City of Athens v. Testa

Decision Date29 January 2019
Docket Number18AP-189,Nos. 18AP-144,s. 18AP-144
Parties CITY OF ATHENS et al., Plaintiffs-Appellants, v. Joseph A. TESTA, Tax Commissioner of the State of Ohio, Defendants-Appellees.
CourtOhio Court of Appeals



{¶ 1} Plaintiffs-appellants, two different coalitions of Ohio municipal corporations, appeal a judgment of the Franklin County Court of Common Pleas in favor of defendants-appellees, Tax Commissioner Joseph A. Testa and the state of Ohio (together, "the State"). For the following reasons, we affirm that judgment.

{¶ 2} Many Ohio municipal corporations impose a tax on income earned within their boundaries. When applied to businesses, that tax is known as the municipal net profit tax. This case focuses on the constitutionality of the General Assembly's efforts to streamline aspects of the various municipalities' income tax systems and centralize the collection and administration of the net profit tax.

{¶ 3} Two recent enactments are at issue in this case. First, in 2014, the 130th General Assembly enacted Sub.H.B. No. 5 (hereinafter, "H.B. 5") to establish more uniformity in the way Ohio municipalities administer their income tax systems. As amended by H.B. 5, R.C. 715.013(B) permits municipal corporations to levy an income tax "in accordance with Chapter 718 of the Revised Code." Accord R.C. 718.04(A) ("A municipal corporation may levy a tax on income and a withholding tax if such taxes are levied in accordance with the provisions and limitations specified in [R.C. Chapter 718]."). In relevant part, the provisions adopted in H.B. 5 require that municipal corporations:

• Maintain a local board of tax review with the composition, powers, and procedures set forth in R.C. 718.11 ;
• Charge interest on untimely or partial income tax payments at the rate specified in R.C. 718.27(A) and (C)(1) ;• Charge a penalty at the rate specified if a taxpayer makes an untimely or partial income tax payment or a taxpayer fails to timely file a return ( R.C. 718.27(C)(2) );
• Ensure that any rules adopted to administer a municipal income tax do not conflict with any provision of R.C. Chapter 718 ( R.C. 718.30 ); and
• Not pay a person hired or retained to examine or inspect a taxpayer's books on a contingency basis ( R.C. 718.31 ).

Additionally, H.B. 5 sets forth standards a municipal tax administrator may consider when deciding whether to accept a compromise or payment-over-time agreement to resolve a claim for unpaid income taxes. R.C. 718.28(C).

{¶ 4} In 2017, the 132d General Assembly enacted Am.Sub.H.B. No. 49 (hereinafter, "H.B. 49"), the biennial budget bill for fiscal years 2018 and 2019. H.B. 49 adopted new sections R.C. 718.80 through 718.95. These sections provide business taxpayers with the opportunity to opt for the State to collect and administer the taxpayer's municipal net profit taxes.

{¶ 5} Prior to the advent of H.B. 49, each municipality that imposed a net profit tax controlled the collection and administration of that tax, resulting in significant compliance costs for business taxpayers that operated in multiple municipalities. Those taxpayers may now register to file a single return and pay all net profit taxes through the State's centralized system. If a business taxpayer does not opt into the state system, it remains subject to the rules and procedures of the municipalities in which it owes net profit taxes.

{¶ 6} Under the new provisions, the tax commissioner is the sole administrator of all municipal net profit taxes owed by taxpayers who choose to file with the State. R.C. 718.80(A)(1). Consequently, the tax commissioner collects the taxes and estimated tax payments, audits taxpayers, makes assessments against taxpayers for delinquent or incorrect returns or payments, and issues refunds of overpaid taxes. R.C. 718.85(A)(1) (requiring submission of annual net-profit-tax returns and taxes to the tax commissioner); R.C. 718.88(C) (requiring submission of declarations of estimated net profit taxes and estimated net-profit-tax payments to the tax commissioner); R.C. 718.90 (authorizing the tax commissioner to make assessments and pursue collection of unpaid assessments); R.C. 718.91 (authorizing the tax commissioner to issue refunds); R.C. 718.93 (authorizing the tax commissioner to examine a taxpayer's records to verify the accuracy of a return or to ascertain the amount of net profit tax due).

{¶ 7} Each month, the tax commissioner must certify to the director of budget and management the amount of net-profit-tax revenue due to each municipal corporation. R.C. 718.83(A). The director of budget and management must then distribute the certified amount to each municipal corporation. Id. However, the State retains one-half percent of all net profit taxes paid to the tax commissioner as a fee for the collection and administration services the commissioner provides. R.C. 718.85(B).

{¶ 8} To enable the tax commissioner to administer the disparate net profit taxes of each municipality, all municipalities with an income tax must certify to the tax commissioner the rate of the tax, as well as any increase in that rate. R.C. 718.80(C)(1)(a) and (b). Additionally, within 90 days of receiving notice that a taxpayer has opted to file with the State, a municipality must report to the tax commissioner specified information about the taxpayer, including whether the taxpayer is entitled to any net operating loss carryforward or tax credits. R.C. 718.80(C)(2). If a municipal corporation fails to timely provide any of the required information, the tax commissioner may penalize it by withholding 50 percent of the net-profit-tax revenue due to it. R.C. 718.80(C)(3).

{¶ 9} When a business taxpayer conducts operations both inside and outside a taxing municipality, the business only owes tax on the net profit apportioned to the municipality. For all municipal net profit taxpayers, a three-factor test based on a business' payroll, sales, and property determines the portion of a business' net profits attributable to a particular municipality. R.C. 718.02(A) (setting forth the three factors applicable to business taxpayers not electing to file with the State); R.C. 718.82(A) (setting forth identical factors for apportioning net profit for business taxpayers electing to file with the State). If a taxpayer opts into the State's centralized system, the tax commissioner may approve an alternative apportionment if the three factors do not fairly represent the extent of a taxpayer's business activity in a municipal corporation. R.C. 718.82(B).

{¶ 10} In addition to permitting the State to collect and administer net profit taxes, H.B. 49 also eliminated the "throwback rule." Under that rule, a business taxpayer's net profit in a particular municipality included gross receipts from sales of goods shipped from the municipality to purchasers outside the municipality if the taxpayer had not solicited sales at the location of the delivery. Former 718.02(D)(1)(c). In other words, in certain circumstances, gross receipts from sales to customers outside a municipal corporation were "thrown back" to the municipal corporation and counted as taxable net profit. Due to the amendments made in H.B. 49, municipalities are no longer permitted to tax such net profit.

{¶ 11} Finally, in uncodified Section 803.100(B), H.B. 49 required each municipal corporation to adopt, by ordinance or resolution, the provisions of R.C. 718.80 through 718.95 by January 31, 2018. This requirement corresponds with the mandate of R.C. 718.04(A), which obligates municipal corporations to levy income taxes "in accordance with the provisions and limitations specified in [R.C. Chapter 718]."

{¶ 12} On November 16, 2017, a coalition of Ohio municipalities (collectively, "the Athens plaintiffs") filed an action for declaratory judgment and injunctive relief against the State.1 In short, the Athens plaintiffs challenged the constitutionality of the provisions of H.B. 5 and H.B. 49 set forth above. The Athens plaintiffs sought a declaratory judgment stating: (1) the challenged provisions of H.B. 5 violate the Ohio Constitution's Home Rule Amendment; (2) the challenged provisions of H.B. 49 violate the Ohio Constitution's Home Rule Amendment; (3) H.B. 49 violates the Ohio Constitution's One-Subject Rule; (4) the challenged provisions of H.B. 49 unconstitutionally impair contractual obligations in violation of Article II, Section 28 of the Ohio Constitution ; (5) the challenged provisions of H.B. 49 effect a conversion of the Athens plaintiffs' property; (6) the challenged provisions of H.B. 49 effect a taking of property without just compensation in violation of Article I, Section 19 of the Ohio Constitution ; and (7) the challenged provisions of H.B. 49 effect a deprivation of property without remedy by due course of law in violation of Article I, Section 16 of the Ohio Constitution. The Athens plaintiffs also sought preliminary and permanent injunctions enjoining the State from taking any action to enforce the challenged provisions of H.B. 5 and H.B. 49.

{¶ 13} With the agreement of all parties, the trial court entered an order temporarily staying the mandate of uncodified Section 803.100(B) of H.B. 49. Under the terms of the stay, municipalities did not have to adopt the provisions of R.C. 718.80 through 718.95 until February 24, 2018 or until further order of the court. In the same order, the trial court set a briefing schedule for the Athens plaintiffs' anticipated motion for a preliminary injunction. The trial court also scheduled a preliminary injunction hearing for February 12 and 13, 2018.

{¶ 14} Before briefing of the preliminary injunction motion concluded, a second coalition of Ohio municipalities (collectively, "the Elyria plaintiffs") moved to intervene in the Athens plaintiffs' action.2 The Elyria plaintiffs had filed an action for declaratory judgment and injunctive relief in the Lorain County Court of Common...

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