GENERAL MOTORS CORP. v. TRACY
The State of 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, known as local distribution companies or LDC's, satisfy the definition. Other producers and independent marketers, according to the State Supreme Court, generally do not. During the period in question, General Motors Corporation (GMC) bought virtually all the gas for its plants from out- of-state independent marketers, rather than from LDC's, making it subject to the Ohio tax. In front of the State Supreme Court, GMC argued that denying a tax exemption to sales by marketers but not LDC's violates the Commerce and Equal Protection Clauses. After an initial conclusion, the court held that GMC lacked standing to bring a Commerce Clause challenge. The court then dismissed the equal protection claim as buried in GMC's Commerce Clause argument.
Does the State of Ohio's different tax treatment of sales of gas by domestic utilities subject to regulation and sales of gas by other entities violate the Commerce Clause or Equal Protection Clause?
Legal provision: Article 1, Section 8, Paragraph 3: Interstate Commerce Clause
No. In an 8-1 opinion delivered by Justice David H. Souter, the Court held that Ohio's differential tax treatment of natural gas sales by public utilities and independent marketers violated neither the Commerce Clause nor the Equal Protection Clause. After concluding that GMC had standing to raise a Commerce Clause challenge, Justice Souter wrote for the Court, "we conclude that Ohio's regulatory response to the needs of the local natural gas market has resulted in a noncompetitive bundled gas product that distinguishes its regulated sellers from independent marketers to the point that the enterprises should not be considered 'similarly situated' for purposes of a claim of facial discrimination under the Commerce Clause. GMC's argument that the State discriminates between regulated local gas utilities and unregulated marketers must therefore fail." Justice John Paul Stevens dissented.
Argument of Timothy B. Dyk
Chief Justice Rehnquist: We'll hear argument next in Number 95-1232, General Motors Corporation v. Roger W. Tracy.
Mr. Dyk: Mr. Chief Justice and may it please the Court:
This case involves the question whether the State of Ohio can discriminate against interstate transactions in the application of its sales and use tax of natural gas purchases.
If the purchaser in Ohio, such as General Motors in this case, purchases from a local public utility which supplies the gas through its own distribution lines, the sale or use is exempt.
On the other hand, if the gas is supplied by an interstate marketer of natural gas which has no distribution lines within the State, the purchase is not exempt, and this is--
Unknown Speaker: When you say discriminate, Mr. Dyk, you suggest that these two entities should be treated as equals.
Mr. Dyk: --Well, I--
Unknown Speaker: That there aren't really any factors that distinguish them.
Mr. Dyk: --There are no factors that distinguish them in our view, Mr. Chief Justice.
It's the same gas that can come from the same well, distributed over the same interstate pipeline, distributed through the same local pipeline, and the local natural gas company may or may not be selling tariff gas.
In other words, it may be--
Unknown Speaker: Well, but isn't it a public utility that we're talking about?
Mr. Dyk: --Justice O'Connor, it is a public utility, but the sales by the public utility are not regulated sales.
Unknown Speaker: Well, I'm very concerned about your theory, frankly, because it seems to me that your theory would really eviscerate public regulation of public utilities.
Mr. Dyk: Well, I don't think so, Justice O'Connor.
First of all, what we have here is our local public utilities, which are making to a very significant extent nontariff sales.
That's admitted at the very outset of the respondent's brief at page 1 and 2.
It's reflected in the record, in the Joint Appendix at pages 229 and 230.
As a result of local deregulation, natural gas public utilities in Ohio, and this is true in other States as well, are permitted to engage in the business of gas marketing.
In other words, they're largely unregulated.
All they had to do during the period in question was to file the contract with the public utility commission.
They in fact were allowed to do this, to engage in these unregulated sales, because they faced competition from these interstate marketers, and the public utilities--
Unknown Speaker: But I assume that the overall rate the utility can earn is limited by regulation.
Mr. Dyk: --Not in these sales, Justice O'Connor.
These sales are unregulated sales.
There is no tariff for them.
The price at which the gas is sold is not regulated.
The whole purpose of this was to allow these local public utilities to compete with the interstate marketers so they wouldn't have to sell pursuant to a tariff, so that they could engage in the same kind of competition, the same kind of discounting, the same kind of individual pricing that the out-of-State marketers--
Unknown Speaker: Was this a new statute, Mr. Dyk, or was... the statutory permission for the utilities to do unregulated sales, was that statute in effect during the tax period here in question?
Mr. Dyk: --It wasn't a statute during the tax period in question.
What you had was permission from the Ohio Public Service Commission to engage in these kinds of sales, and there was a 19... October 1987 order, for example, with respect to East Ohio Gas, which I'll lodge with the Court.
It's not in the record, but it is a public order of the commission which said yes, you can engage in these kinds of sales, and these went on for a number of years.
This is reflected, as I said, in the record at 229 to 230.
Then last June, this was formalized by statute for the first time, and the Ohio legislature said, you don't even have to bother to file these arrangements, these marketing arrangements, with the public utilities commission, you just go ahead and do it, and go on your merry way.
Unknown Speaker: Suppose the unregulated sales were subject to the sales tax so that there would be equivalence between the utility's unregulated sales and the interstate sales, would your case then go away, or would you still argue that there's discrimination?
Mr. Dyk: I still... I would--
Unknown Speaker: I take it your theory is that there's still discrimination.
Mr. Dyk: --I think that... that is not this case, but there is still discrimination involved, because the public utilities are allowed, under an Ohio law, to file volume discount tariffs and things of that sort which allow them to compete even under the tariffs, and this October 1987 order of the public utilities commission which I mentioned shows on its face that Northeast Gas in that particular case was able to compete and actually offer a lower price pursuant to these tariffs.
Unknown Speaker: But public utilities have a number of other burdens on them, do they not, particularly serving retail customers.
They may have to provide gas to people who can't pay the bill, or supply a certain amount of heat during the winter.
Mr. Dyk: They may, Mr. Chief Justice, but they also engage in this unregulated business, and the fact that they are a favored local industry, that the State wishes to protect theme, has not in this Court's other Commerce Clause cases been a sufficient basis for discrimination.
Unknown Speaker: But don't you have to look at their entire business, and not just the part that you single out?
Mr. Dyk: I don't think so, Mr. Chief Justice.
For example, in the Armco case, which is cited in the amicus brief of Columbia Gas, they had a situation where there was a discrimination against out-of-State wholesalers, and the theory was, well, we can treat in-State manufacturers/wholesalers differently, and the fact that you may combine competitive interstate business with some sort of local business doesn't justify discrimination under the Commerce Clause, and I understand the Court in that case to have directly addressed that question and to resolve it in favor of invalidating the discrimination.
Unknown Speaker: Mr. Dyk, when you say that these nontariff sales are not part of its regular business, is it also the case that for purposes of determining what their allowable rate of return will be, the profits they make from these sales are not considered, it's just the separate... they can make as much money as they want from these nonregulated sales, and it will not be considered in fixing their tariffs for the next year.
Mr. Dyk: That is my understanding, Justice Scalia--
Unknown Speaker: Well--
Mr. Dyk: --and the purpose of this is, what you have as a result of Federal deregulation is you have a lot of competition in the natural gas market.
Anybody can sell gas, transport it over interstate pipelines, and the same kind of deregulation has taken place at the State level.
You can take the gas over the local public utility lines and sell it.
Anybody can go into that business.
And as a result of this competition, what happened was that the local public utilities were suffering.
People were going to these interstate marketers, and the local public utilities commissions wanted to find some way of enabling these companies to compete with these new marketers, and the way they figured out to allow them to compete in many instances was to say, okay, we'll allow you, too, to make unregulated sales and to act as marketers, and to compete with these interstate businesses so you don't lose the in-State business.
Now, there's a very important reason for that, of course.
They wanted them to earn additional money to increase their profitability, but that did not come into account in fixing the rates pursuant to the tariffs for natural gas--
Unknown Speaker: --Mr. Dyk, may I ask you a question on that score?
You've indicated that the same intrastate pipelines are used by both the independent seller and the public utility, and are those pipelines owned by the public utility?
Mr. Dyk: --They're owned by the public utility, and--
Unknown Speaker: And how do they determine the charge for the gas sold that's delivered through those pipelines in the independent marketer sales?
Mr. Dyk: --Well, what you have is both open access... that is, people who are not in the public utility business have the right to use those transportation facilities... and so-called unbundling, which was a concept that originated at the Federal level but also exists at the State level, in which there are separate statements for transportation charges and the transportation charges have to be... has to be... have to be justified.
Of course, the public utilities really remain as public utilities when they're supplying the transportation service, but that's unbundled.
It's charged separately, and the rates are calculated separately.
Unknown Speaker: And those are... they're charged separately, but are they controlled by the State public utility commission?
Mr. Dyk: The transportation rates are still controlled by the State public utility commission, though in some instances even those transportation rates are now being individually negotiated.
But by and large those are pursuant to tariffs set by the public utility--
Unknown Speaker: If they're individually negotiated, it would seem to me that the market would take care of the disparity between the taxed and the no-tax sellers.
Mr. Dyk: --Justice Stevens, I'm not under... I'm not sure why I understand the market would take care of that.
What you have is the charges for the gas are stated separately, and if the public utility has an advantage, there's no 5 to 7-percent use tax on the purchases from them, they have an advantage over the interstate seller, who must sell to a purchaser, and the tax is on the purchaser, the purchaser has to pay this 5 to 7-percent tax, and in a business like this, which is highly competitive, 5 to 7-percent can be a significant amount of money and a significant advantage.
Now, what the State says is, oh well, we impose a gross receipts tax on the public utilities.
The problem is that the gross receipts tax doesn't satisfy this Court's standards for a compensatory tax.
It's not imposed on a substantially equivalent event.
It's not even imposed on the same people.
Unknown Speaker: Mr. Dyk, is it clear that for what you call the unregulated sales both before it was formalized in the law and under the new law, that those unregulated sales also escaped the sales tax?
Mr. Dyk: Yes, because the natural gas company is still a supplier of natural gas.
It is still a natural gas company which is supplying the gas over its own distribution lines within the State, and--
Unknown Speaker: Well, couldn't... could Ohio say, because the public utility has obligations that the State imposes on it, and because the regulated sales have bundled together these other aspects, while there won't be an escape from the sales tax entirely, there will be an allocation, so that only the part that's attributable to the commodity is subject to the sales tax and not the part that's attributable to these other items?
Mr. Dyk: --Well, there is no sales or use tax on the transportation.
There's only a sales or use tax now on the gas purchase, so what you have is a discriminatory situation, and these public utilities have the advantage of being able to act as gas marketers.
Unknown Speaker: Even with respect to the gas, the obligation that you must have enough supply to serve everybody at all times, could that be factored out so that you could make the gas sale of the regulated company similar to the unregulated sale?
Mr. Dyk: Justice Ginsburg, there are many ways that the State could achieve its interest here without discriminating against interstate commerce, as you suggest.
For example, if there is concern, and that's expressed in some of the amicus briefs in support of the respondent, if there's concern that residential customers shouldn't have to pay the sales or use tax on gas purchases, it's a simple matter to just exempt residential customers from the sales or use tax.
It's very easy to construct a system that treats equally purchasers from interstate companies and purchasers from local public utilities.
It's not hard at all, and there's no justification for the State framing it the way it does in a discriminatory manner.
I should add that--
Unknown Speaker: Well, you suggested that if there were an exemption for residential customers, no sales tax, that would be all right, but you're recognizing that there can be some recognition by the State that it is imposing, that this is a regulated industry.
What else could the State do to take into account the obligations that the regulated utility is under?
Mr. Dyk: --Well, obviously they could reduce the gross receipts tax, which appears to be what they've done in this new legislation of last June in House bill 476.
They don't have to impose this kind of gross receipts tax on public utilities, but what they can't do under this Court's jurisprudence is to say, we're going to have two identical purchases here.
On one of them we're going to have a use tax; on the other one we're not going to have a use tax.
There's a rule of strict equality here, and it makes particular sense in the context of this very highly competitive natural gas market, and this is not only true with respect to industrial purchasers, and industrial purchasers are the ones who suffered during the period we're involved in here, but it's going to happen in the residential market also.
These... there are tariffs being filed in Ohio and elsewhere, and I think this is again recognized in the Columbia Gas brief, that will allow competition at the residential level.
The whole industry is changing dramatically as a result of congressional policy, reflected in the 1978 and 1989 statutes and the implementing FERC regulations.
There's going to be competition at the residential level for gas sales between the public utilities and between the out-of-State marketers.
Unknown Speaker: I take it an apportioned gross receipts tax would be constitutional, and if everybody paid their gross receipts tax then your client's suppliers would pay an apportioned gross receipts tax.
Mr. Dyk: Well, I think it would be constitutional to have an apportioned gross receipts tax, except for the fact that you probably can't reach out-of-State sellers with a gross receipts tax because of Public Law 86-272, so the State would probably choose to approach it by having a use tax imposed on all people and to remit... as they apparently are seeking to do in the new legislation remit the gross receipts tax so it doesn't bear so heavily on the public utilities.
Unknown Speaker: Can you tell me, getting back to the unregulated sales that the utilities make, is there anything in the record that gives us an idea of the significance, the percentage of sales that were... the utility made that were unregulated sales during the tax period in question?
Mr. Dyk: No, there's no statistic for that.
What I think the record reflects is that about 20 percent of the industrial sales continued to be made by public utilities during the period, but there's no breakdown as to what part of that 20 percent is unregulated sales and what part might be pursuant to volume discount tariffs or other things of that sort.
Now, what... the State--
Unknown Speaker: Mr. Dyk, I just wanted to make sure, in light of what you said about, that even the residential sales are being deregulated.
You responded to me, to my question, what could the State do to recognize that this is a public utility?
You said, it could exempt sales to residential users, and you stand by that?
Mr. Dyk: --Well, I... sure.
Of course they could exempt sales to residential users, as long as a residential user who chooses to purchase from the out-of-State marketer as opposed to the in-State public utility is treated the same way.
Unknown Speaker: Right now, there isn't that choice, is there?
Mr. Dyk: In some places there is, but by and large there isn't.
It's a coming phenomenon.
It hasn't really arrived in substantial degree yet.
What Ohio supreme court said here is, well, we don't have any problem here, because this excise tax to be sure is not imposed on the local public utilities, but it is imposed on local gas marketers who are not public utilities under this Court's precedents for over 100 years, ranging from the Brimmer case way back when up to this Court's decision in Carbone.
The fact that some local people may be disadvantaged is no excuse under the Commerce Clause, and what the State is trying to do now... and this is not an argument that it made below and not an argument that was adopted by the Ohio supreme court... it is saying, well, the Federal regulatory scheme has blessed this discrimination that we have made in amendments to the Natural Gas Act that were passed in the early 1950's, which allowed the State public utilities commissions to continue to regulate the interstate gas market and effectively overruled this Court's decision in East Ohio.
And we've shown in our brief, I think, that these 1950 amendments had nothing to do with permitting discriminatory taxation by the States.
Even this Court's decision in East Ohio recognized that the tax doctrines really didn't have much to do with this and it was addressing itself only to regulatory issues.
But I think the most significant thing is not that Congress in the fifties authorized this kind of discrimination, but that Congress in the seventies and 1980's has taken a very strong position that it wishes to have a competitive natural gas market, that it has taken actions again and again and again to create a competitive natural gas market in this country, and it has recognized that natural gas is a commodity which should be treated separate from transportation... in other words, this is the unbundling aspect of it... and it has said that it wants all the competitors who were selling natural gas to have an equal opportunity, and if there's any Federal policy here, we respectfully suggest, it is a Federal policy that everybody should be treated the same and--
Unknown Speaker: Mr. Dyk, can I interrupt you for just a second?
In response to Justice Kennedy, you said that the record indicated that about 20 percent of the utility sales were industrial sales, but you don't know how much of those were un... pursuant to volume discount tariffs, and how much were unregulated.
Assume they were all pursuant to volume discount tariffs.
Would you win or lose this case?
Mr. Dyk: --Well, I think we would still win, because I think whether the public utility sales are made pursuant to tariffs or are unregulated, that in either event the public utility is a competitor with the out-of-State marketer, and that--
Unknown Speaker: But without the power to set its own prices.
Mr. Dyk: --Well, it has the power to set its own prices in the sense that it can propose tariffs, some of which may be marginal cost tariffs rather than fully allocated tariffs.
Unknown Speaker: Let me put the question a little differently.
The record doesn't tell us how much the 20 percent is unregulated and how much isn't, and I suppose you have the burden of establishing unconstitutionally generally, and if the amount of unregulated sales are critical to your case, I suppose you have the burden of showing us how many they were, so is it correct that we should decide the case on the hypothesis that all of those 20 percent were actually regulated?
Mr. Dyk: Oh, I don't think you need to do that, Justice Stevens.
I think this Court has made clear in a lot of cases that if there is even a small discrimination against interstate commerce; and if you look at the unregulated sales as being the only significant ones, which we don't, there were still some of them, and for example, in Associated Industries and Bacchus the court has said, well, even if the favored sales are very small in volume, and maybe wouldn't be considered economically significant, there's no de minimis doctrine under the Commerce Clause.
It's still invalid.
You just can't discriminate.
Unknown Speaker: Would the whole tax be invalid, or only the tax as applied to those sales, assuming that the tax as applied to other sales by the utility is okay?
Why would we strike down even the sales that were pursuant to volume discounts?
Mr. Dyk: Well, I don't--
Unknown Speaker: Tariff volume discounts?
Mr. Dyk: --Justice Scalia, I don't think you're striking down particular sales that were favored.
I think what you are doing is saying, you can't disfavor the General Motors purchases from the out-of-State marketer of natural gas, and the fact that there is only a small volume of favored sales doesn't matter, that the whole volume of disfavored sales is still treated unconstitutionally.
Unknown Speaker: Just what does the record show about, not the volume of discount sales, but the unregulated sales of the utility?
Mr. Dyk: It shows that they occurred, at pages 229 and 230, and as I mentioned at the beginning of the argument, in the very outset of the respondent's brief they mention that these sales occurred, too, and it's confirmed in the amicus brief in support of the respondent filed by Columbia Gas Company.
Unknown Speaker: And your position is, even if only 1 percent of the 20 percent was this kind of sale, your client is exempt from paying the sales tax, the use tax.
Mr. Dyk: Well, it is until the sales tax is made constitutional, that our view is that any amount of discrimination against interstate commerce and in favor of a local seller or a purchaser from a local seller is unconstitutional, and I think that this Court has never required that there be a particular volume of discrimination, and I think it's made quite clear that it doesn't matter what the scope of the discrimination is, it's still forbidden.
Unknown Speaker: Well, again, I take it your view, even if zero percent is unregulated, it's unconstitutional.
The discrimination exists.
Mr. Dyk: Well, yes, Justice Kennedy, my position is that it's still unconstitutional, but that would be on a different theory.
I think obviously there have to... on the theory that the discrimination here is between unregulated sales by the public utility and the out-of-State marketer, there has to be some volume of sales.
The record confirms that, and the amicus brief confirms that.
But I think, as you suggest, we would also say that even if there had been no sales, which is not the situation here, even if there had been no sales we would still prevail in this case because you can't--
Unknown Speaker: How can an amicus brief confirm a factual question?
I mean, I can imagine the record might.
Mr. Dyk: --Well, the record does confirm that.
Unknown Speaker: But how can an amicus brief do it?
Mr. Dyk: Well, it's an amicus who's in this business and who said--
Unknown Speaker: But the State isn't bound... the State may... the respondent may be bound by its statements in its own brief, but certainly it's not bound by statements in some amicus brief, even though the amicus is in support of the respondent.
Mr. Dyk: --Well, I'm not suggesting they're bound by it, Mr. Chief Justice, and I think the record and the public orders of the public utilities commission and the respondent's brief provides ample evidence that these kinds of sales occurred, and occurred during the period that's involved here.
Unknown Speaker: Mr. Dyk, who was the witness who was testifying at 229 and 230?
Is he your witness, or the State's witness?
Mr. Dyk: I believe it's the State's witness, but if I look at the record here for a moment I can tell you.
Unknown Speaker: It's a Mr. Duffy.
Mr. Dyk: No, that's the counsel.
Mr. Duffy's sitting here.
He wasn't the witness.
Unknown Speaker: He would like to have testified.
Mr. Dyk: It's the tax commissioner's witness.
Unknown Speaker: Mr. Dyk, you would be making the argument that you're making even if every sale by the public utility was regulated.
Mr. Dyk: Yes, I would because--
Unknown Speaker: And would you spell out what that argument is?
Mr. Dyk: --Well, I think the argument is that where you have a competitive gas market like this, and... you cannot favor an in-State interest simply because it has public utility status, and I think this Court's decision in Buck and Kuckendall, which is 267 U.S., dealing with motor transport... it's an opinion by Justice Brandeis from 1925, but I think it's still good law... says that you can't come in here and say, well, this is a market that needs to be regulated and we're going to require certificates of public interest, convenience and necessity, we're not going to let people compete from out of State.
I think the argument that you could treat a public utility differently might have had and made sense 20 years ago.
I don't think it makes sense now.
There's a competitive market, there's a competitive market there as a result of national policy, and I think even if you had nothing but tariff sales, that you couldn't discriminate against the out-of-State marketers.
That wouldn't be permissible under the Commerce Clause.
Unknown Speaker: You're saying that to do that under this market is really to adopt by subterfuge a compensatory tax justification, I take it, then.
Mr. Dyk: Well, I... certainly it's possibly based on that.
They suggest that it's designed to compensate for the gross receipts tax, and our answer is, fine, if you think the gross receipts tax is a problem, fix the gross receipts tax, but have equality in the use tax so that some sellers are not advantaged and others disadvantaged.
Mr. Chief Justice, I'd like to reserve the remainder of my time.
Unknown Speaker: Very well, Mr. Dyk.
Mr. Sutton, we'll hear from you.
Argument of Jeffrey S. Sutton
Mr. Sutton: Thank you, Mr. Chief Justice, may it please the Court:
I'd like to start by addressing an argument that I began thinking about about 8:00 last night, and that is the nontariff argument that was just made.
It's a very clever argument, because what it does is try to take on what I think is our best argument.
Our best argument is that the marketers are trying to have their cake and eat it too.
They want the benefits of utility status, but not the burdens.
And what General Motors is now saying is, they're saying, well, that's not actually true, the utilities are trying to do the same thing, and that's the reason they've relied on this 1987 order, and that's the reason they suggested that there actually were nontariff sales by utilities during the audit period.
That's a great argument.
It's just not supported by the record or by the law.
It's not supported by the record because if you look at pages 229 and 230, it doesn't make any indication that there were actually nontariff sales during the audit period, 1987 through 1989.
There's nothing in the record at all that indicates that.
The notion that 20 percent of the sales to industrial consumers were nontariff sales is also unsupported.
That's simply not true.
But let me--
Unknown Speaker: Well, do we have to take this case on the basis that we assume they were tariff-regulated sales?
Mr. Sutton: --Your Honor, yes, I think you do, but I can make another point, and that is that even if they were nontariff sales, let's say the record actually did support their argument, they've got another hurdle to clear, and that's that Ohio has a doctrine called the dual capacity doctrine.
What the dual capacity doctrine says, and we've cited a case called American Transportation in our brief that deals with it, the dual capacity doctrine acknowledges that utilities can sometimes operate as utilities in a tariff setting, and then other times they can be operating like other businesses.
In this instance, it would be a marketer.
A good example is precisely the facts of American Transportation.
That was a situation where a utility... it happened to be a motor carrier... decided to get into the business not just of delivering services, that is, transporting people or goods, they decided also to get into the business of actually manufacturing part of the trucks, and they thought they could do that and still get utility status with respect to certain tax benefits.
They didn't get it, and the Ohio supreme court recognized that very doctrine.
There's a recent decision that we relied on in our brief called Carnegie, which makes the precise same point.
It was decided less than a year ago, and recognized that you can operate in one setting as a utility, and in another not as a utility.
Unknown Speaker: This is a decision of the supreme court of Ohio?
Mr. Sutton: The Carnegie decision, Your Honor, is not.
The American Transportation decision is an Ohio supreme court decision.
The Carnegie decision is a decision from the Ohio Board of Tax Appeals, which is our intermediate tax court.
It applies throughout the State.
It binds the tax commissioner, the PUC, and the Attorney General's Office.
Unknown Speaker: Was that the decision that said an out-of-State public utility regulated by some other State but not Ohio remains a public utility even though it's acting as a marketer in Ohio?
Mr. Sutton: Your Honor, that is the decision.
Unknown Speaker: And is... are you adhering to that decision?
Are you adopting that decision as part of your position, that once a public utility always a public utility, whether in Indiana, Pennsylvania, Ohio--
Mr. Sutton: Your Honor, the candid answer is the Ohio supreme court and the Ohio courts are wrestling with that issue right now.
The dichotomy they're trying to deal with is, do you decide it's a status-based inquiry, once a utility, always a utility, or do you look at the activity and determine on a case-by-case basis whether they're acting as a utility?
The American Transportation case seems to take this case-by-case, activity-by-activity approach.
We're not saying Carnegie should be good law, should bind this Court, should bind the Ohio supreme court.
The reason we're relying on Carnegie is for a very different point.
We rely on it to show that there are no facial lines here, that the Ohio supreme court has yet to address the question whether utilities actually are defined by State boundaries, so that was part of our alternative argument, Justice Ginsburg.
Unknown Speaker: --Well, to the extent the case is as you first described it, it's... and I was listening to it.
It seemed to me to help Mr. Dyk's position more than yours, i.e., that this is not a utility for some purposes, and therefore it should be comparable to the out-of-State suppliers that sell to GM.
Mr. Sutton: Your Honor, that's not true, and if I said that, I misspoke.
Unknown Speaker: You didn't say that.
It was just the inference I was drawing, and maybe I'm--
Mr. Sutton: --Well, I mis... would it be, I implied, you inferred.
The thing I'm trying to say is that the utilities in this instance, all of the sales, every single sale at issue in this case was a tariff sale.
There's absolutely no evidence that any were nontariff, and so they simply can't rely on that argument.
That's my first point, that it's just--
Unknown Speaker: --Well, it may be the next case, but can you tell me under the new law, are the unregulated sales exempt from sales tax?
Mr. Sutton: --Your Honor, the new law does not address that.
Unknown Speaker: Well, either they're... they have an exemption under current law.
Does that exemption apply to the unregulated sales?
Mr. Sutton: Your Honor, what I'm saying is, the new law went into effect a month ago.
To my understanding, it does not address the question what happens to a nontariff sale, so it's not simply... it's not been decided by the General Assembly of Ohio, and it's not something the Ohio courts addressed--
Unknown Speaker: Yes, but until that law of a month or so ago, during the period developed in this lawsuit, if the utility made unregulated sales, they were exempt from tax.
That's clear, I think, is it not?
Mr. Sutton: --Your Honor--
Unknown Speaker: If they made any.
Mr. Sutton: --Your Honor, it's not entirely clear.
That is not entirely clear, and that goes back to the American Transportation case.
The American Transportation case was a situation in which the utility was acting as a manufacturer, and it was treated like a manufacturer in that capacity.
My guess, my assumption is that they're probably going to treat utilities across the board as regulated entities when it comes to tariff or nontariff sales, but that's just not been decided by the record.
In fact, in the order they're citing, this 1987 order, the utility was not even allowed to earn a profit on the gas.
It was acting as an agent of the producer, so the nontariff hypothetical they're positing is one, not only it wasn't presented there, I'm just not sure what the precise facts are that they're talking about.
Unknown Speaker: Mr. Sutton, did you want us to decide this case on your assumption, or would you be content with a narrow decision that says, at least since we don't know in this case that any nontariff sales are exempted from the tax, it's certainly okay to exempt tariff sales from the tax, it's certainly okay to exempt tariff sales from the tax, and that's all we have to decide?
Mr. Sutton: Your Honor, that's correct.
That's precisely correct.
Unknown Speaker: You'll... what's correct, that you'll take the latter?
Mr. Sutton: --Absolutely, Your Honor.
Unknown Speaker: Take the latter and run.
Mr. Sutton: Absolutely, which is precisely the way the--
Unknown Speaker: Right.
Mr. Sutton: Which is precisely the way the case has been argued, or briefed at least, until now, the assumption being that they all were tariff sales.
Ohio's not contriving this regulatory distinction between utilities on the one hand and all other businesses on the other.
It's been with us for as long as we've had a dormant Commerce Clause, and it's a distinction that in one way or another is reflected in the statutes of every State in the country, including the District of Columbia.
What's going on in this instance, and the danger presented by this case, is that you've got a situation in which marketers have been allowed to enter a natural gas business, they've been allowed to enter the business in an unregulated capacity, which as they acknowledge is critical to this business being... even being in existence.
What they're now trying to do is reach over this regulatory wall and pick off some of the benefits of utility status without sharing in any of those burdens.
That simply just doesn't make sense as a matter of Commerce Clause jurisprudence.
Unknown Speaker: Well, they're just saying, you know, we don't want all the benefits.
There are a lot of other benefits you can give to utilities.
All they're saying is, there's one particular benefit you can't give to utilities, and that is, in transactions that are equivalent, giving them a commercial advantage by reason of your tax.
I mean, you can help these utilities a lot of different ways.
You don't have to do it this way.
Mr. Sutton: Your Honor, these transactions, however, simply aren't equivalent.
There's nothing about them that is equivalent.
In one setting you have prices that are set by the free market, what the market will bear.
The obligations that the seller takes upon themselves are solely obligations that are a matter of contract.
On the other side of the line, you have a completely different sale.
Unknown Speaker: You're assuming all tariff... all these sales were tariff sales.
Mr. Sutton: Absolutely.
The rates are not set by the seller, so they can't price-compete.
They have a public duty to the whole State, to all consumers.
That public duty requires them to supply natural gas on demand at all times in the year, on the coldest day of the winter.
What's critical about that, and what makes these two transactions so different, is that utilities, as a result of their public duty obligation, must enter into long-term contracts to make sure the commodity is available on the coldest day of the winter, and they must also reserve space on interstate pipelines to make sure that they can ship it when they need to.
Unknown Speaker: What if you have a long-term contract by the independent marketer who... that contains all those provisions, we'll deliver gas when it's cold, and we'll guarantee that it will be there and the pipe will be.
Why then are they different?
Mr. Sutton: Your Honor, because in that instance they would be imposing those obligations upon themselves as a matter of contract, not as a matter of State law.
They would be able independently to bargain, both the buyer and the seller, as to whether they wanted to do that.
But let me add another point, Your Honor.
Unknown Speaker: But the other thing that's puzzling about it, the whole rationale for regulating the prices of the utilities are to prevent them from charging too much.
Mr. Sutton: That's absolutely... that's absolutely correct.
Your Honor, the other problem that marketers are going to have in the situation, I think ultimately there's an end game here.
The suggestion that deregulation that is started at the Federal level is going to inexorably extend to the State level, I think is mistaken.
I think there's a stopping point, and the stopping point is that if you're going to have State utility laws like Ohio does that require utilities... and let's say they impose it on marketers as well... to make sure natural gas can be supplied year-round, what happens is, you end up in a situation where the marketer has to own pipeline.
There's simply no way the marketer can guarantee, if he or she does not own pipeline, that natural gas is going to be supplied year-round on the coldest day of the winter.
That is a business that utilities will always control, utilities always will have to control.
That's something marketers can never do.
They can say as a matter of contract we'll do our best, but the reason they can't guarantee it is, someone else owns the pipeline, and that's the public utility, so that's a fundamental distinction.
It's a fundamental distinction that will always be there, and I think as a matter of a State's police power, it's properly always going to be saying to itself, we've got to have a utility industry.
It might be a different utility industry than we had 20, 30 years ago, but the reason we need a utility industry, the reason we can't keep going down this deregulation road, is people die if they don't have heat in winter.
There's no elected official I know of that's going to let the private market, in simply contracts between buyers and sellers, determine whether natural gas is delivered in Cleveland, Ohio, in January of a given year.
Unknown Speaker: We do it for food.
Mr. Sutton: Your Honor, in the food setting, number one--
Unknown Speaker: It's no less essential, and we don't feel the need to have the Government take over bread distribution.
Mr. Sutton: --The distinction between food, Your Honor, and natural gas is that in one you've got a natural monopoly setting and in the other you do not.
There's nothing about the delivery of food that requires you to lay pipelines, telephone wires, or some other form of distribution system to get the good, the commodity from the producer or wholesaler to the individual consumer, so a State would never go down that road because they wouldn't need to.
What's unique about your natural monopolies is, it's a situation where monopolies are actually a good thing.
They're a good thing visually because no one wants pipelines criss-crossing their State more than necessary.
They're a good thing economically because they're much more efficient.
It's much more efficient to have one natural gas pipeline, or two or three at the most, serving an area, than it is to have several.
All economists would agree with that.
That's a problem, Your Honor, that just doesn't exist in the food setting or in other commodity settings.
It just doesn't exist.
I'd like to make another point.
Unknown Speaker: Mr. Sutton, what about Mr. Dyk's argument that of course you can recognize that these are public utilities, but not by the sales tax exemption so long as you're imposing a compensating use tax.
You can adjust the gross receipts tax, you can exempt residential sales.
How do you respond to that?
Mr. Sutton: Our principle argument, Justice Ginsburg, beyond the argument that they're differently situated, is that these are actually transactions that can't be reconciled.
I don't think the court under the guise of the Commerce Clause should be forcing States to reconcile what are inherently irreconcilable transactions.
The reason they're irreconcilable is number 1, because one involves the sale of a naked commodity, the other is a commodity in the service, so they're just, to begin with, different transactions, different in a way that would be true of other sales services versus just a sale.
The other difference is, of course, the rate control and the duty you have to the public.
I don't know quite how... I mean, if the Court... let's just take as an example, if the Court's decision, God forbid, were okay, Ohio, when it comes to public utility sales, you now have to put a 5 to 7-percent tax on all of those sales.
Why... why is that compensating?
It's not clear to me that it's compensating.
It's not clear to me that there's any more integrity in that system than there is in the current one, and that's because the transactions and the sellers are so very different.
In fact, I think this Court's compensatory tax cases most recently Fulton, from just last term, and Associated Industries from three terms ago, stand for that very point.
In rejecting... in rejecting the State's efforts to establish that there was a compensatory tax which justified discrimination, the Court was saying, in effect, we're not going to look at apples and oranges comparisons.
They've got to be mutually exclusive proxies before you can justify a discriminatory tax.
Unknown Speaker: Do most States or almost all States decline to impose sales tax on gas or electricity sold through a utility?
Mr. Sutton: Your Honor, there are seven State statutes which are cited in the Kansas amicus brief that are precisely like ours.
I should note one of them is from the District of Columbia, which of course is something Congress controls and would create, I think, an anomaly here if Ohio was forced to make this change, the District of Columbia would not.
Unknown Speaker: Do other States... you say seven don't.
Does that mean that--
Mr. Sutton: No, I'm sorry, seven have precisely the same system we have.
I'm not aware of the numbers that have, you know, one form of tax and another.
Unknown Speaker: --You think Congress controls the District of Columbia more than it controls Ohio?
I mean, the only point is, Congress could change it in the District of Columbia.
It certainly could change it in Ohio if it wanted to.
Mr. Sutton: Oh, absolutely.
I agree completely.
The point I'm saying is, you have a situation where a different branch of Government would be compelling Ohio to do something.
It would be a branch of Government that couldn't compel the District of Columbia to do it.
I think that's an anomaly.
In fact, Dean Milk, the 1951 case, suggests that's quite relevant.
What is Congress doing with respect to the District of Columbia in an interstate commerce discrimination setting?
But Justice Kennedy, I want to come back to your point, because I think it's an important one.
There are... of the States that have taxation systems with respect to utilities and other businesses, 31 divide their taxation systems between those entities that are public utilities and those that are other businesses.
The problem with General Motors' position in this argument, and I think this also responds to something, Justice Ginsburg, you were asking, is that if you say Ohio has to endorse or adopt a sales tax that's precisely the same for marketers as it is for utilities, then you're going to have to go down a road which requires you to examine the differential treatment in each of these 31 States for utilities on the one hand and other businesses on the other.
I can give you an example of how that plays out in Ohio.
In Ohio, all businesses are required to pay what is effectively an income tax.
It's a corporate franchise tax.
Now, utilities don't pay that tax.
They've never paid it.
They pay lots of other taxes.
In fact, they're a very heavily taxed entity.
But if we lose this case, the next case, and it's one that should be filed the next day, would come in and say, marketers should no longer be forced to pay a corporate income tax, and the reason is because their competitors, public utilities, do not.
Westinghouse would require that very proposition if you adopted the view that they're similarly situated entities that must be taxed and treated the same.
Unknown Speaker: Why do you figure Westinghouse?
Mr. Sutton: Your Honor, because Westinghouse was a case involving corporate taxation, and I'm making the point that this would be a corporate taxation setting.
Westinghouse establishes that you can have a Commerce Clause discrimination at the corporate level... in other words, where sellers are being taxed differently at the corporate level depending on whether they sell in-State or out-of-State, so while I don't want to be arguing against myself if we lose, I'm just making the point that this would be a problem that would come down the road.
That's just the income tax.
There are other problems as well.
Why is it that utilities, for example, should get franchises?
Why should they get exclusive areas where they alone sell a product and no one else does?
It seems to me that if General Motors is correct--
Unknown Speaker: Of course, in most of those situations they don't have competitors.
Mr. Sutton: --Most--
Unknown Speaker: This is an usual case, because a public utility has a competitor for a significant part of its business, but in most public utility regulation there's... it's a natural monopoly and there's no competitor to be concerned about.
Mr. Sutton: --I'm not sure I'm following that, Your Honor.
I mean, the point I'm making is that utilities get a franchise.
That franchise allows them to be the distributor of all natural gas in that area and, if they're asked, to be the seller of the gas and the service.
What I'm saying is that General Motors and its marketers would be allowed to come in and say--
Unknown Speaker: Maybe they could get Congress to pass a must-carry provision.
Mr. Sutton: --I thought I should have read the briefs below in the case before.
The other point I'd like to make, Your Honor, and I think this is... as I read your decisions in the Commerce Clause area it's an efficiency inquiry.
I know some of you have disagreed on that point, but it seems to me if you look at the Court's most aggressive Commerce Clause cases, what I see going on is an efficiency inquiry.
Is the State doing something that is compelling an activity that could be done more efficiently somewhere else within its borders?
That's what I see the Court saying in Carbone.
That's what I see it saying in West Lynn Creamery, and certainly Boston Stock Exchange.
I think fundamentally General Motors is a problem in that area.
I don't see the efficiency problem going on here.
We know, if you look at the natural gas industry and divide the different transactions that go on, there's nothing we're doing discriminatory with respect to solicitation.
That can be done by utilities and marketers anywhere, in-State, out-of-State.
We're not doing anything with respect to where the gas originates.
Is it from Ohio?
Is it from Texas?
There's nothing there.
What we're doing that's discriminatory, we're told, is with respect to the ultimate distribution.
The problem with that efficiency argument is, there's absolutely no way as a matter of common sense and economics to have a more efficient distribution system of natural gas in a State other than Ohio.
That can't be done.
In Ohio, an elected official that said we ought to ensure that the distribution lines are working properly in Indiana would be laughed out of office.
There's an inherent nature to utility sales that they have to be in-State.
There's nothing wrong about that, and as long as Ohio is not saying as a precondition to being--
Unknown Speaker: Well, to say there's an inherent nature that they have to be in-State, the reason they have to be in-State generally is because of a legal provision.
It's that Indiana won't allow an Ohio public utility to come into Indiana, and vice versa.
Mr. Sutton: --Well, I mean, actually Ohio would allow an Indiana utility to come into Ohio.
What Ohio would say is that if you're going to take on an obligation to supply natural gas year-round to every corner of the State, you've got to own pipelines here, and that's the problem.
Unknown Speaker: Are there any... are there any Indiana utilities which presently serve retail customers in Ohio?
Mr. Sutton: --Your Honor, I am not aware of any, but I will say this, and it's reflected in the amicus brief of Columbia Gas, Columbia Gas is a great example of a national utility.
They have utility operations I think in at least four States, including Ohio.
There's nothing about Ohio law that says an Ohio... an Hawaii-owned utility can't buy transportation lines and take on the obligations of an Ohio utility.
Unknown Speaker: And that would be the case for the Indiana utility, the Chief Justice's... if that Indiana utility did provide services in Ohio, it would become an Ohio utility as well, right?
Mr. Sutton: Absolutely.
The point I'm making is--
Unknown Speaker: Now we still have in limbo, Mr. Sutton, that Carnegie you sort of cite, and you say, I want to use it whichever way I can use it, but that seems to be at least one tribunal in Ohio saying, if you are a public utility any place, we'll treat you as a public utility here, even though you're acting as a marketer here.
Mr. Sutton: --Right.
Your Honor, I want to make it perfectly clear, Carnegie helps us.
The reason Carnegie helps us is because that's a setting, or that's a case that suggests of a utility transaction took place outside of Ohio... in other words, we're not dealing what the Chief... Mr. Chief Justice was just asking about.
The utility transaction actually takes place in Indiana alone.
Carnegie suggests you would still get the use tax exemption.
The reason we're relying on Carnegie... and I want to make it clear, it's for a very narrow ground for this decision.
The reason we rely on Carnegie is, it shows that Ohio treats, or at least potentially treats utilities the same whether they own transportation equipment in Ohio or outside of Ohio.
We're trying to... we're taking on the facial absolutism component of General Motors' argument, the notion that you own... you set a requirement that you own transportation equipment in the State, and because you do that that's a facial line, it discriminates against other entities, you lose.
We're saying, that's not true.
We can even respond to the facial absolutism argument.
Unknown Speaker: Well, but you can't be exempted from the sales tax as a utility unless you own pipes, pipeline in Ohio, isn't that so?
Mr. Sutton: No, that's precisely the quandary that Carnegie suggests, and here's why that's true, Your Honor.
You get the benefit of the use tax exemption if it would be a transaction that would be exempt had it been a sale in the State, okay.
If we have an Indiana transaction, what happens is the Indiana utility sells to General Motors or Pipeline, uses its transportation equipment, it winds up in Ohio, there's an argument... it's an argument that there's a use tax applicable.
That is not our preferred ground.
In fact, I think it would be dangerous for the Court to issue an opinion that suggests that in 1996 or 1997 that the only way utilities in this country... and it's just not natural gas utilities, it's all utilities... the only way they can be constitutional is if you don't have a requirement that they own transportation equipment in the State.
I think that's an odd rule, and that's why our fundamental argument is that they're differently situated entities, and even if Ohio law does require you to own the transportation equipment within the State boundaries, it's still constitutionally permissible under the Commerce Clause.
Unknown Speaker: May I ask, just supposing, if Ohio wanted to, could it impose on the competitor, the independent marketer that sells to General Motors, an obligation to sell only at the same price that the utility can charge?
Mr. Sutton: Your Honor, I think in this instance they'd have difficulty doing that, because the transactions occurred out of State, so that they simply couldn't do that.
But to answer your question with respect to what happened if it were in-State, and that happens here, some of these transactions were by in-State marketers, absolutely.
In fact, I think it's important--
Unknown Speaker: And also, I suppose, could require them to supply their customers in the winter even if they don't pay their bills.
Mr. Sutton: --Oh, Your Honor, that's precisely... it's ironic why we're here.
The reason we're here is because back in 1982 some marketers came to Ohio and said, listen, we'd like to sell natural gas, but we'd like to do it in a deregulated capacity, and Ohio at that point had the choice to say, no.
You're a utility, or you're not a utility, and we could still do that under the Natural Gas Act.
But Ohio chose not to, and what Ohio chose to do was to say, well, we think deregulated gas is a good thing.
It's particularly good for industrial consumers.
We're just... the only thing we're going to condition it on is that there's a regulatory line, and if you're on the deregulated side you get the benefits and burdens of it, if you're on the regulated side you get the benefits and burdens as well, but you can't pick and choose.
Once you're one you have to comply with all of those rules and all of those laws.
Unknown Speaker: If they were compelled to comply with the rules, then of course they could not... they would also get the tax exemption, you're saying.
Mr. Sutton: Oh, yes, absolutely.
They of course would ultimately probably have to get transportation equipment as well, right.
This gets back to the point we were talking about earlier, that Ohio... the Ohio Public Utilities Commission, it's elected officials, can't be certain that a company will be able to provide natural gas whenever it is needed, however cold, unless that company owns transportation equipment, so I think fundamentally... I mean, I don't know of an Ohio opinion that says that, but I think as a practical matter, they probably would end up saying that very point.
Unknown Speaker: Mr. Sutton, just to clear out one thing, you're not arguing standing any more at this--
Mr. Sutton: No, we're not, Your Honor.
Your Honor, I'd like to very briefly address the congressional authority argument that we have also raised.
Let me tell you why it's a difficult argument, but why I think we can still make it.
It's a difficult argument because back in 1938 when the Natural Gas Act was passed, and again when it was amended in 1953, I don't think it was in any Congressman or-woman's mind that they needed to pass this law to constitutionalize the status of utilities, so that's a problem I had.
It simply just wasn't something they were after.
They were trying to fill a regulatory void with respect to interstate transportation of gas.
But that said, the language does the trick.
The language indicates that there's a dichotomy between all retail sales on the one hand and all wholesale sales on the other.
In this instance, that's all we have.
All we have are retail transactions, and under section 1(b) and (c) of the act, which is codified at 15 U.S.C. 717b and c, that's precisely what Ohio's allowed to do.
Now, General Motors has argued that's not true.
The enabling language simply gives you authority to regulate rates, services.
It doesn't use the magic words, tax.
We don't think Congress had to use the magic words, tax, in order to bless this form of transaction, and the reason is straightforward.
Number 1, the text of the Commerce Clause itself, of course, uses the word regulate.
It says nothing about tax, and we wouldn't be here if the word regulate in the Constitution didn't cover discriminatory taxes, so that's a starting point.
A second point is a matter of common sense.
As this Court has indicated, is the word regulate does cover tax.
Indeed, in General Motors' own opening brief at page 28, and again in one of their amicus briefs, at page 13 of the Chamber of Commerce brief, they made that very point.
The Chamber of Commerce said, what's going on here is Ohio is using taxes as a back-door way to regulate marketers, so I think as a matter of common understanding, everyone understands the broad term regulate to cover taxes.
There's another reason why this is legitimate, under congressional blessing, and that's the fact that what Ohio has done to all of the marketers... and I think this is important for the Commerce Clause issue as well.
What Ohio has done is treated the marketers like all other businesses.
Unknown Speaker: --Thank you, Mr. Sutton.
Mr. Sutton: Thank you, Your Honor.
Unknown Speaker: Mr. Dyk, you have 5 minutes remaining.
Rebuttal of Timothy B. Dyk
Mr. Dyk: Just very briefly, Mr. Chief Justice, Mr. Sutton suggests that he's not sure, but maybe these unregulated sales by public utilities would not be taxed, would not be exempt.
There's no basis for that in the statute.
The statute does not distinguish between regulated and unregulated sales by public utilities.
All public utility sales are exempt.
All natural gas sales are exempt.
And while we think the interpretation of the Carnegie case that they supply is not correct, if that interpretation is correct, what they're saying is, anybody who can claim the status of public utility can come into any part of the State and make exempt sales as a gas marketer, whereas the out-of-State companies are never going to get the exemption if they can't claim that public utility status.
The congressional policy here, we suggest, is clear.
It's in favor of competition.
It's in favor of allowing everybody to compete on an equal footing.
We respectfully suggest that that policy leads to the same conclusion that this Court's Commerce Clause precedents do, and that is the discrimination here is not acceptable.
Unknown Speaker: What's your best case that we look to of congressional policy in determining whether or not there's a violation of the dormant Commerce Clause, some of the rubbish cases, or... I can't think of a Commerce Clause case where we specifically really rely on the congressional policy.
Mr. Dyk: I can't remember one either, Justice Kennedy, but suggest that this might be an appropriate instance in which to rely on that policy as illuminating the meaning of the Commerce Clause, but we think we don't need that.
We don't need a finding as to congressional policy.
We think the result here is absolutely clear under the Commerce Clause precedents, even without that.
Chief Justice Rehnquist: Thank you, Mr. Dyk.
The case is submitted.