Ohio rules on municipal tax group composition


Ying Lee
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Christopher J. Garman
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Jason Gajramsingh
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Sam Barnett
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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Patrick Skeehan
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The Ohio Court of Appeals recently determined that a state law superseded a city tax ordinance with a different definition of “affiliated group.” Specifically, the Court clarified that for tax years prior to 2016, a consolidated municipal income tax filing could include the same affiliated group as used for federal income tax purposes.1

Background During 2014, the taxpayer, Time Warner Cable, Inc. timely filed its 2013 consolidated Cincinnati income tax return which it amended in late 2015. Upon review, the Cincinnati Department of Finance Income Tax Division notified the taxpayer that, due to an adjustment, it owed a significant amount of outstanding tax and penalties. While the taxpayer had filed its amended return including the same affiliated group used for its federal income tax filing, the city of Cincinnati contended that the affiliated group could only include corporate entities doing business in the city.

After the taxpayer protested the assessment, which was upheld by a local board, the taxpayer appealed to the Ohio Board of Tax Appeals. The Board sided with the taxpayer, determining that the state statutory language included in former Ohio Rev. Code Ann. Sec. 718.062 expressly required that a municipality accept a consolidated return from an affiliated group of corporations where the affiliated group as a whole (and not each individual corporation) was subject to the municipality’s income tax.3 The city appealed the Board’s decision, asserting that no express conflict existed between the state statue and city ordinance in effect during the tax period at issue. As such, the sole issue considered by the Court of Appeals was the interplay between the consolidated return requirements provided in the city’s municipal code and regulations,4 and the related rules provided by the state of Ohio’s statutory provision governing municipal taxation.5

Decision The Court began its analysis by considering the Home Rule Amendment included in the Ohio Constitution, which allows municipalities to exercise “all powers of local self-government,”6 including taxation. While municipalities have been granted broad power in this area, the Ohio legislature has the express right to limit the power of municipalities to levy taxes.7 In considering the interplay between the city and state statutes governing municipal taxation, the Court focused on whether the Ohio General Assembly expressly exercised this power through former Ohio Rev. Code Ann. Sec. 718.06.8 No concept of implied preemption exists for purposes of regulating the municipal taxing authority by the General Assembly.

The Ohio statute provided that: “[A]ny municipal corporation that imposes a tax on the income or net profits of corporations shall accept for filing a consolidated income tax return from any affiliated group of corporations subject to the municipal corporation’s tax if that affiliated group filed for the same tax reporting period a consolidated return for federal income tax purposes pursuant to Section 1501 of the Internal Revenue Code.”9

In contrast, the Cincinnati ordinance allowed an affiliated group of corporations to file a consolidated return if that affiliated group filed “for the same taxable year a consolidated return for federal income tax purposes pursuant to Section 1501 of the Internal Revenue Code.”10 However, the ordinance indicated that “(o)nly corporations subject to the tax imposed by this chapter may be included in such consolidated return filed for Municipal income tax purposes.” A related regulation provided that “[a] consolidated return must include all companies that are so affiliated and that conduct business in the Municipality.”11

The city argued that the state statute, in failing to clarify all related details regarding the term “affiliated group” did not conflict with the city’s own guidance. Specifically, the city focused on: (i) use of the indefinite article “a” before the phrase “consolidated income tax return;” and (ii) the phrase “subject to the municipal corporation’s tax” as a restrictive modifier.

As to the first argument, the Court determined that it was bound to read the phrase “a consolidated income tax return” in conjunction with the entire statute as a whole, concluding that it required the city to accept for filing an affiliated group income tax return which comports with the affiliated group that filed a consolidated federal return. In contrast, the city statute proscribes it, showcasing the direct conflict between the two. As to the second argument, the Court rejected the city’s interpretation of the statute as restrictive. Instead, it cited the General Assembly’s decision to refrain from defining “affiliated group” as further evidence of its intent to conform to the federal meaning.

As former Ohio Rev. Code Ann. Sec. 718.06 specifically required municipalities to accept a consolidated income tax return from the same affiliated group which filed for federal income tax purposes, the Court determined that the statute necessarily preempted any contradictory requirements specified in former Cincinnati Municipal Code 311-11. Therefore, the Court affirmed the Board of Tax Appeals’ decision and rejected Cincinnati’s assessment of the taxpayer.12

Commentary This taxpayer-friendly decision appears to have limited applicability due to its focus on former statutes which became obsolete for tax years beginning in 2016, given that the statute of limitations for municipal income tax returns is generally three years.13 Concluding a process that spanned several years, Ohio enacted significant municipal income tax reform during 2014.14 Beyond specifying that an elective consolidation must be based on the entire federal consolidated group, rather than a nexus consolidation of affiliated members, the legislation also provided for a uniform tax base and other definitions, adopted a phased-in uniform five-year net operating loss (NOL) carryforward for both corporations and individuals, and limited the ability of municipalities and tax administrators to adopt conflicting rules. Further reform legislation, effective for tax years beginning in 2018, eliminated a sales factor throwback rule used to determine the municipal income tax sales apportionment factor15 and made an election available for businesses that allows the Ohio Department of Taxation to serve as the sole administrator of their municipal income taxes, in lieu of administration by each individual municipality in which they conduct business.16

Consolidated filing elections for municipal income tax purposes are generally binding for a period of five years.17 In spite of these restrictions, opportunities for filing amended returns in light of this decision may remain for taxpayers with open periods who originally filed their returns including an affiliated group that was different than their federal income tax affiliated group. Taxpayers who had an agreement to use an accepted alternative consolidated methodology with an Ohio municipality prior to Jan. 1, 2016, and who were not required to adopt the federal consolidated filing methodology should not be affected.

1 Time Warner Cable, Inc. v. Cincinnati, No. 2020-Ohio-4207, Court of Appeals, First Appellate District (Aug. 26, 2020).
2 Former OHIO REV. CODE ANN. § 718.06. During 2014, this statute was revised by Sub. H.B. 5 to clarify that membership of city consolidated returns must mirror the federal affiliated group for periods after 2015.
3 Time Warner Cable, Inc. v. City of Cincinnati, Case No. 2017–1448, Ohio Board of Tax Appeals (May 31, 2019).
4 Former Cincinnati Mun. Code Chapter 311-97 and Reg. R11.
5 Former OHIO REV. CODE ANN. § 718.06.
6 Article XVIII, Section 3, Ohio Constitution.
7 Article XIII, Section 6, Ohio Constitution.
8 Citing Cincinnati Bell Tel. Co. v. Cincinnati, 81 Ohio St. 3d. 599 (1998). In this decision, the Ohio Supreme Court determined that the General Assembly must expressly exercise its power to restrict or limit municipal taxation.
9 Former OHIO REV. CODE ANN. § 718.06.
10 Former Cincinnati Mun. Code Sec. 311-11(a).
11 Former Cincinnati Reg .R11(A).
12 The Court summarily dismissed two alternative arguments posed by Cincinnati: (i) that former Ohio Rev. Code Ann. Sec. 718.06 impermissibly compelled the city to exercise of power of taxation; and (ii) the same statute unlawfully forced it to exercise extraterritorial power by taxing beyond its borders.
13 OHIO REV. CODE ANN. § 718.12.
14 Sub. H.B. 5, Laws 2014. H.B. 5 was originally introduced Jan. 30, 2013. The legislation was previously introduced in 2012 as H.B. 601.
15 OHIO REV. CODE ANN. § 718.02(D)(1).
16 OHIO REV. CODE ANN. § 718.80.
17 OHIO REV. CODE ANN. § 718.06(B)(1).

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