Youngstown Sheet & Tube Co. v. City of Youngstown

Citation91 Ohio App. 431,108 N.E.2d 571
Parties, 49 O.O. 31 YOUNGSTOWN SHEET & TUBE CO. et al. v. CITY OF YOUNGSTOWN et al. YOUNGSTOWN SHEET & TUBE CO. et al. v. CITY OF CAMPBELL et al.
Decision Date19 November 1951
CourtUnited States Court of Appeals (Ohio)

Syllabus by the Court

1. Under the Constitution of Ohio, a municipal income tax is neither a property tax nor an excise tax but is a special tax--an income tax--and in the interpretation of the Constitution should not be treated as a property tax or an excise tax.

2. Whether a municipal tax contravenes rights secured by the Constitution must depend not upon any mere question of form, construction or definition but upon the practical effect of the tax imposed.

3. A municipal income tax ordinance imposing a tax upon individuals at one rate and upon corporations at a substantially higher rate, in the absence of a reasonable basis for the apparent discrimination between individuals and corporations, is invalid in denying to corporations the equal protection of the laws under Section 2, Article I of the Constitution of Ohio, and under the Fourteenth Amendment of the Constitution of the United States.

4. A municipal income tax ordinance imposing a tax upon corporations, the municipality having no similar tax upon individuals, in the absence of a reasonable basis for the discrimination between corporations and individuals, denies the equal protection of the laws of Ohio to corporations under Section 2, Article I of the Constitution of Ohio, and under the Fourteenth Amendment of the Constitution of the United States.

Dargusch, Caren, Greek & King, Columbus, Manchester, Bennett, Powers & Ullman and Harrington, Huxley & Smith, Youngstown, for appellees.

H. H. Hunt, Director of Law, and I. Freeman, Youngstown, for appellant City of Youngstown.

Paul VanSuch and W. P. Barnum, Youngstown, for appellant City of Campbell.

FESS, Presiding Judge.

These appeals are on questions of law and fact from judgments in separate cases permanently enjoining the defendants from levying and collecting income taxes under the provisions of certain ordinances of the municipalities on the ground that such ordinances are repugnant to Section 2, Article I and Section 4, Article XIII of the Constitution of Ohio, and to the Fourteenth Amendment to the Constitution of the United States.

I. The Youngstown Income Tax Ordinance.

As amended on January 10, 1951 (effective January 23, 1951), the Youngstown income tax ordinance levies a tax of .3 per cent per annum on compensation and net profits of residents and a like tax upon compensation received and net profits earned by nonresidents other than corporations, for services performed or business conducted within the city of Youngstown. A tax of one per cent per annum is levied upon the net profits of corporations having an office or place of business in Youngstown. The tax is limited to such part of the net profits as is earned by such corporations as a result of businessconducted in the city, determined according to a certain formula set forth in the ordinance.

The power of cities to levy an income tax has been definitely established. Angell v. City of Toledo, 153 Ohio St. 179, 91 N.E.2d 250, 252. At the outset, appellees attempt to divide taxes into three classes, (1) poll, (2) property, and (3) excise. Appellees contend that the income tax is a property tax within the purport of the term as employed in the Constitution of Ohio. The city contends that it is in the nature of an excise tax and is to be distinguished from other forms of taxation. Whether an income tax is a property or an excise tax has not been definitely determined in Ohio. In the opinion in Angell v. City of Toledo, supra, it is said:

'While an income tax may be regarded as in the nature of an excise tax, the Constitution of Ohio differentiates an excise tax from an income tax. * * * In the interpretation of the Ohio Constitution an income tax is not to be treated as an excise tax.'

Analogically, the Ohio Constitution differentiates an income tax from a property tax as well as from an excise tax and in interpreting the Constitution, an income tax should not be treated as a property tax.

Income taxes are not of recent origin. Shaffer v. Carter, Aud., 252 U.S. 37, 51, 40 S.Ct. 221, 64 L.Ed. 445; argument of George F. Edmunds in Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 488, 489, 15 S.Ct. 673, 39 L.Ed. 759. Prior to the adoption of the federal Constitution, nearly all the states imposed a poll tax and taxes on land, livestock, and various kinds of personal property; and seven of the thirteen states assessed their citizens upon their profits from professions, trades and employments. Pollock v. Farmers Loan & Trust Co., supra. Prior to the Pollock case, federal taxes on successions, business transactions and incomes were sustained as excise taxes and as such constituted indirect taxes not subject to apportionment but subject to the principle of uniformity. Pacific Ins. Co. v. Soule, Collector, 7 Wall. 433, 74 U.S. 433, 19 L.Ed. 95; Veazie Bank v. Fenno, 8 Wall. 533, 544, 546, 75 U.S. 533, 544, 546, 19 L.Ed. 482; Merchants' National Bank v. United States, 101 U.S. 1, 25 L.Ed. 979; Scholey v. Rew, 23 Wall. 331, 90 U.S. 331, 23 L.Ed. 99; Michigan Central Rd. Co. v. Slack, Collector, 100 U.S. 595, 25 L.Ed. 647; Springer v. United States, 102 U.S. 586, 26 L.Ed. 253. The Pollock case did not overrule the prior decisions but distinguished them in holding that the tax on rents was a tax on the real estate itself and, therefore, a direct tax.

But the mere questions of definitions has no legitimate bearing upon a question of constitutionality. The decision whether a municipal tax contravenes rights secured by the Constitution must depend not upon any mere question of form, construction, or definition, but upon the practical effect of the tax imposed. A state may tax the incomes of its own citizens and residents because of the privileges they enjoy under its constitution and laws and the protection they receive from the state. A state, from whose laws property, business and industry derive the protection and security without which production and gainful occupation would be impossible, may also exact a share of those gains in the form of income taxes for the support of the government, from nonresidents. Just as a state may impose income taxes upon its own citizens whose persons are subject to its control, it may, as a necessary consequence, levy a duty of like character and not more onerous in its effect upon incomes accruing to nonresidents from their property and business within the state. Shaffer v. Carter, supra. It is therefore concluded that under the Ohio Constittuion the income tax in question is neither a property tax nor an excise tax but is a special tax--an income tax--and that the tax in question does not violate Section 4 of Article XIII of the Constitution.

However, the requirement of equal protection prescribed by Section 2, Article I of the Ohio Constitution, and the Fourteenth Amendment to the United States Constitution prevents discrimination as between persons subject to taxation. All taxpayers similarly situated are entitled to equality of treatment under any Ohio tax law. To be valid, taxation and other statutes must operate equally upon all persons of the same class; no discrimination or favoritism among them is permitted. Winslow-Spacarb, Inc., v. Evatt, Tax Com'r., 144 Ohio St. 471, 476, 59 N.E.2d 924.

Private corporations are regarded as persons within the meaning of the constitutional provisions relating to persons. Wheeling Bridge & Terminal Ry. Co. v. Gilmore, 8 Ohio Cir.Ct.R. 658, 4 Ohio Cir.Dec. 366; State v. Gardner, 58 Ohio St. 599, 609, 51 N.E. 136, 41 L.R.A. 689, 65 Am. St.Rep. 785; Wheeling Steel Corp. v. Glander, Tax Com'r, 337 U.S. 562, 574, 69 S.Ct. 1291, 93 L.Ed. 1544.

Section 2 of Article I does not declare that every person shall receive the same amount of protection and benefit but does declare that 'Government is instituted for their [the people's] equal protection and benefit'. Equal protection means the protection of equal laws. State ex rel. Webber v. Felton, 77 Ohio St. 554, 571, 84 N.E. 85. It is, however, manifestly impossible to obtain an absolute universality of operation, and due regard must be had as to different capabilities conditions and relations between men and physical forces. There is a wide latitude of selection of classification, and it is only when the power of selection has been abused that the courts may interfere. Legislation involving classification will not be held invalid unless the classification attempted is obviously unreasonable to the point of discriminating against members of the same class, so as to deny the equal protection of the laws. City of Xenia v. Schmidt, 101 Ohio St. 437, 130 N.E. 24. A classification must rest upon some difference which bears a reasonable and just relation to the act in respect to which the classification is proposed and may not be made arbitrarily and without any such reasonable or just basis. Class legislation is prohibited; but legislation which is limited in its application and within the sphere of its operation affects alike all persons similarly situated is not invalid. State ex rel. Webber v. Felton, supra, 77 Ohio St. 574, 84 N.E. 88.

One of the most sensible tests is whether any substantial favor is gained by one class, or any greater burden is fastened on the other by reason of the classification. State ex rel. Turner, Atty. Gen. v. United States Fidelity & Guaranty Co. of Baltimore, 96 Ohio St. 250, 255, 117 N.E. 232. A classification which undertakes to arbitrarily separate some persons from others upon which the act would operate and thus form a class, not upon any reasonable basis of different characteristics, capriciously, but as a matter of will and not of reason, is invalid. Williams v. Donough, 65 Ohio St. 499, 504, 63 N.E. 84, 56 L.R.A. 766. CF. Chambers...

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    ...turn to his other arguments. Plaintiff, in support of his 'discrimination' argument, relies upon Youngstown Sheet & Tube Co. v. City of Youngstown (1951), 91 Ohio App. 431, 108 N.E.2d 571. Therein a municipal income tax ordinance which provided one rate for individuals and a substantially h......
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