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Sixth Circuit hears challenge to Kentucky coal law

Opponents of the law known as S.B. 257 claim it creates a discriminatory framework to favor the sale of in-state coal in Kentucky.

CINCINNATI (CN) — An Illinois company argued before the Sixth Circuit on Tuesday that a Kentucky coal law is unconstitutional because it discriminates against out-of-state coal sellers.

S.B. 257 requires a deduction of any charged severance tax from coal suppliers when providing bids on coal contracts for Kentucky, even though the tax is still paid. The plaintiff in the case, Foresight Coal Sales LLC, claims this deduction creates a “phantom price” that favors in-state coal sales.

Severance tax is a tax that some states impose on nonrenewable natural resources such as coal, that are sold or consumed in other states. Kentucky for example has a severance tax rate of 4.5% for coal.

However, Foresight claims that under S.B. 257 in-state coal bids can effectively hide the severance tax rate even though the tax will still be paid, thus making their bid seem more attractive.

The law was upheld last year by U.S. District Court Judge Gregory Van Tatenhove, who denied Foresight an injunction after finding that S.B. 257 could not be shown to be discriminatory before it had gone into effect.

“Although time may ultimately prove Foresight to be correct about the effects of S.B. 257, the principles of federalism instruct that a federal court should be reticent to enjoin a state law before the effects of that law have been borne out, except in the most extreme circumstances,” Van Tatenhove, a George W. Bush appointee, wrote in his ruling.

Foresight appealed that ruling and the case landed before a three-judge panel of the Sixth Circuit, where the company argued during a roughly 30-minute hearing Tuesday that the district court erred when it denied the injunction request.

“We are here today to talk about S.B. 257, a Kentucky law that treats coal differently depending on where it's from. In particular, the law extends beneficial treatment in the form of a phantom price credit to Kentucky coal and coal from other severance tax states, and it denies that benefit to Illinois coal,” said attorney Joshua Hammack, who argued on behalf of Foresight.

“Why is it a phantom?” asked U.S. Circuit Judge Alice Batchelder, another Bush appointee .

“Because the credit doesn’t actually alter the prices, that utilities pay for the good of coal,” said Hammack. “Instead, it requires them to pretend that the price is different by the amount of severance tax.”

Hammack continued to argue that this treating of states differently under S.B. 257 violates interstate commerce laws.

Representing Kentucky in the case was its Solicitor General Matthew Kuhn, who argued that the law is not unconstitutional because it does not favor Kentucky over all other states. He told the panel on Tuesday that the law in fact only makes a distinction between states that charge a severance tax and those that do not.

Kuhn also echoed the district court’s ruling, saying that because the law has not been enforced yet, it is unclear if the framework creates an environment that would favor in-state coal purchases.

“I mean cost is the primary determinate, right?” asked U.S. Circuit Judge Joan Larsen who was appointed to the court by Donald Trump.

Kuhn responded to the judge’s question by providing two examples of where the state’s commission accepted bid sheets that were not the cheapest, and did so based on other factors, such as the heating quality of the coal.

Larsen continued to question Kuhn, positing that it seemed like under S.B. 257, Kentucky wants the revenue from its severance tax but does not want its market affected by states like Illinois that do not have a severance tax.

“But you want to have your cake and eat it too,” Larsen said.

Kuhn fleshed out his argument by saying that the discriminatory challenge to the law would have merit if S.B. 257 specifically favored Kentucky, but it does not.

“Judge Larsen, you made the point that we are favoring ourselves here because we want to continue imposing a coal severance tax,” Kuhn said. “I think that theory has legs only if this statute is specific to Kentucky. It is not, it applies to any coal severance tax imposed by any jurisdiction.”

Rounding out the three-judge panel was U.S. Circuit Judge Eric Clay, who was appointed to the court by Bill Clinton. The panel did not indicate when or how they would rule on the matter.

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