On Tuesday, September 1, the Supreme Court heard oral arguments in Ohio Grocers' Assn. v. Wilkins, No. 2008-2018. The case presents the issue whether Ohio's commercial activity tax (CAT) was an unconstitutional tax on the sale of food consumed off the premises where sold, or whether it was a permissible franchise tax that included gross receipts from food sales as the measuring stick for the tax.

Attorney General Cordray addressed the Court on behalf of the Ohio Tax Commissioner. In response to a question, Attorney General Cordray explained that an excise tax was any tax imposed upon a privilege and that the CAT was indeed an excise tax. However, a franchise tax is a type of excise tax imposed upon the privilege of doing business. He asserted that while the tax was measured by gross receipts, it was not a tax on the sale of food, itself, and therefore was valid.

In response to another series of questions, Attorney General Cordray referred the Court to a long line of cases, culminating the Bank One Dayton, N.A. v. Limbach (1990), 50 Ohio St. 3d 163, that differentiated between taxes imposed directly upon a forbidden property or transaction, and taxes that that were not imposed directly upon the forbidden class, but rather used the forbidden class merely as the measure of the tax. In those cases, the former class of taxes were uniformly struck down, while the latter were not. Attorney General Cordray acknowledged one "wobble" by the Court in Wrenn Paper Co. v. Glander (1953), 156 Ohio St. 583, but noted that was quickly over-ruled one year later in Fifth Third Union Trust Co. v. Peck (1954), 161 Ohio St. 169.

Towards the end of his argument, the Attorney General was asked about the burden of proof and standards to be applied by the Court in resolving the issue. Attorney General Cordray responded that the burden was beyond all doubt. He pointed to two principles in support of his response. The first was that all statutes enjoy a strong presumption of constitutionality. The second was that any exemption from taxation is narrowly construed against the exemption because it necessarily increases the burden of taxation on all other taxpayers. In this case, he stated the Grocers had simply failed to satisfy that burden.

Mr. Gerhardt Grosnell II argued on behalf of the Appellees. He framed the issue as whether the constitutional prohibition against the taxation of sales of food off the premises where sold had any meaning, or whether the General Assembly, by careful working, could avoid and circumvent the prohibition. He emphasized that the critical point was that the prohibition relates to the item upon which the tax was imposed (i.e., food), and not upon the rate or directness of the tax.

Mr. Grosnell was immediately asked how much consumers would save if gross receipts from food sales were eliminated from the tax. He admitted that could not be determined, but that the economic expert had testified that the burden of the tax was identical to that of a sales tax - the tax was ultimately paid by the consumer who purchased the food. When pressed to distinguish between the economic incidence as opposed to the legal incidence. Mr. Grosnell stated that the key object of the tax, receipts from the sale of food, was what the constitution prohibited.

When asked about whether others in the chain by which food products were brought to market would escape taxation if his position were sustained, Mr. Grosnell intimated that only the end user would benefit, since the exclusion was limited to sales of food for consumption off the premises where sold. In his view, intermediate sales would not fall into that category.

Finally, when asked what cases would have to be over-ruled or distinguished if his position were to be sustained, Mr. Grosnell responded that none would. In his view, none of the other cases cited by the state addressed the precise issue presented here: Whether the CAT, in substance, impermissibly taxed sales of food. In his view, the Court had a clean slate with which to work.

Attorney General Cordray then had 30 seconds for rebuttal. He noted that the Court had long permitted items that could not be taxed directly to be included in the measuring stick for a permissible tax, and he suggested that all those cases would have to be over-ruled for the decision of the Court of Appeals to be sustained. He also pointed to the admission that the amount of the CAT saved by each consumer for each transaction could not be determined as support for the state's position that the CAT was a tax on the privilege of doing business and not on the transaction of selling food. He concluded by stating that only the latter was prohibited by the constitution.

Comment: The oral argument was spirited on both sides. Some members of the Court seemed to have difficulty with equating the CAT to a sales tax, but the view was not unanimous. Ultimately, the Court will have to decide not only the nature of the CAT, but also the scope and intention of the constitutional prohibition in question and whether it applies to all excise taxes, including franchise taxes, or not.

It is likely to be several months before a decision is issued.