Michigan Bottle Returns and the Dormant Commerce Clause

Recently the U.S. Court of Appeals for the Sixth Circuit decided a dormant commerce clause case involving Michigan's bottle law in American Beverage Association v. Snyder.  Michigan requires a 10 cent deposit on glass, plastic, or aluminum bottles containing one gallon or less of a soda drink, soda water, carbonated natural or mineral water, other nonalcoholic carbonated drinks, beer, ale, or other malt drinks with alcoholic content, mixed wine drinks or mixed spirit drinks.  MCL 445.571.  The deposit is refunded when the empty bottle is returned for recycling.  Retailers are only required to refund up to $25 per retailer per person each day. MCL 445.572(10).  75% of unclaimed deposits go to the state for environmental programs and 25% go to retailers.  According to the Michigan Department of the Treasury between 1990 and 2008 97.27% of the deposits were refunded ($7,708,600,000 in deposits were collected and $7,492,700,000 were refunded).  http://www.michigan.gov/documents/deq/dnre-whmd-sw-mibottledepositlawFAQ_318782_7.pdf. 

Only ten states have bottle deposit laws.  The others are Oregon, California, Iowa, New York, Vermont, Maine, Hawaii, Connecticut, and Massachusetts.  Most of these laws require a 5 cent deposit.  Guam also requires bottle deposits. 

Sometimes bottles are returned for refund in Michigan that were purchased in states where either a lesser deposit or no deposit was paid on the bottle.  This is illegal in Michigan with penalties ranging from a $100 civil fine (between 25 and 100 bottles returned) to up to 93 days in jail and a $1,000 fine (between 100 and 10,000 bottles returned) to up to 5 years imprisonment and a $5,000 fine (over 10,000 bottles returned).  MCL 445.574a.  Schemes of this type have been uncovered in the past and were even featured in a Seinfield episode.  One article from 2007 estimated that this fraudulent conduct costs Michigan $13 million per year.    Ethan Trex, "Why are Michigan's Bottle Deposits so High?," CNN.com, http://www.cnn.com/2011/LIVING/04/14/michigan.bottle.deposit.mf/index.html (April 14, 2011).
"Michigan Officials Bust Bottle-Deposit Fraud Ring", Foxnews.com  http://www.foxnews.com/story/0,2933,298433,00.html (Sept. 28, 2007).

Initially to combat this problem the bottle law required that "MI 10¢" appear on the bottle.  MCL 445.571(d).  In 2008 to further identify bottles sold in Michigan subject to the deposit the legislature required that bottlers meeting certain sales thresholds place an additional symbol or mark on the bottle to make it unique to the state.  MCL 445.572a(10). 

In February 2011 the American Beverage Association sued in the United States District Court for the Western District of Michigan claiming that this provision created a Michigan exclusive beverage market which would negate the efficiency benefits of large scale production, eliminate flexibility in the supply chain, and discriminate against out of state bottles and commerce.  http://www.mlive.com/news/index.ssf/2011/03/beverage_industry_sues_michiga.html  The association requested an injunction against the enforcement of this part of the law and a declaratory judgment that it is unconstitutional.  Both sides moved for summary judgment.

The commerce clause in Article I, Section 8 of the U.S. Constitution grants Congress the power to regulate commerce with foreign nations and between the states.  The commerce clause has a negative implication in that if Congress has the power to regulate commerce then the power of states to regulate commerce is restricted.  States may not unjustifiably discriminate against or overly burden interstate commerce.  This is the dormant commerce clause.  The dormant commerce clause is analyzed first by determining if the state statute directly discriminates against state commerce, favors in-state interests over out of state interests  or applies extraterritorially.  Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573 (1986).  Extraterritoriality exists if a statute "directly controls commerce occurring wholly outside the boundaries of a State [and] exceeds the inherent limits of the enacting State's authority."  Healy v. Beer Inst. Inc., 491 U.S. 324, 336 (1989).  Extraterritoriality may be established by the consequences of the statute, how the statute would interact with regulation in other states, or what the effect would be if every state adopted a similar statute.  Id.   When a statute is extraterritorial it is unconstitutional without further inquiry.   If a statute is discriminatory then the burden of proof shifts to the defendant to show that the state statute "advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives."  Dept. of Revenue of Ky. v. Davis, 553 U.S. 328 (2008).  However, if a statute is not discriminatory or extraterritorial then the court applies the Pike balancing test where the statute is unconstitutional only if "the burden it imposes upon interstate commerce is 'clearly excessive in relation to the putative local benefits.'"  Pike v. Bruce Church Inc., 397 U.S. 137, 142 (1970).

U.S. District Judge Gordon Quist ruled that the law did not have an extraterritorial intent of harming businesses out of state and did not discriminate against interstate commerce by favoring in-state interests over out of state interests.  He granted summary judgment on those points for the defendants, but reserved for trial the question of whether the burden on interstate commerce was clearly excessive in relation to the state's benefits under Pike.  As this is not a final order the Plaintiffs sought and received certification and leave to appeal the discrimination and extraterritoriality issues on an interlocutory basis.

The United States Court of Appeals for the 6th Circuit ruled on November 30, 2012 that the bottle unique mark law had an impermissible extraterritorial effect as it did not consider less burdensome alternatives.   Judge Clay wrote the opinion which was unanimous with concurrences by Judge Sutton and Judge Rice.  The Sixth Circuit agreed that the law did not discriminate against interstate commerce facially, purposefully, or in its effect.  However the Court ruled that the law was extraterritorial because its practical effect was to control commerce beyond Michigan's boundaries.  The Court reasoned that the bottles could not be used outside of Michigan, that other states might follow suit with laws that conflict with each other, that the statute involved criminal penalties, that the state did not consider alternative approaches to dealing with the fraudulent redemption issue, and that other states had not imposed this kind of approach.  Mainly though, the Court found that the bottle law allows Michigan to force distributors to package a unique product for Michigan, but also allows Michigan to determine where the containers can be sold which would force other states to react or face legal issues.  The Court said, "Thus, Michigan is forcing states to comply with its legislation in order to conduct business within its state, which creates an impermissible extraterritorial effect and is in violation of the Supreme Court's precedent stated in Brown-Forman and Healy."  American Beverage Association v. Snyder, 11-2097 (6th Cir. 2012).  Michigan was essentially criminalizing the sale of bottles in Ohio that have the Michigan unique mark.  The law impliedly required manufacturers to use a different mark everywhere else.  As less burdensome alternatives existed and were not considered by Michigan, the Court found that the statute was unconstitutional under the dormant commerce clause. 

Judge Sutton wrote a concurrence noting that extraterritoriality is an obsolete concept in that states frequently regulate activities occurring within them, but which affect many states such as California's higher state emissions standards for automobiles.  He also cited Ohio's state specific milk labels, Vermont's light bulb warnings about mercury, and state taxes on businesses operating across state lines.  He argued that the extraterritoriality test should be removed from the dormant commerce clause doctrine.

Judge Rice wrote a brief concurrence clarifying and distinguishing a case cited by the district court and noting that there is no additional inquiry into alternatives after extraterritoriality is found as that is enough to invalidate the law.  The additional inquiry only occurs if the law is either 1) discriminatory or 2) not discriminatory nor extraterritorial.



http://www.ca6.uscourts.gov/opinions.pdf/12a0394p-06.pdf

http://www.michigan.gov/documents/deq/dnre-whmd-sw-mibottledepositlawFAQ_318782_7.pdf

http://www.legislature.mi.gov/(S(sbvr5w45d5i5azjhufli5o45))/mileg.aspx?page=getObject&objectName=mcl-Initiated-Law-1-of-1976

http://www.mlive.com/news/grand-rapids/index.ssf/2012/11/appeals_court_rejects_michigan.html

http://www.detroitnews.com/article/20121130/POLITICS02/211300384

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

FICA Tax on Severance Payments

In United States v. Quality Stores, Inc.  the United States Court of Appeals for the Sixth Circuit (Michigan, Ohio, Kentucky, Tennessee) ruled that supplemental unemployment benefit payments (severance payments) are not subject to FICA (social security and medicare) taxes.  By statute Supplemental unemployment benefit payments are not wages and are only treated as wages for federal income tax withholding only. 

While the government argued that an explicit exemption from withholding was required for income to not be subject to the FICA tax, the court disagreed.  It held that as the benefits were not wages they could not be subject to FICA withholding as there was no explicit allowance for withholding as there was for federal income taxes.  The severance payment could not be compensation for services rendered.  Instead they must be compensation for the loss of employment and must be contingent on the loss of employment whether temporary or permanent. They are still subject to federal and state income taxes.

As half of the FICA tax is paid by the employer and half by the employee both the employer and the employee stand to recover a refund.  In this case Quality Stores sought a one million dollar refund.  The government's total liability could be over four billion dollars. 

The federal circuit concluded that severance payments were subject to FICA taxes in 2008 so there is now a circuit split on this issue and the government will likely request a hearing en banc before the entire Sixth Circuit.  The case may be ripe for review by the United States Supreme Court.  Given the amount the government might have to refund if this decision stands an appeal is likely.  The government had argued that congress had "decoupled" withholding of federal income tax from withholding of FICA taxes in 1983 and that income not subject to withholding for federal income taxes was not

http://www.ca6.uscourts.gov/opinions.pdf/12a0313p-06.pdf

http://www.forbes.com/sites/ashleaebeling/2012/09/13/severance-pay-fica-tax-refunds-for-employers-and-employees-back-on-the-table/

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)

Michigan Civil Rights Initiative - Proposal 2 on the 2006 Ballot - Federal Lawsuits

Proposal 2, an amendment to the Michigan Constitution banning the use of affirmative action with facially neutral language, passed in the November 2006 general election with 58% support. 

The amendment reads:

1. The University of Michigan, Michigan State University, Wayne State University, and any other public college or university, community college, or school district shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.
2. The state shall not discriminate against, or grant preferential treatment to, any individual or group on the basis of race, sex, color, ethnicity, or national origin in the operation of public employment, public education, or public contracting.
3. For the purposes of this section "state" includes, but is not necessarily limited to, the state itself, any city, county, any public college, university, or community college, school district, or other political subdivision or governmental instrumentality of or within the State of Michigan not included in sub-section 1.
4. This section does not prohibit action that must be taken to establish or maintain eligibility for any federal program, if ineligibility would result in a loss of federal funds to the state.
5. Nothing in this section shall be interpreted as prohibiting bona fide qualifications based on sex that are reasonably necessary to the normal operation of public employment, public education, or public contracting.
6. The remedies available for violations of this section shall be the same, regardless of the injured party's race, sex, color, ethnicity, or national origin, as are otherwise available for violations of Michigan anti-discrimination law.
7. This section shall be self-executing. If any part or parts of this section are found to be in conflict with the United States Constitution or federal law, the section shall be implemented to the maximum extent that the United States Constitution and federal law permit. Any provision held invalid shall be severable from the remaining portions of this section.
8. This section applies only to action taken after the effective date of this section.
9. This section does not invalidate any court order or consent decree that is in force as of the effective date of this section.

Opponents of the ballot initiative sued in U.S. District Court.  The amendment was upheld as constitutional by Judge David Lawson.  Last year the U.S. Sixth Circuit Court of Appeals 3 judge panel reversed in a 2-1 decision asserting that the constitutional amendment reorders Michigan's political process to place special burdens on minorities.  It appears that the panel was of the opinion that taking the issue to the statewide constitutional ballot initiative level and consequently away from the discretion of the individual college/university administrations was a reordering of the state's political process.  The full Sixth Circuit agreed to consider the case en banc meaning that the ruling of the panel overturning the law was vacated and all the judges on the Sixth Circuit will consider the case and issue a ruling.  A split opinion is certain on this one.  The only question is will one side or the other come out with more votes.  If the judges split evenly the district court ruling that the amendment is constitutional will be affirmed by default.

 Oral arguments were scheduled for today.

News Source:

http://www.detroitnews.com/article/20120307/METRO/203070336/Court-debate-Mich-affirmative-action-ban?odyssey=mod%7Cnewswell%7Ctext%7CFRONTPAGE%7Cs

s/ Kurt Koehler
308 1/2 S. State Street Suite 36
Ann Arbor, Michigan 48198
(Washtenaw County)