TAX NEWS - JUNE 2010

Ohio Tax: Ohio wins lawsuit, gets to review its tax laws

California natural gas seller had sued in federal court over local distributors' exemption from sales and use taxes.

by Jack Torry, 02 June 2010 -- The U.S. Supreme Court unanimously ruled Tuesday, June 1, that a natural gas supply company that objected to Ohio's tax system should have filed its lawsuit in state court instead of the federal courts.

With its ruling, the justices sided with the Ohio Department of Taxation, which has been trying to block a lawsuit brought by a California company that sells natural gas to customers in Ohio.

The company, Commerce Energy of California, had argued that Ohio law gave unfair tax advantages to local distribution companies — such as Vectren Energy of Indiana, which supplies natural gas to 317,000 customers in Dayton and western Ohio. Commerce Energy claimed Ohio law violated the Commerce Clause of the Constitution and the Equal Protection Clause of the 14th amendment. Vectren was not a party to the suit.

Ohio Attorney General Richard Cordray hailed the court's decision, saying the justices "recognized the critical importance of ensuring state courts the right to review their own tax laws.''

The ruling likely will make it easier for Ohio officials to prevail in a state court.

A federal judge originally dismissed the lawsuit, agreeing with Ohio officials that what is known as the "comity'' doctrine requires federal courts to show deference to state courts. But the 6th U.S. Circuit Court of Appeals in Cincinnati last year struck down the judge's decision.

Writing for the court, Justice Ruth Bader Ginsburg ruled that "the Ohio courts are better positioned than their federal counterparts to correct any violation because they are more familiar with state legislative preferences,'' adding that the California company wanted the federal courts to review "commercial matters over which Ohio enjoys wide regulatory latitude.''

The local distribution companies held a virtual monopoly on the sale of natural gas to major markets in Ohio. They not only owned the gas, but also owned the pipelines that carried the gas to customers.

The California company offered retail customers an alternative: They could buy the gas from the new companies, even though it would still be transmitted by the older companies' gas lines.

Under Ohio law, the local distribution companies were exempt from sales and use taxes, while the newer companies had to pay those taxes.

It's unclear if the decision will have a major impact on Vectren. Company spokeswoman Chase Kelley said Vectren plans to withdraw from selling natural gas but will keep its distribution system.