In Rockies Express Pipeline, LLC,¹ the Supreme Court of Ohio (Court) held that a company operating an interstate pipeline for the transportation of natural gas is subject to Ohio's public utility excise tax on receipts earned from transporting the gas solely within Ohio. The Court concluded that the exclusion from the excise tax for "receipts derived wholly from interstate business" does not apply to receipts earned solely from intrastate transportation.

Background

Rockies Express Pipeline LLC (Rockies Express) is an interstate pipeline used to transport natural gas. The pipeline is approximately 1,700 miles long and crosses through eight states, including Ohio, where its easternmost terminus is located. The pipeline connects with 28 other interstate pipelines, with six of those interconnections in Ohio.

At issue in the case is the transportation of natural gas solely within Ohio. Under Ohio Rev. Code Section 5727.33(B)(1), all receipts derived "wholly from interstate business" are excluded from the public utility excise tax. Rockies Express reported on its 2015 annual return that it had generated almost $700 million in gross receipts for transporting natural gas, but assigned the entire amount to interstate business and, as such, reported no taxable gross receipts and paid the $50 minimum tax.

The Ohio Department of Taxation (Department) initiated an inquiry regarding the 2015 filing and asked for additional information about deliveries within Ohio. Based on the information provided by Rockies Express, the Department assessed $140,000 in public utility excise tax on the $2.1 million in gross receipts related to transactions in which natural gas both entered and exited the pipeline within Ohio. Rockies Express appealed the assessment, arguing that its receipts were derived wholly from interstate business and thus were exempt. The Tax Commissioner issued a final determination upholding the assessment and the Ohio Board of Tax Appeals affirmed.

Ohio Supreme Court upholds the tax assessment

Upon appeal, the Court considered two issues: (1) the statutory construction of "receipts derived wholly from interstate business" under Ohio law; and (2) whether imposing the tax violates the Commerce Clause of the U.S. Constitution.

As to the statutory construction issue, the Court was asked to determine whether gross receipts earned by a public utility for the transportation of natural gas flowing through an interstate pipeline should be exempt from the excise tax when those receipts relate solely to intrastate transportation. The scope of the exclusion, the Court said, turned on the meaning of the word "interstate" in the state statute. Finding the statute unambiguous,² the Court looked to the common, ordinary, and accepted meaning of the word, which "refers to matters existing or occurring between two states." The Court went on to say, "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 Express's] pipeline in Ohio and exited the pipeline at a delivery point in Ohio." Thus, based on common, ordinary, and accepted meaning of "interstate," the Court found that the gross receipts earned by Rockies Express from transporting natural gas solely in Ohio³ were not from receipts derived "wholly from interstate business."⁴

The Court next turned to the issue of whether Ohio's imposition of the excise tax on such gross receipts violated the Commerce Clause, which prohibits state laws that unduly restrict interstate commerce. Rockies Express claimed that it had no "substantial nexus" with Ohio, so the tax was not valid. The Court concluded that Rockies Express had a substantial nexus with Ohio because it had a physical presence in the state due to its interstate pipeline. Further, by installing and transporting the natural gas through the pipeline, Rockies Express availed itself of the privilege of carrying on business in Ohio. The Court rejected a related argument that Ohio was attempting to tax transient property. Citing its prior decision in Ohio Grocers Assn.,⁵ the Court concluded that the tax was not imposed on the transient commodity (the natural gas), but on the receipts earned from transporting it within Ohio.

Implications

Taxpayers should consider this decision in evaluating filing positions involving receipts from intrastate transportation. It is unknown at this time whether the taxpayers will appeal the constitutional issues to the U.S. Supreme Court.

EY will continue to monitor developments in this case.

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ENDNOTES

¹ Rockies Express Pipeline, LLC v. McClain, Slip Opinion No. 2020-Ohio-410 (Ohio S.Ct. Feb. 11, 2020).

² A concurring opinion believed that the statute was not as "unambiguous as the majority presumes" and delved into how the statute would have been understood in 1910 when it was adopted. However, the concurring opinion ultimately came to the same conclusions as the majority that the excise tax, to the extent imposed on intrastate transportation, comported with the statute.

³ The transactions reviewed by the Court included those involving delivery to two hub-pooling points. A hub pooling point is not a specific physical location but a virtual delivery point where multiple interconnections are treated as one delivery point, or hub. Hub pooling points facilitate market liquidity by permitting shippers to designate the delivery of gas to a virtual pooling point rather than a precise location. The deliveries to the hub-pooling points reviewed by the Court comprised 1.2% of the total gross receipts at issue. The Court dismissed Rockies Express' argument regarding these receipts, noting that Ohio Rev. Code Section 5727.33(A) does not impose tax on the making of a physical delivery in Ohio, but imposes a tax based on receipts from all sources of business done within Ohio. The Court's analysis seems cursory as a hub-pooling point could involve transactions with receipt locations in multiple states making it, by definition, an interstate transaction.

⁴ The Court noted that, even a finding that Rockies Express's activity of constructing and operating an interstate pipeline fell within the regulatory authority of the Federal Energy Regulatory Commission did not preclude the taxation of intrastate business receipts of an interstate pipeline.

⁵ Ohio Grocers Assn. v. Levin, 123 Ohio St.3d 303, 2009-Ohio-4872.