Richard C. Farrin, JD – Member
Ohio Supreme Court Upholds Centralized Filing and Administration for Municipal Net Profits Tax
Today the Ohio Supreme Court issued its opinion in Athens v. McClain, Slip Opinion 2020-Ohio-1546, which considered a constitutional challenge by Ohio municipalities to laws enacted by the General Assembly authorizing, among other things, centralized filing and administration by the Ohio Department of Taxation of net profits taxes imposed by Ohio municipalities and the .5% fee retained by the state from the collection of those taxes for administering the taxes. The challenges were based on the Home Rule Amendment of the Ohio Constitution, which confers upon Ohio’s municipalities various powers of self-government, including the power of taxation. However, other provisions of the Ohio Constitution grant the General Assembly the power to limit or restrict the municipalities’ power of taxation. The issue was whether the centralized filing and administration provisions in one of the bills enacted by the General Assembly (H.B. 49, enacted in 2017) were within its power to limit or restrict the municipalities’ power of taxation.
The Ohio Supreme Court held that the provisions were within the General Assembly’s power to limit or restrict the municipalities’ power of taxation. The Court relied on language in R.C. 718.013 and 718.04, enacted by H.B. 5 in 2014, which provided that a municipality was prohibited from imposing an income tax unless it did so in accordance with the provisions of R.C. Chapter 718 and incorporated those provisions in its tax code. The Court held that these provisions were a limitation on municipalities’ power of taxation. The Court held that the General Assembly’s power to limit the municipalities’ power of taxation allowed it to require that municipal income taxes be imposed in strict compliance with laws enacted by the General Assembly. Among the provisions in R.C. Chapter 718 are the provisions authorizing businesses subject to municipal net profits taxes to elect centralized filing and administration with the Department of Taxation. Therefore, the Court concluded, the General Assembly was within its constitutional authority when it enacted the centralized filing and administration provisions in H.B. 49.
However, the Court held that the provision authorizing the state to retain .5% of the amount collected to cover the state’s costs of administering the tax did not constitute a limitation or restriction of the municipalities’ power of taxation and was therefore unconstitutional under the Home Rule Amendment. The Court found that the fee provision was severable from the remainder of the provisions in H.B. 49 and therefore held that the striking down of the fee provision did not invalidate the rest of the enactment.
If you would like to discuss the Athens case or any municipal net profits tax, please contact Richard Farrin or any other ZHF professional.