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Supreme Court Upholds Collection of State Commercial Activity Tax From Grocers

2008-2018. Ohio Grocers Assn. v. Levin, Slip Opinion No. 2009-Ohio-4872.
Franklin App. No. 07AP-813, 178 Ohio App.3d 145, 2008-Ohio-4420. Judgment reversed.
Moyer, C.J., and Lundberg Stratton, O'Connor, O'Donnell, Lanzinger, and Cupp, JJ., concur.
Pfeifer, J., dissents.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2009/2009-Ohio-4872.pdf

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(Sept. 17, 2009) The Supreme Court of Ohio ruled today that collecting the state’s commercial activity tax (CAT) from grocers based on their gross receipts is not an unconstitutional “excise tax upon the sale or purchase of food.”

The court’s 6-1 majority opinion was authored by Justice Maureen O’Connor.

In 2005, as part of legislation overhauling Ohio’s business tax structure, the General Assembly eliminated the former state corporate franchise tax and tangible personal property tax and replaced them with the CAT.  The CAT is assessed on businesses with taxable gross receipts for the privilege of doing business in the state. Businesses grossing less than $150,000 in a calendar year need not register for or pay the tax. Businesses grossing between $150,000 and $1 million pay a flat $150 tax.  The tax paid by businesses with gross receipts over $1 million is measured by .26 percent of their annual gross business receipts.

A group of plaintiffs including individual grocery store owners, food wholesalers and the Ohio Grocers Association filed suit in the Franklin County Court of Common Pleas seeking a declaratory judgment that the state tax commissioner is prohibited from assessing the CAT against any of their gross business receipts arising from the sale of food for off-premises consumption. The plaintiffs, who also sought a refund of  prior-year CAT taxes they have paid on their receipts from food sales since 2005, based their claim on provisions of the Ohio Constitution that prohibit the state from levying or collecting any “excise tax upon the sale or purchase of food.”

The trial court ruled in favor of the tax commissioner, holding that the cited constitutional provisions bar only the collection of state sales tax on the sale or purchase of food, and that the CAT was not a tax levied on food purchases, but rather a franchise tax levied on all businesses for the privilege of doing business in Ohio. On review, the 10th District Court of Appeals reversed the trial court and ruled that imposing the CAT on a grocer or food wholesaler based on a percentage of its business receipts from the sale of food constituted levying an unconstitutional “excise tax on the sale of food.” The tax commissioner sought and was granted Supreme Court review of the 10th District’s ruling.

Writing for the Court in today’s decision, Justice O’Connor noted that laws duly enacted by the General Assembly are entitled to a strong presumption of constitutionality, and also observed that when a party sues the state seeking a tax exemption, courts are required to strictly construe the laws cited by the plaintiff.  She wrote: “These precepts require us to uphold the CAT if it may plausibly be interpreted as permissible under Sections 3(C) and 13 (of the Ohio Constitution).”

“Section 3(C), Article XII prohibits any excise tax ‘levied or collected upon the sale or purchase of food.’  Similarly, Section 13 prohibits ‘sales or other excise taxes’ upon food sales at other points in the distribution chain, such as wholesale sales.  It is well accepted that taken together, these sections prohibit a sales tax on food, and indeed, sales of food remain exempt from the sales tax.  R.C. 5739.02(B)(2). The Grocers, however, assert that Sections 3(C) and 13 do more—namely, prohibit a tax on the privilege of doing business to the degree that the privilege is measured by gross receipts derived from food sales. The court of appeals agreed with this interpretation of these sections.”

“That interpretation is not, however, the best reading of the sections. The actual wording of Sections 3(C) and 13 does not prohibit the state from using gross receipts to compute the amount of a privilege-of-doing-business tax, even if those gross receipts include proceeds from the sale of food. And ... interpreting Sections 3(C) and 13 to allow such a tax is not only faithful to the text, it is (1) consonant with long-settled legal principles governing the taxation of the privilege of doing business, (2) implied by the structure of Sections 3(C) and 13, and (3) confirmed by the history both preceding and succeeding the enactment of those provisions. And when the CAT’s practical operation is considered, it becomes evident that it is what it purports to be: a permissible tax on the privilege of doing business, not a proscribed tax upon the sale or purchase of food. For these reasons, we reverse the judgment of the court of appeals.”

Justice O’Connor’s opinion was joined by Chief Justice Thomas J. Moyer and Justices Evelyn Lundberg Stratton, Terrence O’Donnell, Judith Ann Lanzinger and Robert R. Cupp.

Justice Paul E. Pfeifer entered a dissent stating that in his view collection of the CAT from grocers and other businesses based on their gross receipts from the sale of food is “an excise tax upon the sale or purchase of food” and is therefore prohibited by Sections 3(C) and 13 of the state constitution.

He wrote: “It is an incontrovertible fact that if a retailer has sales over $1 million and he sells an additional 40 gallons of milk at $2.50 per gallon, for a total of $100, a tax of 26 cents is levied upon him and the state collects 26 cents. Is this not a tax ‘levied or collected upon the sale or purchase of food?’ That 26 cents per $100 is a small sum does not mean that this tax is de minumus, as the majority suggests as to the $150 flat fee. Though there are more than 11 million Ohio residents, assume that only ten million people actually live in Ohio. Further assume that they each consume exactly one gallon of milk per month, that milk costs $2.50 per gallon, and that all of the milk is purchased from a retailer with sales in excess of $1 million – that is, any milk purchased from Kroger, UDF, Giant Eagle, Meijer, Target, Whole Foods, Sam’s Club, Costco, and the like. The excise tax levied and collected by the state based on the sale of ten million gallons of milk would be $65,000. Would this not be a tax ‘levied or collected upon the sale or purchase of food?’”

Benjamin C. Mizer, 614.466.8980, for the State Tax Commissioner.

Gerhardt A. Gosnell II, 614.221.4000, for the Ohio Grocers Association et al.

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