Ohio's CAT upheld.

• Author: Bonner, Paul
• Position: Commercial activity tax

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The Supreme Court of Ohio has ruled that the state's commercial activity tax (CAT) does not violate the Ohio constitution's prohibition of excise or sales taxes upon food sales and purchases (Ohio Grocers Ass'n v. Levin, No. 2009-Ohio-4872 (Ohio 9/17/09)). The decision reverses a state appellate court decision that had held that because the CAT is applied to gross business receipts, it is in effect an excise tax on the sale of food.

Ohio enacted the CAT (OH Rev. Code [section]5751.02 et seq.) in 2005 "on each person with taxable gross receipts for the privilege of doing business in this state," as part of a major reform that included a reduction of personal income tax rates and gradual repeal of personal property taxes and a previous corporate franchise tax. It levies $150 on the first $1 million in taxable gross receipts (after exempting the first $150,000) and 0.26% on receipts above $1 million. Gross receipts include amounts received from sales of goods or services, with no exclusion for food.

The Ohio constitution has since the 1930s prohibited any excise tax on "the sale or purchase of food for human consumption off the premises where sold" (OH Constitution, art. XII, [section]3(C)). It further prohibits any "sales or other excise taxes" on wholesale sales or purchases of food (including nonalcoholic beverages) for human consumption or its ingredients or packaging, or "in any retail transaction, on any packaging that contains food for human consumption on or off the premises where sold" (art. XII, [section]13). The CAT's enabling legislation declares that it does not violate the state constitution because it is not a sales or excise tax but a franchise tax, imposed for the privilege of doing business in Ohio.

The Ohio Grocers Association filed suit in 2006, challenging the CAT with respect to food sales. A trial court ruled against the grocers, and an Ohio appeals court reversed on appeal (Ohio Grocers Ass'n v. Wilkins, 178 Ohio App. 3d 145 (Ohio Ct. App. 2008)). The state appealed to the Ohio Supreme Court, which held that the CAT is what it purports to be: a business privilege tax that uses gross receipts as a "measuring stick" rather than as a direct tax on sales. It cited six factors it said supported the distinction:

1. The CAT was so...