Ohio Refund Opportunity for Federal and Non-Ohio Chartered Financial Institutions
Federal and Non-Ohio Chartered Financial Institutions Should Consider Refunds Claims or Offsets for Ohio Financial Institution Tax or Corporation Franchise Tax Based on Potential Violation of Federal Law and the United States Constitution
A provision in the Ohio Financial Institution Tax (“FIT”) that limits the credit for regulatory fees to those paid by Ohio chartered financial institutions may conflict with federal law and may discriminate against federal and non-Ohio chartered financial institutions in violation of the Supremacy Clause or the Commerce and Equal Protection Clauses of the United States (“U.S.”) Constitution. Financial institutions subject to the FIT should consider filing refund claims based on this asserted discrimination. Such companies subject to the former corporation franchise tax on financial institutions should also consider filing refund claims.
The FIT and Regulatory Credit in Former R.C. 5726.51
The FIT is a franchise tax imposed on financial institutions for the privilege of doing business in Ohio in each tax year. The FIT is imposed based on a financial institution’s net worth on December 31st of the prior calendar year. Financial institutions became subject to the FIT starting with the 2014 tax year.
The FIT was enacted to replace the former corporation franchise tax on financial institutions and remedy some of the issues with that prior tax. Unlike the franchise tax, which merely taxed the consolidated net worth of regulated financial institutions, the FIT is typically imposed on the net worth of the bank’s consolidated holding company (defined as a “financial institution”). In situations where a regulated financial institution is not owned by a traditional bank structure, such as certain savings and loans banks and associations, the tax is imposed on the regulated financial institution’s net worth.
Former R.C. 5726.51 allowed Ohio regulated financial institutions to claim a credit against their FIT liability for regulatory fees paid to their Ohio regulator. However, neither federally chartered financial institutions nor non-Ohio state chartered financial institutions could claim a credit for the regulatory fees paid to their respective regulators.
Supremacy Clause Concerns
The Office of the Comptroller of the Currency (“OCC”) issued a letter dated September 17, 2015, stating that former R.C. 5726.51 violated 12 U.S.C. 548, which requires that a national bank be treated the same as a state chartered bank in a state where the national bank has its principal office. The OCC’s conclusion was based on the fact that an Ohio chartered bank would be entitled to the credit for regulatory assessments while a federal chartered bank would not receive a similar credit for its regulatory assessments. The letter states:
The law provides no similar credit for regulatory assessments paid by bank organizations not organized under Title XI of the Ohio Revised Code, and it provides no credit for assessments paid to other financial regulators. Thus, the FIT provides a tax credit to Ohio-chartered state banks that is not available to national banks. This arrangement does not treat a national bank with its principal office located in Ohio as if it were an Ohio-chartered state bank, in contravention of 12 U.S.C. § 548. Because the FIT is inconsistent with 12 U.S.C. §548, it is the opinion of the OCC that the imposition of the FIT on a national bank with its principal office in Ohio is not authorized under federal law. (Emphasis added.)
Based on the OCC’s opinion, the FIT is invalid as applied to a national bank with its principal office located in Ohio. The OCC letter does not discuss national banks with a principal office located outside of Ohio.
Although not discussed in the OCC’s letter, a similar federal provision exists with respect to federally chartered savings and loan institutions. 12 U.S.C. §1464(h), codifying Section 5(h) of the Home Owners’ Loan Act of 1933, reads as follows:
(h) DISCRIMINATORY STATE AND LOCAL TAXATION PROHIBITED. – No State, county, municipal, or local taxing authority may impose any tax on Federal savings associations or their franchise, capital, reserves, surplus, loans, or income greater than that imposed by such authority on other similar local mutual or cooperative thrift and home financing institutions.
Based on the same rationale described in the OCC letter, the FIT may violate 12 U.S.C. §1464(h) to the extent the FIT paid by a federally chartered savings and loan institution is subject to a tax that is greater than that imposed on an Ohio savings and loan institution. Unlike 12 U.S.C. § 548, 12 U.S.C. §1464(h) does not require that the federal savings and loan have its principal office located in Ohio.
Former R.C. 5726.51 and the Ohio Department of Taxation’s administration of the credit may also violate the Commerce Clause and Equal Protection Clause of the U.S. Constitution by imposing a higher level of tax on federally chartered institutions. As described above, the OCC letter does not discuss national banks with a principal office located outside of Ohio or non-Ohio state regulated institutions; the referenced federal provisions would not apply to the latter institutions. However, former R.C. 5726.51 and the Ohio Department of Taxation’s administration of the credit may also violate the Commerce Clause and Equal Protection Clause of the U.S. Constitution by imposing a different or greater tax on non-Ohio state regulated institutions and federally regulated institutions that do not have a principal office in Ohio.
A similar credit was available against the Ohio franchise tax under R.C. 5733.063 for certain Ohio regulated savings and loan associations, not including a savings and loan bank. The OCC letter does not discuss the credit available under the former corporation franchise tax on financial institutions, but the former credit may also violate the Supremacy, Commerce, and Equal Protection Clauses of the U.S. Constitution.
Repeal of the Regulatory Credit
In light of the OCC letter, the Ohio legislature enacted Substitute House Bill 340, repealing R.C. 5726.51. The legislation also repealed the regulatory assessments paid by Ohio regulated institutions and refunded any assessments paid in 2015. The legislation was immediately effective on December 22, 2015. The Ohio Department of Taxation has indicated that the repeal applies to the 2016 FIT tax year based on a financial institution’s net worth as of December 31, 2015. The legislation also repealed R.C. 5733.063 that existed under the corporation franchise tax chapter. There was no language in the legislation precluding a taxpayer from requesting a refund or offset of FIT or corporation franchise tax previously paid.
Based on the authority described above, a taxpayer subject to the FIT may consider whether refunds or offsets are available for the 2015 tax year (based on net worth as of December 31, 2014) and the 2014 tax year (based on net worth as of December 31, 2013). The FIT has a four year statute of limitations (“SOL”). A taxpayer subject to the corporation franchise tax may also consider whether refunds or offsets are available for the 2013 tax year (based on net worth as of December 31, 2012) and any earlier open tax periods. The franchise tax had a three year SOL with the 2013 tax year typically expiring in October of 2016 for most taxpayers.
A taxpayer should thoroughly review the facts and the law, including any relevant regulatory provisions. The strength of the taxpayer’s argument may vary depending on the type of institution. Moreover, if the FIT is found to be invalid, there are questions on whether another Ohio tax, such as the Ohio Commercial Activity Tax, could be imposed. Additionally, the FIT chapter contains a statutory trigger provision that increases or decreases the tax rate depending on the tax revenues collected at certain dates. There are a number of other relevant and complex issues that need to be considered.