Media Law Prof Blog

Editor: Christine A. Corcos
Louisiana State Univ.

Monday, September 15, 2008

Sixth Circuit Allows Lawsuit Challenging Kentucky's Tax Injunction Act To Go Forward

The Sixth Circuit has ruled that a lawsuit challenging Kentucky's Tax Injunction Act, which bars the explanation of a new tax on consumer communication bills, is not barred by the Act. Said the court,  the state's justifications fail "to satisfy even the intermediate scrutiny that applies to restrictions on commercial speech." The court remanded to the lower court for further proceedings.

No one disputes Kentucky's authority to impose this tax, the providers' responsibility to pay it or Kentucky's authority to prevent providers from switching the legal incidence of taxation to their customers. And no one disputes the providers' right to raise prices to account for this additional cost of doing business. The question is whether the Commonwealth may permit providers to raise prices but prohibit them from using their invoices to say why without running afoul of the "freedom of speech" protections of the First (and Fourteenth) Amendment. Whether the no-stating-the-tax provision is more akin to a price-advertising ban (governed by the commercial-speech doctrine)  or to a ban on protesting a new tax in the forum most likely to get consumers' attention (governed by the political-speech doctrine) need not detain us. For it fails to satisfy even the intermediate scrutiny that applies to restrictions on commercial speech. The district court having come to a similar conclusion, we affirm. To the extent the district court also meant to invalidate the provision that bars providers from collecting the tax directly from the consumer, a point not entirely clear from the decision, we reverse that portion of its decision, as this provision regulates conduct, not speech.


In one sense, the law looks like it regulates commercial speech, which the Court variously has defined as "expression related solely to the economic interests of the speaker and its audience,"... The Commonwealth does not wish to regulate the providers' speech about the new tax in any venue but one: a commercial invoice. And that venue suggests that the law concerns just "the economic interests" of the parties or just the means to describe a completed commercial transaction or to propose a new one. That the law primarily regulates "economic interests" also is suggested by our suspicion that the providers would not offer to provide a line item on an invoice if the Commonwealth lowered or eliminated this tax. The providers, like most businesses, are pursuing their economic interest in preserving their shareholders' return on their investment. And one honest, yet market-savvy, way to do that is to raise prices to offset the 1.3% tax while telling customers that the price increase will permit them to maintain, not expand, profits.

In another sense, the law looks like a ban on core political speech. Just because an "economic motivation" underlies speech, we know, does not "by itself" convert it into "commercial speech."... And what is going on here is more than just a debate about how best to sell toothpaste or, as here, telephone services. It is about announcing who bears political responsibility for a new tax and about doing so in the forum most likely to capture voters' attention: an invoice that displays a predictable consequence of the tax. At the same time that the law limits the providers' efforts to duck economic responsibility for a price increase, it permits legislators to duck political responsibility for the new tax. It takes little imagination to envision why an elected official would prefer to evade accountability for a tax increase--whether that official has taken a "Taxpayer Protection Pledge," as one of the amicus curiae alleges some Kentucky legislators have taken, or not....Either way, the no-stating-the-tax provision, passed at the same time as the underlying tax, facilitates keeping consumers (and voters) in the dark about the tax and its impact on their wallets.

Perhaps our difficulty in placing a label on the law suggests it is a hybrid, one that implicates commercial and political speech, that implicates the interests of consumers and voters and that draws its heritage as much from protests over the Townshend Acts as from the Wealth of Nations. If that is the case, we presumably would apply the more rigorous scrutiny.  All laws, for example, must satisfy the Equal Protection Clause's ban on irrational line-drawing. Yet that does not mean rational-basis review governs a lawsuit challenging legislative lines drawn on racial or gender grounds. The more rigorous scrutiny would apply, just as one might say it ought to apply here.


While it may often be the case that a "'commonsense' distinction" will divide commercial speech from other speech, ... this is not one of those cases. It remains difficult to pin down where the political nature of these speech restrictions ends and the commercial nature of the restrictions begins. Yet because Kentucky's regulation does not survive even the less-stringent intermediate level of scrutiny applicable to commercial speech and because a choice between these categories thus would not affect the outcome of the case, we can save the issue for another day and decide only what we must to resolve this dispute....Central Hudson announced a four-part test to gauge the validity of commercial-speech regulations: (1) does the challenged law regulate speech, does the proposed speech concern lawful activity and is it non-misleading? (2) is the governmental interest substantial? (3) does the regulation directly advance the governmental interest? and (4) is the regulation  [*18] more extensive than necessary to serve that interest?...Gauged by this test, the law must fall.

First, this provision regulates speech, not conduct, as it prohibits providers from "stat[ing]" the tax on the bill. And as the positions of the parties illustrate, their debate concerns what the providers may say, not what they may do. The Commonwealth has no objection to the providers' conduct (raising prices to account for the new tax), just its speech (saying why it has raised prices).

In seeking to list the tax on consumer invoices, the providers' proposed speech also does not concern unlawful activity. If, as Kentucky has acknowledged, it does not oppose the providers' efforts to raise prices to account for the new tax, speech about the reasons for these price increases does not advance an illegal transaction. Nor does Kentucky law contain a general ban on line-item tax descriptions that the providers' invoices otherwise would violate. Indeed, the Commonwealth in some instances requires line item tax descriptions, even when (as here) the tax is imposed on the retailer....The lawfulness of the activity does not turn on the existence of the speech ban itself; otherwise, all commercial speech bans would all be constitutional.

Nor is the speech "inherently misleading" such that it receives no First Amendment protection....The proposed speech is truthful and verifiable: The Commonwealth in fact imposed a 1.3% tax on the gross revenues of providers; the providers in fact increased prices to absorb the tax; and, so far as the record shows, the providers in fact intend to send invoices that will accurately show the amount by which the new tax increases prices.

Kentucky nowhere argues that the providers' speech is false. And truthfully telling customers why a company has raised prices simply by listing a new tax on a bill, it seems to us, is not the kind of false, inherently misleading speech that the First Amendment doesnot protect. Were it otherwise, we doubt that the United States Congress, the Federal Communications Commission or the Commonwealth would endorse line-item listings of taxes in one form or another....Second, while the Commonwealth has done little to justify this ban, we will accept solely for the sake of argument that Kentucky's interest in avoiding potential consumer confusion--here, that consumers, rather than the providers, bear legal responsibility for the 1.3% tax--is substantial.

Third, the regulation does not directly advance the government's interest in avoiding consumer confusion over responsibility for paying the tax. By considering whether the government's goals and the regulation's scope align or whether the regulation is riddled with "exemptions and inconsistencies," the directly advance prong seeks to ferret out whether a law ostensibly premised on legitimate public policy objectives in truth serves those objectives....

Read the entire opinion here.

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