"Penalty Masquerading As Tax": NTUF Files Brief Urging SCOTUS To Take New York Dispute

NTUF's Taxpayer Defense Center today asked the U.S. Supreme Court to agree to hear a case that challenges the efforts by New York and other states to close off access to federal courts to those challenging revenue-raising measures.

The case, Healthcare Distribution Alliance v. Zucker, involves a $100 million per year collective charge imposed in 2018 by Gov. Andrew Cuomo (D) and the New York Legislature on opioid manufacturers and distributors. The charge includes a prohibition on passing the cost onto consumers, and the challengers claim this violates various constitutional provisions. New York successfully argued to the Second Circuit Court of Appeals that the charge is a tax, and therefore cannot be challenged in federal court due to the federal Tax Injunction Act (TIA).

Our brief argues that the matter should be heard in federal court because the charge is more akin to a penalty than a tax. Broadly and universally, (1) taxes are imposed for the primary purpose of raising revenue, (2) fees are imposed for the primary purpose of recouping costs from those being regulated or benefitting from a service, and (3) penalties are imposed for the primary purpose of punishment. All three are imposed by government, raise revenue, and impose economic costs. While the history of distinguishing taxes, fees, and penalties is filled with many close cases, generally a state tax involves the money being used for general government purposes, paid to the tax collector and deposited into the state general fund, and imposed with a primary purpose unrelated to recouping costs, regulating conduct, or punishing bad actors. Penalties redress wrongs to the public or the state, as opposed to individuals, and are intended more to deter others from similar conduct than to compensate victims for their loss. The charge imposed in this case is a penalty, and the Second Circuit is an outlier in concluding that any challenge to the charge is barred by the Tax Injunction Act.

New York's argument erodes the long relied-upon definition of “tax” and wrongfully invokes the TIA to stifle any scrutiny or legal challenge as to its constitutionality. As the TIA serves to bar almost any federal challenge to a state tax statute and is the threshold for the vast majority of tax disputes, any festering confusion between federal circuit courts as to what constitutes a “tax” will create havoc for lower courts and for taxpayers who depend on clear law.

The Supreme Court’s recent 9-0 decision in CIC Services, in which NTUF also filed a key brief, rejected the IRS's broad interpretation of “tax” sought by the government that would have barred those challenging regulatory actions from having their day in court. In this case, the Supreme Court has the opportunity to do the same for those facing a legislatively-imposed punishment masquerading as a tax.

The case is Healthcare Distribution Alliance v. Zucker, U.S. Supreme Court No. 20-1611. The lower court case is found at 974 F.3d 216 (2d Cir. 2020).