State of Ohio Seeks Ohio Supreme Court Review of CAT Tax Unconstitutionality Decision

Mark A. Engel
Bricker & Eckler LLP
October 2008

On Friday, October 17, the Ohio Attorney General filed a notice of appeal and memorandum in support of jurisdiction with the Ohio Supreme Court, asking it to review a decision of the Franklin County Court of Appeals that held that the Ohio commercial activity tax ("CAT") was a transaction tax that violated the Ohio constitution in so far as it applied to sales of food to be consumed off the premises where sold. Ohio Grocers Assn. v. Wilkins, 2008-Ohio-4420.

In its memorandum, the Attorney General, on behalf of the state Tax Commissioner, argued the CAT is not an excise tax imposed upon sales, but rather is a franchise tax imposed upon all business for the privilege of doing business in Ohio.

The memorandum also highlights the financial impact of the decision. Not only will the decision result in a $188 million shortfall when the CAT is fully implemented for fiscal year 2010, but it will also also result in the redirection of about $155 million annually in revenue attributed to the sale of motor fuel from the general revenue fund to funds set aside for public highways. In addition, it is expected that the litigation could result in refund claims of up to $350 million for taxes already paid by the plaintiffs.

The decision also brings into question the validity of the economic nexus standard that applies to businesses located outside Ohio, but who transact sales into Ohio. Under the tax as enacted, businesses doing business in Ohio in excess of $500,000 annually are subject to the tax, even if they don't maintain a place of business, or have employees or property located, in the state. If the tax is a transaction tax, as the court of appeals ruled, then it will be necessary for those out-of-state businesses to have a physical presence in Ohio before they are subject to the tax.

In addition, two business groups filed memoranda in support of the state's position, asking the court to review the decision. The Ohio Business Roundtable, a group of business leaders in the state, filed a memorandum as a friend of the court, asking the Court to review and reverse the decision of the court of appeals. In a separate filing, the Ohio Manufacturers' Association, the Ohio Dental Association, the Ohio State Bar Association, The Ohio Society of Certified Public Accountants, the Ohio State Medical Association, and the Ohio Chemistry Technology Council, also asked the Court to accept the case. In addition to the legal issues raised by the State, the business groups focused upon the tax reform effort that was behind the enactment of the CAT and the implications for Ohio's economy if the decision of the court of appeals is left standing.

On October 31, 2008, the plaintiffs/appelless in the litigation notified the Supreme Court that they were waiving their memorandum in response to the state's memorandum in support of jurisdiction that was filed by the Department of Taxation on October 17, 2008. This means that the Court will proceed to determine whether to accept the appeal based upon the Department's filing and those of the amici that filed in support of the Department's memorandum

Bricker & Eckler serves as counsel to amici curiae the Ohio Manufacturers' Association, the Ohio Dental Association, the Ohio State Bar Association, The Ohio Society of Certified Public Accountants, the Ohio State Medical Association, and the Ohio Chemistry Technology Council.

State of Ohio Notice of Appeal to Ohio Supreme Court
Filed October 17, 2008

State of Ohio Memorandum to Ohio Supreme Court in Support of Jurisdiction
Filed October 17, 2008

Memorandum to Ohio Supreme Court in Support of Jurisdiction by Amicus Curiae Ohio Business Roundtable
Filed October 17, 2008

Memorandum to Ohio Supreme Court in Support of Jurisdiction by Amici Curiae Ohio Manufacturers' Association, et al.
Filed October 17, 2008

Plaintiffs/Appellees Waiver of Memorandum in Reponse to State
Filed October 31, 2008

Full text of the Franklin County Court of Appeals Decision
Issued September 2, 2008

Ohio Appellate Court Rules CAT Is Unconstitutional Excise Tax on Sales of Food
September 2008 article by Mark Engel discussing the Court of Appeals decision