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Supreme Court Rules Use of Commercial Activity Tax Revenues From Sale of Motor Vehicle Fuel For Non-Highway Purposes Is Unconstitutional

Ruling Is Prospective Only, Does Not Apply to Past Allocations

The Supreme Court of Ohio ruled today that the state tax law imposing a Commercial Activity Tax (CAT) on the gross receipts of most Ohio businesses, and allocating the revenues generated by that tax to the state’s General Fund, is unconstitutional as applied to CAT taxes that are collected on  gross receipts from the sale of motor vehicle fuel.  The court stated that today’s ruling is to be applied only prospectively, that is, to allocations of CAT revenues after the date of today’s decision.

In a 6-1 decision authored by Justice Robert R. Cupp that reversed a ruling by the Tenth District Court of Appeals, the court found that allocation of CAT revenues from the sale of motor vehicle fuel for non-highway purposes violates Article XII, Section 5a of the Ohio Constitution. 

That provision, which was added to the constitution by the state’s voters through a 1947 initiative petition, states that

“No moneys derived from fees, excises, or license taxes relating to registration, operation, or use of vehicles on public highways, or to fuels used for propelling such vehicles, shall be expended for other than costs of administering such laws, statutory refunds and adjustments provided therein, payment of highway obligations, costs for construction, reconstruction, maintenance and repair of public highways and bridges and other statutory highway purposes, expense of state enforcement of traffic laws, and expenditures authorized for hospitalization of indigent persons injured in motor vehicle accidents on the public highways.”

With regard to a remedy for the constitutional violation, the court held that: “The expenditure of the revenue derived from the CAT relating to motor-vehicle-fuel sales for purposes other than those enumerated in Section 5a violates that section.  However, the constitution does not forbid the imposition of the CAT itself on the gross revenues derived from motor-vehicle-fuel sales.  Consequently, the state may still collect the revenue derived from the CAT relating to motor-vehicle fuel, but the revenue may not be expended until the General Assembly properly allocates the revenue according to Section 5a.”

The case arose from a lawsuit filed against State Tax Commissioner Joseph Testa by a group of contractors, including Beaver Excavating Company, and the county engineers of Ashland and Highland Counties. The relators asked the Franklin County Court of Common Pleas to declare that collection and allocation of CAT revenues based on the sale of motor vehicle fuel to the General Fund violated the requirements of Article XII, Section 5a.

The trial court granted summary judgment in favor of the tax commissioner. On review, the Tenth District Court of Appeals affirmed the trial court’s judgment. The relators sought and were granted Supreme Court review of the Tenth District’s decision.

In today’s decision, Justice Cupp noted that both the trial court and Tenth District incorrectly based their rulings largely on the legal reasoning of the Ohio Supreme Court’s 2009 decision in Ohio Grocers Assn. v. Levin, which held that application of the CAT to the gross receipts of grocery stores did not violate a constitutional provision that prohibits the imposition of state sales or excise taxes on food. Justice Cupp wrote that in Ohio Grocers, the court pointed to specific wording in the constitutional provision addressing food taxes that limited the prohibition to “excise” or transactional taxes on the sale or purchase of food, but did not bar a “franchise” or “privilege of doing business” tax like the CAT that is imposed on most businesses without regard to what products or services they sell.

Justice Cupp wrote: “In Ohio Grocers, we held that the CAT was not a transactional tax, that is, a tax on the sale or purchase of food, as contemplated by the Ohio Constitution, and, therefore, it did not violate the constitutional prohibitions against sales or excise taxes on food. ... The distinction between transactional and privilege-of-doing-business taxes that was central to the Ohio Grocers decision does not apply here.”

Noting that the language of Article XII, Section 5a addressing motor vehicle fuel taxes broadly applies to all taxes “relating to ... fuels used in propelling ... vehicles,” Justice Cupp wrote, “Section 5a explicitly prohibits the expenditure of revenue derived from excises on motor-vehicle fuel for any purpose other than highway purposes. Because R.C. 5751.20 (one of the provisions of the CAT legislation) credits revenue collected from excise taxes on motor-vehicle fuel to purposes other than highway purposes, that provision of the CAT is unconstitutional.”

In determining that today’s ruling should be applied only to future allocations of CAT revenues from the receipts of motor vehicle fuel sales, Justice Cupp noted that “(t)he taxpayers affirm that they do not seek, and do not claim as part of the relief sought from this court, any refund of taxes they have paid pursuant to the CAT relating to motor vehicle fuel.  Nor do they seek an order requiring the state to replenish moneys derived from the CAT relating to motor-vehicle fuel that have already been expended for non-highway purposes. The tax commissioner specifically contends that should this court hold that the revenue derived from the CAT may not constitutionally be expended except as allowed by Sec. 5a, the appropriate remedy is to prospectively enjoin the expenditure of the revenue until the General Assembly acts to remedy the statutory defect.”

“(T)he taxpayers assert that approximately $140 million per year is diverted from public-highway purposes to general revenue funds by the application of the CAT statute.  The fiscal effect of reallocating other state revenue to replace money that has been expended for nonhighway purposes would have a significant, consequential, and negative impact on the state’s fiscal footing, which has been under sustained stress for several years during the course of the economic recession. ... Moreover, prospective application promotes equity to the extent that the CAT revenue previously collected and expended by the state is not subject to any refund requests by aggrieved taxpayers, including appellants or any others with claims pending. In this manner, all taxpayers are treated the same, and there is no unequal treatment between similarly situated taxpayers.”  

Justice Cupp concluded by noting that the contractors and county engineers who brought this action had appealed two other aspects of the trial court’s decision, but those assignments of error were not addressed by the court of appeals based on its threshold finding that application of the CAT to receipts from fuel sales  was not unconstitutional.  In light of today’s ruling overturning the Tenth District’s ruling on that issue, the court remanded the case to the court of appeals for consideration of  the appellants’ remaining assignments of error.

Justice Cupp’s opinion was joined by Chief Justice Maureen O’Connor and Justices Evelyn Lundberg Stratton, Judith Ann Lanzinger and Yvette McGee Brown. Justice Paul E. Pfeifer concurred in judgment only.  Justice Terrence O’Donnell dissented without opinion.

Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.

2011-1536. Beaver Excavating Co. v. Testa, Slip Opinion No. 2012-Ohio-5776.
Franklin App. No. 10AP-581, 2011-Ohio-3649.  Judgment reversed and cause remanded.
O’Connor, C.J., and Lundberg Stratton, Lanzinger, Cupp, and McGee Brown, JJ., concur.
Pfeifer, J., concurs in judgment only.
O’Donnell, J., dissents.

Video clip View oral argument video of this case.

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