GESLER ET AL., APPELLANTS, v. CITY OF WORTHINGTON INCOME TAX BOARD OF APPEALS ET AL., APPELLEES.
No. 2012-2105
Supreme Court of Ohio
November 19, 2013
[Citе as Gesler v. Worthington Income Tax Bd. of Appeals, 138 Ohio St.3d 76, 2013-Ohio-4986.]
O‘DONNELL, J.
Submitted September 11, 2013
James L. Messenger, Richard J. Thomas, and Jerry R. Krzys, for appellee Superior Beverage Group, Ltd.
Krugliak, Wilkins, Griffiths & Dougherty Co. and John P. Maxwell, urging reversal for amicus curiae Tramonte Distributing Company.
Squire Sanders, L.L.P., David W. Alexander, and Emily E. Root, urging reversal for amicus curiae Beverage Distributors, Inc.
Lancione, Lloyd & Hoffman and Tracey Lancione Lloyd, urging reversal for amicus curiae Muxie Distributing Co., Inc.
O‘DONNELL, J.
{¶ 1} James L. and Angeline O. Gesler appeal from a decision of the Board of Tax Appeals affirming the denial of their request for a refund from the city of Worthington in connection with municipal income tax they paid on stock-option income earned in 2005, 2006, and 2007, as reported on Form 1040, Schedule C of their federal income tax return.
{¶ 2} Specifically at issue in this case is the application of former Worthington Codified Ordinance 1701.15, which defined net profit for purposes of the city‘s income tax for a taxpayer who is an individual as “the individual‘s profit, other
{¶ 3} Because the municipal power of taxation involves an exercise of a power of local self-government, we need not determine whether the Worthington ordinances at issue in this case conflict with any statutory provisions. Moreover, because the General Assembly does not exercise its power to limit or restrict the municipal power of taxation through
Factual Background and Procedural History
{¶ 4} The Geslers resided in Worthington during the tax years at issue. James Gesler is a retired certified public accountant who provided tax advisory services to clients as a sole proprietor until December 31, 2007. Two of his clients paid for his services by granting him stock options, and in 2005, 2006, and 2007, hе exercised those stock options. As a result, he reported ordinary income on Schedule C of the couple‘s joint federal tax returns in the amounts of $649,602 for tax year 2005, $1,118,030 for tax year 2006, and $1,201,132 for tax year 2007.
{¶ 5} The Geslers filed joint Worthington city income tax returns and reported the Schedule C federal incоme on Schedule J of Regional Income Tax Agency Form 37 for each year. The Geslers paid municipal income tax in accordance with the returns filed for those tax years. The Geslers then sought a refund from Worthington of the tax paid on the Schedule C income for all three tax years and statutory interest. Worthington denied the Geslers’ refund claim, and the Geslers appealed the denial to the city‘s Income Tax Board of Appeals, which we will refer to as the municipal board of appeal (“MBOA“), in accordance with a consistent practice employed by the BTA. After the MBOA rejeсted the Geslers’ refund claim, they appealed the order to the BTA.1
{¶ 7} In their appeal of right to this court, the Geslers assert that former Ordinance 1701.15 governs this matter and must be applied as written. They further contend that
{¶ 8} In response, Worthington contends that the BTA properly applied
{¶ 9} Thus, the issue in this case is whether the BTA properly affirmed the denial of the refund on the basis that the definition of net profit found in former Ordinance 1701.15 contravened the definition of net profit enacted by the General Assembly.
Standard of Review
{¶ 10} Pursuant to
Statutory Framework
Worthington Ordinances
{¶ 11} Former Worthington Codified Ordinance 1703.01(c)(1) imposed a municipal income tax on “the net profits earned on or after January 1, 2004, of all unincorporated businesses, professions or other activities conducted by residents of the City.”2 Former Worthington Codified Ordinance 1701.15 provided that “‘net profit’ for a taxpayer who is an individual means the individual‘s profit, other than amounts required to be reported on schedule C, schedule E, or schedule F.”3 (Emphasis added.)
{¶ 12} In interpreting these ordinances, we follow standard rules of statutory construction. First, “if the language is unambiguous, we must apply the clear meaning of thе words used.” Bosher v. Euclid Income Tax Bd. of Rev., 99 Ohio St.3d 330, 2003-Ohio-3886, 792 N.E.2d 181, ¶ 14, citing Roxane Laboratories, Inc. v. Tracy, 75 Ohio St.3d 125, 127, 661 N.E.2d 1011 (1996). Moreover, pursuant to
{¶ 13} We have further explained that “we must strictly construe tax ordinances and resolve any doubt as to their meaning in favor of the taxpayer.” Bosher at ¶ 14, citing Roxane Laboratories at 127. However, “we must resolve any doubt as tо the meaning of [a tax-exemption provision] in favor of taxation and against the applicability of the exemption.” In re Estate of Roberts, 94 Ohio St.3d 311, 315, 762 N.E.2d 1001 (2002).
{¶ 14} Former Ordinance 1701.15 defined net profit as “the individual‘s profit, other than amounts required to be reported on schedule C.” (Emphasis added.) Thus, Worthington‘s former definition of net profit excludes amounts required to be reported on Schedule C of Form 1040. See Roberts at 314 (statutory provision stating that the value of the gross estate “does not include” certain property “unmistakably excludes certain property from a calculation of the gross estate‘s
R.C. 718.01
{¶ 15} Former
{¶ 16} Moreover, former
In the case of a taxpayer who has a net profit from a business or prоfession that is operated as a sole proprietorship, no municipal corporation may tax or use as the base for determining the amount of the net profit that shall be considered as having a taxable situs in the municipal corporation, an amount other than the net profit required to be reported by the taxpayer on schedule C or F from such sole proprietorship for the taxable year.
However, this case does not require a determination of whether these statutory provisions conflict with the Worthington ordinances, because such a conflict analysis is not necеssary when the municipality exercises a power of local self-government. Moreover, the General Assembly does not limit or restrict the municipal power to tax in this instance.
Municipal Power to Tax
{¶ 17} Municipal power over matters of local self-government is derived from the Constitution. State ex. rel. Bednar v. N. Canton, 69 Ohio St.3d 278, 280, 631 N.E.2d 621 (1994). The Home Rule Amendment to the
{¶ 18} It is well established that “[t]he municipal taxing power is one of the ‘powers of local self-government’ expressly delegated by the people of the state to the people of municipalities.” Cincinnati Bell Tel. Co. v. Cincinnati, 81 Ohio St.3d 599, 605, 693 N.E.2d 212 (1998), citing State ex rel. Zielonka v. Carrel, 99 Ohio St. 220, 227, 124 N.E. 134 (1919). Therefore, because Worthington‘s taxing authority is a power of local self-government, it is not necessary to determine whether
{¶ 19} While Worthington points to Fisher v. Neusser, 74 Ohio St.3d 506, 507, 660 N.E.2d 435 (1996), to assert that municipalities “have the right to exercise all powers of local self-government and may adopt and enforce such local regulations that are not in conflict with the general law,” we have subsequently established that a conflict analysis is not necessary when a municipality exercises a power of local self-government. Ohioans for Concealed Carry at ¶ 24. The power to impose a municipal income tax is a power of local self-government, and when considering an exercise of municipal taxing power, the analysis turns on whether the General Assembly exercises its power to limit or restrict the municipal taxing authority. See
{¶ 20} We have explained that “[g]iven this general, broad grant of power that municipalities enjoy under Article XVIII, the Constitution requires that the provisions allоwing the General Assembly to limit municipal taxing power be interpreted in a manner consistent with the purpose of home rule.” Cincinnati Bell, 81 Ohio St.3d at 605, 693 N.E.2d 212. Moreover, “in the absence of an
{¶ 21} Furthermore, although the Constitution grants thе General Assembly the power to limit or restrict the municipal power to tax, Worthington fails to point to any constitutional provision that confers on the General Assembly the authority to command a municipality to impose a tax when it chooses not to do so.
{¶ 22} Here, for the tax years at issue, Worthington chose not to tax Schedule C income, and the General Assembly cannot limit or restrict a power of taxation that Worthington did not exercise. Moreover, in this circumstance, the General Assembly is not exercising power to limit or restrict municipal taxing authority, but rather is directing imposition of a tax on Sсhedule C income. See, e.g., State ex rel. Dayton v. Bish, 104 Ohio St. 206, 210-213, 135 N.E. 816 (1922) (holding that a statute providing that “in no case shall the combined maximum rate for all taxes levied in any year * * * exceed fifteen mills” limited the municipality‘s power to levy a tax that would exceed the 15-mill limitation). Thus, the General Assembly cannot command Worthington to impose a tax on Schedule C income when Worthington has chosen not to tax that income, because such a requirement is not an act of limitation. In the absence of any statute that functions as an “express act of restriction by the General Assembly,” Cincinnati Bell at 605, the former ordinance excluding Schedule C income from the dеfinition of net profit is a valid exercise of the city‘s municipal power to tax.
Conclusion
{¶ 23} The former Worthington ordinances at issue excluded Schedule C income from the definition of net profit, and therefore, the Geslers’ Schedule C income for the years at issue is excluded from municipal tax. Furthermore, sincе the imposition of a municipal tax is an exercise of a power of local self-government and the General Assembly does not limit or restrict the exercise of municipal taxing authority in this case, we need not determine whether a conflict exists between the former Worthington ordinances and thе state statutory provisions. Accordingly, we reverse the determination of the BTA as being unreasonable and unlawful and order that the Geslers are entitled to the refund they seek, together with statutory interest.
Judgment accordingly.
O‘CONNOR, C.J., and PFEIFER, LANZINGER, KENNEDY, FRENCH, and O‘NEILL, JJ., concur.
Vorys, Sater, Seymour & Pease, L.L.P., David A. Froling, Jeffrey Allen Miller, and Steven L. Smiseck, for appellants.
Baker & Hostetler, L.L.P., and Andrew M. Ferris, for appellees.