COLUMBUS - The Ohio Supreme Court handed Gov. Ted Strickland a major victory Thursday, rejecting an argument from grocers that the state's new business tax unconstitutionally taxes food.
The 6-1 ruling overturns a 10th District Court of Appeals decision in the grocers' favor and saves the state potentially $731 million - $188 million raised from the tax for each year of the state's two-year budget plus $355 million the state might have been forced to refund for prior years.
Justice Maureen O'Connor, writing for the majority, agreed that provisions of the Ohio Constitution prohibit an excise or sales tax against the sale of food. But she added, "They do not prohibit a tax upon sellers of food. Nor do they prohibit the consideration of receipts from food sales in measuring the value of the privilege of doing business."
Justice Paul Pfeifer cast the sole dissenting vote.
"Today, a majority of this court has defeated the purpose of the constitution, which clearly intends that food, a paramount necessity for 11-plus million Ohioans, not be subject to an excise tax," he wrote. "The majority accomplishes its end by narrowly and unreasonably construing numerous cases and by ignoring the obvious purpose behind a constitutional provision that states that 'no excise tax shall be levied or collected upon the sale or purchase of food for human consumption off the premises where sold.'•"
As part of a massive tax-reform plan begun in 2005 and nearing completion, Ohio has been replacing a loophole-laden tax on corporate profits and an unpopular tax on business inventory, machinery, equipment, and fixtures with the Commercial Activity Tax. That reform plan also included a 21 percent across-the-board cut in the personal income tax spread over five years.
"I am thankful for the Supreme Court's decision, which protects the integrity of Ohio's reformed tax code and upholds the broad-based, low-rate structure that gives Ohio the lowest business taxes in the Midwest," Mr. Strickland said.
The CAT is imposed against business gross receipts, regardless of the source of that revenue, and was designed to be applied more broadly but at a lower rate than its predecessors.
Businesses earning less than $150,000 a year do not pay the tax. The CAT is assessed at a flat $150 for businesses with receipts between $150,000 and $1 million. Businesses earning more than that, including large grocery store chains, pay 0.26 percent.
"This tax, when taken from an economic perspective, when applied to food is exactly like a sales tax," said Gerhardt "Gage" Gosnell II, attorney for the Ohio Grocers Association. "Of the $188 million that the state estimates it collects in CAT each year, a significant portion is paid by Ohio consumers in the price of their food."
The state, however, countered that the tax is levied against the business after a sale and is not directly imposed on the consumer at the cash register as a sales tax is.
"The court made clear today that all businesses in the state of Ohio are expected to pay their fair share," said Attorney General Richard Cordray, who personally argued the state's case. "This is a clear victory for state and local governments, as well as our public schools, which depend on this revenue to provide critical services to countless Ohioans."
Justice O'Connor noted that grocers had been subject to the corporate franchise tax on their profits, including that generated by food sales, and had not challenged that tax for 40 years.
This case had placed Mr. Strickland in the position of aggressively defending a tax that his fellow Democrats in the General Assembly opposed when first adopted in 2005. The Democrats' argument at the time mirrored that of the grocers.
The governor continues to battle other lawsuits that could have major impacts on the state's precarious $50.5 billion, two-year budget that took effect July 1.
He is appealing a Franklin County Common Pleas Court ruling that has prevented him from spending $258 million in tobacco settlement money confiscated from a state anti-smoking foundation. He is also fighting multiple lawsuits challenging his $933 million plan to install up to 17,500 slot machines at seven racetracks.
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