Appeals court upholds centralized collection, other muni tax reforms

Written on Jan 29, 2019

By Gary Hunt, CAE, OSCPA Communications Director

In a win for Ohio’s CPA profession – and Ohio taxpayers – the state’s 10th District Court of Appeals on Jan. 29 upheld a lower court decision supporting the constitutionality of centralized collection of municipal net profits taxes and other municipal tax reforms adopted in recent years by the Ohio General Assembly.

The court said previous case law does not support the cities’ contention that reforms enacted in 2014’s House Bill 5 and 2017’s Am. Sub. H.B. 49 constitute a violation of “home rule.”

“… We deduce the General Assembly’s authority over municipalities’ power to levy taxes extends beyond limiting the imposition of taxes,” Judge William Klatt wrote in the 2-1 decision. “By granting the General Assembly the authority to limit municipalities’ power to levy taxes, Article XVIII Section 13 endows the General Assembly with the capability to circumscribe the imposition, raising and collection of a municipal tax.”

“This win is important for Ohio CPAs and the broader business community,” said Greg Saul, Esq., CAE, tax policy director at The Ohio Society of CPAs. “As the leader of the Municipal Tax Reform Coalition, The Ohio Society of CPAs, has advocated for years to reduce municipal income tax compliance problems for individual and business taxpayers.”

The Municipal Tax Reform Coalition is a broad partnership of statewide organizations driving reform of Ohio’s municipal income tax code. Collectively, Coalition members represent thousands of Ohio business and individual taxpayers who are the lifeblood of Ohio’s economy. The Coalition has proudly supported the State of Ohio throughout court proceedings, including filing an amicus brief.

“2019 brings the same result as 2018,” Saul said. “Now it’s an Ohio court of appeals that ruled that centralized collection of the municipal net profits tax and other important changes are are constitutional and here to stay.”

Close to 150 cities had filed two lawsuits – later merged into one – and an injunction to stop the Ohio Department of Taxation from allowing businesses to centrally file and pay net profits tax. Both actions were thrown out last February at the common pleas level, prompting an appeal that was heard in October in Ohio’s 10th District Court of Appeals.

As the defendant in the case, the State of Ohio made the winning argument that the Ohio Legislature may allow taxpayers to opt-in to file municipal net profits taxes with the state department of taxation.

Judge Lisa Sadler concurred with Klatt in the decision; dissenting Judge Gary Tyack’s only argument was with the Ohio Department of Taxation’s 0.5% administrative fee.

“I feel that much of what the legislature did with respect to the collection of income taxes levied by municipal corporations makes sense,” Tyack wrote. “…No matter how you spin it or attempt to gloss it over, the state of Ohio is charging municipalities a tax. I do not believe the state of Ohio can legally tax municipalities.”

The appellates in the case – the cities – are expected to appeal the decision to the Ohio Supreme Court. In the meantime, businesses are encouraged to continue to register for centralized collection of municipal net profits taxes, a reform the Ohio Department of Taxation has said could save businesses up to $800 million per year in compliance costs.