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The Commerce Clause, U.S. Const. art. I, § 8, cl. 3, does not prevent the States from structuring their tax systems to encourage the growth and development of intrastate commerce and industry, nor does it prevent a state from competing with other States for a share of interstate commerce so long as no State discriminatorily taxes the products manufactured or the business operations performed in any other State.
In 1998, defendant Daimler Chrysler Inc. entered into an agreement with the City of Toledo to construct a new vehicle-assembly plant near the company's existing facility in exchange for various tax incentives. Defendant estimated that it would provide the region with several thousand new jobs. In return, defendant would be given a ten-year 100 percent property tax exemption, as well as an investment tax credit against the state corporate franchise tax for certain qualifying investments. Ohio's investment tax credit granted a taxpayer a non-refundable credit against the state's corporate franchise tax if the taxpayer purchased new manufacturing machinery and equipment during the qualifying period, provided that the new manufacturing machinery and equipment were installed in Ohio. The personal property tax exemption was authorized under §§ 5709.62 and 5709.631. It permitted municipalities to offer specified incentives to an enterprise that agreed to establish, expand, renovate, or occupy a facility and hire new employees, or preserve employment opportunities for existing employees in economically depressed areas. An exemption may be granted for a specified number of years, not to exceed ten, of a specified portion, up to seventy-five percent, of the assessed value of tangible personal property first used in business at the project site as a result of the agreement. The exemption may exceed 75 percent with the consent of the affected school districts. Plaintiffs local businesses, Charlotte Cuno et al., filed a complaint under Fed. R. Civ. P. 12(b)(6). They originally brought suit in state court, challenging the validity of certain state tax credits and local property tax abatements the city granted defendant, contending the tax benefit scheme was unconstitutionally discriminatory. The district court, however, dismissed their complaint and held that the investment tax credit and the property tax exemption did not violate the Commerce Clause. From that decision, plaintiffs appealed.
Did the Ohio statutes authorizing the investment tax credit and personal property tax exemption violate the Commerce Clause?
On appeal, the court ruled that the investment tax credit scheme violated the Commerce Clause. The court noted that while the city's effort to attract industry was legitimate, and the investment tax credit was equally available to in-state and out-of-state businesses, it discriminated against interstate economic activity by coercing businesses already subject to the Ohio franchise tax to expand locally rather than out of state. The court, however, found that the conditions imposed on the receipt of the property tax exemption were minor collateral requirements. Since they were directly linked to the use of the exempted personal property and did not violate the Constitution. Accordingly, the court reversed the judgment upholding the investment tax credit provision of the statute as constitutional, the remaining parts of the judgment were affirmed.