Amicus Curiae Brief — General Motors Corp. v. Tracy

_ GENERAL Motors Conronion ¢

“RocER Ww. TRACY, TAK ¢ COMMISSIONER OF OHIO,

= Respondent.

ee See : ? eee On Writ of Certiorari to

Sta S. _ the re Sone of Obip

#:

BRIEF OF COLUMBIA GAS OF OHIO, INC.

AS AMICUS CURIAE

IN SUPPORT OF THE RESPONDENT

ANDREW J. SONDERMAN

KENNETH W. CHRISTMAN

(Counsel of Record)

200 Civic Center Drive

P O. Box 117

Columbus, Ohio 43216-0117

(614) 460-4655

Counsel for Amicus Curiae

Columbia Gas of Ohio, Inc.

EE eR

-BESTAVAILABLE COPY!

i

TABLE OF CONTENTS

Page

SUUOCNICIOEY DIBUPNNONE i iid ki 5 ko ees as 1

SEUOCOEE GE ANNO COTIBG ono as cescecesicinnn 1

SUEY GE ARBUTNORE oo. 5 5 wc ccc ccc nces 5

PD 6 Oh 5 on 2 458 oa ks Oke A ok 6

A. Qhio’s comprehensive statutory scheme for

taxing the sale and use of natural gas neither

discriminates against nor burdens interstate

commerce, and therefore does not violate the

Commerce Clause of the United States

(Rc ccadawitaagekincdec cae ees s 6

1. The complementary sales and use taxes

imposed under §§ 5739.02 and 5741.02 of

the Ohio Revised Code are facially neutral

and exhibit no intent to discriminate

against interstate commerce............. 7

2. The record fails to show that the Ohio

statutory scheme has the effect of unduly

burdening interstate commerce .......... 17

B. The Ohio statutory scheme does not violate the

Equal Protection Clause of the Fourteenth

Amendment to the United States Constitution . 28

EIS PEI Ge ne ER 29

ii

TABLE OF AUTHORITIES

Cases

Page

Alaska v. Arctic Maid,

See AE Se Gee 3a oe canbe 9, 10, 11, 12

Amerada Hess Corp. v. Director, Div. of Taxation,

SO UE, GR Ee i oo oc ccerecees 7, 9, 10, 11, 12

14, 15, 17

Armco Inc. v. Hardesty,

SEr Ui Ge Ce boc ko se ah ie even eae 8, 27

Associated Industries of Mo. v. Lohman,

Sis BC es es sa 17, 23

Bacchus Imports, Ltd. v. Dias,

GGB SAE. Ae Cas has $a seen denen 12

Boston Stock Exchange v. State Tax Commission,

GFP Si Ge Re ho 6 ck a es ee eeasieeee 7,8

Chrysler Corp. v. Tracy,

G52 PLEOG Tp Cee Ose ai a hdc. 12, 15

CTS Corp. v. Dynamics Corp. of America,

Bi TD. GE Cee ac Vewiced sted basi ween ss 9

Dunbar-Stanley Studios v. Alabama,

Sat Sd Se CED Ak vi bas CiNeneee 10, 11, 12

Fulton Corp. v. Faulkner,

306 SEA. Bee Gee a a os esac cea 23, 24, 25, 26

General Motors Corp. v. Tracy,

G52 PCE 28 UBS Cie BGR) ok ccc ice icicns 7, 16

General Telephone Co. v. Public Utilities

Comm., 181 N.E.2d 698 (Ohio 1962)............. 13

Gregg Dyeing Co. v. Query,

ee UE; Sle A a a is Sado ns Mca as 17, 18, 28

Haefner v. City of Youngstown,

OS U0.5.2e OS Cee Pee ok vec occu. Seanad 19, 27

iil

TABLE OF AUTHORITIES (Cont'd)

Page

Halliburton Oil Well Cementing Co. v. Reily,

ee OD SEES os oS bec cel use vs 9, 17-18, 23, 27

Henneford v. Silas Mason Co.,

Ea shia 6 wit orn COS 54% 8

Industrial Gas Co. v. Public Utilities Comm.,

pee Re 12

Interstate Busses Corp. v. Blodgett,

NR pia a he na a Wide dle WO we'd « 18

Kraft General Foods v. Iowa Dept. of Revenue

ome Somme, Due US. 71 (1992) ....... 2.2.6... 9

Maryland v. Louisiana,

NN IED oe ova ne oe oo iho ec dele wu 27

New Energy Co. of Indiana v. Limbach,

oe po page bob ale Snie Gidie's 7

Norton Co. v. Department of Revenue,

Nk ds Lis Bde we % 17

Oregon Waste Systems v. Department of

Environmental Quality, 114 S.Ct. 1345 (1994) ..... 27

Postal Telegraph Cable Co. v. Adams,

RE, es os co kg hoo me oe bole Ki wie ws 24

Railway Express Agency v. Virginia,

oa k's ob boo bie 860 8s 24, 25

Tyler Pipe Industries v. Washington State Dept. of

te air ca ts) rs 27

Yankee Resources, Inc.,

Case No. 82-1086-GA-ARJ, Ohio Public Utilities

Comm. (Sep. 9, 1982) (unreported)............. 12

Constitutional Provisions and Statutes

U.S. Constitution, art. I, §8 ........... 6 and passim

U.S. Constitution, amend. XIV, §1.............. 28

IV

TABLE OF AUTHORITIES (Cont’d)

Page

Ohio Rev. Code Ann. § 1723.01,

CRDIGN TI sigs ood oo we wine biee ne ONE AS ae 13

Ohio Rev. Code Ann. Chapter 4905

(ASEOEII DE. 6k ik oo ke Sod KOA Wie be a hard od 12

Ohio Rev. Code Ann. § 4905.02

LANE FOOD cave nea yea ORR ih Se ee ee os 2

Ohio Rev. Code Ann. § 4905.03 |

LAE BOER e's kok bewtos ree s CIS cece 2

Ohio Rev. Code Ann. § 4905.04

( NOE Brea é arior cit Soa dees te SETS 2

Ohio Rev. Code Ann. § 4905.05

[ ANON Sed soos s bee veti scot a heas's 2

Ohio Rev. Code Ann. § 4905.06

(PORNO BN 5s kv viawic nace dienth creetodwn 2

Ohio Rev. Code Ann. § 4905.10

[AIRI SOE acc Rae oss des tah seess deen 19

Ohio Rev. Code Ann. § 4905.22

(ARIE TN 6 en F5 aE CUTE RR 13

Ohio Rev. Code Ann. § 4905.302

I Ses 4.6 ok oon ck dee eas tees 13

Ohio Rev. Code Ann. § 4905.32

Fo | ee eee rere carr e 13 |

Ohio Rev. Code Ann. § 4905.92

(AMO TOs. ook Gee a 8S ev 0 HRS 27

Ohio Rev. Code Ann. Chapter 4909 |

(AINE SHES 6s CRE iss SG sos tea Cen 12

Ohio Rev. Code Ann. § 4909.15

PR RS Choc nin <n s ot 4 ORs 13, 26

Ohio Rev. Code Ann. § 4909.161

CP COUR 6 5 Tia ool Wie AOA S <n odib wed’ 26

Ohio Rev. Code Ann. § 4909.17

RI PU ie akc ag ars Ske oiale Sak ye eS 13

ee

V

TABLE OF AUTHORITIES (Cont’d)

Page

Ohio Rev. Code Ann. § 4911.18

CPU I fs feos | ove bals chu ed ba 4s 19

Ohio Rev. Code Ann. § 5727.01

PE CE ono bb a Lehn MSE we Re ae 2, 8

Ohio Rev. Code Ann. § 5727.111

PU is nae os Ch eles cas UES 27

Ohio Rev. Code Ann. § 5727.30

RE i nmap oh eae es 18

Ohio Rev. Code Ann. § 5727.38

SU Se oars on a nde @ & bce « 2.4. © 69500 0:0 18, 19

Ohio Rev. Code Ann. § 5739.01

SE i Sas nach a w 6b 0 0 Oe 22, 23

Ohio Rev. Code Ann. § 5739.011

I ns oy a dn Gh a 23

Ohio Rev. Code Ann. § 5739.02

FE, i ena g cu hikg ¥ o's Wia'n 400 8 ye Sy AS

Ohio Rev. Code Ann. § 5739.025

ae, isk wine wha aos aan one baw 7, 8

Ohio Rev. Code Ann. § 5741.02

PU, CO bg ice bh kk Anke Ah tote ae

Session Laws

Amended Substitute House Bill 476 (1996) ....... 5

SEO Goer Be hE ODD co bas o ek cn chee bes awees 15

EEG CA ROE BOR IPOS ss ow cece ke wera ccancus 15

Administrative Regulations

Ohio Admin. Code Chapter 4901:1-14

Re ee 13

Ohio Admin. Code Rule 4901:1-14-01(I)

[XIN MERIOUE EOUOR ie nw cnc ncesesvenevessen 22

vi

TABLE OF AUTHORITIES (Cont'd)

Page

Ohio Admin. Code Chapter 4901:1-18

CRRMEGIGNE TGS 6 6c ccc eas s See OE EE 13

Ohio Admin. Code Rule 5703-9-26

(Banks-Baldwitl 1996) .....0.0cccececwel eet ees 22

Miscellaneous Authority

Garfield, P. and Lovejoy, W. F,

Public Utility Economics (1964)................ 26

Hellerstein, W., Complementary Taxes as a Defense

to Unconstitutional State Tax

Discrimination, 39 Tax Lawyer 405 (1986) ........ 24

BRIEF OF COLUMBIA GAS OF OHIO, INC.

AS AMICUS CURIAE

INTRODUCTORY STATEMENT

This brief is submitted by Columbia Gas of Ohio, Inc.

as amicus curiae in support of Respondent Roger W. Tracy,

Tax Commissioner of Ohio. Petitioner and Respondent

have consented to the filing of this brief.!

INTEREST OF AMICUS CURIAE

Columbia Gas of Ohio, Inc. (“Columbia’’) is an Ohio

corporation engaged in the distribution and sale of natural

gas to approximately 1.2 million retail customers through-

out the State of Ohio. Four of Columbia’s sister companies

provide similar gas distribution service to an additional

681,000 customers in the neighboring states of Kentucky,

Pennsylvania, Maryland, and Virginia.? All of these com-

panies, including Columbia, are wholly-owned subsidiaries

of The Columbia Gas System, Inc., a Delaware Corpora-

tion, which is one of the largest integrated natural gas

systems in the United States. Through its various subsidi-

aries, The Columbia Gas System is engaged in the produc-

tion, transmission, and distribution of natural gas

throughout much of the nation.

For commercial and industrial customers such as Peti-

tioner, General Motors Corporation, Columbia offers

1 Letters from the parties consenting to the filing of this brief

have been filed with the Clerk of this Court pursuant to Rule 37.3

of the Rules of this Court.

2 The four sister companies are Columbia Gas of Kentucky, Inc.,

Columbia Gas of Pennsylvania, Inc., Columbia Gas of Maryland,

Inc., and Commonwealth Gas Services, Inc.

2

both gas sales and gas transportation service, and the cus-

tomer is free to select either or both of these services. If the

customer selects sales service, Columbia purchases gas

supplies from various third party suppliers, and delivers

those supplies to the customer’s premises for sale. If the

customer selects gas transportation service, the customer is

responsible for acquiring its own gas supplies directly from

natural gas producers or marketers, such as Mobil Natural

Gas, Inc. or Enron Capital and Trade (formerly Access

Energy Corporation), and arranging to have those supplies

delivered to Columbia. Columbia then redelivers the gas

to the customer’s factory or business location. In either

case, the gas is ultimately delivered to the customer

through the same pipeline facilities of Columbia.

Since Columbia is “engaged in the business of supply-

ing natural gas. . . to consumers,” it is a “natural gas

company” within the meaning of Ohio Rev. Code Ann. § |

4905.03(A)(6), and is therefore a “public utility” subject to

the regulatory jurisdiction of the Ohio Public Utilities

Commission. Ohio Rev. Code Ann. §§ 4905.02, 4905.04,

4905.05, and 4905.06. These activities also make Columbia

a “natural gas company” for purposes of Ohio Rev. Code

Ann. § 5727.01(D)(4), and Columbia’s sales of natural gas

to retail customers are therefore exempt from the Ohio

sales and use taxes by virtue of Ohio Rev. Code Ann. §§

5739.02(B)(7) and 5741.02(C)(2).

Petitioner’s central contention in this proceeding is

that this exemption renders the use tax unconstitutional, in

violation of both the Commerce and Equal Protection

Clauses of the United States Constitution, because the tax

impermissibly discriminates against “out-of-state” gas

marketers, such as Petitioner’s various suppliers, and in

favor of “local” gas utilities, such as Columbia. Pet. Brief

mnie

3

9-115 An icus brief submitted by the Chamber of Com-

merce of the United States, the National Association of

Manufacturers, two interstate pipelines, and a natural gas

marketing company contends that this exemption also

frustrates federal natural gas policy, which encourages

open competition among suppliers. Amicus Brief 11-13. If

Petitioner and its supporting amici were to prevail on those

arguments, any resulting modification of the Ohio tax laws

might well increase the relative tax burden borne by natu-

ral gas utilities, such as Columbia, and their customers,

while decreasing the burden on competing natural gas pro-

ducers and marketers. As a result, Columbia clearly has a

vital interest in the outcome of this proceeding.

Columbia, like Petitioner and its supporting amici,

strongly supports the development of a competitive, na-

tional market for natural gas, in which individual custom-

ers are permitted to choose among competing suppliers.

Historically, Columbia has been a leader in developing and

offering the very gas transportation programs that make

such competition possible, by allowing customers such as

Petitioner to purchase gas directly from third-party suppli-

ers, rather than purchasing all of their supplies from a

natural gas utility such as Columbia. In the early 1970s,

Columbia offered one of the first such gas transportation

programs in the nation. Today, Columbia offers gas trans-

portation service to all of its commercial and industrial

3 The following abbreviations are used in this brief: “Pet. Brief”

refers to the Petitioner’s Brief. “Pet. Opp.” refers to the Respon-

dent’s Brief in Opposition to the Petition for Certiorari. “Amicus

Brief” refers to the Brief of Amici Curiae filed by the Chamber of

Commerce of the United States, the National Association of Man-

ufacturers, Coastal Gas Marketing Co., ANR Pipeline Company,

and Colorado Interstate Pipeline Co. “J.A.” refers to the Joint

Appendix filed with the Court.

4

customers, from the largest manufacturing facility to the

smallest corner drugstore or fast food restaurant, and the

company is currently developing a program that would

extend the benefits of gas transportation service to individ-

ual residential customers.

Columbia also opposes the imposition of discrimina-

tory state taxes, because Columbia recognizes, as Peti-

tioner does, that such taxes may affect customers’

purchasing decisions. Columbia fully agrees that state

taxes should not provide either a competitive advantage or

disadvantage to any class of sellers, including natural gas

marketers or natural gas utilities.

Columbia cannot, however, agree that the existing

Ohio statutory scheme unconstitutionally discriminates

against out-of-state natural gas marketers, or in favor of

natural gas utilities. As more fully explained in the Argu-

ment section, infra, natural gas marketers and natural gas

utilities are engaged in fundamentally different businesses.

They have different rights and responsibilities, and there

are significant differences in the manner in which they are

permitted to sell natural gas to consumers. For example,

marketers are free to sell gas at negotiated prices, while

utilities must charge a regulated price which reflects a

company-wide average gas cost, irrespective of the cus-

tomer’s size or usage characteristics. Furthermore, utilities

are limited to a dollar-for-dollar pass-through of their ac-

tual gas costs, without any markup or profit. Thus, while it

is true, as Petitioner contends, that marketers and utilities

both sell natural gas to burner-tip customers, Pet. Brief 4,

they are certainly not competing on a “level playing field,”

and were not doing so during the audit period in this case

5

(1986-90).4 As a result of such factors, natural gas market-

ers and natural gas utilities are not similarly situated for

purposes of the Commerce Clause, and there is nothing in

the Clause that requires the state to impose identical taxes

upon such entities.

In addition, Petitioner has selectively focused on the

application of the Ohio use tax, while virtually ignoring all

other Ohio taxes which are occasioned by the retail pur-

chase and consumption of natural gas. When Petitioner’s

argument is properly analyzed in the context of all state

taxes that apply to such transactions, including the various

revenue-based taxes that apply to gas utilities in lieu of the

use tax, it is apparent that the Ohio statutes neither dis-

criminate against nor burden sales of natural gas by out-of-

State gas marketers, and therefore violate neither the

Commerce Clause nor the equal protection rights of such

marketers.

SUMMARY OF ARGUMENT

The complementary sales and use taxes imposed

under Ohio Rev. Code Ann. §§ 5739.02 and 5741.02 are

facially neutral and exhibit no intent to discriminate

against interstate commerce. These taxes are applied on a

uniform basis, irrespective of where the gas originates or

where the customer takes title to that gas. A retail cus-

tomer purchasing gas from an out-of-state marketer will

4 Amended Substitute House Bill 476, which was signed into law

by the Governor of Ohio on June 18, 1996, will allow gas utilities to

make unregulated sales of gas under certain circumstances, but the

provisions of that law have not yet been implemented, and in any

event, they have no bearing upon events that occurred during the

audit period.

6

pay exactly the same tax as a similarly situated customer

purchasing gas from a marketer located in Ohio.

The exemption from the use tax for sales by natural /

gas companies is likewise facially neutral and exhibits no |

discriminatory intent. It is based solely upon the nature of

the seller’s business, and not upon any factors relating to |

interstate commerce.

Finally, the record fails to show that the existing Ohio

statutory scheme either favors natural gas utilities or has a

discriminatory effect which burdens out-of-state gas mar-

keters. Ohio imposes a series of revenue-based taxes on

natural gas utilities that are as onerous, if not more so,

than the use tax imposed upon gas purchased from out-of-

state marketers. This effectively negates any claim that the

existing statutes violate either the Commerce Clause or the

equal protection rights of Petitioner’s suppliers.

ARGUMENT

A. Ohio’s comprehensive statutory scheme for taxing

the sale and use of natural gas neither

discriminates against nor burdens interstate

commerce, and therefore does not violate the

Commerce Clause of the United States |

Constitution. |

The Commerce Clause, which is contained in

Article I, section 8, of the United States Constitution, |

provides that “(t]he Congress shall have Power... To

regulate Commerce . . . among the several States . . .” |

It is now well-established that the Commerce Clause not |

only grants Congress the affirmative power to regulate

interstate commerce; it also prohibits the states from

engaging in “economic protectionism” designed to benefit

——

7

in-state economic interests while burdening out-of-state

competitors. New Energy Co. of Indiana v. Limbach, 486

U.S. 269, 273 (1988). In particular, no state may impose a

tax which discriminates against interstate commerce by

providing a direct commercial advantage to local business.

Boston Stock Exchange v. State Tax Commission, 429 U.S.

318, 329 (1977). A state tax may violate the Commerce

Clause if it is facially discriminatory, has a discriminatory

intent, or has the effect of unduly burdening interstate

commerce. Amerada Hess Corp. v. Director, Div. of

Taxation, 490 U.S. 66, 75 (1989).

Petitioner argues that the use tax imposed under Ohio

Rev. Code Ann. § 5741.02 violates the Commerce Clause,

because it discriminates against sales by out-of-state gas

marketers, and in favor of sales by “local” gas utilities. The

Ohio Supreme Court rejected that argument. General

Motors Corp. v. Tracy, 652 N.E.2d 188 (Ohio 1995). For the

reasons set forth herein, Columbia contends that the Ohio

Supreme Court’s decision was correct and urges this Court

to affirm that decision.

1. The complementary sales and use taxes

imposed under §§ 5739.02 and 5741.02 of the

Ohio Revised Code are facially neutral and

exhibit no intent to discriminate against

interstate commerce.

Ohio, like most states, imposes complementary sales

and use taxes on the purchase or subsequent use of tangi-

ble personal property, including natural gas. If a sale of gas

occurs within Ohio, the state imposes a 5% sales tax on the

transaction. Ohio Rev. Code Ann. §§ 5739.02 and

5739.025. If the sale occurs outside the state but the gas is

ultimately consumed within Ohio, the state levies a 5%

8

percent use tax on the “storage, use, or other consump-

tion” of gas which occurs within the state. Ohio Rev. Code

Ann. §§ 5741.02 and 5739.025. (Local governments are

permitted to levy certain additional taxes which increase

the rate of the sales and use taxes.) The sales and use taxes

are “complementary” in the sense that the use tax does not

apply to any transaction upon which the sales tax has been

imposed and paid. Ohio Rev. Code Ann. § 5741.02(C)(1).

As a result, the sales and uses taxes, taken together, are

facially neutral and are applied in a non-discriminatory

manner. Customers purchasing natural gas will pay exactly .

the same tax (whether denominated as a sales or use tax) |

irrespective of where the gas originates, where they took

title to the gas, or whether they purchased that gas from a

local or out-of-state supplier. In this respect, the Ohio

sales and use taxes are virtually identical to the Washington

sales and use taxes which this Court upheld almost sixty

years ago in Henneford v. Silas Mason Co., 300 U.S. 577

(1937).

The use tax does not apply to gas sold by natural gas

utilities (which are statutorily defined as “natural gas com-

panies”), Ohio Rev. Code Ann. §§ 5727.01(D)(4),

5739.02(B)(7) and 5741.02(C)(2), but that exemption is

likewise facially neutral. It applies to all sales of gas by such

companies, irrespective of where the gas originated, where

the utility took title to the gas, or whether that gas was

acquired from a local or out-of-state supplier. As a result,

the exemption neither taxes a transaction or incident more

heavily when it crosses a state line, Armco Inc. v. Hardesty,

467 U.S. 638, 642 (1984), nor otherwise discriminates on

the basis of some “interstate element.” Boston Stock Ex-

change v. State Tax Commission, 429 U.S. 318, 332 (1977).

The exemption is based solely upon the nature of the

seneeeaed Senmeaiiee cee

Ss aamrsaasaemaarinaeniaeanaiaascitiiianialiiiiiiiiiliiiiiiiltaal

9

seller’s business, and not upon any factors relating to inter-

state commerce.

Petitioner nonetheless argues that the exemption for

sales by natural gas utilities facially discriminates against

interstate commerce, because it provides a direct commer-

cial advantage to local business. Pet. Brief 9, 17. Although

the exemption is not facially discriminatory in the typical

sense, because “there is no explicit discriminatory design”

which favors local businesses, Amerada Hess Corp. v. Di-

rector, Div. of Revenue, 490 U.S. 66, 76 (1989), Petitioner

contends that the exemption necessarily favors local busi-

nesses, because under Ohio law, the definition of a “‘natu-

ral gas company” is limited to companies that “own or

operate the transportation and distribution equipment and

deliver the natural gas to consumers in Ohio.” Pet. Brief 6.

While the definition of a “natural gas company” is, in fact,

limited to such entities, it does not follow that the use tax

impermissibly discriminates against interstate commerce.

In considering claims of discrimination under the

Commerce Clause, it is necessary to compare entities that

are similarly situated. Kraft General Foods v. Iowa Dept. of

Revenue and Finance, 505 U.S. 71, 80 (Fn. 23) (1992); CTS

Corp. v. Dynamics Corp. of America, 481 U.S. 69, 88 (1987);

Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 70

(1963). If taxpayers are engaged in different businesses,

they are not similarly situated for purposes of the Com-

merce Clause, and the Clause imposes no “iron rule of

equality” with respect to taxes assessed on different types

of businesses. Alaska v. Arctic Maid, 366 U.S.199, 205

(1961).

This principle is perhaps best illustrated by the

Court’s recent decision in Amerada Hess Corp. v. Director,

Div. of Taxation, 490 U.S. 66 (1989). In that case, several oil

10

producers challenged an “add-back” provision of the New

Jersey Corporation Business Tax Act that prohibited them

from deducting, for state tax purposes, the Windfall Profit |

Tax that they paid to the federal government. The adverse

effect was limited to oil producers, since the Windfall

Profit Tax did not apply to oil retailers or other entities.

Furthermore, since there are no oil reserves in New Jersey,

all of the activities that gave rise to the adverse impact of

the challenged tax provision necessarily took place outside

the state, and purely “local” businesses were not affected. |

The oil producers argued that the add-back provision |

therefore violated the Commerce Clause, because it dis-

criminated against oil producers who market their oil and

in favor of independent retailers who do not produce oil.

The Court rejected that contention. Even though the pro-

ducers and retailers were obviously competitors engaged

in the sale of the same product, the Court found that the

add-back provision did not discriminate against interstate

commerce, because any differences in the effect of that

provision resulted “solely from differences between the

nature of their businesses, not from the location of their

activities.” 490 U.S. at 78.

ee ee

The Court reached similar conclusions in Alaska v.

Arctic Maid, 366 U.S. 199 (1961) and Dunbar-Stanley Stu-

dios v. Alabama, 393 U.S. 537 (1969). Arctic Maid involved

a tax which Alaska had imposed on “freezer ships” operat-

ing in territorial waters off its coast. The freezer ships

gathered fish which had been caught by their own “catcher |

boats” or by independent operators; froze the fish; and \

then transported them to out-of-state locations for can-

ning. Since Alaska imposed no similar tax on salmon

caught and frozen in Alaska for delivery to local canneries,

the tax was challenged on the grounds that it violated the

Commerce Clause by discriminating against the freezer

en D

11

ships. The Court rejected that challenge. Noting that the

Commerce Clause imposes no strict rule of equality with

respect to taxes assessed on different types of businesses

(and also noting that local canneries paid an even higher

tax than the freezer ships), the Court held that any differ-

ence between the taxes imposed upon the freezer ships and

their competitors was not so “palpably disproportion-

ate ... as to run afoul of the Commerce Clause.” 366

U.S. at 205.

In Dunbar-Stanley Studios, the State of Alabama im-

posed a tax of three to five dollars per week on transient or

traveling photographers (depending upon the size of the

towns in which they were operating), and twenty-five dol-

lars per year on photographers operating in fixed loca-

tions. The fixed-location photographers (like Ohio’s gas

utilities) were necessarily located within the state, while at

least some of the transient photographers were engaged in

interstate travel. A photography firm challenged the tax on

transient photographers, claiming that it discriminated

against interstate commerce. The Court rejected that

claim, noting that the tax applied equally to transient pho-

tographers who were engaged in interstate travel and those

who traveled solely within the state. The Court also found

no evidentiary basis upon which to conclude that the tax on

out-of-state transient photographers was so disproportion-

ate to the tax imposed on fixed-location photographers as

to “bear unfairly on the former.” 393 U.S. at 542. The

Court went on to suggest that even if the tax on transient

photographers had amounted to twice the tax imposed

upon those operating in fixed locations, the tax might not

have been unconstitutional, “given the differences be-

tween the two ways of carrying on the business.” Jd. (Fn.

5).

12

The fundamental principle that emerges from Amer-

ada Hess, Arctic Maid, and Dunbar-Stanley Studios is that a

state may, without violating the Commerce Clause, impose

different taxes upon different types of businesses. This is

true even if the entities are competitors who sell the same

product (oil), provide the same service (taking photo-

graphs), or engage in the same commercial activity (gath-

ering and transporting fish for canning).> That principle is

directly relevant here. Despite the fact that natural gas

utilities and natural gas marketers sell the same product to

the same customers, they are engaged in fundamentally

different businesses.

Natural gas utilities are classified as public utilities,

and their rates, services, and operations are therefore sub-

ject to extensive regulation. See generally, Ohio Rev. Code

Ann. Chapters 4905 and 4909. Natural gas marketers are

not classified as public utilities, Chrysler Corp. v. Tracy, 652

N.E.2d 185 (Ohio 1995); Yankee Resources, Inc., Case No.

82-1086-GA-ARJ (Ohio Pub. Util. Comm. Sep. 9, 1982)

(unreported) (Pet. Opp. 2a-5a), and face no similar regula-

tory constraints.

Natural gas utilities are legally obligated to serve the

public, without discrimination, throughout their field of

operations. Indus:rial Gas Co. v. Public Utilities Comm. , 21

N.E.2d 166 (Ohio 1939). Natural gas marketers are free to

select their own customers. J.A. 199.

Natural gas utilities may charge only those rates which

have been found to be “just and reasonable” by the Ohio

Public Utilities Commission, and cannot change those

>In this regard, Bacchus Imports, Ltd. v. Dias, 468 U.S. 263

(1984), cited by Petitioner, is clearly distinguishable. The tax in that

case discriminated among entities who were engaged in the same

business, i.e., the sale of liquor at wholesale.

13

rates without formal regulatory approval. General Tele-

phone Co. v. Public Utilities Comm., 181 N.E.2d 698 (Ohio

1962); Ohio Rev. Code Ann. §§ 4905.22, 4905.32, 4909.15,

and 4909.17. Their rates are set using a statutory formula,

which is based on the cost of providing service plus a “fair

and reasonable” return on investment. Ohio Rev. Code

Ann. § 4909.15. With respect to one major category of

expense, the cost of obtaining natural gas supplies for their

customers, natural gas utilities are limited to a dollar-for-

dollar pass-through of those costs without any markup or

profit. Ohio Rev. Code Ann. § 4905.302; Ohio Adm. Code

Chapter 4901:1-14. Furthermore, the sales price charged

by natural gas utilities must reflect a single, average cost of

gas, irrespective of the customer’s size or usage character-

istics. Jd. Natural gas marketers, on the other hand, are free

to negotiate their prices and other contract terms on a

case-by-case basis, J.A. 199-200, and may earn whatever

profit the market allows.

Natural gas utilities, like state and local governments,

may use the power of eminent domain to appropriate pri-

vate property where necessary to fulfill their public service

obligations. Ohio Rev. Code Ann. § 1723.01. Natural gas

marketers have no such power. J.A. 201. Natural gas utili-

ties typically hold franchises granted by municipal govern-

ments, which allow their pipelines and other facilities to

occupy the streets and public rights-of-way. Natural gas

marketers own no such facilities (J.A. 202), and hold no

such franchises.

Natural gas utilities must administer extensive social

programs, such as the Percentage of Income Payment Plan,

which help to assure continued service to low-income cus-

tomers by limiting the utilities’ ability to disconnect service

for nonpayment. Ohio Admin. Code Chapter 4901:1-18.

14

Natural gas marketers are free to terminate service in

accordance with the terms of their contracts.

In short, natural gas utilities are heavily regulated

businesses with special rights and responsibilities that are

not shared by the general business community. They face

significant regulatory constraints on the manner in which

they are permitted to sell natural gas to consumers. Natu-

ral gas marketers, on the other hand, are essentially unreg- |

ulated commodity merchants. By any reasonable measure, |

these entities represent two very different types of busi- |

nesses. As a result, there is absolutely nothing in the Com-

merce Clause that requires Ohio to impose identical taxes

upon such entities, and the exemption of natural gas com-

panies from the Ohio use tax does not facially discriminate

against interstate commerce. Any differences in the result-

ing tax treatment result “solely from differences between

the nature of their businesses, not from the location of

their activities.” Amerada Hess Corp., 490 U.S. at 78.°

ae ern onc e oeN

In addition, the Ohio statutes exhibit absolutely no

evidence of discriminatory intent. The Ohio General As- |

sembly could not have been motivated by any intent to

discriminate against out-of-state gas marketers when it

first exempted sales by natural gas companies from the use

tax, because that exemption has existed since the sales and

use taxes were first enacted in 1935, several decades before |

the availability of gas transportation programs allowed

6 Although Petitioner maintains that the location of the exempt

seller is the determinative factor for purposes of the sales and use

taxes, Pet. Brief 19 (Fn.15), this is clearly not the case. If the

location was determinative, the sales tax would not apply to sales by

in-state natural gas marketers. That alone demonstrates that the

determinative factor is the nature of the seller’s business, and not

the seller’s location.

ee

15

customers to purchase gas from marketers instead of natu-

ral gas utilities. 116 Ohio Laws 41, 43-44, 101, 102-3 (1935).

Nor is the exemption for natural gas utilities moti-

vated by any desire to exert pressure on out-of-state mar-

keters to conduct their business in Ohio, Amerada Hess,

490 U.S. at 77-78, since such sales would still be subject to

an equal sales tax. The only way that out-of-state market-

ers could avoid the imposition of the sales or use tax on the

gas that they sell is to get into an entirely new line of

business by becoming public utilities.

Petitioner further argues that the taxability of a sale or

purchase depends not on the character of the seller as a

public utility, but on whether the seller owns distribution

equipment and facilities within the state and uses such

equipment and facilities to deliver gas to consumers. Pet.

Brief 6. That argument misses the point, because the two

are basically inextricable. Under Ohio law, it is the owner-

ship or operation of such facilities, and the use of those

facilities to deliver gas to consumers, that causes an entity

to be characterized as a public utility. Chrysler Corp. v.

Tracy, 652 N.E.2d 185 (Ohio 1995).

Finally, Petitioner argues that the use tax exemption

for natural gas utilities discriminates against goods which

are delivered into the state by “common carriage” rather

than by the seller’s own distribution network. Pet. Brief.

21-22. That argument also misses the point, because natu-

ral gas is delivered through the same interstate pipelines

and local distribution facilities whether it is sold by natural

gas marketers or natural gas utilities. Since Petitioner has

effectively conceded as much, Pet. Brief 25, that argument

should be rejected.

For the foregoing reasons, Columbia submits that the

Ohio sales and uses taxes are facially neutral, that they

16

exhibit no discriminatory intent, and that the exemption

for natural gas utilities is based solely upon the nature of

their business, and not upon factors relating to interstate

commerce. It was essentially upon this basis that the Ohio

Supreme Court rejected Petitioner’s claim:

We have before us purchases by GM of natural

gas from a company that does not own any pro-

duction, transportation, or distribution equip-

ment. The commissioner claims that he would tax

purchases from these persons whether they sold

gas in-state or out-of-state. Thus, the commis-

sioner’s application of the statute does not bene-

fit in-state purchasers by favoring in-state

vendors over out-of-state vendors; he treats

purchases from both the same.

652 N.E.2d at 190 (emphasis supplied). In other words, the

court found that the Ohio statutes did not discriminate

against interstate commerce, because all similarly situated

sellers were treated alike. Since the Constitution requires

nothing more, the court’s judgement should be affirmed.’

7 Petitioner and its supporting amici argue at great length that

the Ohio Supreme Court improperly upheld the use tax, despite its

discrimination against interstate commerce, because the tax also

burdened a portion of intrastate commerce. Pet. Brief 11-17; Ami-

cus Brief 10-11; Brief of Process Gas Consumers Group and Natu-

ral Gas Supply Association 11-13. That mischaracterizes the court’s

decision. What the court found was that the use tax did not discrim-

inate against interstate commerce, and therefore, did not violate

the Commerce Clause.

17

2. The record fails to show that the Ohio

statutory scheme has the effect of unduly

burdening interstate commerce.

Even if a tax is facially neutral, it may be deemed to

violate the Commerce Clause if it has a discriminatory

effect which unduly burdens interstate commerce. Amer-

ada Hess Corp. v. Director, Div. of Revenue, 490 U.S. 66, 75

(1989). Since it is actual, and not hypothetical, discrimina-

tion that violates the Commerce Clause, Associated Indus-

tries of Mo. v. Lohman, 114 S.Ct. 1815, 1824 (1994), this is

essentially a question of fact, upon which the Petitioner has

the burden of proof. Norton Co. v. Department of Revenue,

340 U.S. 534, 537 (1951) (“[A] taxpayer claiming immunity

from a tax has the burden of establishing his exemption.”);

Gregg Dyeing Co. v. Query, 286 U.S. 472, 481 (1932) (“Ap-

pellants had the burden of showing an injurious discrimi-

nation against them because they bought their gasoline

outside the State.”) Petitioner has clearly failed to sustain

that burden.

The major flaw in Petitioner’s analysis is that it fo-

cuses exclusively on the Ohio use tax, while virtually ignor-

ing the other Ohio taxes which are occasioned by the sale

and consumption of natural gas. The use tax cannot be

viewed in isolation. As the Court held in Gregg Dyeing Co.

v. Query, 286 U.S. 472, 480:

There is no demand in [the] Constitution that the

State shall put its requirements in any one stat-

ute. It may distribute them as it sees fit, if the

result, taken in its totality, is within the State’s

constitutional power.

A proper analysis, therefore, “must take the whole scheme

of taxation into account,” Halliburton Oil Well Cementing

18

Co. v. Reily, 373 U.S. 64, 69 (1963) (internal quotation

marks omitted), including taxes which are imposed upon

natural gas utilities in lieu of the use tax.

Petitioner, moreover, cannot “establish discrimina-

tion by showing merely that the [different taxing] statutes

are different in form or adopt a different measure or

method of assessment .. . ” Interstate Busses Corp. v.

Blodgett, 276 U.S. 245, 251 (1928). This Court is “not con-

cerned with what the tax is called but with what the statute

does.” Gregg Dyeing Co., 286 U.S. at 478. Furthermore, the

Court’s ultimate decision is “not dependent upon the form

of a taxing scheme, or upon the characterization of it by

the state court.” Jd. at 476. Instead, “the controlling test is

found in the operation and effect of the statute as applied

and enforced by the State.” Jd In other words, for pur-

poses of the Commerce Clause, the critical consideration

is the bottom-line economic impact upon taxpayers. As the

Court explained more recently in Halliburton Oil Well Ce-

menting Co. v. Reily, 373 U.S. 64, 70, “equality for the

purposes of competition and the flow of commerce is mea-

sured in dollars and cents, not legal abstractions.” It is

therefore essential to evaluate the Ohio use tax in the

context of all state taxes which are occasioned by the retail

sale and consumption of natural gas.

As previously explained, a customer who purchases

natural gas from a natural gas marketer will pay either the

sales or use tax, depending upon whether the sale occurred

within or outside the state. If, on the other hand, the

customer purchases gas from a natural gas utility, the sales

and use taxes do not apply, but the state imposes three

different taxes upon the “gross receipts” derived from that

sale: (1) a public utility excise tax (Ohio Rev. Code Ann.

§§ 5727.30, 5727.38); (2) a PUCO maintenance tax, to fund

19

the operations of the Ohio Public Utilities Commission

(Ohio Rev. Code Ann. § 4905.10); and an OCC mainte-

nance tax, to fund the operations of the Ohio Office of

Consumers’ Counsel (Ohio Rev. Code Ann. § 4911.18)

(hereinafter collectively “the gross receipts taxes”) .

It has long been clear, moreover, that these gross

receipts taxes are imposed in lieu of the sales and use taxes,

and vice versa. As the Ohio Supreme Court explained in

Haefner v. City of Youngstown, 68 N.E.2d 64 (Ohio 1946):

A reason for exempting sales by public utilities

[from the sales and use taxes] is found in the fact

that their gross receipts are subject to a state

excise tax...

[T]he whole legislative course shows an intent to

avoid double taxation of receipts whether they

come from sales proper or are the “gross re-

ceipts”’ of utilities that are subject to the excise

Oe aie «

68 N.E.2d. at 66, 67.

The public utility excise tax is imposed at a nominal

rate of 4.75% (Ohio Rev. Code Ann. § 5727.38), while the

PUCO and OCC maintenance taxes fluctuate from year to

year, depending upon the amounts appropriated by the

Ohio General Assembly to fund the activities of those

agencies. The current rate of the PUCO maintenance tax

is .1299% (for the 1995 tax year) and the current rate of the

OCC maintenance tax is .0310%. During the audit period

under review in this case (1986-90), the PUCO mainte-

nance tax ranged from a low of .1031% in 1986 to a high of

.1230 % in 1989, while the OCC tax ranged from a low of

.0286% in 1986 to a high of .0344% in 1988. The specific

20

rates for each year in the audit period are set forth in the

margin.§

At first glance, it might appear that the use tax is still

more burdensome, because the total current rate of the

gross receipts taxes (4.91%) is still less than the 5% base

rate for the use tax. It is important, however, to distinguish

between the nominal rates of these taxes and the actual,

effective rates as they apply to specific taxpayers. There

are three major factors that alter the effective rates.

The first is the “tax on tax” effect that one encounters

with any revenue-based tax, which serves to increase the

effective rate of the gross receipts taxes. Although this

concept may seem somewhat esoteric, it can be illustrated

with a fairly straightforward example. If Petitioner were to

purchase one hundred dollars worth of natural gas from a

natural gas marketer in Texas for ultimate consumption at

its manufacturing plants in Ohio, a 5% use tax ($5.00)

would be assessed as a result of the transaction (assuming

that local governments had not levied any additional

taxes). When the $5.00 was paid, the transaction would be

complete, and Petitioner would owe no further tax.

If, on the other hand, Petitioner purchased the same

quantity of gas from a gas utility, such as Columbia, at the

same price ($100.00), the State would assess gross receipts

taxes totaling 4.91% (at current tax rates) on the revenues

collected by the utility for that sale, and the utility would

8 The PUCO and OCC maintenance tax rates (in percentages)

for the audit period were as follows:

1986 1987 1988 1989 1990

et eee 1031 1171 .1224 .1230 = .1191

Se tsk ees 0286 .0320 .0344 .0333 .0343

in eaicanasiianaiadaniasininianaeetiniaaaaatiiainiiaiitel

21

owe the State $4.91 in tax. However, when the utility col-

lected the additional $4.91 from Petitioner in order to

cover that tax expense, that $4.91 would itself become part

of the utility’s taxable gross receipts, and the utility would

then owe an additional 4.91% of that $4.91, or $.24. In

order to make the utility whole and permit it to recover the

total tax expense incurred in providing service, the total

amount of revenue collected for the sale ($100.00) must be

increased by an amount equal to the original gross receipts

($100.00) multiplied by the quantity of 1/1-T, where T

equals the nominal rate of the gross receipts taxes (4.91%).

Although this process may seem complex, this is precisely

how the Ohio Public Utilities Commission sets utility rates

in order to allow utilities to recover the various gross re-

ceipts taxes from their customers. In this particular in-

stance, the calculation produces an effective rate of the

gross receipts taxes of 5.16%, which exceeds the base rate

of the use tax imposed by the State on gas supplied by out-

of-state gas marketers. One can make similar calculations

for each year in the audit period. The lowest effective rate

was 5.13% for 1986, which still exceeds the base rate for

the use tax.9

The second such factor involves the base upon which

the various taxes are calculated. When utilities sell gas to

9 The calculation of the 5.16% effective rate of the gross receipts

taxes can be mathematically verified as follows, assuming an origi-

nal purchase price of $100.00:

Total Amount Collected from Customer

(assuming 5.16% effective tax rate) 105.16

PUCO Tax (.001299 x .105.16) —.14

OCC Tax (.000310 x 105.16) — .03

Pub. Util. Excise Tax (.0475 x 105.16) —4.99

Original Purchase Price

(unadjusted for taxes) 100.00

22

consumers, they do so on a “bundled” basis, which means

that the sales price includes all costs of obtaining and

delivering that gas to the utility, including the transporta-

tion charges of interstate pipeline companies. Ohio Ad-

min. Code Rule 4901:1-14-01(I). The gross receipts taxes

apply to the entire amount, including those transportation

charges. Marketers, on the other hand, have the option of

delivering gas to a customer at a receipt point outside

Ohio, allowing title to pass at that point, and then having

the customer to contract directly with the interstate pipe-

lines for delivery of the gas. J.A. 141-42, 210-11. The rec-

ord shows that Petitioner and its suppliers have, in fact,

utilized that option; Petitioner has purchased gas from

marketers; taken title to the gas outside the State of Ohio;

and contracted directly with interstate pipelines for the

delivery of that gas. Id. see also, J.A. 23-4, 30. In those

instances, the “price” of the gas, upon which the use tax is

calculated, would not include the interstate pipeline trans-

portation charges, because it does not include delivery

charges incurred after title has passed to the purchaser.

Ohio Rev. Code Ann. § 5739.01(H); Ohio Admin. Code

Rule 5703-9-26. While the exact effect of this exclusion

cannot be calculated from the record in this case, it obvi-

ously serves to decrease the effective rate of the use tax,

vis-a-vis the gross receipts taxes.

The third such factor is the “manufacturers’ use ex-

emption,” which also serves to decrease the effective rate

of the use tax. If Petitioner were to purchase its gas sup-

plies from a gas utility, such as Columbia, the gross receipts

taxes would apply to all revenues derived from those sales,

irrespective of how Petitioner used the gas. The use tax, on

the other hand, does not apply to any gas which Petitioner

uses “primarily in a manufacturing operation to produce

tangible personal property for sale.” Ohio Rev. Code Ann.

23

§§ 5739.01(E)(9), 5739.011(B)(8), and 5741.02(C)(2);

J.A.73. Although Petitioner characterizes this exemption

as “a minor exception not relevant to this case,” Pet. Brief

6, the evidentiary record indicates that the volume of gas

subject to this exemption is “[p]robably the majority” of

Petitioner’s usage. J.A. 74. If one conservatively estimates

that 50% of Petitioner’s gas usage is subject to the manu-

facturers’ use exemption, the effective rate of its use tax

would not exceed 3.5%, even if additional taxes imposed

by local governments produced a nominal use tax rate of

7%, which Petitioner concedes to be the maximum permit-

ted by Ohio law. Pet. Brief 5. Since an effective rate of

3.5% is considerably lower than even the nominal rate of

the public utility excise tax (4.75%), it is apparent that the

use tax does not discriminate against sales of gas by out-of-

state marketers, and therefore does not burden interstate

commerce. !0

Petitioner essentially argues that the various gross re-

ceipts taxes imposed upon natural gas utilities cannot be

considered in this analysis, because they fail to qualify as

“compensatory taxes” under the test enunciated in Fulton

Corp. v. Faulkner, 116 S.Ct. 848 (1996). Pet. Brief 17-18.

That argument should be rejected.

10 Columbia is aware of the Court’s reluctance to engage in

detailed examinations of relative tax burdens, especially where it

requires complex economic analyses. Fulton Corp. v. Faulkner,

116 S. Ct. 848, 859 (1996); Associated Industries of Mo. v. Lohman,

114 S. Ct. 1815, 1825 (Fn. 5) (1994). The analysis presented here,

however, can be performed using only the existing tax rates, the

evidence in the record, and some basic arithmetic. Such an analysis

is essential, moreover, if the ultimate decision is to be based upon

“dollars and cents,” and not “legal abstractions.” Halliburton Oil

Well Cementing Co. v. Reily, 373 U.S. 64, 70 (1963).

24

To begin with, the Fulton test is not applicable to the

facts of this case, because it applies only where a state tax

facially discriminates against interstate commerce. In cases

such as this, where the challenged tax is not facially dis-

criminatory (or even arguably not so), but where taxes on

interstate commerce are imposed in lieu of taxes on intra-

state commerce, the Court applies a “somewhat different

standard.” Fulton, 116 S.Ct. at 854 (Fn. 2). Under that

standard, the challenged tax is upheld if it constitutes the

“just equivalent” of the tax in lieu of which it is imposed.

Railway Express Agency v. Virginia, 358 U.S. 434, 436

(1959); Postal Telegraph Cable Co. v. Adams, 155 U.S. 688,

696-97 (1895); see also, W. Hellerstein, Complementary

Taxes as a Defense to Unconstitutional State Tax Discrimina-

tion, 39 Tax Lawyer 405, 420-22 (1986).

In Railway Express Agency, for example, this Court

upheld a Virginia franchise tax on express companies en-

gaged in interstate commerce that had been imposed “in

lieu of all other property taxes on intangibles and rolling

stock.” 358 U.S. at 435. The taxpayer argued that the new

franchise tax, which amounted to $139,739.66, was not the

“just equivalent” of the tax in lieu of which it was imposed,

because that tax, which applied only to rolling stock and

cash, would have yielded just $679.77. The Court rejected

that argument on the grounds that the new franchise tax

was “not only in lieu of the previous tax on rolling stock

and cash on hand,” but also reached “intangible rights of

great value .. . ” 358 U.S. at 445. In doing so, moreover,

the Court made it clear that precise mathematical equiva-

lence was not required:

{W]e will not inquire into the exactitudes of the

formula where appellant has not shown it be so

baseless as to violate due process.

peeeeeeenneael

25

358 U.S. at 436. Under that standard, the Ohio use tax

clearly constitutes the “just equivalent” of the gross re-

ceipts taxes, and the use tax should therefore be sustained.

Assuming, however, for the sake of argument, that the

Fulton test applies, the Ohio gross receipts taxes clearly

satisfy the requirements of that test. In Fulton, the Court

held that even a facially discriminatory tax may survive

Commerce Clause scrutiny if it is truly a “compensatory”

tax designed to make interstate commerce bear a burden

already borne by intrastate commerce. 116 S.Ct. at 854.

The Court then outlined the three conditions necessary for

a valid compensatory tax. First, the state must identify the

intrastate tax burden for which it is attempting to compen-

sate. Second, the tax on interstate commerce must

“roughly approximate,” but not exceed, the tax on intra-

state commerce. And third, the taxes must be imposed on

“substantially equivalent” events. Jd., at 854-55.

Petitioner first argues that the public utility excise tax

fails the second prong of the Fulton test because it is im-

posed at a nominal rate of 4.75%, while the use tax, which

applies to gas sold by out-of-state marketers, is imposed at

a higher base rate of 5% (with a possible addition of up to

2% by local governments). Pet. Brief 17-18. That argument

(which completely ignores both the PUCO and OCC

maintenance taxes) fails to recognize the difference be-

tween the nominal and effective tax rates. As previously

explained, the effective rate of the gross receipts taxes

significantly exceeds the effective rate of the use tax (under

the facts shown on the record of this case), even if a local

government were to increase the use tax by the maximum

amount permitted by law.

Petitioner also argues that the public utility excise tax

fails the third prong of the Fulton test, because the excise

26

and use taxes are imposed upon different entities (the

customer in the case of the use tax; the utility in the case of

the public utility excise tax), and therefore cannot fall on

substantially equivalent events. Pet. Brief 17-18. Although

actual incidence upon the same class of taxpayers is essen-

tial to a finding that two taxes are complementary, the

Court has recognized that there are instances in which the

nominal and actual incidences of a tax fall upon different

entities. Fulton Corp., 116 S.Ct. at 858. The most obvious

example occurs where a “nominal taxpayer can pass [the

tax] through to other parties, like consumers.” Jd.

That is precisely the situation here. As two noted

authorities have explained, “[w]here public utilities are

concerned . . . the tax burden is shifted to consumers

through the rates charged for service. This results from the

fact that regulatory law and commission practice require

taxes payable to be recognized as proper costs of service.”

P. Garfield and W. FE. Lovejoy, Public Utility Economics

392 (1964). Under Ohio law, the gross receipts taxes are

included in utility rates along with other operating ex-

penses, and any increases in tax expense resulting from

increases in the public utility excise tax rate may be recov-

ered by utilities through a separate tariff filing outside the

normal rate case process. Ohio Rev. Code Ann. $§ 4909.15

and 4909.161. This is clearly enough to shift the actual

incidence of these taxes from the utility to the consumer,

and to satisfy the third prong of the Fulton test by showing

that the “real taxpayers are within the same class... ”

116 S.Ct. at 858.

Moreover, it is abundantly clear, from a practical

standpoint, that the sales and use taxes and the gross re-

ceipts taxes fall upon substantially equivalent events: the

27

purchase and consumption of natural gas by retail custom-

ers. In all cases, these taxes are applied to the receipts from

retail sales of natural gas, “whether they come from the

sales proper or are the ‘gross receipts’ of utilities that are

subject to the excise tax . . . ” Haefner v. City of Youngs-

town, 68 N.E. 2d. at 67.1! To suggest otherwise is to ignore

economic reality (since the customer ultimately pays the

tax in all cases) and to base one’s determination on “legal

abstractions,” rather than “dollars and cents.” Halliburton

Oil Well Cementing Co. v. Reily, 373 U.S. 64, 70.12 There-

fore, if the Court finds that the Fulton test is applicable to

the facts of this case, it should likewise find that both the

public utility excise tax and the other gross receipts taxes

assessed upon public utilities are “compensatory taxes”

that fully satisfy the requirements of that test.

11 In this regard, the Ohio gross receipts and use taxes are clearly

distinguishable from the taxes challenged in other recent cases,

which applied to events that were not substantially equivalent, such

as earning income and disposing of waste, Oregon Waste Systems v.

Department of Environmental Quality, 114 S.Ct. 1345 (1994), manu-

facturing and wholesaling tangible goods, Tyler Pipe Industries v.

Washington State Dept. of Revenue, 483 U.S. 232 (1987), Armco Inc.

v. Hardesty, 467 U.S. 638 (1984), and the severance of natural

resources from the soil and the use of resources imported from

other states. Maryland v. Louisiana, 451 U.S. 725 (1981).

12 To assure comparability, Columbia has deliberately limited

this analysis to transaction-based taxes which are occasioned by the

purchase and consumption of natural gas. Columbia has not, for

instance, addressed the state’s general property tax (which is as-

sessed upon gas utilities at a rate which is more than three times the

rate assessed upon other, non-utility businesses) (Ohio Rev. Code

Ann. § 5727.111(C)), or other taxes, such as the assessment used to

fund the state’s pipeline safety operations (Ohio Rev. Code Ann.

§ 4905.92), which applies to natural gas utilities but not to natural

gas marketers or other businesses that do not own or operate

pipeline facilities.

28

In conclusion, Petitioner has failed to sustain its bur-

den of showing that “whatever distinction there existed in

form, there was any substantial discrimination in fact.”

Gregg Dyeing Co. v. Query, 286 U.S. at 482. There is no

basis, on the record of this case, for concluding that the

existing Ohio statutory scheme discriminates against out-

of-state gas marketers or in favor of local natural gas utili-

ties. If anything, it does just the opposite. Since there is no

basis in the Commerce Clause for invalidating a tax which

discriminates against an intrastate entity, Petitioner’s Com-

merce Clause claim should be rejected.

B. The Ohio statutory scheme does not violate the

Equal Protection Clause of the Fourteenth

Amendment to the United States Constitution.

Petitioner also claims that the Ohio use tax violates

the Equal Protection Clause of the Fourteenth Amend-

ment. This argument, like Petitioner’s Commerce Clause

claim, is predicated upon the contention that the use tax

discriminates against out-of-state marketers and in favor

of “local” public utilities.

Assuming, arguendo, that Petitioner has standing to

assert such a claim (even though Petitioner is clearly not an

out-of-state marketer, and is therefore not a member of

the supposedly disadvantaged class), that argument also

fails for the reasons set forth in the preceding section.

Petitioner has failed to show that the existing Ohio statu-

tory scheme, as applied to the facts of this case, either

discriminates against out-of-state gas marketers or in favor

of natural gas utilities. The Ohio Supreme Court properly

rejected that argument, and its judgement should be

affirmed.

29

CONCLUSION

For the foregoing reasons, Columbia urges the Court

to reject the arguments presented by Petitioner and its

supporting amici, and affirm the judgement of the Ohio

Supreme Court.

Respectfully submitted,

ANDREW J. SONDERMAN

KENNETH W. CHRISTMAN

(Counsel of Record)

200 Civic Center Drive

P. O. Box 117

Columbus, Ohio 43216-0117

(614) 460-4655

Counsel for Amicus Curiae

Columbia Gas of Ohio, Inc.