Focus on ‘levy’ definition, home rule in muni tax case

Written on Oct 18, 2018

By Gary Hunt, CAE, OSCPA Communications Director

The fate of municipal tax reform in Ohio could hang upon a definition; specifically, the meaning of the word “levy” in the Ohio Constitution.

That was one of the key issues discussed Wednesday as cities appealed a decision upholding the reforms enacted last year in Am. Sub. House Bill 49. Municipalities say the law is unconstitutional because it violates their right to “home rule.”

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 in February at the common pleas level, prompting the plaintiffs to appeal to Ohio’s 10th District Court of Appeals.

The position of the State of Ohio – advocated for by The Ohio Society of CPAs in an amicus brief – is that the Ohio Legislature is within its rights to allow taxpayers to opt-in to file municipal net profits taxes with the state department of taxation. Article 18, section 13 of the Ohio Constitution reads, in part: “Laws may be passed to limit the power of municipalities to levy taxes and incur debts for local purposes…”

Judge William Klatt was part of the three-judge panel examining the oral arguments this week.

“On home rule, the key question is whether the definition of ‘levy’ includes both ‘impose’ and ‘collect,’” Klatt said at one point.

Arguing the state’s case was special counsel Jeffrey Miller of Brennan Manna & Diamond in Akron. He said the authority behind HB 49 “is based upon the constitutional authority of the General Assembly,” and he offered examples of tax law where “levying” included collection.

Judge Gary Tyack focused on the state’s administrative fee of 0.5%.

“Where does the power to raise the 0.5% come from?” Tyack asked.

Miller replied that it came from the Ohio Legislature’s “sovereign authority,” and noted that the Regional Income Tax Authority charges 1.5% or more. In fact, administrative fees for the state-operated process average 70% less than those charged by regional tax administration entities.

“In a way, it seems like cities are saving money on centralized collection,” Klatt remarked.

The court also briefly explored whether HB 49 might violate the single-subject rule, which is designed to prevent lawmakers from slipping unrelated items into a single piece of legislation.

Wednesday’s testimony was concluded efficiently in about an hour, and the court is expected to render a decision by the end of the year or early next year. The appellates in the case – the cities – bear the burden of proof that the law is unconstitutional.

In the meantime, businesses may 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.