Ohio Revised Code
Ohio Grocers Assn. v. Levin, Ohio Tax Commr. (update)
September 17, 2009 04:32 PM Filed in: Supreme Court
of Ohio | Taxation
| Ohio Revised
Code |
Ohio
Constitution
Following up on my
August 19 and September 2 posts (click
here and here), it didn't take long for the
Supreme Court of Ohio to render a decision
in Ohio
Grocers Assn. v. Levin, Ohio Tax
Commr. (Case No. 2008-2018), which
involves the constitutionality, under Ohio's
constitution, of applying Ohio’s Commercial
Activity Tax (“CAT”) to grocery stores. Oral
argument in the case took place on September 1.
The Court ruled, in a 6-1 decision, that the CAT
is constitutional. (Click here). I look forward to reading the
opinion. (Click here).
0 Comments
Ohio Grocers Assn. v. Levin, Ohio Tax Commr.
August 19, 2009 10:00 PM Filed in: Supreme Court
of Ohio | Taxation
| Ohio Revised
Code |
Ohio
Constitution
There’s an interesting
case pending before the Supreme Court of Ohio,
Ohio Grocers Assn.
v. Levin, Ohio Tax Commr. (Case No. 2008-2018), which involves
the constitutionality of applying Ohio’s Commercial
Activity Tax (“CAT”) to grocery stores. The case has
important budgetary
implications.
The CAT is a “tax on each person with taxable gross receipts for the privilege of doing business in this state.” R.C. 5751.02. For businesses with gross receipts over $1 million, the CAT amounts to $150 plus .26 percent of taxable gross receipts over $1 million. R.C. 5751.03(A). Ohio’s Constitution, meanwhile, prohibits the imposition of excise and sales taxes on “food for human consumption.” See Article XII, Section 3(C) and Section 13. The State of Ohio argues that the CAT is simply a franchise tax and is therefore constitutional. The grocers, in contrast, contend that the CAT is essentially an unconstitutional sales tax on food.
On August 24, 2007, the Franklin County Court of Common Pleas held that the CAT is constitutional because it is a franchise tax and “an excise tax on the privilege of doing business in the state of Ohio,” but not an excise tax “that is ‘levied or collected upon the sale or purchase of food.’” The trial court further held that “the CAT is simply not tied to a transaction, and therefore distinctly different from a sales tax.” The grocers appealed.
On September 2, 2008, the Tenth District Court of Appeals reversed. The Tenth District held that the CAT is a sales tax, “because the tax is measured solely by gross receipts and is based on aggregate sales, including those from the sales of food. . . . If the legislature is prohibited from collecting a tax on the individual sale, it logically follows the legislature would be prohibited form collecting a tax on the aggregate of those same sales.” 2008-Ohio-4420, par. 21 (emphasis in original).
The State appealed, and the Supreme Court of Ohio accepted the appeal on February 4, 2009.
Based on my initial reading of the three primary briefs (available here), I think the State has the stronger position under the language of the Ohio Constitution, although the case isn’t an easy one, as evidenced by the fact that the trial court and appeals court reached very different conclusions.
Some of the difficulty in the case arises from the fact that the relevant sections of the Ohio Constitution (cited above) use the terms “excise tax,” “sales tax,” and “franchise tax,” but don’t define them. In its initial brief, the State relies upon the Black’s Law Dictionary definitions of those terms (Appellant’s Merit Brief at 5), which is what you cite when there isn’t anything better (e.g., constitutional provision, statute, or case law) upon which to rely. The State also admits a “possible ambiguity” in the relevant provisions in the Ohio Constitution (cited above). (Id. at 28). The briefs devote a lot of attention to how excise, sales, and franchise taxes relate to one another, because it’s not self-evident.
A central issue is that the CAT is imposed on the business and not on the consumer. In its reply brief, the State frames this issue by drawing a distinction between “legal incidence” and “economic incidence.” The State argues, “[l]egal incidence involves how the statute formally imposes the tax: who pays, and how liability is measured. Economic incidence analysis, by contrast, ‘looks beyond’ legal incidence and seeks to calculate who ‘really’ pays a tax--that is, whether businesses absorb the cost or pass it on, whether to customers or others, and the relative share each party bears. On that score, the Court has always analyzed legal incidence, not economic incidence, and the Grocers offer no sound reason to inject instability into the Court’s tax jurisprudence by changing that approach.” (Appellant’s Reply Brief at 10). The State further argues that the economic incidence analysis is unworkable, because it “turns every case into a battle of experts that calls on the courts to assess whose mathematical model is the better one. That approach would make rules of law turn on matters of degree, not of kind, such as whether some disputed effect is strong enough to trigger the relevant rule of law. And worse, even after this Court or another court resolved an issue on such grounds, the result would be unstable, because the results of such formulae evolve over time as circumstances change.” (Id. at p. 12) (footnote omitted).
I like that argument, and agree that the legal incidence analysis is a more workable approach, although neither the legal incidence analysis nor the economic incidence analysis represents a complete answer by itself. It will be interesting to see what the Ohio Supreme Court does in this case. Oral argument is scheduled for September 1, 2009.
The CAT is a “tax on each person with taxable gross receipts for the privilege of doing business in this state.” R.C. 5751.02. For businesses with gross receipts over $1 million, the CAT amounts to $150 plus .26 percent of taxable gross receipts over $1 million. R.C. 5751.03(A). Ohio’s Constitution, meanwhile, prohibits the imposition of excise and sales taxes on “food for human consumption.” See Article XII, Section 3(C) and Section 13. The State of Ohio argues that the CAT is simply a franchise tax and is therefore constitutional. The grocers, in contrast, contend that the CAT is essentially an unconstitutional sales tax on food.
On August 24, 2007, the Franklin County Court of Common Pleas held that the CAT is constitutional because it is a franchise tax and “an excise tax on the privilege of doing business in the state of Ohio,” but not an excise tax “that is ‘levied or collected upon the sale or purchase of food.’” The trial court further held that “the CAT is simply not tied to a transaction, and therefore distinctly different from a sales tax.” The grocers appealed.
On September 2, 2008, the Tenth District Court of Appeals reversed. The Tenth District held that the CAT is a sales tax, “because the tax is measured solely by gross receipts and is based on aggregate sales, including those from the sales of food. . . . If the legislature is prohibited from collecting a tax on the individual sale, it logically follows the legislature would be prohibited form collecting a tax on the aggregate of those same sales.” 2008-Ohio-4420, par. 21 (emphasis in original).
The State appealed, and the Supreme Court of Ohio accepted the appeal on February 4, 2009.
Based on my initial reading of the three primary briefs (available here), I think the State has the stronger position under the language of the Ohio Constitution, although the case isn’t an easy one, as evidenced by the fact that the trial court and appeals court reached very different conclusions.
Some of the difficulty in the case arises from the fact that the relevant sections of the Ohio Constitution (cited above) use the terms “excise tax,” “sales tax,” and “franchise tax,” but don’t define them. In its initial brief, the State relies upon the Black’s Law Dictionary definitions of those terms (Appellant’s Merit Brief at 5), which is what you cite when there isn’t anything better (e.g., constitutional provision, statute, or case law) upon which to rely. The State also admits a “possible ambiguity” in the relevant provisions in the Ohio Constitution (cited above). (Id. at 28). The briefs devote a lot of attention to how excise, sales, and franchise taxes relate to one another, because it’s not self-evident.
A central issue is that the CAT is imposed on the business and not on the consumer. In its reply brief, the State frames this issue by drawing a distinction between “legal incidence” and “economic incidence.” The State argues, “[l]egal incidence involves how the statute formally imposes the tax: who pays, and how liability is measured. Economic incidence analysis, by contrast, ‘looks beyond’ legal incidence and seeks to calculate who ‘really’ pays a tax--that is, whether businesses absorb the cost or pass it on, whether to customers or others, and the relative share each party bears. On that score, the Court has always analyzed legal incidence, not economic incidence, and the Grocers offer no sound reason to inject instability into the Court’s tax jurisprudence by changing that approach.” (Appellant’s Reply Brief at 10). The State further argues that the economic incidence analysis is unworkable, because it “turns every case into a battle of experts that calls on the courts to assess whose mathematical model is the better one. That approach would make rules of law turn on matters of degree, not of kind, such as whether some disputed effect is strong enough to trigger the relevant rule of law. And worse, even after this Court or another court resolved an issue on such grounds, the result would be unstable, because the results of such formulae evolve over time as circumstances change.” (Id. at p. 12) (footnote omitted).
I like that argument, and agree that the legal incidence analysis is a more workable approach, although neither the legal incidence analysis nor the economic incidence analysis represents a complete answer by itself. It will be interesting to see what the Ohio Supreme Court does in this case. Oral argument is scheduled for September 1, 2009.