Municipal Income Tax – Ohio Court denies challenge to Centralized Filing System

The Franklin County Court recently denied a challenge to the provision in H.B. 49 that allows taxpayers to file a single municipal net profit return with the Ohio Tax Commissioner through the Ohio Business Gateway. The sole issue in the case was whether Ohio’s General Assembly had the constitutional authority to enact centralized collection of municipal net-profits taxes.

Approximately 130 municipalities joined in arguing that the collection provisions usurped the municipalities’ power to tax under Ohio’s home rule. While the Court acknowledged that the home rule grants municipalities all powers of local self-government, the provision is “subject to the restrictions or limitations contained in any other provision in the Constitution.” Specifically, Ohio Const. Art. XVIII §13 states that laws may be passed to limit the power of municipalities to levy taxes, therefore providing Ohio’s General Assembly the power to pass H.B. 49. Ohio cities asserted that the definition of “levy” includes the collection provisions.

The decision is a victory for Ohio business owners who could save up to $800 million in aggregate compliance costs. The Ohio Department of Taxation estimates that the centralized filing system could save up to $1.6 billion per year. Not only would this save Ohio businesses on compliance costs, but Ohio municipalities would also benefit as the administrative fee charged by the Department (.5%) is much less than the cost of municipalities administering and collecting the tax themselves.

While local governments worry about their ability to review filings and control revenue, this ruling is a significant advancement in Ohio’s municipal income tax, which has often been criticized as the nation’s worst municipal tax system.

UPDATE: This decision has been appealed and is pending in the Tenth Appellate District of Franklin County, OH.

Please contact a member of our team if you have questions about Ohio’s municipal taxes or net profit returns.