The battle of Ohio municipal income tax is here: Will common sense prevail?

By Adam L. Garn, JD, CPA, MT-Associate, Zaino Hall & Farrin LLC

The fight over Ohio’s municipal tax has continued. Currently, there are two Court of Appeals cases pending on the municipalities’ challenge to the constitutionality of the centralized collection and administration provisions. Taxpayers and the business community continue to defend against the threatened elimination of the important new features authorized by H.B. 5 of the 130th General Assembly and H.B. 49 of the 132nd General Assembly to make Ohio’s municipal tax less onerous. Below is an update on Ohio’s municipal tax developments. 

Lawsuit #1 - City of Athens, et. al. v. Testa, et. al.

On Feb. 21, 2018, Franklin County Court of Common Pleas Judge David E. Cain issued a final appealable order that denied the requested preliminary and permanent injunction which would have prohibited the Tax Commissioner from implementing the centralized collection and administration provisions authorized by H.B. 49. Further, the order found that the centralized collection and administration provisions, along with the provisions adopted by H.B. 5 of the 130th General Assembly, were constitutional. The order rejected all other arguments by the municipalities. This order applied to both Lawsuit #1 and Lawsuit #2.

Lawsuit #2 - City of Elyria, et. al. v. State of Ohio, et. al.

In January 2018, the Lorain County Court of Common Pleas determined that jurisdiction was improper in Lorain County and transferred this case to Franklin County. Ultimately, this case was consolidated with Lawsuit #1 for trial court purposes. As noted above, the final appealable order issued by Judge Cain applied to this case as well.

Appeal #1 - City of Athens, et. al. v. Testa, et. al.

On February 27, 2018, the municipalities in the original case filed in the Franklin County “Franklin County Appellants” filed a Notice of Appeal with the 10th District Court of Appeals. In March 2016, the Franklin County Appellants filed a Motion to Stay and requested that the Court of Appeals delay the effect and enforcement of the order issued by Judge Cain pending the outcome of the appeal. Further, the Franklin County Appellants argued that the agreed-to temporary injunction that delayed the ordinance reconciliation requirements for H.B. 49 changes (see below) should continue to be enforced. Both arguments were rejected by the 10th District Court of Appeals. In rejecting the argument for the temporary injunction, the Court of Appeals noted that by the terms of the agreed-to temporary injunction, it expired Feb. 24, 2018 and thus there was no relief issued by the trial court that would be effected by a stay.

On May 22, 2018, the Franklin County Appellants filed their brief. In addition to the Franklin County Appellants’ original arguments at the common pleas court (see below), the Franklin County Appellants asserted two assignments of error:

1. The trial court erred in granting judgment to the Defendant-Appellees and
2. The trial court erred in denying the Plaintiff-Appellants’ request for preliminary injunction.

It is anticipated that the Tax Commissioner and State of Ohio will file a reply brief soon. 

Appeal #2 - City of Athens, et. al. v. State of Ohio, et. al.

On March 16, 2018, the municipalities in the case originally filed in Lorain County “Lorain County Appellants” and transferred to Franklin County filed a Notice of Appeal with the 10th District Court of Appeals. In April 2018, the Lorain County Appellants filed their brief, asserting two assignments of error:

1. The trial court acted in derogation of Civ. R. 65(B)(2) when, in addressing Plaintiffs’ Motion for Preliminary Injunction, it dismissed Plaintiffs’ Complaint without first issuing an order consolidating on the trial on the merits with the preliminary injunction hearing and
2. The trial court erred in finding that H.B. 49’s amendments to Chapter 718 of the Ohio Revised Code did not violate Plaintiffs’ Home Rule Authority under Article XVIII, Section 3 of the Ohio Constitution.

On May 29, 2018, the State of Ohio and the Tax Commissioner filed their brief disputing all of the arguments set forth by the Lorain County Appellants. An amicus brief (friend of the court brief) was also filed on May 29, 2018 in support of the State of Ohio and Tax Commissioner. The amici represented in the amicus brief included the Ohio Society of CPAs, 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, and Mechanical Contractors Association of Ohio. The amicus brief detailed the onerous municipal tax compliance requirements that were placed on businesses prior to the enactment of H.B. 5 and H.B. 49 and set forth the significant need for the centralized collection and administration of the municipal net profit tax.

Registration Update

As discussed in our previous Buzzes, March 1, 2018 was the deadline for calendar year net profit taxpayers to elect into the centralized collection and administration system administered by the Ohio Tax Commissioner for taxable year 2018. The election is still able to be made for subsequent years. In the initial year of the availability of the election, over 2,000 businesses have elected to opt into the centralized collection and administration system. Depending on a fiscal year taxpayer’s year end, a fiscal year net profit taxpayer could still elect into the centralized collection and administration system for taxable year 2018. As a reminder, a taxpayer must file its election by the first day of third month after the beginning of the taxpayer's taxable year.

Ordinance Reconciliation Requirements of House Bill 49 

Under the provisions of H.B. 49, municipalities were required to incorporate the H.B. 49 provisions into their ordinances by Jan. 31, 2018. In the original Franklin County case, the parties agreed to a temporary injunction which delayed these requirements until Feb. 24, 2018 or until a further order by the trial court. No other provisions under H.B. 49 were impacted by this agreed-to temporary injunction. Based on discussions with municipal officials, it is estimated that as many as half of the municipalities were either late to adopt or have yet to adopt the H.B. 49 provisions. Municipalities that have not adopted or that were late to adopt these provisions could risk the validity of their municipal income tax. 

Ordinance Reconciliation Requirements of Federal Tax Reform 

On March 30, 2018, Senate Bill 22, became effective which incorporated changes made to the Internal Revenue Code as a result of federal tax reform. The incorporation also applied to Chapter 718 of the Ohio Revised Code. Depending on a municipality’s ordinance, a municipality may have to adopt the current version of the Internal Revenue Code to be in compliance with the provisions of the Ohio Revised Code that authorize the municipality to levy their municipal tax. Otherwise, a municipality could risk the validity of their municipal income tax. 

Author’s Note: Zaino Hall & Farrin LLC filed the amicus brief on behalf of the Ohio Society of CPAs, 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, and Mechanical Contractors Association of Ohio. 

January 12, 2018

Am. Sub. H.B. 49 (the "Bill"), Ohio's biennial budget bill, enacted significant new features to assist taxpayers in complying with Ohio's onerous municipal income tax system. As we discussed in a previous SALT Buzz, Major Changes for Ohio Municipal Income Tax in 2018: Centralization and Elimination of Throwback, for taxable years beginning on or after Jan. 1, 2018, the Bill created an elective method of centralized collection and administration for certain net profit taxpayers. The collection and administration of the tax will be overseen by the Ohio Tax Commissioner for those that elect into the system. Some Ohio municipalities have joined together to challenge the new centralized collection and administration system in filing two separate lawsuits. The City of Columbus is also threatening that taxpayers will forfeit eligibility for previously negotiated incentive agreements if the taxpayer elects into the centralized collection and administration system administered by the Ohio Tax Commissioner, while some others are taking such position on future economic development agreements.

Lawsuit #1 - City of Athens, et. al. v. Testa, et. al.

In November 2017, over 130 municipalities joined together to file a civil lawsuit in the Franklin County Court of Common Pleas to challenge the constitutionality of the centralized collection and administration system, as well as challenge certain changes made under Sub. H.B. 5 of the 130th Ohio General Assembly. In this lawsuit, the municipalities have alleged the following:

• The provisions of the Bill violate the Home Rule Amendment of the Ohio Constitution by diverting net profit tax revenues away from municipalities, requiring municipalities to file reports with the state, and removing the audit and refund review powers of the municipalities.
• The provisions of Sub. H.B. 5 violate the Home Rule Amendment of the Ohio Constitution by dictating the exercise of administrative, procedural, and enforcement powers rather than the power of taxation.
• The provisions of the Bill violate the single subject rule of the Ohio Constitution.
• The provisions of the Bill impair the obligation of contracts which violates the Ohio Constitution.
• The provisions of the Bill allow the state to illegally convert (i.e., steal) municipal net profit tax away from municipalities.
• The provisions of the Bill violate a municipality's property interest in municipal net profit tax without providing just compensation.
• The provisions of the Bill violate a municipality's property interest in municipal net profit tax without a remedy by due course of law.

This lawsuit seeks a preliminary and permanent injunction to prohibit the Tax Commissioner from implementing the centralized collection and administration of the municipal net profit tax that was enacted under the Bill. The lawsuit also seeks a preliminary and permanent injunction to prohibit the State of Ohio from taking any actions to enforce certain provisions of Sub. H.B. 5, a law that was signed by Gov. Kasich in 2014.

Thus far, two municipalities have withdrawn from the case. Ohio Treasurer Josh Mandel and the Director of Ohio Office of Budget and Management Timothy Keen have been dismissed as defendants. Currently, the hearing on the temporary injunction is scheduled for Feb. 12-13, 2018. 

Lawsuit #2 - City of Elyria, et. al. v. State of Ohio, et. al.

In December 2017, 22 RITA municipalities joined together to file a separate civil lawsuit in the Lorain County Court of Common Pleas to challenge the constitutionality of the centralized collection and administration of the municipal net profit tax adopted by the Bill. Specifically, this lawsuit alleges:

• The provisions of the Bill violate the Home Rule Amendment of the Ohio Constitution by interfering with a municipality's local self-government authority to administer, collect, receive, and audit net profit taxes and by requiring reports other than reports of a municipality's financial condition and transactions.
• The provisions of the Bill violate the Home Rule Amendment of the Ohio Constitution by usurping local police powers.

The State of Ohio and the Tax Commissioner filed a motion to transfer venue to Franklin County. The court has previously delayed the hearing on the temporary injunction to give it time to rule on the motion to transfer venue. Currently, the hearing for the temporary injunction is scheduled for Jan. 26, 2018.

Threatened Elimination of Incentives

Recently, Columbus has started to send letters to taxpayers that have existing economic incentive contracts for locating or expanding within the municipality. The correspondence indicates that if the taxpayer elects into the centralized collection and administration system, the taxpayer will forfeit eligibility for the previously negotiated economic incentives. Of course, this seems to be violative of those pre-existing contracts. Other municipalities have indicated that they intend to condition future grants of economic development incentives on taxpayers not opting into the statewide system.

Reminder: Registration is Due March 1, 2018 for Calendar Year End Taxpayers

A taxpayer electing into the centralized collection and administration must do so by the first day of the third month after the beginning of the taxpayer's taxable year (March 1 for calendar year taxpayers). The ability to elect to file on a centralized basis is available at http://www.tax.ohio.gov/MunicipalTax.aspx or by filing Form MNP R.  A taxpayer electing into the statewide system must also notify each municipal corporation in which the taxpayer conducted business during the previous taxable year. Notification of the election should be made by filing Form MNP MN with each municipality. New businesses that elect into the centralized collection system are the only taxpayers that are not required to notify any municipal corporations of its election.

Summary

The significant new features that will assist taxpayers in complying with the onerous Ohio municipal tax enacted by the Bill have been threatened by the two lawsuits filed by the municipalities. Based on the lawsuits and other actions of the municipalities, it is clear that the municipalities are attempting to hinder any progress that has been made to simplify the complex and burdensome municipal income tax structure. In any event, registration is due March 1, 2018 for calendar year end taxpayers. 

Republished with permission from Zaino Hall & Farrin LLC (SALT Buzz, June 4, 2018)

This Buzz will be updated periodically with new issues or updates relating to the Ohio municipal income tax. If you have any questions, please contact Adam Garn, Steve Hall,Tom Zaino or any one of the other professionals at Zaino Hall & Farrin LLC.

Return to Blog