2020 Ohio 5146
Ohio2020Background
- Many Ohio municipalities levy local income taxes; businesses pay municipal "net-profits" taxes to each municipality where they operate.
- In 2014 H.B. 5 conditioned municipal income taxation on adoption of a uniform statutory scheme (R.C. Chapter 718); in 2017 H.B. 49 created an optional centralized-administration regime (R.C. 718.80–718.95).
- Under H.B. 49 a business (other than a sole proprietor) may elect to file a composite return with the Ohio Department of Taxation, which determines liabilities, processes refunds, audits, and remits funds to municipalities monthly.
- R.C. 718.85(B) diverts 0.5% of municipal net-profits tax collections to a state "municipal income tax administrative fund" to defray administration costs; municipalities must provide taxpayer and rate information to the Department.
- Over 100 municipalities sued, challenging H.B. 49 (and the 0.5% retention) as violating the Home Rule Amendment and exceeding the General Assembly’s power to limit municipal taxation; the Ohio Supreme Court affirmed centralized administration but struck the 0.5% retention as unconstitutional and severed it.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the General Assembly may require centralized state administration of municipal net-profits taxes | Elyria/Athens: State cannot commandeer administration of a valid home-rule municipal tax; limiting power doesn't include takeover of administration | State: "Levy taxes" includes administrative functions; Article XVIII §13 permits limiting municipal levy and requiring centralized administration | Held: Centralized administration is a valid act of limitation; state may provide centralized administration and require municipalities to adopt the statutory scheme |
| Whether the constitutional phrase "to levy taxes" includes administrative acts (assessing/collecting) | Plaintiffs: "Levy" means only the legislative imposition of a tax, not administration | State: "Levy" includes assessment and administrative implementation; dictionaries and precedents support broader meaning | Held: "Levy" encompasses administrative acts (assessment/collection); the General Assembly can limit administration as well as enactment |
| Whether the state may retain 0.5% of municipal net-profits collections to fund administration | Athens: Municipal taxing power includes right to keep revenues; diversion is an improper seizure of municipal funds | State: Retention is not a tax but simply defrays administrative costs municipalities would otherwise bear | Held: The 0.5% diversion is effectively a fee or tax on municipal revenues and is not an authorized act of limitation under the Constitution; it is unconstitutional |
| Whether the unconstitutional 0.5% retention is severable from H.B. 49 | Plaintiffs: Retention is integral; whole scheme should fall | State: Retention is severable; centralized administration can operate without it | Held: The retention provision is severable; centralized-administration provisions survive if retention words are removed |
Key Cases Cited
- Cincinnati Bell Tel. Co. v. Cincinnati, 81 Ohio St.3d 599 (1998) (recognizes taxation as a municipal power subject to state preemption)
- Angell v. Toledo, 153 Ohio St. 179 (1950) (upholding municipal income tax while noting General Assembly power to preempt)
- Gesler v. Worthington Income Tax Bd. of Appeals, 138 Ohio St.3d 76 (2013) (General Assembly cannot compel a municipality to tax a category it chose not to tax)
- Dies Elec. Co. v. Akron, 62 Ohio St.2d 322 (1980) (limits on state control over municipal internal operations in the debt context)
- State ex rel. Toledo v. Weiler, 101 Ohio St. 123 (1920) (General Assembly may limit extent of tax levies but may not annul constitutionally granted municipal powers)
- State ex rel. Cronin v. Wald, 26 Ohio St.2d 22 (1971) (construing limits on municipalities' power to incur debt)