Background: Ohio Taxes on Natural Gas

NATURAL GAS SUPPLY ASSOCIATION

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Background: Ohio Taxes on Natural Gas

Issue

General Motors Corporation v. Roger W. Tracy, Tax Commissioner of Ohio now before the Supreme Court, deals with an Ohio sales and use tax that is applied to natural gas purchases, but from which Ohio public utilities are exempted. Thus, end users of natural gas who buy gas from non-utility marketers (a category that includes GM) must pay the tax, while end users who purchase from utilities do not.

Background

The Ohio tax appears to be an attempt by the Ohio legislature to ensure that the state continues to enjoy tax revenues from all natural gas used in the state. The effect of the tax is to keep in place the monopoly franchise power of local distributors. It denies the full benefits to competition to Ohio natural gas customers. One likely result is a slowing in the development of natural gas demand in the state.

The issue of taxes on non-utility marketers has emerged in a number of states that saw tax revenues from natural gas decline after implementation of the Federal Energy Regulatory Commission's Order 636 and other initiatives to increase competitiveness in the natural gas marketplace.

Some state legislatures have also responded to arguments from local distribution companies that state taxes disadvantaged them in competition with out-of-state marketers for local end users. And some have responded with approaches that do not violate the U.S. Constitution. In Illinois, for instance, state legislators solved the problem by freeing utilities from taxes that appeared to disadvantage them in selling to large industrial consumers. Another alternative is a corporate reorganization plan under which the utility sets up a separate marketing affiliate that is not subject to utility taxes, thus solving the tax problem while facilitating full unbundling behind the citygate.

NGSA Position

NGSA's Supreme Court challenge rests on the fact that the Ohio approach to its revenue problem discriminates against non-utilities. The current Court's analysis of the "Commerce Clause" in Article I of the U.S. Constitution disallows any state taxing scheme that discriminates against interstate commerce. And because only Ohio-based local distribution companies can qualify for an exemption to the tax, the discrimination against interstate marketers appears clear.

In May, the Natural Gas Supply Association and the Process Gas Consumers filed an amicus curiae brief in the Ohio case that states in part:

The Ohio sales and use taxing scheme patently discriminates against interstate commerce by providing an exemption that benefits only local public utilities, to the detriment of out-of-state independent marketers and producers of natural gas. . . . [In past cases, the Supreme] Court struck down taxing schemes that had the effect of encouraging transactions to be consummated in the home State to the detriment of interstate commerce. The exemption to the Ohio sales and use tax has the identical effect.

This page was last updated August 31, 1997