from the consumer.

Byron R. White:

Well whatever it is, it going to, it comes at 4%.

Daniel J. McAuliffe:

That’s correct.

Byron R. White:

They are paying a 4%, that particular company is paying 4%.

Daniel J. McAuliffe:

So the fully, we are both generating retails, that’s correct.

Byron R. White:

Exactly.

Now your clients pay 2%?

Daniel J. McAuliffe:

That’s correct 2% energy tax.

Byron R. White:

Now why do you say — now why is it that there is a discrimination — is there is a discrimination there against you?

Daniel J. McAuliffe:

Not at that level, but we are not comparable at that level because we don’t retail in New Mexico.

You are comparing Public Service of Company to New Mexico’s retail transaction with our wholesale transaction.

What we say is that we are wholesalers, that’s a significant segment of economic activity.

Public Service Company in New Mexico also engages in the wholesale transaction.

At the wholesale level Public Service Company in New Mexico pays nothing, it will receive back if it sells –

William H. Rehnquist:

Who do they sell wholesale to?

Daniel J. McAuliffe:

Well, I believe it sells to Points Electric, GNT.

There is reference in there in the New Mexico legislative history that there is at least a South West co-op which could not recoup the entire energy tax liability as the tax was initially formulated.

Byron R. White:

You mean that the co-op is a generator?

Daniel J. McAuliffe:

I believe that’s correct.

It was a wholesaler or a –

Byron R. White:

Well, now you say that Public Service Company also sells at wholesale?

Daniel J. McAuliffe:

That’s correct.

Byron R. White:

And, to whom does it sell?

Daniel J. McAuliffe:

I don’t believe the record reflects that.

I believe it in the legislative history before the New Mexico —

Byron R. White:

Well how do you know, does the record reflected it sells at wholesale?

Daniel J. McAuliffe:

In the legislative history before the New Mexico legislature there are references to the fact that there are New Mexico intrastate wholesalers I —

Byron R. White:

Merely putting the record before us doesn’t reflect that?

Daniel J. McAuliffe:

Yes, the transcript on this appeal will include the legislative history before the New Mexico legislature.

We are under discussion of the need for the section 9 (c) credit.

They discuss it specifically on the basis that it is necessary to save wholesalers from the impact of the energy tax, the New Mexico intrastate wholesalers.

What is bothering me, at the moment is memory does not serve me as to whether they identify particular intrastate wholesalers to whom they are trying to protect.

Byron R. White:

They save them from the tax but and they don’t pay gross receipts tax?

Daniel J. McAuliffe:

Not on a wholesale transaction, that is correct.

Gross receipts tax will not apply to a wholesale transaction.

William H. Rehnquist:

Was this wholesaler argument that you are making now made to the New Mexico’s Supreme Court?

Daniel J. McAuliffe:

Yes it was Mr. Justice Rehnquist and it was just not out within in the court below.

That concludes the final, you might you know the final assumption which is that we only look at the facial tax equivalence.

The rule is taxpayers pay taxes and we look at the treatment of individual tax payer similarly situated tax payers.

That’s what Halliburton says and when we look at similarly situated tax payers in this case at the wholesale level again under the constitutional test as the state advocates it to be this tax is discriminatory.

If there are no further questions Mr. Chief Justice —

John Paul Stevens:

May I ask another question?

Daniel J. McAuliffe:

Yes, Mr. Justice.

John Paul Stevens:

Could the state have come our about the same and would you agree that it would have been constitutional to do it this way, to impose the 2% generation tax on both the instate and out of state sellers and to reduce the gross receipts tax across the board to 2%, that would have been constitutional.

Daniel J. McAuliffe:

I suppose, I have never focused specifically on that question, I think it would remove the credit provision in the discriminatory treatment of which we complaint at the present time.

John Paul Stevens:

Dollars would probably come out about the same to, isn’t?

Daniel J. McAuliffe:

Again I’m not sure that I’ve never tried to cross that, I believe my time has expired Mr. Chief Justice.

Warren E. Burger:

Thank you, gentlemen.

The case was submitted.