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Ohio considers city net profits tax regimes

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In a recent decision, the Ohio Supreme Court upheld Ohio’s legislative efforts to centralize administration of the state’s municipal net profits tax regimes, but ruled that the provision allowing the state to retain a percentage of the tax collected to fund the centralized administration is unconstitutional.1 The Court held that the laws allowing centralized administration constitute a permissible limitation on home-rule power within the legislature’s express constitutional authority. However, the retention provision is not a permissible act of limitation because it imposes a fee or tax. As a result, the Court severed the statute imposing the retention provision.

Background The net profits tax is a city income tax imposed by Ohio municipalities on income earned within a municipality’s jurisdiction. Many Ohio municipalities historically have chosen to impose local income taxes, and in response, the state has enacted legislation to make municipal taxation more uniform. Specifically, H.B. 5, enacted in 2014, provided greater statewide uniformity of municipal income taxes by pre-empting municipalities from imposing an income tax unless they adopted certain uniform state provisions.2 In 2017, Ohio enacted legislation, H.B. 49, which created a centralized, state-administered portal where taxpayers may elect to file and remit municipal net profits taxes.3 Under the statutes enacted by H.B. 49, for tax years beginning on or after Jan. 1, 2018, a business taxpayer may: (i) continue to file its return and pay taxes to each municipality; or (ii) elect to have the Ohio Department of Taxation collect and administer the tax.4 To offset the costs of operating the centralized portal, the legislation allows the state to retain an administrative fee of 0.5% of any municipal tax payments paid through the portal.5

In November 2017, more than 100 municipalities brought suit against the state of Ohio arguing the laws providing for centralized administration of municipal income tax violated the Ohio Constitution. Also, some of the municipalities challenged the provision that allows the state to retain 0.5% of the collected taxes as a fee or tax for the state’s centralized administration. Both trial and appellate courts6 ruled in favor of the state on both issues, ultimately leading to the Ohio Supreme Court hearing the case.

Constitutional arguments The municipalities argued before the Ohio Supreme Court that a state-administered, centralized system for reporting and collecting municipal net profits taxes, paid for by the tax on municipalities, violated the Home Rule Amendment of the Ohio Constitution, which provides municipalities with the authority to exercise all powers of local self-government.7 Historically, the Ohio Supreme Court has consistently ruled that the Home Rule Amendment also grants municipalities the power to levy taxes.8

Specifically, the provisions of the Ohio Constitution known as the Home Rule Amendment state that “[m]unicipalities shall have authority to exercise all powers of local self-government and to adopt and enforce within their limits such local police, sanitary and other similar regulations, as are not in conflict with general laws.”9 Furthermore, the Home Rule Amendment provides that “[a]ny municipality may frame and adopt or amend a charter for its government and may, subject to the provisions of section 3 of this article, exercise thereunder all powers of local self-government.”10

However, Ohio’s Constitution provides the state legislature the power to limit municipal home-rule power under Art. XVIII, Sec. 13, which grants it authority to enact laws that “limit the power of municipalities to levy taxes and incur debts for local purposes.”11 Also, Art. XIII, Sec. 6 of the Ohio Constitution provides the legislature with the authority to “restrict [municipalities’] power of taxation, assessment, borrowing money, contracting debts and loaning their credit, so as to prevent the abuse of such power.”12

With this in mind, the municipalities argued that the Home Rule Amendment prohibited the state legislature from engulfing the municipalities’ powers of taxation, asserting that the specific language of the Ohio Constitution grants the state authority to govern only how a municipality enacts a net profits tax. In contrast, Ohio argued that the constitutional language gave the state the power to control not just enactment, but also the administrative acts that the enactment requires.

Centralized administration does not exceed legislature’s authority The Ohio Supreme Court agreed with the state, ruling that the legislature has the power to impose limitations on both the enactment and the administration of municipal taxes. In deciding this issue, the Court considered what it means for the legislature to have authority under Art. XVIII, Sec. 13 of the Ohio Constitution to limit the municipal power “to levy taxes.” Specifically, the Court accepted the state’s broad interpretation of the term “levy” as used in Art. XVIII, Sec. 13 to mean a municipality’s legislative enactment of a tax as well as the administrative acts that the enactment of the tax requires. In a thorough analysis, the Court found that: (i) the dictionary definitions of “levy” supported the state’s broad interpretation of the term; (ii) uses of the term “levy” in other provisions of the Ohio Constitution did not support the municipalities’ more restrictive interpretation of the term in Art. XVIII, Sec. 13; (iii) the municipalities’ corpus-linguistics analysis was unpersuasive;13 (iv) there was no canon of construction calling for a restrictive interpretation of “levy” in the phrase “levy taxes;” and (v) the restrictive construction of “incur debt” in Art. XVIII, Sec. 13 did not imply a restrictive meaning of “levy taxes.”

The Court determined that the legislature’s power to limit the levy of municipal taxes includes the power to impose centralized administration. Because the state has the authority to limit the power of the municipalities to tax, the state can broadly preempt municipal income taxes and require that such taxes be imposed in strict accordance with the terms dictated by legislation passed by the general assembly. Thus, the Court affirmed the Ohio appellate court’s holding on the centralized administration issue.

State collection fee is unconstitutional While the Ohio Supreme Court found the legislation creating the state central administration of the net profits tax collection was constitutional, it disagreed with the state on the constitutionality of the mandatory appropriation of 0.5% of the municipal net-tax proceeds.

The Court explained that when municipalities properly exercise their home-rule powers, they are “immune from general laws,” and do not qualify as persons subject to the state’s regulation. It concluded that while the Ohio Constitution provides the legislature the authority to restrict the power of municipalities’ actions, it does not grant it the power to tax municipal revenues. The Court held that imposing a fee measured by a percentage of municipal-tax proceeds is not an authorized act of home-rule limitation under Art. XVIII, Sec. 13, or a valid restriction under Art. XIII, Sec. 6 of the Ohio Constitution. Finding that it also was empowered to sever the retention provisions from the rest of H.B. 49, the Court declared the 0.5% payment unconstitutional without affecting other portions of the centralized, state-administered portal. The Court reversed the portion of the appellate court’s judgment upholding the retention fee provision.

Concurring and dissenting opinions Two justices filed separate opinions concurring in part and dissenting in part. Justice Kennedy filed an opinion concluding that the entire centralized administration of municipal net profits taxes, including the retention fee, should have been found to be unconstitutional. According to Justice Kennedy, “the majority’s holding permits the General Assembly to eliminate the municipal power of taxation altogether and to compel the cities and villages of Ohio to cede their sovereignty over matters of local self-government to the state in exchange for revenue essential to their survival.” Justice Kennedy concluded that the majority’s “holding cannot be squared with the plain language of the Home Rule Amendment.”

In a separate opinion concurring and dissenting in part, Justice DeWine concluded that both the centralized administration of municipal net profits taxes and the fee retention should have been found to be constitutional.14 As explained by Justice DeWine, “[o]ne would think that the authority to impose a fee to defray the administrative costs goes hand in hand with the legislature’s power to provide for centralized administration of the net-profits tax.” However, “the majority tweezes the fee from the rest of the scheme, and because it can identify no provision in the Ohio Constitution explicitly authorizing such a fee, decrees it unconstitutional.”

Commentary In this case, the Ohio Supreme Court approved the legislature’s effort to standardize the municipal tax code. This decision is favorable for taxpayers because the contested legislation allows them to make an election to have the Ohio Department of Taxation collect and administer their municipal net profits tax. This greatly eases the compliance burden for taxpayers that have net profits tax liability in multiple jurisdictions within the state. The majority opinion thoroughly and carefully examines the relevant language of the Home Rule Amendment. The justices were divided on both the centralized administration and retention fee issues, but there was substantial support for the majority decision. Six of the seven justices agreed on the centralized administration issue and five justices agreed on the retention fee issue.

The severance of the administrative fee from the rest of the centralized tax administration statute may create some uncertainty about how Ohio’s centralized municipal tax filing regime will be able to continue operating because it is no longer funded by the tax collections paid to the state. In the future, legislative responses to preserve or replace the lost funding could be offered, conceivably in the form of a complementary state net profits tax, or an increase in the Commercial Activity Tax or sales tax rate.



1 City of Athens v. McClain, Ohio Supreme Court, No. 2020-Ohio-5146, Nov. 5, 2020. Four of the Ohio Supreme Court’s seven justices joined the majority opinion. Two opinions concurring in part and dissenting in part also were filed.
2 Ch. 158 (H.B. 5), Laws 2014.
3 Ch. 14 (H.B. 49), Laws 2017, enacting OHIO REV. CODE ANN. §§ 718.80–718.95. For a discussion of this legislation, see GT SALT Alert: Ohio Enacts Budget Expanding Sales Tax Nexus, Municipal Income Tax Changes, and Amnesty Program.
4 OHIO REV. CODE ANN. § 718.80.
5 OHIO REV. CODE ANN. § 718.85(B).
6 City of Athens v. Testa, 119 N.E.3d 469 (Ohio App. 2019).
7 OHIO CONST. art. XVIII, § 3.
8 Cincinnati Bell Tel. Co. v. Cincinnati, 693 N.E.2d 212 (Ohio 1998), citing State ex rel. Zielonka v. Carrel, 124 N.E. 134 (Ohio 1919); see also New York Frozen Foods, Inc. v. Bedford Hts. Income Tax Bd. of Rev., 82 N.E.3d 1105 (Ohio 2016).
9 OHIO CONST. art. XVIII, § 3.
10 OHIO CONST. art. XVIII, § 7.
11 OHIO CONST. art. XVIII, § 13.
12 OHIO CONST. art. XIII, § 6.
13 “Corpus linguistics allows lawyers to use a searchable database to find specific examples of how a word was used at any given time.” Wilson v. Safelite Group, Inc., 930 F.3d 429, 440 (2019) (Thapar, J., concurring in part and concurring in judgment).
14 Justice French concurred in this opinion.



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