519 U.S. 278 (1997), 95-1232, Gen. Motors Corp. v. Tracy

Docket Nº:Case No. 95-1232
Citation:519 U.S. 278, 117 S.Ct. 811, 136 L.Ed.2d 761, 65 U.S.L.W. 4086
Case Date:February 18, 1997
Court:United States Supreme Court

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519 U.S. 278 (1997)

117 S.Ct. 811, 136 L.Ed.2d 761, 65 U.S.L.W. 4086




Case No. 95-1232

United States Supreme Court

February 18, 1997

Argued October 7, 1996



Ohio imposes general sales and use taxes on natural gas purchases from all sellers, whether in-state or out-of-state, that do not meet its statutory definition of a "natural gas company." Ohio's state-regulated natural gas utilities (generally termed "local distribution companies" or LDC's) satisfy the statutory definition, but the State Supreme Court has determined that producers and independent marketers generally do not. LDC gas sales thus enjoy a tax exemption inapplicable to gas sales by other vendors. The very possibility of nonexempt gas sales reflects an evolutionary change in the natural gas industry's structure. Traditionally, nearly all sales of natural gas directly to consumers were by LDC's, and were therefore exempt from Ohio's sales and use taxes. As a result of congressional and regulatory developments, however, a new market structure has evolved in which consumers, including large industrial end users, may buy gas from producers and independent marketers rather than from LDC's, and pay pipelines separately for transportation. Indeed, during the tax period in question, petitioner General Motors Corporation (GMC) bought virtually all the gas for its plants from out-of-state independent marketers, rather than from LDC's. Respondent Tax Commissioner applied the general use tax to GMC's purchases, and the State Board of Tax Appeals sustained that action. GMC argued on appeal, inter alia, that denying a tax exemption to sales by marketers but not LDC's violates the Commerce and Equal Protection Clauses. The Supreme Court of Ohio initially concluded that the tax regime does not violate the Commerce Clause because Ohio taxes natural gas sales at the same rate for both in-state and out-of-state companies that do not meet the statutory definition of "natural gas company." The court then stepped back to hold, however, that GMC lacked standing to bring a Commerce Clause challenge, and dismissed the equal protection claim as submerged in GMC's Commerce Clause argument.


1. GMC has standing to raise a Commerce Clause challenge. Cognizable injury from unconstitutional discrimination against interstate commerce does not stop at members of the class against whom a State ultimately discriminates. Customers of that class may also be injured, as in this case where the customer is liable to pay the tax and as a result

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presumably pays more for gas purchased from out-of-state producers and marketers. See Bacchus Imports, Ltd. v. Dias, 468 U.S. 263, 267. Pp. 286-287.

2. Ohio's differential tax treatment of natural gas sales by public utilities and independent marketers does not violate the Commerce Clause. Pp. 287-311.

(a) Congress and this Court have long recognized the value of state-regulated monopoly arrangements for gas sales and distribution directly to local consumers. See, e. g., Panhandle Eastern Pipe Line Co. v. Michigan Pub. Serv. Comm'n, 341 U.S. 329. Even as congressional and regulatory developments resulted in increasing opportunity for a consumer to choose between gas sold by marketers and gas bundled with state-mandated rights and benefits as sold by LDC's, two things remained the same: Congress did nothing to limit the States' traditional autonomy to authorize and regulate local gas franchises, and those franchises continued to provide bundled gas to the vast majority of consumers who had neither the capacity to buy on the interstate market nor the resilience to forgo the reliability and protection that state regulation provided. To this day, all 50 States recognize the need to regulate utilities engaged in local gas distribution. Pp. 288-297.

(b) Any notion of discrimination under the Commerce Clause assumes a comparison of substantially similar entities. When the allegedly competing entities provide different products, there is a threshold question whether the companies are indeed similarly situated for constitutional purposes. If the difference in products means that the entities serve different markets, and would continue to do so even if the supposedly discriminatory burden were removed, eliminating the burden would not serve the dormant Commerce Clause's fundamental objective of preserving a national market for competition undisturbed by preferential advantages conferred by a State upon its residents or resident competitors. Here, the LDCs' bundled product reflects the demand of a core market—typified by residential customers to whom stability of rate and supply is important—that is neither susceptible to competition by the interstate sellers nor likely to be served except by the regulated natural monopolies that have historically supplied its needs. So far as this noncompetitive market is concerned, competition would not be served by eliminating any tax differential as between sellers, and the dormant Commerce Clause has no job to do. On the other hand, eliminating the tax differential at issue might well intensify competition between LDC's and marketers for the noncaptive market of bulk buyers like GMC, which have no need for bundled protection. Thus, the question here is whether the existence of competition between marketers and LDC's in the noncaptive market requires treating the entities as alike for dormant

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Commerce Clause purposes. A number of reasons support a decision to give the greater weight to the distinctiveness of the captive market and the LDCs' singular role in serving that market, and hence to treat marketers and LDC's as dissimilar for Commerce Clause purposes. Pp. 297-303.

(c) First and most important, this Court has an obligation to proceed cautiously lest it imperil the LDCs' delivery of bundled gas to the noncompetitive captive market. Congress and the Court have recognized the importance of not jeopardizing service to this market. Panhandle Eastern Pipe Line Co. v. Michigan Pub. Serv. Comm'n, supra. State regulation of gas sales to consumers serves important health and safety interests in fairly obvious ways, in that requirements of dependable supply and extended credit assure that individual domestic buyers are not frozen out of their houses in the cold months. The legitimate state pursuit of such interests is compatible with the Commerce Clause, Huron Portland Cement Co. v. Detroit, 362 U.S. 440, 443-444, and such a justification may be weighed in the process of deciding the threshold question addressed here. Second, the Court lacks the expertness and the institutional resources necessary to predict the economic effects of judicial intervention invalidating Ohio's tax scheme on the LDCs' capacity to serve the captive market. See, e. g., Fulton Corp. v. Faulkner, 516 U.S. 325, 341-342. Thus, the most the Court can say is that modification of Ohio's tax scheme could subject LDC's to economic pressure that in turn could threaten the preservation of an adequate customer base to support continued provision of bundled services to the captive market. Finally, should intervention by the National Government be necessary, Congress has both the power and the institutional competence to decide upon and effectuate any desirable changes in the scheme that has evolved. For a half century Congress has been aware of this Court's conclusion in Panhandle Eastern Pipe Line Co. v. Public Serv. Comm'n of Ind., 332 U.S. 507, that the Natural Gas Act of 1938 exempts state regulation of in-state retail gas sales from the dormant Commerce Clause, and since that decision has only reaffirmed the States' power in this regard. Pp. 303-310.

(d) GMC's argument that Ohio's tax regime facially discriminates because the sales and use tax exemption would not apply to sales by out-of-state LDC's is rejected. Ohio courts might extend the challenged exemption to out-of-state utilities if confronted with the question, and this Court does not deem a hypothetical possibility of favoritism to constitute discrimination transgressing constitutional commands. Associated Industries of Mo. v. Lohman, 511 U.S. 641, 654. Pp. 310-311.

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3. Ohio's tax regime does not violate the Equal Protection Clause. The differential tax treatment of LDC and independent marketer sales does not facially discriminate against interstate commerce, and there is unquestionably a rational basis for Ohio's distinction between these two kinds of entities. Pp. 311-312.

73 Ohio St. 3d 29, 652 N.E.2d 188, affirmed.

Souter, J., delivered the opinion of the Court, in which Rehnquist, C. J., and O'Connor, Scalia, Kennedy, Thomas, Ginsburg, and Breyer, JJ., joined. Scalia, J., filed a concurring opinion, post, p. 312. Stevens, J., filed a dissenting opinion, post, p. 313.

Timothy B. Dyk argued the cause for petitioner. With him on the briefs were Gregory A. Castanias and John C. Duffy, Jr.

Jeffrey S. Sutton, State Solicitor of Ohio, argued the cause for respondent. With him on the brief were Betty D. Montgomery, Attorney General, and Barton A. Hubbard, Robert C. Maier, Paul A. Colbert, and Thomas McNamee, Assistant Attorneys General.[*]

Justice Souter delivered the opinion of the Court.

The State of Ohio imposes its general sales and use taxes on natural gas purchases from all sellers, whether in-state or

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out-of-state, except regulated public utilities that meet Ohio's statutory definition of a "natural gas company." The question here is whether this difference in tax treatment between sales of gas by domestic utilities subject to regulation and sales of gas by other entities violates the Commerce Clause or Equal Protection Clause of the Constitution. We hold that it does not.


During the tax period at issue,[1] Ohio levied a 5% tax on...

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