All parties are awaiting a judge’s decision regarding the collection of municipal-net-profit taxes after a preliminary injunction hearing began Feb. 12 in the Franklin County Court of Common Pleas.
The injunction hearing has concluded and a decision is expected sometime next week, said Matthew Chafin, chief counsel for the Ohio Department of Taxation.
The court's decision is expected on or before Feb. 23, according to Megan Kilgore, Columbus city auditor.
The hearing relates to a lawsuit by several municipalities – including most of central Ohio – against the Ohio Department of Taxation.
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 would make 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.
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 say the HB 49 provision would constitute an erosion of home rule in addition to a loss of revenue, but state leaders see it as an option to streamline the tax-filing process for business owners.
Roughly 120 municipalities filed the action, Chafin said.
A second lawsuit was filed out of Lorain County and was transferred to Franklin County, Chafin said; that party has asked to join the larger lawsuit group.
The initial coalition of cities requested a preliminary injunction to prevent the state from actually collecting municipal-net-profit taxes until the court rules on the lawsuit, Chafin said. The lawsuit will take about a year to litigate, he said.
The Central Ohio Mayors and Managers Association of 17 central Ohio cities is part of the coalition. Members 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.
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 city manager and COMMA vice chairman. (He said he would succeed Bexley Mayor Ben Kessler as chairman at the group’s March meeting.)
If the injunction is granted, COMMA would continue to support the coalition of communities fighting in court to support home rule in Ohio, Staton said. On the other hand, if the injunction is declined, COMMA will advise its members to comply with the law while it continues attempts to overturn it.
More than 300 businesses have opted in to the state-tax-collection program, Chafin said, and estimated payments from those businesses to the state were planned in April. The state planned to return money to the cities monthly, he said.
The state had given cities through Feb. 24 to pass conformity ordinances in keeping with the legislative changes from the passage of HB 49, Chafin said.
Some central Ohio cities already had plans for those ordinances.
Worthington City Council introduced such an ordinance Feb. 5, according to law director Tom Lindsey.
Joelle Khouzam, Grandview Heights’ city attorney, said “while the city of Grandview Heights does not support the state’s approach to the collection of net profit taxes, it introduced legislation last month to do two things: first, to clean up some of the issues that arose as a result of the implementation of HB 5, and second, to address changes that may be needed if the court does not grant the municipal plaintiffs’ motion to enjoin HB 49 from taking effect.”
The ordinance Khouzam referenced has been given two readings and been assigned to the finance committee, which has not met recently.
Dublin City Council scheduled an HB 49 ordinance for first reading Feb. 12, said Dublin law director Jennifer Readler.
Powell’s finance committee was slated to discuss HB 49 on Feb. 13, said City Manager Steve Lutz. Any recommendation the committee might make regarding enacting ordinances could be placed on the Feb. 20 City Council agenda, he said.
New Albany City Council on Feb. 6 tabled its ordinance to Feb. 20 at the recommendation of special counsel Frost Brown Todd, said law director Mitch Banchefsky.
Upper Arlington tentatively scheduled a similar amendment to city tax code Feb. 20, Staton said.
Hilliard City Council approved an ordinance Feb. 12 that would go into effect if the injunction isn’t granted.
Law director Tracy Bradford said Hilliard leaders “fully support extending the court-ordered stay prohibiting enforcement of HB 49 regarding collection of our net-profit taxes and of mandatory fees the state will receive on these collections. That’s less tax dollars to the city and usurps our home-rule authority provided under the Ohio constitution.”
For Columbus, Kilgore said, "any plans related to future ordinances (would) be made after the court's decision."
Joe Testa, director of the Ohio Department of Taxation, previously said the HB 49 provision originated with the business community. More than a year ago, state officials discussed impediments in tax law with business associations and city chambers, he said.
“The common thread was municipal net profits,” he said.
A number of business owners have 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 last year.
The provision is a step in the right direction for improving a convoluted Ohio municipal-tax system, he said.
Under the current terms, businesses would be able to opt in to state collection early next year, Chafin said, and could begin making estimated payments during that year for their corporate municipal net profits. In 2019, businesses could file a return directly with the state.
A business owner would file one form that includes information for multiple municipalities, Gudmundson said.