City of Athens v. McClain

• Decision Date: 05 November 2020
• Docket Number: 2019-0696,Nos. 2019-0693,s. 2019-0693
• Citation: 168 N.E.3d 411,163 Ohio St.3d 61
• Parties: The City of ATHENS et al., Appellants, v. MCCLAIN, Tax Commr., et al., Appellees.
• Court: Ohio Supreme Court

163 Ohio St.3d 61

168 N.E.3d 411

The City of ATHENS et al., Appellants,

v.MCCLAIN, Tax Commr., et al., Appellees.

Nos. 2019-0693

2019-0696

Supreme Court of Ohio.

Submitted May 13, 2020

Decided November 5, 2020

Walter Haverfield, L.L.P., Avon, and Darrell A. Clay, Cleveland, for the Elyria appellants (case No. 2019-0693).

Frost Brown Todd, L.L.C., Eugene L. Hollins, Columbus, Stephen J. Smith, Kent, Frank J. Reed Jr., Yazan S. Ashrawi, Thaddeus M. Boggs, Columbus, and Matthew C. Blickensderfer, Cincinnati, for the Athens appellants (case No. 2019-0696).

Roetzel & Andress, L.P.A., Stephen W. Funk, and Emily Anglewicz ; and Eve Belfance, Akron Law Director, and Brian D. Bremer, Akron, for appellant city of Akron (case No. 2019-0696).

Dave Yost, Attorney General, Benjamin M. Flowers, Solicitor General, and Samuel C. Peterson, Deputy Solicitor, for appellees.

John A. Scavelli Jr., Wooster Law Director, urging reversal for amicus curiae city of Wooster.

Ohio Municipal Attorneys Association and Garry E. Hunter, Athens; and Paul W. Flowers Co., L.P.A., Paul W. Flowers, and Louis E. Grube, Cleveland, urging reversal for amicus curiae Ohio Municipal League.

Taft, Stettinius & Hollister, L.L.P., and J. Donald Mottley, Columbus, urging reversal for amicus curiae Greater Dayton Mayors and Managers Association.

Dale R. Emch, Toledo Law Director, and John E. Bibish IV, urging reversal for amicus curiae city of Toledo.

Graydon, Head & Ritchey, L.L.P., Nicholas J. Ziepfel, Liberty Township, and Roula Allouch, Cincinnati, urging reversal for amicus curiae city of Trenton.

Mitchell H. Banchefsky, urging reversal for amici curiae local-government-law professors, International Municipal Lawyers Association, and International City/County Management Association.

Zaino, Hall & Farrin, L.L.C., Richard C. Farrin, and Thomas M. Zaino, urging affirmance for amici curiae Ohio Society of Certified Public Accountants, Ohio Chamber of Commerce, National Federation of Independent Business in Ohio, Ohio Realtors, Manufacturing Policy Alliance, Associated General Contractors of Ohio, Ohio Contractors Association, National Electrical Contractors Association, Mechanical Contractors Association of Ohio, Ohio Business Roundtable, Ohio Manufacturers' Association, Ohio Farm Bureau Federation, Ohio Council of Retail Merchants, ABC of Ohio, and Ohio Cable Telecommunications Association.

Donnelly, J. {¶ 1} Many Ohio municipalities impose a tax on income earned within their boundaries. When that tax is applied to businesses, it is known as a net-profits tax. Appellants, the cities of Athens, Akron, and Elyria and numerous other cities and villages, all of which impose a net-profits tax, challenge the General Assembly's enactment of laws that centralize the collection and administration of those taxes. Additionally, some of the appellants challenge the portion of the law that allows the state to retain .5 percent of the collected taxes as a fee or a tax for the state's centralized administration.

{¶ 2} The contested legislation permits municipal net-profits taxpayers (other than sole proprietors) to elect to have the Ohio Department of Taxation administer their net-profits-tax obligations with respect to all the municipalities in which the taxpayer incurs those obligations. Appellants contend that the legislation violates their home-rule authority and exceeds the General Assembly's constitutional power to limit the power of municipalities to levy taxes.

{¶ 3} We conclude that the laws imposing centralized administration constitute an act of limitation within the General Assembly's explicit constitutional authority, and we affirm the portion of the court of appeals' judgment upholding the centralized-administration system. The law providing for the state's retention of .5 percent of municipal net-profits taxes is a different matter. Because the retention provision amounts to the imposition of a fee or a tax and because imposing a fee or a tax does not constitute an act of limitation, this provision exceeds the General Assembly's authority. We therefore sever the .5-percent-retention provision and reverse the portion of the court of appeals' judgment upholding that portion of the legislation. We also remand the cause to the Franklin County Court of Common Pleas.

I. BACKGROUND

A. Municipal income taxes and the General Assembly's power to limit municipal taxation

{¶ 4} Toledo enacted the first municipal income tax in Ohio in 1946, Ohio Legal Center Institute, Ohio Taxation, Chapter 17, at 316 (1967), and in upholding that tax as a valid exercise of home-rule authority, we specifically noted that the power of municipalities to tax is subject to preemption by the General Assembly, Angell v. Toledo , 153 Ohio St. 179, 91 N.E.2d 250 (1950), paragraph one of the syllabus. According to the Tax Foundation, 649 Ohio municipalities currently impose income taxes. https://taxfoundation.org/local-income-taxes-2019 (accessed July 24, 2020) [https://perma.cc/6HWJ-PEEX].

{¶ 5} In 1957, the General Assembly first exercised its power to limit municipal income taxation by enacting R.C. Chapter 718. Am.Sub.S.B. No. 133, 127 Ohio Laws 91. As originally enacted, R.C. Chapter 718 mandated a uniform tax rate, required municipalities to get voter approval before they could impose a higher rate, and immunized certain income from municipal taxation. Former R.C. 718.01, 127 Ohio Laws at 91-92. Over the years, R.C. Chapter 718 has been expanded to make municipal taxation more uniform, with the goal of making it easier for taxpayers to comply.

{¶ 6} In 2014, the General Assembly enacted 2014 Sub.H.B. No. 5 ("H.B. 5"), which established greater statewide uniformity of municipal income taxes by explicitly preempting municipalities from imposing an income tax unless they adopted, by ordinance or resolution, the provisions of R.C. Chapter 718 and levied the tax in accordance with those provisions. R.C. 715.013 and 718.04(A).

B. Enactment of centralized administration

{¶ 7} In 2017, the General Assembly enacted 2017 Am.Sub.H.B. No. 49 ("H.B. 49"), which added new sections to R.C. Chapter 718— R.C. 718.80 through 718.95 —sections which provide for a centralized administration of municipal net-profits taxes. R.C. 718.80 authorizes municipal net-profits taxpayers to "elect to be subject to" those newly enacted sections "in lieu of the provisions set forth in the remainder of [R.C. Chapter 718]." Simply put, these taxpayers have the option to select the new method of centralized administration.¹

{¶ 8} Before H.B. 49 was enacted, businesses had to file returns with and pay taxes directly to the municipalities to which they had net-profits-tax obligations. Or if one or more of those municipalities contracted for tax-administration services with an agency, such as Cleveland's Central Collection Agency or the Regional Income Tax Agency, the businesses would file and pay their municipality taxes on a composite basis to the respective agency. Businesses also had the option to submit their municipal tax filings and payments electronically, through the Ohio Business Gateway.

{¶ 9} Under the statutes enacted by H.B. 49, any business taxpayer may continue to file its return with and pay its taxes to each municipality, as it did in the past, or it may file a composite return with the state tax department and make its estimated and final payments to that department, which in turn determines the business's municipal net-profits liabilities for all municipalities, issues any assessment for deficiencies, processes all refund claims, and arranges through the state director of budget and management for tax amounts to be remitted to the appropriate municipalities on a monthly basis.

{¶ 10} The statutes enacted by H.B. 49 require the municipalities and the tax department to exchange information related to local tax liability of taxpayers that elect to file a composite return with the state. For their part, municipalities must annually certify their tax rates and any increase in those rates to the tax department. R.C. 718.80(C)(1). Additionally, within 90 days of receiving notification of a taxpayer's election to have the state administer its municipal taxes, the municipalities must submit information to the tax commissioner regarding the taxpayer's net operating losses and carryforwards, its municipally granted credits and carryforwards, its overpayment carryforwards, and any other information the municipality deems relevant to the state's determination of the taxpayer's liability. R.C. 718.80(C)(2). If a city or village fails to comply with these requirements, the tax commissioner must notify the state director of budget and management, who is required to withhold 50 percent of the amount due to that municipality "until the municipal corporation complies." R.C. 718.80(C)(3).

{¶ 11} For its part, the state has the obligation, each May and November, to provide the municipalities with a list of taxpayers that filed returns with the tax department and that had income apportionable to the particular municipality; the list must include (1) each taxpayer's name, address, and federal identification number, (2) each taxpayer's apportionment ratio for and amount of income apportionable to the municipality, (3) the amount of net operating loss carryforward used by each taxpayer, (4) whether the taxpayer requested that overpayments be carried forward, and (5) the amount of tax credits claimed under R.C. 718.94. R.C. 718.84(B). Additionally, within 30 days of the state's distribution of tax funds to the municipality, the tax commissioner must provide the municipality with a list naming each taxpayer that made estimated payments attributable to that municipality and the amount of the payment. R.C. 718.84(C).

{¶ 12} A municipality that discovers additional information that could result in a change to the taxpayer's liability may make a referral to the tax commissioner for an audit of the taxpayer. R.C. 718.84(F)(1). And if a municipality "believes...