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The Battle Of Ohio Municipal Tax Is Here: Will Common Sense Prevail?



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 January 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 Governor 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 February12-13, 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 January 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 athttp://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.

Have a question? Contact Thomas Zaino. Your comments are always welcome!

Thomas Zaino

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