Wednesday, May 13, 2020
City of Athens et al. [Elyria plaintiffs] v. Joseph A. Testa (Jeff McClain), tax commissioner of the State of Ohio, Case No. 2019-0693
Tenth District Court of Appeals (Franklin County)
City of Athens et al. [Athens plaintiffs] v. Joseph A. Testa (Jeff McClain), tax commissioner of the State of Ohio, Case No. 2019-0696
Tenth District Court of Appeals (Franklin County)
State of Ohio v. Chalmer L. Brown, Case No. 2019-0737
Second District Court of Appeals (Greene County)
Does State-Run, Centralized System for Collecting Municipal Taxes Violate Home Rule?
City of Athens et al. [Elyria plaintiffs] v. Joseph A. Testa (Jeff McClain), tax commissioner of the State of Ohio, Case No. 2019-0693
Tenth District Court of Appeals (Franklin County)
ISSUE: Does a state-administered, centralized system for reporting and collecting municipal taxes, paid for by a fee on municipalities, violate the Home Rule Amendment of the Ohio Constitution?
OVERVIEW:
Two pieces of legislation – House Bill 5 in 2014 and House Bill 49 in 2017 – changed the way Ohio cities and villages collect their local taxes. The laws shift the local processing of these taxes to a centralized state system. The state then distributes the money back to the municipalities. Before these changes, cities and villages administered, collected, and audited their own taxes.
Nearly 200 Ohio cities and villages have sued the state because of these changes. They argue in two separate cases that the state has taken over a key local government function – taxation – in violation of their home rule powers under the Ohio Constitution. The cases are distinguished by the description of the groups of cities and villages that sued – one referred to as the “Elyria plaintiffs,” and the other as the “Athens plaintiffs.”
BACKGROUND:
In passing 2014’s H.B. 5, the General Assembly required municipalities to conform their municipal tax laws with state statutes in order to continue to collect income taxes. The legislation also mandated the creation of local boards of tax review and set certain interest rates and penalties, among other requirements.
H.B. 49, the state budget bill passed in 2017, updated R.C. Chapter 718 to permit businesses that pay net-profit taxes to file their returns and pay their taxes through a centralized state system instead of filing separate returns in each jurisdiction where businesses earn profits. The state administers and collects these municipal taxes from the businesses for all Ohio municipalities.
According to the Ohio Department of Taxation, 667 of Ohio’s 931 cities and villages impose taxes on businesses based on the net profits that the businesses generate in those municipalities. Of the 400,000 businesses in 2015 that were required to pay the net-profit tax, approximately 20 percent, or 80,000, had to file these taxes in two or more municipalities.
Legislation Overhauls Complete Process for Municipal Taxation
Before H.B. 5 and H.B. 49, cities and villages determined their tax rates and administered, collected, and audited these taxes. Under the earlier system, they received daily remittances of estimated taxes from these businesses. Under the new arrangement, though, the state sends the money only monthly.
With H.B. 49’s passage, the state began placing all the local tax revenues into the Municipal Income Tax Fund, then distributing the money back to the cities and villages. To run the program, the state charges municipalities a 0.5-percent fee on the tax revenues and deducts that fee before disbursing the money to the municipalities. If a municipality doesn’t provide certain information, such as its tax rate or financial information about the businesses, the state can withhold 50 percent of the tax revenues.
For businesses that file these taxes through the state’s centralized system, the Ohio Department of Taxation reviews and decides any business requests for refunds. The cities and villages state they are barred from giving input to these decisions and they can’t appeal. In addition, the state, instead of municipalities, now audits returns filed through the centralized system, and the state can adjust how much of the business profits are apportioned to each municipality. The municipalities note that they can’t review tax records, can’t pursue enforcement against delinquent businesses, and can’t participate in appeals made by businesses. The changes to R.C. Chapter 718 mandate that municipalities can levy taxes only if they comply with the General Assembly’s changes in the law.
Nearly 200 Cities and Villages Sue State
Two groups of municipalities challenged the constitutionality of these laws, filing lawsuits against the state and the Ohio tax commissioner, the head of the Ohio Department of Taxation. The “Athens plaintiffs” filed their lawsuit in Franklin County Common Pleas Court in November 2017. The Athens plaintiffs comprise 163 cities, including Akron, Athens, Cincinnati, Cleveland, Columbus, and Dayton. The “Elyria plaintiffs,” a group of 28 Ohio cities and villages in Lorain, Cuyahoga, Erie, Greene, Lake, Mahoning, and Summit counties, filed their lawsuit in Lorain County Common Pleas Court in December 2017.
At the state’s request, the Lorain County court transferred the Elyria plaintiffs’ case to Franklin County. The Franklin County court scheduled a February 2018 hearing about a motion from the municipalities for a preliminary injunction and declaratory judgment.
About two weeks after the hearing, the Franklin County court ruled on the merits of the challenges, concluding that the new tax laws didn’t violate the Ohio Constitution’s Home Rule Amendment (Article XVIII, Section 3) or single-subject rule for legislation.
Both groups of municipalities appealed separately to the Tenth District Court of Appeals, which ruled the legislation didn’t infringe on home rule because the General Assembly has absolute control of municipal taxation.
The municipalities appealed their cases to the Ohio Supreme Court, which accepted both appeals to consider whether the state’s centralized system violates the home rule powers of local governments. The Court will allow the parties to argue the cases together, allotting 30 minutes to each side. To comply with state directives during the COVID-19 pandemic, the Court will hear municipalities’ appeals via teleconference.
Centralized System Another Attack on Local Power, Municipalities Maintain
The Elyria plaintiffs, which filed their brief in this case (2019-0693), explain that Ohio’s first sales tax was implemented in 1934 with an understanding that part of the revenue would be distributed to municipalities and other local governments. About 40 percent of the sales tax was allotted to the Local Government Fund. In 2012, the General Assembly cut the contribution to local governments by one quarter, and in 2013, the legislature reduced it by another 50 percent.
The Elyria plaintiffs focus on H.B. 49 and describe those changes as “the latest salvo in a multi-year effort by the State to jigger its finances, renege on decades-old promises to municipalities, and thereby accomplish a political slight-of-hand – lowering State tax rates but maintaining a balanced budget by slashing contributions to local governments, leaving them to rely on existing tax revenues to fund their operations.”
They contend that the new municipal tax laws infringe on their power of local self-government, as guaranteed by Article XVIII, Section 3 of the Ohio Constitution, known as the Home Rule Amendment. Court decisions have made clear that the power of local self-government includes the power of taxation, they note. In 2018, an Ohio Supreme Court decision, quoting a 1948 ruling, stated, “A municipality’s powers under the Home Rule Amendment are the ‘broadest possible powers of self-government in connection with all matters which are strictly local.’” When imposing local taxes on businesses’ net profits, cities and villages were exercising this constitutional authority, but the state now has seized that power, the municipalities maintain.
New System Is Streamlined and Good for Business, State Argues
On behalf of the state, the Ohio Attorney General’s Office counters that the centralized tax system will lessen the burden on companies conducting business in multiple taxing jurisdictions in the state and result in a more efficient and consistent tax system. These steps will save money and make Ohio a more attractive place to do business, the attorney general maintains.
The state’s brief argues that, regardless of one’s views on the General Assembly’s centralization of municipal tax collection, “this Court does not sit to decide the wisdom of legislative enactments. It sits to decide their legality.”
The brief contends that Article XIII, Section 6 and Article XVIII, Section 13 permit the state to “restrict” and “limit” taxation by municipalities “without regard to the Home Rule Amendment.” The attorney general states that the Court has read the constitution’s provisions “as broadly conferring legislative authority over municipal taxation.”
The attorney general notes that the 1851 Ohio Constitution gave municipalities no inherent power of self-government. The people of the state amended the constitution in 1912 to add the home rule provisions. The public, however, did not alter the General Assembly’s control over municipal taxation, the attorney general maintains.
“The framers of the 1912 Constitution would have understood Article XVIII, Section 13 as a broad grant of authority that allows the legislature to regulate all aspects of municipal taxation, not as a limit on the General Assembly’s power,” the state’s brief argues.
Levying Taxes Doesn’t Include Collecting Them, Cities and Villages Assert
The lower court rulings relied on the Ohio Constitution’s provision that states, “Laws may be passed to limit the power of municipalities to levy taxes and incur debts for local purposes....” The state and the municipalities disagree about the meaning of “levy.” Does it mean only to assess a tax or, rather, the assessment and collection of the tax? The Tenth District concluded that “levy” means both the assessment and the collection of a tax, citing definitions from two dictionaries.
The Elyria plaintiffs argue that courts have cautioned against relying too much on dictionary definitions:
“[R]eference to one dictionary, or even two, as the definitive source for interpreting a word or phrase is an inherently risky endeavor,” their brief argues. “As Seventh Circuit Judge Frank Easterbrook once aptly noted, ‘the choice among meanings must have a footing more solid tha[n] a dictionary – which is a museum of words, an historical catalog rather than a means to decode the work of legislatures.’”
Pointing out that variations of the word “levy” appear in the Ohio Constitution 36 times, the Elyria plaintiffs note that several provisions (in Articles VIII and XII) use the words “levy” and “collect” separately in the same phrase. If collecting the taxes were incorporated into the meaning of “levy,” then there would be no need to add the word “collect” in the phrases, they argue. They arrive at the same conclusion when analyzing the meaning of “levy” using corpus linguistics, which is a database method for empirically investigating the meaning of words. The Elyria plaintiffs conclude that the legislature’s authority to limit municipalities’ power to levy taxes doesn’t encompass the collection of those taxes, so the state has no authority to take over collection.
To Levy Taxes Lacks Meaning Without Their Collection, State Contends
The state maintains that the dictionaries cited by the Tenth District – such as the 1906 Funk & Wagnalls’ Standard Dictionary of the English Language – are authoritative sources for the meanings of words, such as “levy,” in 1912. The references by the cities and villages to Black’s Law Dictionary also don’t help their arguments, the attorney general argues. The legal dictionary at that time included a definition of “levy” that incorporates the collection of taxes, the attorney general notes. The attorney general also points to case law from the late 1800s and early 1900s to support the broader view of “levy.”
Also, the constitution refers to the “power of municipalities to levy taxes,” which the state maintains would be meaningless if the municipalities couldn’t collect the taxes. Earlier case rulings reinforce the state’s dominance over cities and villages for taxation, the attorney general notes.
The attorney general describes corpus linguistics as only a tool, and one that isn’t helpful in this case. The state believes it is clear that “levy” has both a narrow and a broad meaning. The problem with using corpus linguistics in this case is its greater focus on the frequency of a word’s use rather than the context of its usage, the state argues. It adds that constitutional references to the government’s power to levy taxes – as in Article XII, Section 5’s “No tax shall be levied …” – would include no power to collect those taxes under the municipalities’ interpretation.
Local Governments and State Dispute Legality of Fee
Before the legislative changes, the Elyria plaintiffs note, cities and villages could collect and administer their taxes on their own or could voluntarily pay a third party to handle that process. They contend that the state’s mandatory fee imposed for collecting municipal taxes is an illegal tax on municipalities. The constitution doesn’t allow for an involuntary fee on cities and villages, and the fee isn’t connected to the state’s constitutional power to limit the local levying of taxes, they maintain.
The state refers to the fee as a “cost offset” rather than a tax. The attorney general argues that municipalities used to pay the costs of collecting its taxes, but now the state is incurring those costs by administering the centralized tax system. The new laws don’t assert a state right to seize municipal taxes, but instead requires cities and village to pay the costs associated with collecting their taxes, the attorney general maintains.
Organizations File Amicus Brief on Each Side
An amicus curiae brief supporting the position of the cities and villages has been submitted by the Greater Dayton Mayors and Managers Association.
A group of 15 organizations representing businesses, including the Ohio Chamber of Commerce, Ohio Farm Bureau Federation, Ohio Manufacturers Association, and Ohio Society of Certified Public Accountants, has filed an amicus brief supporting the state’s position.
– Kathleen Maloney
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing the Elyria plaintiffs: Darrell Clay, 216.928.2896
Representing the State of Ohio from the Ohio Attorney General’s Office: Benjamin Flowers, 614.466.8980
Does State-Run, Centralized System for Collecting Municipal Taxes Violate Home Rule?
City of Athens et al. [Athens plaintiffs] v. Joseph A. Testa (Jeff McClain), tax commissioner of the State of Ohio, Case No. 2019-0696
Tenth District Court of Appeals (Franklin County)
ISSUE: Does a state-administered, centralized system for reporting and collecting municipal taxes, paid for by a fee on municipalities, violate the Home Rule Amendment of the Ohio Constitution?
OVERVIEW:
Two pieces of legislation – House Bill 5 in 2014 and House Bill 49 in 2017 – changed the way Ohio cities and villages collect their local taxes. The laws shift the local processing of these taxes to a centralized state system. The state then distributes the money back to the municipalities. Before these changes, cities and villages administered, collected, and audited their own taxes.
Nearly 200 Ohio cities and villages have sued the state because of these changes. They argue in two separate cases that the state has taken over a key local government function – taxation – in violation of their home rule powers under the Ohio Constitution. The cases are distinguished by the description of the groups of cities and villages that sued – one referred to as the “Elyria plaintiffs,” and the other as the “Athens plaintiffs.”
BACKGROUND:
The case above (2019-0693) describes the specifics of the changes H.B. 5 and H.B. 49 made to the municipal tax system, and the paths of these cases from the initial lawsuits to the their arrival before the Ohio Supreme Court.
This case (2019-0696) focuses on the “Athens plaintiffs.” Led by the city of Athens, this group comprises 163 cities and villages, including some of Ohio’s larger cities – Akron, Cincinnati, Cleveland, Columbus, and Dayton – as well as smaller municipalities, such as Belpre, Celina, Chardon, Defiance, Gambier, Leesburg, Lima, Marietta, Mason, Napoleon, Portsmouth, Mt. Gilead, St. Marys, Stryker, Tipp City, Union, and Wapakoneta.
All but one of the Athens plaintiffs jointly filed their brief in this case. The city of Akron filed its own brief.
State’s Centralized Tax System ‘Engulfs’ Local Tax Power, Municipalities Argue
The Athens plaintiffs maintain that the General Assembly has been resisting the direction provided in the Ohio Supreme Court’s Cincinnati Bell Tel. Co. v. Cincinnati decision since it was released in 1998. In that ruling, the Court stated that the constitution’s Home Rule Amendment and the state’s authority over taxation provide a “balanced delegation of power,” and that “[t]he balance is best maintained by interpreting the specific limiting power of the General Assembly so that it does not engulf the general power of taxation delegated to municipalities.”
The municipalities maintain that, given the Home Rule Amendment, the constitution doesn’t allow the state to set the terms of a municipality’s tax code. Yet the tax provisions in H.B. 5 and H.B. 49 do more than limit the exercise of local taxation powers, they “usurp that power,” their brief states. They describe the state’s constitutional power to “limit” and “restrict” local taxation as “carve-outs to the general home rule power of taxation” and argue the state’s power can’t “nullify” the municipalities’ power.
They contend that the state has gone far beyond “limiting” the power of municipalities to tax. Instead, they explain, the state has forced cities and villages to adopt the state’s municipal tax code or else be barred from any right to tax.
“H.B. 49, like its predecessor H.B. 5, attempts to do indirectly what it cannot do directly,” their brief argues. “The State admittedly has no authority to regulate municipal income taxes by directly enacting a municipal tax code or directly centralizing all municipal tax collection and administration functions. So, instead, the State usurps authority through threatening a cloud over the legitimacy of a municipality’s income tax authority unless the state model code is adopted (H.B. 5) and coerces municipalities into granting it authority to collect net profits taxes on their behalf (H.B. 49).”
In its brief, the city of Akron adds that the Court “has never held that [Ohio Constitution, Article XVIII,] Section 13 authorizes the General Assembly to take over the functions and operations of local self-government by directly performing the local government function of collecting municipal income taxes” and “has never held that Section 13 authorizes the General Assembly to command the municipal legislative body of municipal corporations to adopt certain local ordinances as a condition for exercising their home rule authority.”
These cities and villages also make arguments on many of the same points that the Elyria plaintiffs do in their case, including objecting to the state’s fee for collecting municipal taxes and its 50 percent penalty if a municipality doesn’t follow certain information disclosures. They find no authority anywhere in the Ohio Constitution for the state to take or keep municipal tax revenues.
State’s Authority Dominates Local Power to Tax, Attorney General Maintains
On behalf of the state, the Ohio Attorney General’s Office responds that Cincinnati Bell was more specific than the municipalities indicate. The attorney general’s brief argues the ruling concluded the best way to interpret the “twin powers” in the Ohio Constitution is to permit the legislature to limit municipal taxation powers as long as it is done expressly.
It’s not about whether the state’s power is broad or narrow, the attorney general contends. Instead, the office maintains, the General Assembly must state explicitly how it is limiting municipal taxation powers – as it did in H.B. 5 and H.B. 49.
The state points to multiple Ohio Supreme Court decisions to support its view. One ruling, from 1922, stated that Article XII, Section 6, and Article XVIII, Section 13 – the state’s constitutional authority to restrict and limit municipal taxation – exist in part so that “there might be no mistake as to the power of the legislature over the matter of taxation by municipalities notwithstanding the liberal concessions made to municipalities in the other sections of Article XVIII.”
The laws creating the centralized tax system are a valid exercise of the General Assembly’s authority to regulate municipal taxation, the state concludes.
Cities, Law Professors, and Multiple Organizations File Briefs on Issue
Three cities – Toledo, Trenton, and Wooster – filed separate amicus curiae briefs supporting the Athens plaintiffs. Also submitting briefs in their support:
- Greater Dayton Mayors and Managers Association, which also submitted an amicus brief in the Elyria plaintiffs’ case
- Local government law professors, International Municipal Lawyers Association, and International City/County Management Association, in a joint brief
- Ohio Municipal League, which represents 730 of Ohio’s 931 cities and villages.
A group of 15 organizations representing businesses, including the Ohio Chamber of Commerce, Ohio Farm Bureau Federation, Ohio Manufacturers Association, and Ohio Society of Certified Public Accountants, filed an amicus brief supporting the state’s position in this case as well as in the Elyria plaintiffs’ appeal.
– Kathleen Maloney
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing the Athens plaintiffs: Eugene Hollins, 614.464.1211
Representing the city of Akron: Stephen Funk, 330.376.2700
Representing the State of Ohio from the Ohio Attorney General’s Office: Benjamin Flowers, 614.466.8980
After Child’s Emancipation, Can State Prosecute Father for Not Paying Earlier Child Support?
State of Ohio v. Chalmer L. Brown, Case No. 2019-0737
Second District Court of Appeals (Greene County)
Can a person ordered to pay child support be prosecuted for failure to pay it under R.C. 2919.21(B) when the charges are filed after the child has been emancipated and the child support obligation has been terminated?
BACKGROUND:
The Greene County Juvenile Court ordered Chalmer Brown in August 2001 to pay child support of $87 per month for his child who was born the prior year. In 2017, the Greene County Child Support Enforcement Agency emancipated the child, who was 17 years old. Brown was ordered to pay $177 per month toward child support he hadn’t paid before his child became emancipated.
In January 2018, the Greene County prosecutor charged Brown with two misdemeanor counts of nonsupport of dependents under R.C. 2919.21(B). The alleged failure to pay child support occurred from July 2016 through December 2016, and from January 2017 through September 2017, when the child was emancipated.
Brown was arrested on the charges. He asked the Xenia Municipal Court to dismiss them, and the court agreed in June 2018.
The Greene County Prosecutor’s Office appealed. The Second District Court of Appeals reversed the dismissal and returned the case to the municipal court. The appellate court also noted that its decision conflicts with State v. Hubbard, a 2018 ruling from the Eleventh District Court of Appeals.
The Ohio Supreme Court agreed that a conflict exists between the appeals courts and will review the issue. To comply with state directives during the COVID-19 pandemic, the Court will hear the case via teleconference.
Charges Can’t Be Pursued after Child Support Obligation Ends, Father Argues
The version of R.C 2919.21(B) that applies to this case stated, “No person shall abandon, or fail to provide support as established by a court order to, another person whom, by court order or decree, the person is legally obligated to support.” In State v. Pittman (2016), the Ohio Supreme Court concluded there can be no prosecution under this statute for failure to pay court-ordered child support arrearages when no current support obligation is in place because the child is emancipated.
Brown maintains the Court found that the statute’ss present-tense phrase “is legally obligated to support” means a person charged with a violation must be under a current child support obligation that hasn’t ended because of a minor child’s emancipation. Brown’s brief argues that R.C. 2919.21(B) “creates an effective bar on criminal liability” once the child support obligation is terminated, regardless of the statute of limitations.
The Eleventh District in Hubbard agreed, determining that the Pittman majority applied the holding to all cases involving charges of nonsupport, even those cases filed within the statute of limitations, Brown states. He concludes he cannot be prosecuted for nonsupport.
Charges Relate to Lack of Financial Support before Emancipation, Prosecutor Maintains
The Greene County prosecutor states that Brown was obligated legally to pay child support from May 2001 until September 2017. The office also notes that it filed the charges in Brown’s case in January 2018, within the required two-year statute of limitations for the misdemeanor nonsupport offenses.
The prosecutor contends that the Court must decide whether Pittman requires the state to charge individuals for failing to pay child support before a child is emancipated. In Pittman, the prosecutor states, the charges at issue in the appeal alleged failure to pay child support during a time when the children were no longer minors. In this case, however, the time periods of alleged nonsupport occurred when Brown’s child was a minor and before the child’s emancipation, the prosecutor notes.
The test should be whether a child was emancipated when the offense – the failure to pay child support – was committed, not when the charges were filed, the prosecutor argues. The office asks the Court to reject the Eleventh District’s interpretation in Hubbard and to uphold the Second District’s decision, as well as a similar ruling from the Tenth District Court of Appeals.
Franklin County Prosecutor Agrees with Greene County Prosecutor
The Franklin County Prosecutor’s Office has filed an amicus curiae brief supporting the Greene County prosecutor.
– Kathleen Maloney
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing Chalmer L. Brown: Adam Stout, 937.293.1911
Representing the State of Ohio from the Greene County Prosecutor’s Office: Christopher Murray, 937.562.6380