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Appeal from the Iowa District Court for Polk County, Rebecca Goodgame Ebinger, Judge. An ethanol producer appeals after the Iowa Department of Revenue and the district court both concluded Iowa's excise tax on natural gas delivery is constitutional.
Christopher E. James and William E. Hanigan of Davis, Brown, Koehn, Shors & Roberts, P.C., Des Moines, for appellant.
Thomas J. Miller, Attorney General, Donald D. Stanley Jr., Special Assistant Attorney General, and James D. Miller, Assistant Attorney General, for appellee.
All justices concur
except Zager, J., who takes no part.
Iowa taxes the delivery of natural gas at variable tax rates depending on volume and the taxpayer's geographic location within the state. In this appeal, we confront several constitutional challenges to that statutory framework.
I. Background Facts and Proceedings.
LSCP, LLLP operates an ethanol manufacturing plant near Marcus, Iowa. Operations began in April 2003. The ethanol LSCP manufactures at its Marcus plant is sold primarily through a marketing firm for use as fuel. LSCP also produces several ethanol byproducts, all of which are marketed for use as feed for livestock.
LSCP's manufacturing processes use a substantial volume of natural gas. The gas supplies energy for the plant's steam boilers and is burned to provide ambient heat for the plant in the winter months. The relevant unit of measurement for the natural gas LSCP consumes is a therm. Between 2007 and 2010, LSCP consumed millions of therms of natural gas each year.
There are no natural gas producers in Iowa. Accordingly, all natural gas consumed in the state necessarily comes from out-of-state suppliers through federally regulated interstate pipelines. Most consumers receive their natural gas from a state-regulated local distribution company (LDC). LDCs connect to the interstate pipeline, redirect the natural gas at a reduced pressure into pipes that are smaller in diameter, and move it to the locations where it is ultimately consumed. In other words, in the delivery of natural gas, the role of an LDC is analogous to the role played by utility companies delivering electricity to consumers. MidAmerican Energy is an example of an LDC.
Some consumers of natural gas bypass LDCs and connect directly to an interstate pipeline. Companies owning interstate pipelines must allow direct connections to any consumer agreeing to certain terms and conditions. See 18 C.F.R. § 284.8(a), (e) (2014). Some industrial consumers of natural gas connect directly because they require natural gas service at higher pressures not available from an LDC. Although the record does not reflect whether a need for higher pressure was a reason for LSCP's choice, it is undisputed that LSCP bypassed an LDC and connected directly to an interstate pipeline.
In 1998, five years before LSCP began operations, the legislature restructured the statutes authorizing taxes on electricity and natural gas providers. See 1998 Iowa Acts ch. 1194, § 3 (codified at Iowa Code § 437A.2 (1999)). The new framework took effect January 1, 1999. Id. § 40. As the district court explained:
Prior to 1998, natural gas utility companies were taxed on the property they owned in the area the utility serviced--an ad valorem tax. . . . [C]hapter 437A replaced the ad valorem property tax system with an excise tax on the delivery, consumption, or use of natural gas--the " Replacement Tax." Iowa Code § 437A.3(26).
Whereas the former system taxed property, the new system taxes activity. The general assembly expressly intended the new replacement tax scheme to preserve revenue neutrality, approximate the amount of taxes that were paid under the former ad valorem framework, and " remove tax costs as a factor in a competitive environment." Id. § 3; Iowa Code § 437A.2 (2007).
Under the new replacement tax framework, the state is divided into fifty-two natural gas competitive service areas (CSAs). Iowa Code § 437A.3(22). Within each CSA, " [a] replacement delivery tax is imposed on every person who makes a delivery of natural gas to a consumer within th[e] state." Id. § 437A.5(1). The statute contains a formula for calculating the amount of replacement tax due. See id. The amount of tax is equal to the number of therms a taxpayer delivered into a particular CSA multiplied by the delivery tax rate for that CSA. Id. § 437A.5(1)(a).
The Iowa Department of Revenue (the Department) calculated each CSA's initial delivery tax rate using a statutorily-prescribed mathematical formula. See id. § 437A.5(3). First, the Department calculated average " centrally assessed property tax liability allocated to natural gas service of each taxpayer, other than a municipal utility, principally serving a natural gas [CSA] for the assessment years 1993 through 1997 based on property tax payments made." Id. § 437A.5(3)(a). The Department next determined " the number of therms of natural gas delivered to consumers which would have been subject to taxation . . . in calendar year 1998" in each CSA had the replacement tax been in effect. Id. § 437A.5(3)(b). Finally, the initial tax rate was determined by dividing
the number computed under subsection (3)(a) by the number of therms calculated under subsection (3)(b). See id. § 437A.5(3)(c). With this initial determination as a baseline, any CSA's delivery tax rate can be adjusted each tax year based upon the number of therms delivered within that CSA. See id. § 437A.5(1)(a), (8).
Typically, the replacement tax applies to LDCs because they remove natural gas from the interstate pipeline and deliver it to consumers. However, LSCP has bypassed an LDC. Thus, section 437A.5(1) does not directly apply to LSCP, because strictly speaking, LSCP does not deliver natural gas; the interstate pipeline does.
Interstate pipeline companies are exempt from the replacement tax. See id. § 437A.5(7) (providing the replacement tax in section 437A.5(1) does not apply to natural gas delivered by a pipeline other than those governed by chapter 479); id. § 479.2(2) (excluding interstate natural gas pipelines from the definition of " pipeline" under chapter 479). Yet, those who bypass LDCs by directly connecting to an interstate pipeline do not avoid the replacement tax under section 437A.5. Section 437A.5(2) imposes the replacement tax on consumers who directly connect and draw natural gas from an interstate pipeline. Id. § 437A.5(2) (" If natural gas is consumed in this state . . . and the delivery, purchase, or transference of such natural gas is not subject to the tax imposed in subsection 1, a tax is imposed on the consumer at the rates prescribed under subsection 1." ). Accordingly, because LSCP is a direct-connect consumer and the interstate pipeline company is exempt, LSCP is required to pay the replacement tax on the therms of natural gas it consumes. As the district court noted, the statute essentially " treats a direct-connect consumer as delivering the natural gas to itself."
In 2010, LSCP filed with the Department a claim for a refund of replacement tax LSCP paid for tax years 2007 through 2010, asserting the replacement tax in section 437A.5(2) is unconstitutional because it is based on the CSA in which a taxpayer is located. In particular, LSCP asserted the replacement tax violates the Federal Equal Protection Clause, article I, section 6 of the Iowa Constitution, and the dormant Commerce Clause.
Chapter 437A establishes a limitations period of three years for taxpayers filing claims for refunds of replacement tax due to clerical or mathematical errors. Iowa Code § 437A.14(1)( b ). However, the chapter also establishes a shorter limitations period of ninety days for making refund claims based on an assertion the tax is unconstitutional. Id. LSCP's claim for refunds filed with the Department contended the shorter limitations period for refund claims based on constitutional grounds violates the Federal Equal Protection Clause and article I, section 6 of the Iowa Constitution. Therefore, LSCP asserted its refund claims were timely filed within the broader three-year limitations period.
An administrative law judge (ALJ) denied LSCP's refund claims and rejected the constitutional challenges to both the refund limitations period and the replacement tax itself. The ALJ reasoned that under both the Federal Equal Protection Clause and article I, section 6 of the Iowa Constitution, any unequal treatment in the statutory framework was supported by a rational basis; that the shorter limitations period for filing refund claims was rationally
related to encouraging prompt filing of claims that may impact many other taxpayers; and that the replacement tax framework does not violate the dormant Commerce Clause because it taxes the activity of natural gas delivery without regard to the supplier's location.
LSCP sought judicial review in the district court. The district court denied each of LSCP's constitutional challenges. LSCP appealed, and we retained the appeal.
II. Scope of Review.
" We generally review a district court's decision on a petition for judicial review of agency action for correction of errors at law. However, in cases . . . where constitutional issues are raised, our review is de novo." Qwest Corp. v. Iowa State Bd. of Tax Review, 829 N.W.2d 550, 557 (Iowa 2013) (citation omitted). This is one such case.
III. The Parties' Positions.
1. Equal protection.
LSCP first contends the natural gas replacement tax violates both the Federal Equal Protection Clause and article I, section 6 of the Iowa Constitution. LSCP asserts it is similarly situated to other directly connected ethanol plants within the state, but is taxed at a different rate than other such plants solely because of its geographic location within a particular CSA. See Racing Ass'n of Cent. Iowa v. Fitzgerald (RACI I), 648 N.W.2d 555, 559 (Iowa 2002) (focusing on the main activity being taxed--slot machine gambling--rather than dissimilar scenery surrounding different facilities), rev'd, Fitzgerald v. Racing Ass'n of Cent. Iowa, 539 U.S. 103, 110, 123 S.Ct. 2156, 2161, 156 L.Ed.2d 97, 105 (2003); see also Racing Ass'n of Cent. Iowa v. Fitzgerald (RACI II), 675 N.W.2d 1, 15 (Iowa 2004) (" In the end, we return to the fact that the item taxed--gambling revenue--is identical." ). In particular, LSCP compares itself to a biorefining plant located in Emmetsburg. Like LSCP, the Emmetsburg plant is directly connected, but because it is situated within two miles of the city of Emmetsburg, it is in the Emmetsburg CSA and therefore benefits from a replacement tax rate of zero. See Iowa Code § 437A.3(22)(a)(1)(j) (establishing the Emmetsburg CSA). This disparity of taxation, LSCP posits, violates our constitutional command that " [a]ll persons in like situations should stand equal before the law." Chi. & Nw. Ry. v. Fachman, 255 Iowa 989, 1002, 125 N.W.2d 210, 217 (1963).
2. Limitations period for refund claims.
LSCP contends the shorter limitations period for refund claims based on a constitutional objection also violates the Federal Equal Protection Clause and article I, section 6 of the Iowa Constitution. In LSCP's view, the shorter limitations period draws a classification between constitutional claims and other types of claims, and therefore impedes its fundamental right of meaningful access to the courts to resolve constitutional claims. Because it contends a fundamental right ...