Starting in June of 2005, Ohio began levying a “commercial activity tax” on many entities—including contractors—doing business in the state. The new statute, Revised Code § 5751.02, calls the tax a “privilege tax” and notes that it is “imposed on the person receiving the gross receipts and is not a tax imposed directly on the purchaser.” Contractors working in Ohio found their cost of doing business increased by the amount of the new tax.

Many were performing under contracts that considered the payment of certain taxes part of the “Cost of the Work” and also permitted an adjustment in their Contract Price for changes in laws or regulations. Under such a contract, was a contractor entitled to more compensation to recoup the amount of commercial activity tax it had to pay after June 30, 2005? Last week the court in Mosser Construction, Inc. v. City of Toledo (Lucas App. Sept. 21, 2007), 2007-Ohio-4910, decided that it was.

Mosser was constructing improvements to the Bayview Water Treatment Plant for the City of Toledo when the new tax took effect. Its contract with Toledo specified that changes in the law affecting either the cost or the time of performance “shall be the subject of an adjustment in Contract Price or Contract Times.” If the parties could not agree on the amount of such an adjustment, they were to follow the claims procedure in the contract.

Was the new tax such a change in the law?

The City thought it was not, even though the contract included “sales, consumer, use, and other similar taxes related to the Work, and for which contractor is liable” as part of the Cost of the Work. The City argued that the tax was levied for the privilege of doing business in Ohio and was therefore not like a sales tax; it was part of the contractor’s overhead. The City found support in section (B) of the new statute, which stated that “the tax imposed by this section is a tax on the taxpayer and, shall not be billed or invoiced to another person.”

Mosser saw the tax differently, also with support from section (B) of the statute. The sentence that appealed to the contractor said this: “Nothing in division (B) of this section prohibits a person from including in the price charged for a good or service an amount sufficient to recover the tax imposed in this section.” It argued that the new tax had increased the cost of performing the contract by $30,423.00, so the Contract Price should be adjusted accordingly.

The trial court agreed with Mosser, and the City appealed. The question for the appellate court was whether the new commercial activity tax was part of contractor overhead—as the City argued—or was similar to sales, consumer, and use taxes—as the contractor argued—and thus should be included in the Cost of the Work and reimbursed by the City.

The court looked at how the tax was calculated and concluded that it was similar to a sales tax: “Since the amount of tax owed is tied to the amount of a business’s gross receipts, the tax is similar to a sale or consumer tax and not an overhead tax.” Additionally, under these circumstances, the court thought it was okay for the contractor to bill the City directly for the tax, even though the statute would otherwise prohibit invoicing the tax to another person. Here, “the billing was the result of the increased cost of work due to the new commercial activity tax,” so the increase had to be billed separately.

This issue is only relevant in situations where there is a change in law after the contract is signed. Had the statute been in place at bid time, Mosser would have been required to include this tax in its original bid. A change in law after the bidding but before a contract was signed would most likely result in negotiating a change in the contract price.