If independent retail gas marketers want a level state tax playing field with local distribution company (LDC) marketers in Ohio, they will have to pursue their case in state courts, the U.S. Supreme Court said in a decision issued June 1 [No. 09-223].

The high court overturned a Sixth Circuit Appeals Court decision that would have allowed the independent marketers to have their case against the Ohio Tax Commissioner tried in federal court. The Supreme Court decision reversing and remanding the lower court ruling relied on precedent known as “comity,” barring federal courts from entertaining claims that threaten to disrupt state tax administration.

The marketers were seeking to have tax exemptions granted by the state that benefited LDCs declared discriminatory and invalidated. The marketers, Commerce Energy, Inc., a California company, and Interstate Gas Supply, Inc., an Ohio company, brought their suit under the Commerce and Equal Protection clauses of the Constitution, saying the tax situation put them at a disadvantage in their attempts to compete with LDC marketers.

Under state law LDCs receive three tax exemptions that independent marketers do not. LDCs are exempt from sales and use taxes that independent marketers must pay. Instead the LDCs pay a gross receipts tax which is lower than those for sales and use. Second, LDCs are not subject to the commercial activities tax imposed on independent marketers’ taxable gross receipts. Third, Ohio law excludes inter-LDC natural gas sales from the gross receipts tax, which independent marketers must pay when they buy gas from LDCs.

In this case, the Supreme Court said, Ohio courts are better positioned to deal with state tax matters because they are more familiar with state legislative preferences, and they can command more remedial options.

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