Ohio's CAT Upheld

By Paul Bonner, AICPA, Durham, NC

The Supreme Court of Ohio has ruled that the state’s commercial activity tax (CAT) does not violate the Ohio constitution’s prohibition of excise or sales taxes upon food sales and purchases (Ohio Grocers Ass’n v. Levin, No. 2009-Ohio-4872 (Ohio 9/17/09)). The decision reverses a state appellate court decision that had held that because the CAT is applied to gross business receipts, it is in effect an excise tax on the sale of food.

Ohio enacted the CAT (OH Rev. Code §5751.02 et seq.) in 2005 “on each person with taxable gross receipts for the privilege of doing business in this state,” as part of a major reform that included a reduction of personal income tax rates and gradual repeal of personal property taxes and a previous corporate franchise tax. It levies $150 on the first $1 million in taxable gross receipts (after exempting the first $150,000) and 0.26% on receipts above $1 million. Gross receipts include amounts received from sales of goods or services, with no exclusion for food.

The Ohio constitution has since the 1930s prohibited any excise tax on “the sale or purchase of food for human consumption off the premises where sold” (OH Constitution, art. XII, §3(C)). It further prohibits any “sales or other excise taxes” on wholesale sales or purchases of food (including nonalcoholic beverages) for human consumption or its ingredients or packaging, or “in any retail transaction, on any packaging that contains food for human consumption on or off the premises where sold” (art. XII, §13). The CAT’s enabling legislation declares that it does not violate the state constitution because it is not a sales or excise tax but a franchise tax, imposed for the privilege of doing business in Ohio.

The Ohio Grocers Association filed suit in 2006, challenging the CAT with respect to food sales. A trial court ruled against the grocers, and an Ohio appeals court reversed on appeal (Ohio Grocers Ass’n v. Wilkins, 178 Ohio App. 3d 145 (Ohio Ct. App. 2008)). The state appealed to the Ohio Supreme Court, which held that the CAT is what it purports to be: a business privilege tax that uses gross receipts as a “measuring stick” rather than as a direct tax on sales. It cited six factors it said supported the distinction:

  1. The CAT was so described by legislation;
  2. It is imposed on the person enjoying the privilege;
  3. It may not be collected from any other person than the holder of the privilege;
  4. It is imposed for the exercise of the privilege for any portion of a calendar year;
  5. It is calculated on annual or quarterly results and not by each transaction; and
  6. It is calculated from “a broad measure of market access that is rationally related to the enjoyment of the privilege of doing business”—i.e., gross receipts.

The CAT does not operate like a tax on food sales because it is not necessarily triggered by a food sale, nor is it added to the price of food at sale, the court said. The CAT’s generous exemption amount and low rate make it unlikely to ever be reflected in the price of food, making any direct relationship with food sales “extremely attenuated.”

Most states with sales taxes exempt food sales either fully or partially through a reduced rate, according to a 2008 comparison by the Federation of Tax Administrators (see www.taxadmin.org/FTA/rate/sales.html), although none other than Ohio are known to do so by constitutional provision. A few of those states also have a broad-based franchise tax on gross receipts, including those from sales of food or other items or transactions exempt from sales or use tax. Washington State, for example (which has no personal or corporate income tax), exempts food, prescription drugs, and certain medical supplies from sales tax but includes them in most instances in gross receipts subject to its business and occupation tax (WA Rev. Code Ch. 82.04).

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