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Ohio Appellate Court Holds Commercial Activity Tax (CAT) on Food Products to be Unconstitutional

In a judgment rendered on September 2, 2008, by the Court of Appeals of Ohio in Ohio Grocers Association et al. v. William W. Wilkins in His Official Capacity as Ohio Tax Commissioner (Ohio), the Ohio CAT was held unconstitutional as it applies to gross receipts from the wholesale sale of food and from the retail sale of food for human consumption off premises.

In 2005, the Ohio legislature enacted a series of tax revisions, one of which was the CAT. The CAT has been in effect since June 30, 2005. The CAT is a gross receipts based tax imposed on gross receipts from the sale of tangible personal property received by purchasers in Ohio.

The grocers challenged the constitutionality of the CAT as applied to sales of certain food products. They argued that the CAT violated two Ohio constitutional provisions, Section 3 and 13 of Article XII: These provisions do not allow Ohio to impose excise and franchise tax on retail sale of food for human consumption off premises as well as any sales or other excise taxes on the wholesale sale of food. The trial court concluded that the CAT is a franchise tax, describing it as a form of "excise tax." However, the trial court upheld the constitutionality of the CAT on certain food products, on the grounds that the tax is imposed on the privilege to do business in Ohio and is not a tax imposed on individual sales. Though gross receipts measures the amount of tax owed, Ohio argued that it does not convert the franchise tax into a transactional one and thereby implicates the constitutional provisions.

The appeals court reversed this decision and held that the CAT, in its application to the sale of food, is indeed operating as an excise tax and is therefore in violation of Sections 3 and 13 of Article XII of the Ohio Constitution. The court determined, in relevant part:

" ... the CAT becomes a transaction tax because the tax is measured solely by gross receipts and is based on aggregate sales including those from sales of food ... " the CAT is merely based on the aggregate of all sales within a specified time frame. If the legislature is prohibited from collecting a tax on the individual sale, it logically follows that the legislature would be prohibited from collecting a tax on the aggregate of the same sales."

It is expected that Ohio will appeal this decision.

For more information, please contact Jason Parish at jparish@BlackmanKallick.com or 312-980-2959, or your Blackman Kallick representative. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.