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  • Richard C. Farrin, JD - Member

Ohio Appeals Court Rules on First Amendment Challenge to Cincinnati Billboard Tax

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Executive Summary

On June 18, 2020, Ohio’s First District Court of Appeals (Hamilton County) issued its decision in Lamar Advantage GP Company, LLC and Norton Outdoor Advertising, Inc. v. City of Cincinnati, Ohio, 1st Dist. Hamilton No. C-180675, 2020-Ohio-3377 (“Lamar”). On the surface, the decision is applicable to a small number of companies who rent out billboards in Cincinnati to advertisers, but it may have wider implications. In the decision, the Court of Appeals applied the Central Hudson test enunciated by the U.S. Supreme Court for regulating commercial speech under the First Amendment to Cincinnati’s excise tax on billboard rentals. Reversing the Hamilton County Court of Common Pleas, the Court of Appeals upheld the constitutionality of the tax. However, the Court of Appeals struck down the provision prohibiting certain communications regarding the tax from the owner of the billboard to the customer renting the billboard. Under the fourth prong of the Central Hudson test, the prohibition of communications by the billboard owner stating that the cost of the tax might be passed to customers was held to be an unnecessary regulation of protected speech.

In considering the billboard tax, the Court of Appeals applied similar reasoning to that used by the federal Sixth Circuit in BellSouth Telecommunications, Inc. v. Farris, 542 F.3d 499 (6th Cir. 2008). We believe the BellSouth decision precludes the Ohio Department of Taxation from enforcing the Ohio CAT’s prohibition of CAT taxpayers from stating the CAT on a customer invoice. The recent decision in Lamar adds an Ohio court of appeals decision to the federal jurisprudence disallowing such prohibitions under the First Amendment’s protection of commercial speech. To read our full discussion of the Lamar decision, please read below.

If you would like to discuss the Lamar decision or any other state and local tax matter, please contact Richard Farrin, Derek Heyman or any other ZHF professional.

Detailed Buzz

On June 18, 2020, Ohio’s First District Court of Appeals (Hamilton County) issued its decision in Lamar Advantage GP Company, LLC and Norton Outdoor Advertising, Inc. v. City of Cincinnati, Ohio, 1st Dist. Hamilton No. C-180675, 2020-Ohio-3377 (“Lamar”). On the surface, the decision is applicable to a small number of companies (primarily Lamar and Norton, the two complainants) who rent out billboards in Cincinnati to advertisers. But the decision may have much wider implications, as it deals with the First Amendment’s implications for statutory prohibitions on certain communications between a seller or lessor and its customer, including what language may be included on invoices. As discussed below, the Ohio CAT contains statutory language similar to that in Cincinnati’s Outdoor Advertising Sign Excise Tax at issue in the decision.

The Outdoor Advertising Sign Excise Tax (for convenience, “billboard tax”) was enacted by the City of Cincinnati (“the city”) by Emergency Ordinance No. 167-2018, effective July 1, 2018. The tax is levied on “the privilege of installing, placing, and maintaining outdoor advertising signs in the city of Cincinnati,” and equals the greater of seven percent of the gross receipts generated by a billboard or an annual minimum tax measured by the square footage of sign face on each billboard located in the city. The legal incidence of the tax falls on the “advertising host,” the owner or operator of the billboard, as opposed to the “advertiser” who rents the space to present content to the public. “Gross receipts” means the consideration paid the advertising host “for the installation, placement, or maintenance of, or license or other legal right to install, place, or maintain, an advertisement, message, or other content on an outdoor advertising sign.”[1]

The statute explicitly states that it does not prohibit the advertising host from recovering the amount of the billboard tax by charging higher prices to its advertisers.[2] However, the advertising host does face the following prohibitions regarding the communication of the tax:

(a)  The tax shall not be stated or charged separately from the rent or other consideration paid by an advertiser for use or occupancy of an outdoor advertising sign or shown separately on any record thereof, or otherwise reflected upon any bill, statement, or charge made for the sign's use or occupancy issued or delivered by the advertising host.

(b)  No advertising host shall state in any manner, whether directly or indirectly, that the tax or any part thereof will be assumed or absorbed by an advertiser, or that it will be added to the rent or other charge.[3]

The Hamilton County Court of Common Pleas (“trial court”), after hearing evidence from the parties, declared the billboard tax unconstitutional under the First Amendment to the U.S. Constitution and enjoined the city from enforcing the tax. The city appealed, leading to the First District Court of Appeals’ decision.

The Court of Appeals reviewed two assignments of error raised by the city regarding the trial court’s decision. In its first assignment of error, the city argued that the trial court was wrong to apply strict scrutiny to the tax itself. This standard protects First Amendment rights by requiring the city to show a compelling governmental interest that the city could not have achieved without the discriminatory tax. The trial court considered the tax discriminatory because it is a tax on speech or on instruments utilized in exercising First Amendment rights, and it targets a small, narrow group to bear the burden of the tax: the handful of billboard operators qualifying as advertising hosts for purposes of the tax. The trial court found that the city was not able to show that the discriminatory tax was necessary to meet the compelling interest because there are other ways to raise revenue.

In evaluating that holding, the Court of Appeals found that Clear Channel Outdoor, Inc. v. Dir., Dept. of Fin. Of Baltimore City, 223 A.3d 1050 (Md.App. 2020) was persuasive. In reviewing a challenge to a similar tax on billboards, the Clear Channel court held that while a tax is suspect if it targets a small group of speakers, the reason is the fear of censorship of particular ideas or viewpoints. Heightened scrutiny under the First Amendment is also triggered if a tax discriminates on the basis of the content of taxpayer speech. The Clear Channel court, in upholding the tax, reasoned that “Maryland’s billboard tax was content neutral in that the tax applied whenever an advertising host charged a fee to a third party, regardless of the advertiser’s message.”[4] Moreover, since the tax applied to all billboard owners and operators, it did not single out a small group of billboard operators, regardless of the actual number involved.

The Court of Appeals applied the same reasoning to the Cincinnati billboard tax. This tax is also content neutral because it “applies to billboards regardless of the message displayed.”[5] Nor is there reason to believe the tax “will threaten to suppress the expression of certain viewpoints.”[6] Finally, the “tax does not single out a particular group of billboard operators to bear the burden of the tax.”[7] While the trial court determined that the tax “targets a small, narrow group of the media,” the Court of Appeals explains that other factors led to the oligopoly in the Cincinnati billboard industry. “The tax itself did not single out a small group for taxation.”[8] For these reasons, and because billboard operators, unlike traditional news organizations, do not display their own content, but rather the content of others, and this content, per the evidence presented below, has included “a myriad of messages from various corporate, nonprofit, and government agencies,” the tax does not infringe on the First Amendment.[9] The Court of Appeals upheld the city’s first assignment of error, allowing the billboard tax to stand.

The city’s second assignment of error was that the trial court erred in separately enjoining the no-stating-the-tax provision of CMC 313-7, quoted above. As with the tax itself, the trial court had applied a strict scrutiny test to this provision, determining it to be “a content-based restriction on noncommercial speech.” As summarized by the Court of Appeals, the trial court reasoned that “the provision was a calculated means for public officials to avoid accountability for the billboard tax and the inevitable increased advertising costs of billboards.”[10]

The Court of Appeals rejected this finding of political motive as unsupported by the evidence and found the statutory language to be limited to communication between the billboard operator and its customer regarding the billboard space rental. As such, it found the regulated speech to be commercial speech, which is accorded a lower degree of protection under the First Amendment.

The test applied under the intermediate standard was developed in the U.S. Supreme Court decision, Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm., 447 U.S. 557, 566 ( 1980). The Supreme Court held that for commercial speech to be protected by the First Amendment, “it at least must concern lawful activity and not be misleading.” Assuming this is the case, the next step is to determine whether the asserted governmental interest in regulating such speech is “substantial.” If that too is affirmative, the court “must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.”[11]

The Court of Appeals’ application of the Central Hudson test to Cincinnati’s billboard tax largely mirrors the federal Sixth Circuit’s decision in BellSouth Telecommunications, Inc. v. Farris, 542 F.3d 499 (6th Cir. 2008). In BellSouth, the Sixth Circuit applied the Central Hudson four-pronged test to a telecommunications excise tax imposed by Kentucky. The Kentucky tax was also imposed on the provider, who was allowed to pass on the economic but not legal burden of the tax to consumers but was prohibited from stating the tax on an invoice to those consumers. The Sixth Circuit found the no-stating-the-tax provision to be unconstitutional under the intermediate scrutiny of the Central Hudson test.

In Lamar, the Court of Appeals first rejects the city’s argument that the prohibited speech between advertising hosts and their customers is inherently misleading. Because the commercial speech in question concerns lawful activity and is not inherently misleading, it is subject to protection under the First Amendment. As such, the governmental interest in regulating the speech must be substantial. The Court of Appeals, following the Sixth Circuit’s method in BellSouth, assumes the substantiality test is met by the government’s interest in maintaining a distinction between an excise tax and a sales tax, and moves on to whether the government’s means of regulating the proposed communication fails either of the two criteria regarding the “fit” of the regulation to the interest the government seeks to protect. As stated in BellSouth, “[j]ust as the directly advance requirement generally guards against underinclusive laws (those that do too little), the reasonable-fit requirement generally guards against overinclusive laws (those that do too much).”[12]

A notable difference of the billboard tax from the Kentucky telecom tax in BellSouth is that the billboard tax prohibits not only the separate statement of the tax on an invoice to the advertiser, but any direct or indirect statement by the advertising host that the advertiser will in some way be absorbing the cost of the tax.[13] It may be this additional provision that leads the Court of Appeals to refrain from passing judgment on the test’s third prong, whether the tax directly advances the government interest. This is a departure from the Sixth Circuit’s analysis in BellSouth, where the court found the law to be underinclusive because “the Commonwealth allows providers to tell their customers anything about the tax, no matter how confusing, in all settings save one: an invoice.”[14] No matter whether this provision of the billboard tax passes the directly-advances prong or not, it violates the First Amendment because it fails the reasonable-fit prong. “Just as in BellSouth, a simple disclaimer to the customers would clear up any would-be confusion that the billboard tax remains the operators’ responsibility to pay.”[15] Since alternatives such as this would not require the regulation of protected speech, the provision is over-inclusive and fails the final prong of the Central Hudson test regulating commercial speech under the First Amendment.

Implications for the Ohio CAT and Other Taxes with Similar Provisions

The Lamar decision adds an Ohio court of appeals decision to the federal jurisprudence applying the Supreme Court’s Central Hudson test to a tax provision’s prohibition on the communication between a seller or lessor and its customer stating that the cost of an excise tax will be recovered from the customer, even though the cost recovery itself is allowed. Similar prohibitions continue to exist in the law, however: one prominent example in Ohio is in the Commercial Activity Tax. Ohio Revised Code 5751.02(B) states, in pertinent part: “The tax imposed by this section is a tax on the taxpayer and, shall not be billed or invoiced to another person.” Like the taxes at issue in BellSouth and Lamar, the taxpayer is allowed to include “in the price charged for a good or service an amount sufficient to recover the tax,” but they may not separately state the CAT on an invoice to the customer, as one would ordinarily do with a sales tax. The CAT provision is less broad than the prohibitions invalidated in Lamar, but not BellSouth. A fine distinction may be drawn between billing or invoicing the tax to a customer, and merely informing the customer of the amount of the tax while at the same time, on the same invoice, charging the customer the amount that will recover the cost of the tax to be paid by the vendor. However, we believe that BellSouth precludes the Ohio Department of Taxation from prohibiting the latter.

If you would like to discuss the Lamar decision or any other state and local tax matter, please contact Richard Farrin, Derek Heyman or any other ZHF professional.

[1] Cincinnati Municipal Code (“CMC”) 313-1-G. [2] CMC 313-7(c). [3] CMC 313-7(a) – (b).

[4] Lamar at ¶ 35, paraphrasing Clear Channel. [5] Id. at ¶ 36. [6] Id. [7] Id. [8] Id. at ¶ 38. [9] Id. at ¶ 39. [10] Id. at ¶ 44.

[11] Central Hudson at 566.

[12] BellSouth at 508.

[13] 313-7(b), quoted in full above.

[14] BellSouth at 507. [15] Lamar at ¶ 51.

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