(CN) – Coors Brewing Co. cannot challenge Puerto Rico’s practice of taxing large brewers at a higher rate than small brewers, the 1st Circuit ruled.
Over the years, Puerto Rico passed laws that enhanced the tax disparity between small and large brewers. In 2002, it increased the tax for large brewers to $4.05 per gallon, compared to $4.15 for small brewers.
Since 1978, “large brewers” has meant those who produce more than 31 million gallons annually. The same is true today, but there are five lower gradations of “small brewers” to categorize those who brew less than that.
Coors filed suit in Puerto Rico claiming that taxing categories of brewers differently violates the U.S. Constitution’s dormant commerce clause. It argued that treasury secretary and courts of Puerto Rico have played a strategic game of “keep away” for 35 years to avoid addressing a matter of commerce.
The fight is also personal for the Colorado-based beer giant, which wants a leg up over Puerto Rico-based Cerveceria India.
A federal judge initially dismissed the case after concluding that it was duplicative of an unsuccessful lawsuit that Coors had filed over the taxing scheme in Washington, D.C. But the 1st Circuit revived the Puerto Rico case in 2009 after finding that Supreme Court precedent held “that neither comity nor any federal statute barred Coors from seeking relief from the state taxation scheme in federal court.”
Comity bars federal courts from hearing claims that risk disrupting state tax administration. As the case proceeded on remand, the Supreme Court upended the case with a new holding, and the judge dismissed on the grounds of comity.
The Boston-based federal appeals court affirmed last week, finding that Puerto Rico is an “adequate state forum” to hear Coors’ constitutional claims, and that the state knows better how to handle its excise taxes.
Puerto Rico’s differential taxing scheme for brewers has a long history, inspiring challenges from large brewers since 1969.
Litigation in both state and federal court has been “almost continuous,” according to the 1st Circuit.
In dismissing these challenges, courts have mainly relied on the Butler Act, which states in part: “No suit for the purpose of restraining the assessment or collection of any tax imposed by the laws of Puerto Rico shall be maintained in the United States District Court for the District of Puerto Rico.”
Coors had claimed that Puerto Rico courts no longer provide a “plain, adequate and complete remedy” for its suit, and that the courts are “stacked against it.
But the three-judge appellate panel rejected such speculation.
“Should the Puerto Rico courts, as Coors fears, fail to follow federal constitutional precedent or unconstitutionally constrain their analyses, that, in and of itself, may constitute grounds for a petition for certiorari in the U.S. Supreme Court,” Chief Judge Sandra Lynch wrote for the court.
The case cannot proceed because the comity doctrine “restrains federal courts from entertaining claims for relief that risk disrupting state tax administration,” according to the decision.
“Comity is a doctrine of ‘equitable restraint,’ and operates to ‘stay [the] hand’ of the federal courts when state-law remedies are ‘plain, adequate, and complete,'” Lynch wrote (emphasis added in ruling). “The balance in favor of restraint arises here in the state taxation context: ‘comity … counsel[s] that [federal] courts should adopt a hands-off approach with respect to state tax administration.'”
“If federal declaratory relief were available to test state tax assessments, state tax administration might be thrown into disarray, and taxpayers might escape the ordinary procedural requirements imposed by state law,” she added.