Over 100 Ohio cities filed a lawsuit on November 16 against the state challenging the municipal income tax provisions in House Bill 49 (H.B. 49) and House Bill 5 (H.B. 5)— specifically, the centralization of return filing and collection of municipal net profits taxes by the Department of Taxation.
Proponents for municipal reform believe that leveraging resources of the Department of Taxation will ultimately benefit businesses and help cities grow. Under the municipal income tax reform provisions, non-individual taxpayers can elect to file returns and remit taxes with the Department of Taxation online through the Ohio Business Gateway. Municipal income tax reform has often been a hot topic for discussion, in hopes of streamlining a cumbersome process for businesses that operate in multiple cities.
According to the lawsuit, though, certain amendments and enactments within the 3,384 page bill, among other things, purport to:
- Confiscate 0.5% of net profit tax receipts from the cities
- Deprive cities the ability to audit tax filings, contest claims for refund, and inspect taxpayer books and records of taxpayers that have made the election without court order
- Designate the Tax Commissioner as administrator of all municipal net profits taxes for electing taxpayers
- Give the Tax Commissioner rulemaking authority to govern the terms and conditions under which municipal tax professionals may inspect the Tax Commissioner’s net profit tax records
The lawsuit alleges the provisions of H.B. 49 and H.B. 5 violate the special “Home Rule Amendment” which grants municipalities under Section 3, Article XVIII of the Ohio Constitution, the authority to self-govern and adopt and enforce regulations when not in conflict with general laws. Laws may be passed to limit the power of municipalities to levy taxes as to prevent abuse of power. But H.B. 49 municipal income tax provisions, according to the suit, usurp for the state the local self-government power to tax, administer, audit and receive net profit taxes.
Additionally, the suit alleges that the primary purposes of H.B. 49 is “to make operating appropriations for the biennium and to provide authorization and conditions for the operation of state programs.” The administration and collection of net profits taxes is not related to state operating appropriations. Section 15(D), Article II of the Ohio Constitution requires that no bill contain more than one subject, and that the subject be clearly expressed in its title. According to the suit, a “blatant disunity” exists between the municipal income tax provisions and the primary purpose of the bill.
H.B. 49 is the state’s omnibus biennial budget bill and became law effective June 29, 2017. H.B. 5 became law effective March 23, 2015.
Registration is now open for the 2018 tax year for the option to file one municipal net profit tax return for all jurisdictions through the Ohio Business Gateway. The Gateway is currently undergoing a modernization and work is ongoing integrating the municipal net profit filings with the system.
Considering the uncertainty of the outcome of the recently filed suit, the decision to elect to file with the state may be difficult and should not be taken lightly. Let the state and local tax professionals at Skoda Minotti help. Please contact Ben Dalesandro at 330-668-1100 or email Ben with any questions.