General Motors challenged an Ohio sales and use tax which applied generally to purchases of natural gas, but exempted purchases when they were made from a "natural gas company" defined by the Ohio Supreme Court as limited to local public utilities (also known as "local distribution companies," or LDCs). GM, however, purchased its supplies of natural gas from out-of-state natural gas marketers, which are not considered "natural gas companies" under Ohio law; therefore, GM's purchases were not exempted from the tax. The Ohio Supreme Court rejected GM's Commerce Clause and Equal Protection Clause challenges to the tax. The Supreme Court affirmed.Justice Souter, writing for the majority on 2/18/97, reasoned that Ohio's tax scheme worked no unconstitutional discrimination between in state LDCs and natural gas marketers, because the two types of entities are not "similarly situated." LDCs, the Court explained, principally sell "bundled gas" (gas plus transportation services) to a "captive market" composed principally of residential consumers and small companies. By contrast, gas marketers sell "unbundled gas" (gas without transportation services), principally to a "noncaptive market" of larger consumers like GM, who themselves arrange for the necessary transportation services. Even though LDCs do compete with marketers in the so-called "noncaptive market," the Court nonetheless held that it was appropriate, and nondiscriminatory, for Ohio generally to exempt purchases from LDCs from tax, so to maintain the LDCs' customer base, and therefore to preserve the LDCs' ability to serve the "captive market."
Justice Stevens dissented on the ground that the clear favoritism of LDC purchases in the "noncaptive" (competitive) market could not be sustained under the Commerce Clause.
The NAM filed an amicus brief in support of GM.