An Ohio statute awards a tax credit against the Ohio motor
vehicle fuel sales tax for each gallon of ethanol sold (as a
component of gasohol) by fuel dealers, but only if the ethanol is
produced in Ohio or, if produced in another State, to the extent
that State grants similar tax advantages to ethanol produced in
Ohio. Appellant, an Indiana limited partnership, manufactures
ethanol in Indiana, which has no sales tax exemption for ethanol,
wherefore appellant's ethanol sold in Ohio is ineligible for the
Ohio tax credit. Appellant sought declaratory and injunctive relief
in the Ohio Court of Common Pleas of Franklin County, alleging that
the Ohio tax credit violates the Commerce Clause of the Federal
Constitution by discriminating against out-of-state ethanol
producers. The court denied relief; the Ohio Court of Appeals and
the Ohio Supreme Court affirmed.
The Ohio statute discriminates against interstate
commerce in violation of the Commerce Clause. Pp. 486 U. S.
(a) The Clause's "negative" aspect, directly limiting the
States' power to discriminate against interstate commerce,
prohibits economic protectionism -- that is, regulatory measures
designed to benefit in-state economic interests by burdening
out-of-state competitors. Thus, state statutes, such as Ohio's,
that clearly discriminate against interstate commerce are invalid,
unless the discrimination is demonstrably justified by a valid
factor unrelated to economic protectionism. There is no merit to
appellees' argument that the availability of the Ohio tax credit to
some out-of-state manufacturers (those in States that give tax
advantages to Ohio-produced ethanol) shows that the Ohio provision
is not discriminatory but, rather, is likely to promote interstate
commerce by encouraging other States to enact similar tax
advantages that will spur the interstate sale of ethanol.
Discriminatory tax treatment for out-of-state goods is no more
validated by the promise to remove it if reciprocity is accepted
than would be the categorical exclusion of out-of-state goods. Nor
is there any merit to appellees' argument that the Ohio statute
should not be considered discrimination against interstate commerce
because apparently only one Ohio ethanol manufacturer (appellee
South Point Ethanol) is benefited by it, and only one out-of-state
manufacturer (appellant) is clearly disadvantaged. Where
discrimination is patent, as
Page 486 U. S. 270
it is here, neither a widespread advantage to in-state interests
nor a widespread disadvantage to out-of-state competitors need be
shown. Moreover, the "market participant" doctrine -- under which
the negative Commerce Clause's limitations apply only to a State's
acting in its governmental capacity, not to its acting in the
capacity of a market participant -- has no application here. The
state action at issue is not Ohio's purchase or sale of ethanol,
but its assessment and computation of taxes. Although the tax
credit scheme has the purpose and effect of subsidizing a
particular industry, that does not transform it into a form of
state participation in the free market. Pp. 486 U. S.
(b) The clear discrimination in this case cannot be validated by
the justifications advanced by appellees: health and commerce.
Appellees argue that the Ohio statute encourages use of ethanol to
reduce harmful exhaust emissions, both in Ohio and in surrounding
States whose polluted atmosphere may reach Ohio. There is no reason
to suppose, however, that ethanol produced in a State that does not
offer tax advantages to ethanol produced in Ohio is less healthy,
and thus should have its importation into Ohio suppressed by denial
of the otherwise standard tax credit; and ethanol use outside Ohio
is just as effectively fostered by other States' subsidizing
ethanol production or sale in some fashion other than by giving a
tax credit to Ohio-produced ethanol. Thus, health is not the
purpose of the Ohio provision, but is merely an occasional and
accidental effect of achieving what is its purpose, favorable tax
treatment for Ohio-produced ethanol. Essentially the same reasoning
applies to the asserted justification that Ohio's reciprocity
requirement is designed to increase commerce in ethanol by
encouraging other States to enact ethanol subsidies. Pp.
486 U. S.
32 Ohio St. 3d 206, 513 N.E.2d 258, reversed.
SCALIA, J., delivered the opinion for a unanimous Court.
Page 486 U. S. 271
JUSTICE SCALIA delivered the opinion of the Court.
Appellant New Energy Company of Indiana has challenged the
constitutionality of Ohio Rev.Code Ann. § 5735.145(B) (1986), a
provision that awards a tax credit against the Ohio motor vehicle
fuel sales tax for each gallon of ethanol sold (as a component of
gasohol) by fuel dealers, but only if the ethanol is produced in
Ohio or in a State that grants similar tax advantages to ethanol
produced in Ohio. The question presented is whether § 5735.145(B)
discriminates against interstate commerce in violation of the
Commerce Clause, U.S.Const., Art. I, § 8, cl. 3.
Ethanol, or ethyl alcohol, is usually made from corn. In the
last decade, it has come into widespread use as an automotive fuel,
mixed with gasoline in a ratio of 1:9 to produce what is called
gasohol. The interest in ethanol emerged in reaction to the
petroleum market dislocations of the early 1970's. The product was
originally promoted as a means of achieving energy independence
while providing a market for surplus corn; more recently, emphasis
has shifted to its environmental advantages as a replacement for
lead in enhancing fuel octane. See
Department of Agriculture, Ethanol: Economic and Policy Tradeoffs 1
(1988). Ethanol was, however (and continues to be), more expensive
than gasoline, and the emergence of ethanol production on a
commercial scale dates from enactment of the first federal subsidy,
in the form of an exemption from federal motor fuel excise taxes,
in 1978. See
Energy Tax Act of 1978, Pub.L. 95-618, § 221,
92 Stat. 3185, codified, as amended, at
26 U.S.C. §§ 4041,
4081 (1982 ed. and Supp. IV). Since then, many States,
Page 486 U. S. 272
those in the grain-producing areas of the country, have enacted
their own ethanol subsidies. See
United States General
Accounting Office, Importance and Impact of Federal Alcohol Fuel
Tax Incentives 5 (1984). Ohio first passed such a measure in 1981,
providing Ohio gasohol dealers a credit of so many cents per gallon
of ethanol used in their product against the Ohio motor vehicle
fuel sales tax payable on both ethanol and gasoline. This credit
was originally available without regard to the source of the
Act of June 10, 1981, § 1, 1981-1982 Ohio
Leg.Acts 1693, 1731-1732. In 1984, however, Ohio enacted §
5735.145(B), which denies the credit to ethanol coming from States
that do not grant a tax credit, exemption, or refund to ethanol
from Ohio, or, if a State grants a smaller tax advantage than
Ohio's, granting only an equivalent credit to ethanol from that
State. [Footnote 1
Appellant is an Indiana limited partnership that manufactures
ethanol in South Bend, Indiana, for sale in several States,
including Ohio. Indiana repealed its tax exemption for ethanol,
effective July 1, 1985, see
Act of Mar. 5, 1984, §§ 4, 5,
8, 1984 Ind.Acts 189, 194-195, at which time it also passed
legislation providing a direct subsidy to Indiana ethanol producers
(the sole one of which was appellant). See
4-4-10.1 to 4-4-10.8 (Supp.1987). Thus, by
Page 486 U. S. 273
reason of Ohio's reciprocity provision, appellant's ethanol sold
in Ohio became ineligible for the Ohio tax credit. Appellant sought
declaratory and injunctive relief in the Court of Common Pleas of
Franklin County, Ohio, alleging that § 5735.145(B) violated the
Commerce Clause by discriminating against out-of-state ethanol
producers to the advantage of in-state industry. [Footnote 2
] The court denied relief, and the
Ohio Court of Appeals affirmed. A divided Ohio Supreme Court
initially reversed, finding that § 5735.145(B) discriminated
without adequate justification against products of out-of-state
origin, and shielded Ohio producers from out-of-state competition.
The Ohio Supreme Court then granted appellees' motion for rehearing
and reversed itself, a majority of the court finding that the
provision was not protectionist or unreasonably burdensome. 32 Ohio
St.3d 206, 513 N.E.2d 258 (1987). We noted probable jurisdiction. 4
84 U.S. 984 (1987).
It has long been accepted that the Commerce Clause not only
grants Congress the authority to regulate commerce among the
States, but also directly limits the power of the States to
discriminate against interstate commerce. See, e.g., Hughes v.
Oklahoma, 441 U. S. 322
441 U. S. 326
(1979); H. P. Hood & Sons, Inc. v. Du Mond, 336 U.
, 336 U. S.
-535 (1949); Welton v. Missouri,
91 U. S. 275
(1876). This "negative" aspect of the Commerce Clause prohibits
economic protectionism -- that is, regulatory measures designed to
benefit in-state economic interests by burdening out-of-state
Page 486 U. S. 274
See, e.g., Bacchus Imports, Ltd. v. Dias, 468 U.
, 468 U. S.
-273 (1984); H. P. Hood & Sons, supra,
at 336 U. S.
-533; Guy v. Baltimore, 100 U.
, 100 U. S. 443
(1880). Thus, state statutes that clearly discriminate against
interstate commerce are routinely struck down, see, e.g.,
Sporhase v. Nebraska ex rel. Douglas, 458 U.
(1982); Lewis v. BT Investment Managers,
Inc., 447 U. S. 27
(1980); Dean Milk Co. v. Madison, 340 U.
(1951), unless the discrimination is demonstrably
justified by a valid factor unrelated to economic protectionism,
see, e.g., Maine v. Taylor, 477 U.
The Ohio provision at issue here explicitly deprives certain
products of generally available beneficial tax treatment because
they are made in certain other States, and thus on its face appears
to violate the cardinal requirement of nondiscrimination. Appellees
argue, however, that the availability of the tax credit to some
out-of-state manufacturers (those in States that give tax
advantages to Ohio-produced ethanol) shows that the Ohio provision,
far from discriminating against interstate commerce, is likely to
promote it, by encouraging other States to enact similar tax
advantages that will spur the interstate sale of ethanol. We
rejected a similar contention in an earlier "reciprocity" case,
Great Atlantic & Pacific Tea Co. v. Cottrell,
424 U. S. 366
(1976). The regulation at issue there permitted milk from out of
State to be sold in Mississippi only if the State of origin
accepted Mississippi milk on a reciprocal basis. Mississippi put
forward, among other arguments, the assertion that
"the reciprocity requirement is in effect a free-trade
provision, advancing the identical national interest that is served
by the Commerce Clause."
at 424 U.S.
. In response, we said that
"Mississippi may not use the threat of economic isolation as a
weapon to force sister States to enter into even a desirable
at 424 U. S. 379
More recently, we characterized a Nebraska reciprocity requirement
for the export of groundwater from the State as "facially
Page 486 U. S. 275
which merited "strictest scrutiny.'" Sporhase v.
Nebraska ex rel. Douglas, supra, at 458 U. S. 958,
quoting Hughes v. Oklahoma, supra, at 441 U. S.
It is true that, in Cottrell
effect of a State's refusal to accept the offered reciprocity was
total elimination of all transport of the subject product into or
out of the offering State, whereas in the present case the only
effect of refusal is that the out-of-state product is placed at a
substantial commercial disadvantage through discriminatory tax
treatment. That makes no difference for purposes of Commerce Clause
analysis. In the leading case of Baldwin v. G.A.F. Seelig,
Inc., 294 U. S. 511
(1935), the New York law excluding out-of-state milk did not impose
an absolute ban, but rather allowed importation and sale so long as
the initial purchase from the dairy farmer was made at or above the
New York State-mandated price. In other words, just as the
appellant here, in order to sell its product in Ohio, only has to
cut its profits by reducing its sales price below the market price
sufficiently to compensate the Ohio purchaser-retailer for the
forgone tax credit, so also the milk wholesaler-distributor in
in order to sell its product in New York, only
had to cut its profits by increasing its purchase price above the
market price sufficiently to meet the New York-prescribed minimum.
We viewed the New York law as "an economic barrier against
competition" that was "equivalent to a rampart of customs duties."
at 294 U. S. 527
Similarly, in Hunt v. Washington Apple Advertising Comm'n,
432 U. S. 333
432 U. S.
-351 (1977), we found invalid under the Commerce
Clause a North Carolina statute that did not exclude apples from
other States, but merely imposed additional costs upon Washington
sellers and deprived them of the commercial advantage of their
distinctive grading system. The present law likewise imposes an
economic disadvantage upon out-of-state sellers, and the promise to
remove that if reciprocity is accepted no more justifies disparity
of treatment than it would justify categorical exclusion. We
Page 486 U. S. 276
have indicated that reciprocity requirements are not per
unlawful. See Cottrell, supra,
at 424 U.S. 378
. But the case we cited for
that proposition, Kane v. New Jersey, 242 U.
, 242 U. S.
-168 (1916), discussed a context in which, if a State
offered the reciprocity did not accept it, the consequence was, to
be sure, less favored treatment for its citizens, but nonetheless
treatment that complied with the minimum requirements of the
Commerce Clause. Here, quite to the contrary, the threat used to
induce Indiana's acceptance is, in effect, taxing a product made by
its manufacturers at a rate higher than the same product made by
Ohio manufacturers, without (as we shall see) justification for the
Appellees argue that § 5735.145(B) should not be considered
discrimination against interstate commerce because its practical
scope is so limited. Apparently only one Ohio ethanol manufacturer
exists (appellee South Point Ethanol) and only one out-of-state
manufacturer (appellant) is clearly disadvantaged by the provision.
Our cases, however, indicate that where discrimination is patent,
as it is here, neither a widespread advantage to in-state interests
nor a widespread disadvantage to out-of-state competitors need be
shown. For example, in Bacchus Imports, Ltd. v. Dias,
we held unconstitutional under the Commerce Clause a
special exemption from Hawaii's liquor tax for certain locally
produced alcoholic beverages (okolehao and fruit wine), even though
other locally produced alcoholic beverages were subject to the tax.
at 468 U. S. 265
468 U. S. 271
And in Lewis v. BT Investment Managers, Inc., supra,
held unconstitutional a Florida statute that excluded from certain
business activities in Florida not all out-of-state entities, but
only out-of-state bank holding companies, banks, or trust
companies. In neither of these cases did we consider the size or
number of the in-state businesses favored or the out-of-state
businesses disfavored relevant to our determination. Varying the
strength of the bar against economic protectionism according to the
size and number of in-state and out-of-state firms affected
Page 486 U. S. 277
serve no purpose except the creation of new uncertainties in an
already complex field.
Appellees contend that, even if § 5735.145(B) is discriminatory,
the discrimination is not covered by the Commerce Clause because of
the so-called market-participant doctrine. That doctrine
differentiates between a State's acting in its distinctive
governmental capacity and a State's acting in the more general
capacity of a market participant; only the former is subject to the
limitations of the negative Commerce Clause. See Hughes v.
Alexandria Scrap Corp., 426 U. S. 794
426 U. S.
-810 (1976). Thus, for example, when a State chooses
to manufacture and sell cement, its business methods, including
those that favor its residents, are of no greater constitutional
concern than those of a private business. See Reeves, Inc. v.
Stake, 447 U. S. 429
447 U. S.
The market-participant doctrine has no application here. The
Ohio action ultimately at issue is neither its purchase nor its
sale of ethanol, but its assessment and computation of taxes -- a
primeval governmental activity. To be sure, the tax credit scheme
has the purpose and effect of subsidizing a particular industry, as
do many dispositions of the tax laws. That does not transform it
into a form of state participation in the free market. Our opinion
in Alexandria Scrap, supra,
a case on which appellees
place great reliance, does not remotely establish such a
proposition. There we examined, and upheld against Commerce Clause
attack on the basis of the market-participant doctrine, a Maryland
cash subsidy program that discriminated in favor of in-state
auto-hulk processors. The purpose of the program was to achieve the
removal of unsightly abandoned autos from the State, id.
at 426 U. S.
-797, and the Court characterized it as proprietary,
rather than regulatory, activity, based on the analogy of the State
to a private purchaser of the auto hulks, id.
426 U. S.
-810. We have subsequently observed that subsidy
programs unlike that of Alexandria Scrap
might not be
characterized as proprietary. See Reeves, Inc., supra,
447 U. S. 440
n. 14. We think
Page 486 U. S. 278
it clear that Ohio's assessment and computation of its fuel
sales tax, regardless of whether it produces a subsidy, cannot
plausibly be analogized to the activity of a private purchaser.
It has not escaped our notice that the appellant here, which is
eligible to receive a cash subsidy under Indiana's program for
in-state ethanol producers, is the potential beneficiary of a
scheme no less discriminatory than the one that it attacks, and no
less effective in conferring a commercial advantage over
out-of-state competitors. To believe the Indiana scheme is valid,
however, is not to believe that the Ohio scheme must be valid as
well. The Commerce Clause does not prohibit all state action
designed to give its residents an advantage in the marketplace, but
only action of that description in connection with the State's
regulation of interstate commerce. Direct subsidization of domestic
industry does not ordinarily run afoul of that prohibition;
discriminatory taxation of out-of-state manufactures does. Of
course, even if the Indiana subsidy were invalid, retaliatory
violation of the Commerce Clause by Ohio would not be acceptable.
424 U.S. at 424 U. S.
Our cases leave open the possibility that a State may validate a
statute that discriminates against interstate commerce by showing
that it advances a legitimate local purpose that cannot be
adequately served by reasonable nondiscriminatory alternatives.
See, e.g., Maine v. Taylor,
477 U.S. at 477 U. S. 138
477 U. S. 151
Sporhase v. Nebraska ex rel. Douglas,
458 U.S. at 968;
Hughes v. Oklahoma,
441 U.S. at 441 U. S.
-337; Dean Milk Co. v. Madison,
340 U.S. at
340 U. S. 354
This is perhaps just another way of saying that what may appear to
be a "discriminatory" provision in the constitutionally prohibited
sense -- that is, a protectionist enactment -- may on closer
analysis not be so. However it be put, the standards for such
justification are high. Cf. Philadelphia v. New Jersey,
437 U. S. 617
437 U. S. 624
(1978) ("[W]here simple economic protectionism is
Page 486 U. S. 279
effected by state legislation, a virtually per se
of invalidity has been erected"); Hughes v. Oklahoma,
at 441 U. S. 337
("[F]acial discrimination by itself may be a fatal defect" and
"[a]t a minimum . . . invokes the strictest scrutiny").
Appellees advance two justifications for the clear
discrimination in the present case: health and commerce. As to the
first, they argue that the provision encourages use of ethanol (in
replacement of lead as a gasoline octane-enhancer) to reduce
harmful exhaust emissions, both in Ohio itself and in surrounding
States whose polluted atmosphere may reach Ohio. Certainly the
protection of health is a legitimate state goal, and we assume for
purposes of this argument that use of ethanol generally furthers
it. But § 5735.145(B) obviously does not, except perhaps by
accident. As far as ethanol use in Ohio itself is concerned, there
is no reason to suppose that ethanol produced in a State that does
not offer tax advantages to ethanol produced in Ohio is less
healthy, and thus should have its importation into Ohio suppressed
by denial of the otherwise standard tax credit. And as far as
ethanol use outside Ohio is concerned, surely that is just as
effectively fostered by other States' subsidizing ethanol
production or sale in some fashion other than giving a tax credit
to Ohio-produced ethanol; but these helpful expedients do not
qualify for the tax credit. It could not be clearer that health is
not the purpose of the provision, but is merely an occasional and
accidental effect of achieving what is its purpose, favorable tax
treatment for Ohio
-produced ethanol. [Footnote 3
] Essentially the same reasoning also
responds to appellees' second (and related) justification for the
discrimination, that the reciprocity
Page 486 U. S. 280
requirement is designed to increase commerce in ethanol by
encouraging other States to enact ethanol subsidies. What is
encouraged is not ethanol subsidies in general, but only favorable
treatment for Ohio-produced ethanol. In sum, appellees' health and
commerce justifications amount to no more than implausible
speculation, which does not suffice to validate this plain
discrimination against products of out-of-state manufacture.
"* * * *"
For the reasons stated, the judgment of the Ohio Supreme Court
Section 5735.145(B) provides:
"The qualified fuel otherwise eligible for the qualified fuel
credit shall not contain ethanol produced outside Ohio unless the
tax commissioner determines that the fuel claimed to be eligible
for credit contains ethanol produced in a state that also grants an
exemption, credit or refund from such state's motor vehicle fuel
excise tax or sales tax for similar fuel containing ethanol
produced in Ohio; provided however, that such credit shall not
exceed the amount of the credit allowable for qualified fuel
containing ethanol produced in Ohio."
This provision was passed in 1984, and took effect on January 1,
1985. After this litigation began, Ohio again amended its ethanol
credit statute to reduce the amount of the credit, and scheduled it
for elimination in 1993. See
Ohio Rev.Code Ann. § 5735.145
Appellant also argued there, as it has here, that § 6735.145(B)
was an excessive burden on commerce under the test set forth in
Pike v. Bruce Church, Inc., 397 U.
, 397 U. S. 142
(1970). To the extent that claim requires separate analysis, we
find it unnecessary to reach it, in light of our disposition of the
discrimination claim. Appellant also alleged in the state courts
violations of the Equal Protection Clause and the Privileges and
Immunities Clause of the Fourteenth Amendment; those challenges are
not at issue in this appeal.
We do not interpret the trial court's acceptance of appellees'
proposed finding of fact of April 10, 1985, as a judicial finding
that protecting health was in fact a purpose of the Ohio General
Assembly, rather than merely one of several conceivable purposes
for the enactment. In any event, a subjective purpose that has so
little rational relationship to the provision in question is not
merely implausible but, even if true, inadequate to validate patent
discrimination against interstate commerce.