The Ohio Department of Taxation may proceed with the collection of businesses' municipal-net-profit taxes, according to a recent ruling in the Franklin County Court of Common Pleas.

The case thrown out Feb. 21 by Judge David Cain was related to a lawsuit by more than 160 municipalities -- including most of central Ohio -- against the state.

The state constitution "makes it clear that the General Assembly has the power to pass laws to limit the power of municipalities to levy taxes," Cain said.

At issue is a portion of House Bill 49, which is Gov. John Kasich's most recent two-year budget. A provision in the bill makes it possible for business owners to file net-profit income-tax returns with the state instead of the municipality in which their business is located.

Cain declined to issue a preliminary injunction requested by the coalition of municipalities and upheld the constitutionality of the state's ability to collect the municipal-net-profit taxes, according to court documents from Feb. 21.

The municipal-net-profit tax is the tax rate applied to a business' income after expenses are factored out, said Gary Gudmundson, communications director for the department of taxation.

Some city leaders said the HB 49 provision would constitute an erosion of home rule in addition to a loss of revenue, but state leaders said they saw it as an option to streamline the tax-filing process for business owners. Ohio businesses pay more than $600 million in municipal income taxes each year, according to The Columbus Dispatch.

Roughly 120 municipalities filed the initial action, said Matthew Chafin, chief counsel for the Ohio Department of Taxation.

A second lawsuit was filed out of Lorain County and was transferred to Franklin County, Chafin said; that party joined the larger lawsuit group.

The Central Ohio Mayors and Managers Association of 17 central Ohio cities is part of the coalition. Members of COMMA include executives from Bexley, Canal Winchester, Columbus, Delaware, Dublin, Gahanna, Grandview Heights, Grove City, Hilliard, New Albany, Pickerington, Powell, Reynoldsburg, Upper Arlington, Westerville, Whitehall and Worthington.

Next steps

Frank Reed Jr., a Frost Brown Todd attorney representing the 160 cities and villages that filed the lawsuits, said they are evaluating options with their clients and studying the court ruling. Although they have 30 days to file an appeal, because the stay of proceedings was slated to expire Feb. 24, they might have to act sooner than that, he said.

In the long run, the state collection of municipal-net-profit tax threatens cities' ability to provide basic services, including police, fire and EMS services, parks and recreation, street maintenance and trash collection, to the residents of their communities, said Theodore Staton, Upper Arlington's city manager who will become COMMA chairman when the group meets this month.

More than 600 businesses have opted in to the state's municipal-net-profit collection program, Chafin said, and others have until March 1 to do so. Businesses are slated to make their first estimated payments in April, he said.

Under the new system, the state will process business-tax returns and then will distribute the money back to local governments after charging a half-percentage-point fee for the service.

The state will distribute the funds, including any interest earned to municipalities, on a monthly basis and in the same way it distributes sales-tax revenues to counties and income-tax revenue to school districts, Chafin said.

"This is nothing new for us," he said. "We've been doing this for a long time."

Wider effect

Although larger companies may opt in to the state's tax-collection program, smaller businesses, such as those in plumbing and carpentry, also could use the service, Chafin said.

The program also could benefit the public in other ways, he said.

The state's collection of municipal net profits should save the cities money they would have had to spend to do the same thing, Chafin said.

"They're going to save money," he said.

"We are pleased that the court found this law to be constitutional," Joe Testa, Ohio's tax commissioner, said in a statement. "It's an important ruling for business taxpayers in Ohio who for too long have had to deal with this costly, complex process for local tax on business income. This law gives business taxpayers the opportunity to save millions of dollars in the cost of complying with the fragmented municipal tax system."

Testa previously said state officials had discussed impediments in tax law with business associations and city chambers.

"The common thread was municipal net profits," he said.

A number of business owners had expressed frustration with the filing of taxes on municipal net profits, Jeff McClain, director of tax and economic policy with the Ohio Chamber of Commerce, said previously.

The budget provision was a step in the right direction for improving a convoluted municipal-tax system, he said.

The Ohio Society of CPAs, a group that has pushed for reform for years, also issued a statement.

"(The) ruling is a victory for the entire state economy because it will allow job-producing employers to operate more efficiently in a competitive national and international environment," said Scott Wiley, president and CEO of the Ohio Society of CPAs.

Mark Williams of The Columbus Dispatch contributed to this story.

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