The Ohio tax commissioner correctly charged a public-utility excise tax on $2 million of the $699 million of income earned by a pipeline operator for transporting natural gas solely within the state, the Ohio Supreme Court ruled today.

The Supreme Court justices unanimously affirmed the Ohio Board of Tax Appeals (BTA) decision, but split 4-3 on their reasoning why it was appropriate to impose the tax on Rockies Express Pipeline. Writing for the Court majority, Justice Judith L. French stated that since 1910, Ohio has exempted taxation on “receipts derived wholly from interstate business,” but the portion of Rockies’ receipts related to within-Ohio transmissions can be taxed.

Chief Justice Maureen O’Connor and Justices Michael P. Donnelly and Melody J. Stewart joined Justice French’s opinion.

In a concurring opinion, Justice R. Patrick DeWine stated that as the statutory
language would have been understood at the time the statute was enacted, the movement of goods under a transport contract with starting and ending points in Ohio would not have counted as interstate business.  Hence, it could be taxed by the state. 

Justices Sharon L. Kennedy and Patrick F. Fischer joined Justice DeWine’s opinion.

Tax Assessment Challenged
Rockies operates a 1,700-mile-long pipeline that crosses eight states, including Ohio, with its westernmost end points in Wyoming and Colorado. It crosses Ohio with an easternmost end point in Monroe County on the state’s eastern border. The pipeline connects with 28 other interstate pipelines; six of the interconnection points are in Ohio.

Rockies does not gather or process gas, but is paid to transport it. The pipeline was originally designed to move western-produced gas to eastern states, but with the access to large gas supplies discovered in Ohio and elsewhere, the pipeline was modified to send gas in both directions.

Rockies reported to the state tax commissioner that its 2015 annual gross receipts were about $699 million and that all of the income was generated from interstate-business activities. Under R.C. 5727.30(A), all public utilities, including pipelines, must pay an annual excise tax for the privilege of doing business in the state. The amount of the tax is based on the gross receipts from business actually conducted in the state. However, under R.C. 5727.33(B)(1), wholly interstate business is exempt from the excise tax.

After Rockies reported no Ohio receipts and paid the state’s $50 minimum utility excise tax, the tax commissioner asked for additional information from the company.  The reports revealed 36 transactions where the company transported the gas to points solely within Ohio, and charged about $2 million for the service. About 94% of the transactions were deliveries to other interstate pipelines.

The tax commissioner assessed Rockies $139,000 for gas shipments where gas entered and exited the pipeline within Ohio. Rockies paid the tax and petitioned the commissioner for reconsideration, arguing the gas was wholly interstate business and exempt from the excise tax.

The commissioner rejected the argument, and the company appealed to the BTA. The BTA affirmed the commissioner’s decision, and the company appealed to the Supreme Court. The Court agreed to consider Rockies’ contention that payments were not taxable under the statute and that imposing the tax also would violate the commerce clause of the U.S.  Constitution.

Court Examines Law’s Text
Justice French explained the scope of receipts that can be excluded when calculating the tax turns on the meaning of “interstate,” and the Court looked to the common meaning of the word when the law was passed in 1910. The opinion stated the word “interstate” as understood since 1910 refers to matters occurring between two states.

“Applying this meaning, we conclude that Rockies’ tax-year-2015 receipts do not bear an interstate character. The state does not seek to tax any receipts generated from transporting gas from Ohio to another state. Rather, the tax commissioner seeks to tax only those receipts that are derived from the transportation of gas that entered Rockies’ pipeline in Ohio and exited the pipeline at a delivery point in Ohio,” the opinion stated.
Rockies did not offer an alternative meaning of the word “interstate,” the opinion stated, but claimed that the statute’s use of the words “interstate business” was interchangeable with “interstate commerce,” and the Court should rely on cases dealing with the constitution’s commerce clause. The opinion countered that only if a statute is “ambiguous” does the Court consider such factors as legislative history or the public policy behind the law. Because the Court sees no ambiguity in the phrase “interstate business,” it rejected the need to examine the “historical underpinnings” of the law.

Court Finds Commerce-Clause Restrictions Do Not Apply
Rockies argued that the imposition of taxes would violate the commerce clause, which prohibits state laws that unduly restrict interstate commerce. The Court explained that the U.S. Supreme Court developed a four-factor test to determine whether a state law violates the commerce clause. Rockies claimed the state tax is illegal because it fails the first factor of the test, which is that a business activity has a “substantial nexus” with the state.

The opinion noted that the U.S. Supreme Court has ruled that when a taxpayer “avails itself of the substantial privilege of carrying on business” in the state, a substantial nexus is established. The opinion stated the Ohio Supreme Court ruled in its 2016 Crutchfield Corp. v. Testa decision that a company’s physical presence in the state is sufficient to find a substantial nexus. With an interstate pipeline running across the width of the entire state, and transporting gas through it, Rockies has a physical presence in the state and “has availed itself of the privilege of carrying on business in Ohio,” the Court stated.

Because the tax meets the first and all other factors of the test, it does not violate the commerce clause, the Court concluded.

Concurrence Considers Travel of Goods by Segments
In his concurrence, Justice DeWine noted that he agrees with the majority that the Ohio law does not violate the commerce clause. However, in this case, the historical and legal context of the statutory language needs to be examined to determine whether the tax exemption applies to Rockies’ shipments.

The concurrence stated that “interstate business” had a technical meaning at the time Ohio’s excise tax was developed. At that time, laws taxing pipelines and railroads carrying goods across state lines were commonly challenged on commerce-clause grounds.

The opinion stated that Rockies invited the Court to treat its transport of gas within Ohio as interstate commerce because the gas may have originated in another state or ultimately be destined for another state.

“Consider a case in which a company transports goods from Cincinnati to Cleveland and another company picks up the goods in Cleveland and takes them to Pittsburgh. Is the transfer from Cincinnati to Cleveland an intrastate transfer because the starting and ending points for the contract of delivery are within the same state? Or is it better to conceive of that trip as a portion of an interstate transfer of goods because the goods are ultimately destined to move across state lines?” the concurring opinion stated.

The opinion stated that at the time the statute was originally enacted, courts solved this “puzzle” by looking at the contracts for the transportation; contracts with starting and ending points within the same state would have been treated as intrastate transactions subject to taxation by the state, regardless of the future movement of the goods. Because the tax commissioner only taxed the Rockies’ transmissions that started and ended in Ohio with no indication the gas was destined for another state, the excise tax can be imposed, the concurrence concluded.

2018-0882. Rockies Express Pipeline LLC v. McClain, Slip Opinion No. 2020-Ohio-410.

View oral argument video of this case.

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