On August 24, 2007, the Franklin County Court of Common Pleas issued a decision that rejected the arguments of a group of plaintiffs that the Ohio Commercial Activity Tax ("CAT") was an excise tax imposed on the sale of food in violation of the Ohio Constitution. Rather, the Court concluded the CAT was imposed upon all businesses for the privilege of doing business in Ohio. Ohio Grocers Association, et al. v. Wilkins, No. 06CVH02-2278 (Franklin Comm. Pleas, Aug. 24, 2007).
Legal Background: The Commercial Activity Tax was enacted by the Ohio in 2005 as part of a sweeping tax reform effort. The CAT is imposed upon the gross receipts of virtually all business activity in the State. Persons with annual gross receipts under $150,000 pay no tax; persons with annual gross receipts between $150,000 and $1 million pay a flat tax of $150; and persons with annual gross receipts in excess of $1 million pay $150, plus the product of .26% and annual gross receipts in excess of $1 million.
Section 3(C), Art. XII of the Ohio Constitution prohibits the imposition of an excise tax on the purchase of food for human consumption off the premises where sold. Section 13, Art. XII, imposes a similar proscription against excise taxes on ingredients and packaging for food.
Plaintiffs' Arguments: In early 2006, a group of plaintiffs, headed by the Ohio Grocers Association, challenged the validity of the CAT on the basis that it was really an excise tax imposed on the sale of food, food ingredients, and packaging in violation of Sections 3(C) and 13 of Article XII. The plaintiffs contended that on its face and in operation and effect, the CAT was really a sales tax in disguise. As applied to the sale of food, it violated these two provisions.
The Tax Commissioner claimed the tax was not a sales tax, but rather was a tax imposed upon all business entities for the privilege of doing business in Ohio. As such, it was not an excise tax, but rather was a franchise tax. Even if it were an excise tax, the official claimed the tax was measured on gross receipts during a specified period, and not on individual transactions. In fact, it was impossible to determine the liability of a business for the tax with respect to any particular customer or transaction. As such, it was not a tax imposed upon an underlying component of the business, or on the transaction constituting the sale of food.
Court's Decision: First, the Court determined the CAT was an indeed an excise tax. An excise tax is a tax that is imposed in exchange for some special privilege or immunity granted to some artificial or natural person. By its very terms, the CAT is characterized as a tax imposed upon the privilege of doing business in Ohio. Therefore, while the CAT is indeed a franchise tax, a franchise tax is merely a type of excise tax.
However, being an excise tax was not fatal to the CAT. The Court recognized that the privilege being taxed was not the sale of food or packaging for food. Rather, the tax was imposed upon the general privilege of doing business. Citing several decisions of the Ohio Supreme Court, the Court repeated the rule that an excise tax on the privilege of doing business did not turn the levy into a tax on some underlying component of the business. Therefore, the fact the tax was measured in part by gross receipts from the sale of food did not mean that the CAT was an excise tax imposed upon the sale of food.
The Court then turned to the claim that regardless of its name, the CAT was, in practical effect, a traditional sales tax. The plaintiffs claimed the economic incidence of the tax was the ultimate purchaser and was measured by gross receipts received from the sale of food. The Court disagreed. It noted the CAT is calculated on gross receipts over a specified period of time and does not relate to any single purchaser or transaction. While the cost of the tax may ultimately be passed to the customer in the form of a higher price, the person legally liable for the tax was the business entity. That the economic cost might be passed on to a customer is true for any tax that is imposed upon a business. Such indirect impact did not convert the incidence of the tax to the consumer.
Comments: Many critics of the CAT acknowledge that on is face, the CAT appears to be an excise tax on the privilege of doing business. However, those same critics urge that in effect, the CAT is really a sales tax. It was this latter factor that served as the basis for the litigation in this case. In this first review of the issue, the court rejected that argument and sided with the Tax Commissioner. However, there will undoubtedly be more rounds to this battle before a final decision is reached.
According to published reports in the news media, an appeal is planned.