ROCKIES EXPRESS PIPELINE, L.L.C., APPELLANT, v. MCCLAIN, TAX COMMR., APPELLEE.
No. 2018-0882
SUPREME COURT OF OHIO
February 11, 2020
Slip Opinion No. 2020-Ohio-410
FRENCH, J.
Taxation—Public-utility excise tax—R.C. 5727.33(B)(1)’s exclusion of “receipts derived wholly from interstate business” from a public utility’s computation of its taxable gross receipts does not apply to receipts earned by transporting gas solely within Ohio—Imposing such tax does not violate the Commerce Clause of the United States Constitution—Board of Tax Appeals’ decision affirmed.
NOTICE
This slip opinion is subject to formal revision before it is published in an advance sheet of the Ohio Official Reports. Readers are requested to promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 South Front Street, Columbus, Ohio 43215, of any typographical or other formal errors in the opinion, in order that corrections may be made before the opinion is published.
SLIP OPINION NO. 2020-OHIO-410
ROCKIES EXPRESS PIPELINE, L.L.C., APPELLANT, v. MCCLAIN,1 TAX COMMR., APPELLEE.
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as Rockies Express Pipeline, L.L.C. v. McClain, Slip Opinion No. 2020-Ohio-410.]
Taxation—Public-utility excise tax—
(No. 2018-0882—Submitted August 6, 2019—Decided February 11, 2020.)
APPEAL from the Board of Tax Appeals, No. 2016-1144.
{¶ 1} Ohio’s public-utility excise-tax statutes provide that “[a]ll receipts derived wholly from interstate business” are excluded from a public utility’s computation of its taxable gross receipts.
FACTS AND PROCEDURAL BACKGROUND
Rockies’ operations
{¶ 2} Appellant, Rockies Express Pipeline, L.L.C. (“Rockies”) is an interstate pipeline used for transporting natural gas. Rockies does not gather or process gas, and its incidental purchases and sales of gas are not at issue. The pipeline is 42 inches in diameter, roughly 1,700 miles long, and crosses through eight states, including Ohio. The pipeline’s westernmost termini are in Wyoming and Colorado; its easternmost terminus is in Monroe County, which is located on Ohio’s eastern border. Rockies’ pipeline connects with 28 other interstate pipelines; six of these interconnections are located in Ohio. Although Rockies originally focused its operations on transporting gas from production areas in the West to serve markets in the East, the discovery of large gas supplies in Ohio and elsewhere prompted Rockies to
{¶ 3} Rockies is regulated by the Federal Energy Regulatory Commission (“FERC”), see
Proceedings before the tax commissioner
{¶ 4} Rockies reported to the tax commissioner on its 2015 Annual Statement of Gross Receipts that it generated $699,018,936 in gross receipts for transporting natural gas. Rockies assigned this entire amount to interstate-business activities and reported no taxable gross receipts. Based on that assignment, Rockies reported the minimum tax liability of $50. After Rockies reported its statement, an agent for the tax commissioner asked Rockies to provide additional information on its within-Ohio deliveries. Rockies submitted information pertaining to 36 discrete transactions in which it charged a total of $2,084,426 to transport natural gas solely within Ohio. Of these transactions, 94.1 percent were deliveries to other interstate pipelines, 1.9 percent were to local distribution companies, 2.8 percent were to industrial end users, and 1.2 percent were to hub pooling points.
{¶ 5} After reviewing Rockies’ information, the tax commissioner assessed Rockies a tax liability of $139,011.26 on gross receipts of $2,084,426—in other words, the commissioner assessed Rockies on transactions in which natural gas entered and exited Rockies’ pipeline within Ohio. Rockies paid the tax and petitioned the tax commissioner for reassessment under
{¶ 6} The tax commissioner issued a final determination upholding the assessment. The commissioner rejected Rockies’ reliance on
Proceedings before the Board of Tax Appeals
{¶ 7} The Board of Tax Appeals (“BTA”) affirmed the tax commissioner’s final determination, concluding as a statutory matter that Rockies’ receipts were not eligible for exclusion. The BTA declined to address whether imposition of the
Questions presented
{¶ 8} We granted Rockies’ petition, 153 Ohio St.3d 1486, 2018-Ohio-3867, 108 N.E.3d 83, which presents two propositions of law. The first involves a matter of statutory construction: whether the gross receipts earned by a public utility for the transportation of natural gas flowing through an interstate pipeline should be excluded from taxation under
ANALYSIS
The interstate-business exclusion in R.C. 5727.33(B)(1)
{¶ 9} Subject to certain exceptions, Ohio imposes on “each public utility * * * an annual excise tax * * * for the privilege of owning property in this state or doing business in this state * * *.”
(B) In ascertaining and determining the gross receipts of each public utility subject to this section, the following gross receipts are excluded:
(1) All receipts derived wholly from interstate business.
{¶ 10} The exclusion in
{¶ 11} Rockies posits that all of its gross receipts in tax year 2015 are “derived wholly from interstate business” and therefore fall within the exclusion. As with any matter of statutory interpretation, we begin with the text of the enactment. State v. Hanning, 89 Ohio St.3d 86, 91, 728 N.E.2d 1059 (2000). We must construe strictly any claimed exemption from taxation, and the taxpayer bears the burden of establishing its entitlement to the exemption. A. Schulman, Inc. v. Levin, 116 Ohio St.3d 105, 2007-Ohio-5585, 876 N.E.2d 928, ¶ 7. We conclude that the plain text of
{¶ 12} In our view, the scope of the exclusion turns largely on the meaning of the word “interstate.” In the absence of a statutory definition, we rely on the “common, ordinary, and accepted meaning” of a word. State v. Black, 142 Ohio St.3d 332, 2015-Ohio-513, 30 N.E.3d 918, ¶ 39;
{¶ 13} The word “interstate,” as understood since 1910, refers to matters existing or 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. We view the receipts derived from Rockies’ transportation of gas within Ohio as taxable receipts generated from “business done within this state,”
{¶ 14} Rockies does not offer an alternative meaning of the word “interstate,” nor does it dispute that the receipts at issue involve transactions in which Rockies received and delivered gas within Ohio. Rather, it argues that the phrase “interstate business” is interchangeable with “interstate commerce” and that we should examine Commerce Clause cases decided around the time of the statute’s enactment to determine what the General Assembly intended to exclude from taxation as interstate commerce.
{¶ 15} “If a statute is ambiguous,” we may consider factors such as “[t]he circumstances under which the statute was enacted” to determine legislative intent. (Emphasis added.)
{¶ 16} We see no ambiguity—and Rockies makes no contention of any ambiguity—in the phrase “interstate business,” as used in
{¶ 17} Rockies also relies on Columbia Gas Transm. Corp. v. Levin, 117 Ohio St.3d 122, 2008-Ohio-511, 882 N.E.2d 400, to argue that its transportation of natural gas to each of the delivery points at issue constitutes movement through interstate commerce and therefore falls within the exclusion in
{¶ 18} In Columbia Gas, a public utility challenged its designation as an interstate-pipeline company for the purpose of determining the tax assessment on its personal property. Columbia, a federally regulated interstate-pipeline company, was required to pay property tax at a higher rate than state-regulated local distribution companies. Columbia argued that this disparate tax treatment violated the Commerce Clause. Id. at ¶ 50. Columbia attempted to show that interstate pipelines and local distribution companies directly compete with each other because local distribution companies own significant amounts of transmission pipeline (as identified by the diameter and pressure strength of the pipeline). Id. at ¶ 60-61. We noted, however, that FERC does not rely on pipeline diameter and pressure as controlling for purposes of distinguishing between interstate transportation and local distribution of natural gas. Id. at ¶ 62. Rather, FERC defines interstate transportation as “beginning at the point where the interstate pipeline receives gas from the gathering or production area and ending at the point where the interstate pipeline delivers gas into the [local distribution company’s] distribution facility (commonly known as the ‘city gate’).” Id. We also acknowledged that under federal law, “the transportation of natural gas by an interstate pipeline directly to an end user constitutes transportation in interstate commerce, not local distribution.” Id. at ¶ 63. We therefore rejected Columbia’s constitutional claim because it could not make a threshold showing that interstate-pipeline companies and local distribution companies are similarly situated or compete for the same customers. Id. at ¶ 58, 65.
{¶ 19} Rockies relies on the above language from Columbia Gas to argue that its deliveries to other interstate pipelines, to local distribution companies, and to an industrial end user all constitute interstate commerce and thus fall under the interstate-business exclusion in
{¶ 20} Rockies also argues that the tax commissioner lacked any basis to tax its deliveries to hub pooling points because they are virtual locations and not physical facilities. But
{¶ 21} We adhere to the unambiguous language enacted by the General Assembly and conclude that Rockies has not met its burden of showing that its receipts fall under the exclusion in
The Commerce Clause
{¶ 22} Rockies argues in its second proposition of law that if we decide that the interstate-business exclusion does not apply, then imposing the tax under these circumstances would violate the Commerce Clause. We disagree.
{¶ 23} The United States Constitution empowers Congress “[t]o regulate Commerce * * * among the several States.”
{¶ 24} In Complete Auto Transit, Inc. v. Brady, the United States Supreme Court articulated the standard for analyzing the validity of a state tax under the Commerce Clause. 430 U.S. 274, 279, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Under this four-part test, a tax is valid if it is “applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” Id. Rockies challenges the substantial-nexus prong.
{¶ 25} The substantial-nexus inquiry “simply asks whether the tax applies to an activity with a substantial nexus with the taxing State.” South Dakota v. Wayfair, Inc., __ U.S. __, 138 S.Ct. 2080, 2099, 201 L.Ed.2d 403 (2018), overruling Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992) and Natl. Bellas Hess, Inc. v. Dept. of Revenue of Illinois, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967). When a taxpayer “ ‘avails itself of the substantial privilege of carrying on business,’ ” in the state, substantial nexus is established. Id., quoting Polar Tankers, Inc. v. Valdez, 557 U.S. 1, 11, 129 S.Ct. 2277, 174 L.Ed.2d 1 (2009).
{¶ 26} In Crutchfield Corp. v. Testa, we addressed the concept of substantial nexus in the context of Ohio’s commercial-activity tax, which is a form of business-privilege tax measured by gross receipts. 151 Ohio St.3d 278, 2016-Ohio-7760, 88 N.E.3d 900.
{¶ 27} The first part of our holding from Crutchfield decides the constitutional question at issue here: Rockies has substantial nexus with Ohio based on its physical presence within the state. That physical presence manifests itself in the interstate pipeline that Rockies installed across the width of Ohio—a pipeline that enables it to transport natural gas for its customers. By installing and transporting natural gas through that pipeline, Rockies has availed itself of the privilege of carrying on business in Ohio.
{¶ 28} Rockies argues that “[t]he application of a state tax on interstate commerce cannot depend upon which interstate route the goods take.” But in concentrating on the movement of the gas, Rockies has ignored its Ohio-sited pipeline. Rockies’ theory, if accepted, would seemingly defeat a finding of substantial nexus in every state in which its pipeline is located.
{¶ 29} Big Boy’s Toy, Ltd. v. Limbach, 64 Ohio St.3d 448, 597 N.E.2d 76 (1992), a case that Rockies cites, does not require a different result. Big Boy’s Toy was a use-tax case in which we reversed the BTA for applying the wrong substantial-nexus standard in evaluating the taxability of transient property, namely, a boat. This case, in contrast, does not involve the tax commissioner’s attempt to tax the use of transient property. The public-utilities excise tax is a form of privilege tax,
CONCLUSION
{¶ 30} For the foregoing reasons, we affirm the BTA’s decision and conclude that Rockies’ gross receipts for tax year 2015 from the transportation of natural gas within the state of Ohio are not excluded from taxation under
Decision affirmed.
O’CONNOR, C.J., and DONNELLY and STEWART, JJ., concur.
DEWINE, J., concurs, with an opinion joined by KENNEDY and FISCHER, JJ.
DEWINE, J., concurring.
{¶ 31} I agree with the majority that
{¶ 32} At issue here is the proper interpretation of the exemption in
{¶ 33} What was the relevant historical and legal context? In a series of cases from the end of the nineteenth and the beginning of the twentieth century, the United States Supreme Court held that the Commerce Clause limited a state’s authority to tax rail and pipeline companies transporting goods in interstate commerce. As will be apparent shortly, to call the rules from that era arcane would be something of an understatement—and by the end of the 1970s, the court had rejected the entire approach. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 289, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). But in 1910 that rather arcane approach was alive and well, and it is against that backdrop that the exclusion in
{¶ 34} The basic principles were fairly straightforward. At the end of the nineteenth century, it was well established that states could not tax interstate commerce directly, though they could tax the property of interstate carriers within the state. See Galveston, Harrisburg, & San Antonio Ry. Co. v. Texas, 210 U.S. 217, 225, 28 S.Ct. 638, 52 L.Ed. 1031 (1908). Of course, states had a free hand in taxing wholly intrastate commerce directly. Ratterman v. W. Union Tel. Co., 127 U.S. 411, 425, 8 S.Ct. 1127, 32 L.Ed. 229 (1888).
{¶ 35} But the principle that states could tax the property of interstate carriers though not interstate commerce itself raised the question of how to value that property. And around the turn of the century, the court allowed states to impose a tax based on the percentage of receipts in proportion to the percentage of a route that was within the taxing state, even if the route crossed state lines. Maine v. Grand Trunk Ry. Co., 142 U.S. 217, 228-229, 12 S.Ct. 121, 35 L.Ed. 994 (1891). But such taxes based on the gross receipts of interstate transport were upheld only insofar as they truly functioned as a proxy for taxing the value of the privilege of doing business within the state; states could not tax interstate commerce directly. Grand Trunk at 229; see also United States Express Co. v. Minnesota, 223 U.S. 335, 347, 32 S.Ct. 211, 56 L.Ed. 459 (1912).
{¶ 36} Confronted with this legal backdrop, the Ohio legislature enacted the disputed exclusion in 1910. See Ohio Tax Cases, 232 U.S. 576, 591-592, 34 S.Ct. 372, 58 L.Ed. 737 (1914). As recounted by the Ohio Tax Cases court, the exclusion was passed in response to the United States Supreme Court’s 1908 Galveston decision. Id. at 592. The decision in Galveston led to doubts about the constitutionality of Ohio’s tax scheme, which included a tax calculated by first determining a company’s average gross receipts per mile of line and then multiplying that number by the number of miles in Ohio. Id.; see also Galveston at 227-228. So, “anticipat[ing] that the [prior] law would probably be held unconstitutional,” the
{¶ 37} Given this history, in 1910, it would have been plain to all concerned that for purposes of the exemption, “interstate business” had a technical legal meaning informed by the Commerce Clause jurisprudence of the era. Thus, in Ohio Tax Cases, the United States Supreme Court construed the phrase “excluding therefrom all earnings derived wholly from interstate business” to mean that the tax applied only to earnings from intrastate commerce that the state could tax without offending the prevailing understanding of the Commerce Clause. Id. at 591.
{¶ 38} Indeed, this is the approach that Rockies asks us to take. They argue that at the time the statute was passed, “interstate business” would have been understood to include intrastate segments of the transport of goods otherwise moving in interstate commerce. In other words, Rockies invites us to treat its transport of gas wholly within Ohio as interstate business because that gas may have originated in another state or ultimately be destined for another state.
{¶ 39} This line of argument presents something of a puzzle (and also shows why the statute is not as unambiguous as the majority presumes). 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? In short, the puzzle is how to determine the starting and ending points for the transport of goods so that one can decide whether that transport is interstate or intrastate.
{¶ 40} Suffice it to say, courts from the era were aware of this puzzle and they had a partial solution—but not the one that Rockies argues for here. The seminal case on this issue is Coe v. Errol, 116 U.S. 517, 6 S.Ct. 475, 29 L.Ed. 715 (1886). There, the court had to assess whether logs sent from New Hampshire forests to a New Hampshire way station were taxable, notwithstanding the fact that they would be later sent on to Maine. The court held that they were taxable. Interstate commerce, the court explained, commenced when the goods “are committed to the common carrier for transportation out of the State to the State of their destination, or have started on their ultimate passage to that State.” Id. at 525. Until the goods are actually put into the custody of a carrier destined for some out-of-state location, they are still subject to state taxation, because until that time they “may never be exported.” Id. at 526.
{¶ 41} The relevant principles were further elaborated in 1907 when the United States Supreme Court was asked to decide whether goods transferred from Texarkana, Texas, to Goldthwaite, Texas, were in interstate commerce because before arriving in Texarkana, the goods had been shipped from Hudson, South Dakota. Gulf, Colorado, & Santa Fe Ry. Co. v. Texas, 204 U.S. 403, 411, 27 S.Ct. 360, 51 L.Ed. 540 (1907). The court concluded that this segment of the shipment was intrastate commerce, despite the origin of the goods, because the goods had been shipped from South Dakota to Texarkana under one contract of shipment and from Texarkana to Goldthwaite under a separate contract of shipment. Id. at 412-413. Thus, the court adopted the principle that
{¶ 42} The principle that can be derived from these cases is that as it would have been understood in 1910, goods were in intrastate commerce, and therefore subject to taxation by the state, if the contract for transport was between two points in the same state. That the goods might be sent out of state after reaching the destination under the contract doesn’t change that fact. Applied here, that means that Rockies is subject to the tax for any shipments with starting and ending points within Ohio, regardless of the further movement of the goods after they leave Rockies’ pipeline. What the tax commissioner taxed was only those contracts of shipment with starting and ending points in Ohio. Hence, I agree with the majority that the tax imposed comported with the statute.
{¶ 43} Thus, on the first question presented—whether the transactions at issue are exempt from taxation under
KENNEDY and FISCHER, JJ., concur in the foregoing opinion.
Taft Stettinius & Hollister, L.L.P., and W. Stuart Dornette, J. Donald Mottley, and Philip D. Williamson; MBGallTax, and Maryann B. Gall; and Van Ness Feldman, L.L.P., and Paul Korman, for appellant.
Dave Yost, Attorney General, and Benjamin M. Flowers, State Solicitor, Zachery P. Keller, Deputy Solicitor, and Daniel W. Fausey and Zachary J. Stackhouse, Assistant Attorneys General, for appellee.