Ohio CAT Factor Context Analyzed

SUMMARY: In sustaining the constitutionality of Ohios Commercial Activity Tax (CAT) as applied to the gross receipts from the sale of food for human consumption, the Ohio Supreme Court has reaffirmed the principle that a tax measured by a factor is not legally equivalent to a tax imposed on that factor. Ohio Grocers Ass'n v. Levin, 2009 Ohio 4872 (Ohio Sept. 17, 2009).

Author Sheldon Laskin writes: The Ohio General Assembly imposed the Commercial Activity Tax (CAT) on gross receipts for the privilege of doing business in Ohio. In 2005, the Ohio General Assembly enacted the CAT, to be phased in beginning that year. 2005 Ohio H.B. 66. The CAT is imposed "on each person with taxable gross receipts for the privilege of doing business in [Ohio]." Ohio Rev. Code Ann. 5751.02(A). For many businesses, the CAT replaces the tax on personal property located and used in businesses in Ohio and the corporate franchise tax measured by net income.

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The Ohio Constitution permits laws that provide for excise and franchise taxes. However, the Constitution prohibits the imposition of an excise tax "upon the sale or purchase of food for human consumption off the premises where sold." Oh. Const. Art. XII, § 3(C). Furthermore, Ohio Grocers Ass'n v. Levin, 2009 Ohio 4872 , similarly prohibits the imposition of a "sales or other excise tax" on the wholesale sale or purchase of food for human consumption, whether on or off the premises where sold.

The Ohio Grocers Association ("Grocers") brought a declaratory judgment action, alleging that the CAT violates the provisions of Sections 3 (C) and 13 of Article XII, to the extent that the tax is imposed on gross receipts from the sale of food for human consumption. The Grocers asserted that the CAT, as applied to the sale of food for human consumption, is an excise tax on the sale or purchase of food for human consumption and is therefore prohibited by the Ohio Constitution.

In sustaining the constitutionality of the CAT, the Ohio Supreme Court initially noted that "it is permissible to tax the privilege of doing business, and to do so, the privilege must be valued."
Ohio Grocers Ass'n v. Levin, 2009 Ohio 4872, P14 (Ohio Sept. 17, 2009). The Court cited several Ohio cases in support of the principle that an appropriate measure of the value of a business franchise is the gross income or receipts of the business.

Second, the Court pointed out that both Ohio and federal law make clear that there is a legal distinction between a tax levied on a factor and a tax on a privilege measured by that factor. 2009 Ohio Lexis 2531, **10. The courts have long ruled that the measure of a tax can include a factor even if it would be illegal for a state to impose a tax directly on that factor. See, e.g., Werner Machine Co. v. Director, New Jersey Division of Taxation, 350 U.S. 492, 1956 U.S. LEXIS 1203 (1956)  (New Jersey's corporate franchise tax measured by net worth does not violate intergovernmental tax immunity notwithstanding that federal bonds exempt from state taxation were included in the measure of net worth).

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As the caselaw cited in Ohio Grocers makes clear, the question of whether a tax is imposed on a factor or merely measured by the factor arises in varied and numerous contexts challenging the application of a tax to particular taxpayers, transactions or assets. Tax counsel would be well advised to study the opinion for a thorough survey of the law on this recurring issue.

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For further discussion, see 1-6 Bender's State Taxation: Principles and Practice § 6.01 and 1-6 Bender's State Taxation: Principles and Practice § 6.04.