Ohio: Court upholds centralized collection of municipal net profit tax

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The municipal net profit tax is a local income tax levied on the net profit of businesses. Historically, each municipal corporation that imposed a tax administered it either directly or through a third party administrator. According to WHIO, this tax produces about $600 million annually in tax revenue.

Until last summer’s budget bill, H.B. 49, came along, businesses that operated in multiple municipalities had to file separate tax returns for each one. But now, thanks to H.B. 49 and related legislation, there is a state-administered alternative that taxpayers may elect for tax years beginning after Jan. 1, 2018. The new option allows taxpayers to elect to file a single, centralized municipal net profits tax return with the Ohio Department of Taxation that covers its total municipal net profits tax liability to all municipal corporations.  

The Department of Tax’s website contains a Municipal Net Profit Tax page explaining that registration for centralized filing is open, and as such, the department will “…handle all administrative functions for those centrally-filed returns and will distribute payments to the appropriate municipalities,” as well as audits and appeals.

Late last year, pursuant to the state legislation, approximately 130 Ohio municipalities sued Joseph Testa and Mike DeWine, the state’s tax commissioner and attorney general, respectively. As we described at the time, the complaint, filed in the Franklin County Court of Common Pleas on Nov. 16, 2017, alleged that the municipal income tax provisions contained in H.B. 49, as well as certain enforcement provisions contained in H.B. 5, which became law in 2015, unconstitutionally infringe upon local control over taxation. This, they alleged, deprives the plaintiffs of a portion of their own tax revenues. Twenty-two other municipalities filed suit in Lorain County Court of Common Pleas, but the state successfully transferred venue to Franklin County Court of Common Pleas in February 2018.

The court’s analysis

In the case initially filed in Franklin County, the court issued a decision on Feb. 21, 2018 upholding the centralized reporting regime and ruling in favor of the State on all counts.  The municipalities did not waste any time appealing, and quickly filed their notice of appeal to the Franklin County Court of Appeals on Feb. 27, 2018.


In its analysis, the Franklin County Court of Common Pleas first addressed whether the centralized collection provisions violate municipalities’ home rule authority, which is set forth in Article XVIII.03 of Ohio’s Constitution. The section provides that “[m]unicipalities shall have authority to exercise all powers of local self-government and to adopt and enforce within their limits such local police, sanitary and other similar regulations, as are not in conflict with general laws.”


Quipped the court: “From just reading this section, it would seem that Plaintiffs have a good point. Unfortunately for Plaintiffs, the Court cannot stop here.” It pointed to case law establishing that “[t]he Home Rule Amendment is not absolute,” which requires it to look to two other sections of the state constitution.

The first is Article XII.05 concerning the levying of taxes: “No tax shall be levied, except in pursuance of law; and every law imposing a tax shall state, distinctly, the object of the same, to which only, it shall be applied.”

The second is Article XVIII.13, pertaining to taxation, debts, reports, and accounts: “Laws may be passed to limit the power of municipalities to levy taxes and incur debts for local purposes, and may require reports from municipalities as to their financial condition and transactions, in such form as may be provided by law, and may provide for the examination of the vouchers, books and accounts of all municipal authorities, or of public undertakings conducted by such authorities.”

To the court, these provisions “make[] it clear that all taxes must be levied…pursuant to the law. Furthermore…the general assembly has the power to pass laws to limit the power of municipalities to levy taxes.”

On this reasoning, the court concluded that it “must rule in Defendants’ favor. It is undisputed that the [c]ollection [p]rovisions deal with Ohio municipalities’ ability to administer taxes, i.e. their ability to levy taxes. Plaintiffs can argue the definition of the word ‘levy’ until [they are] blue in the face, but using common sense the Court can only find that the Collections deal with the levying of taxes.”

The court then dispensed with a separate theory, which attacked HB 49 for violating the single subject rule. This, contained in Article II.15(D) of the state constitution, says that “[n]o bill shall contain more than one subject, which shall be clearly expressed in its title...” The court determined that the collection provisions have a “logical and natural connection to the subject matter of HB 49, i.e. appropriations. Plaintiffs’ single subject challenge fails.”

Other allegations asserted that the provisions:

  • Impair contractual relationships and obligations.
  • Constitute a wrongful exercise of dominion over property to the exclusion of the rights of the owner and a governmental taking of tax revenues without just compensation.
  • Deprive the plaintiffs of property through confiscation and loss of tax revenue.

With respect to this “plethora of other legal theories,” the court concluded that because “[e]verything comes down to whether the general assembly has the power or it doesn't,” these arguments “los[e] merit.”


Some observers may characterize the “commonsense” underpinnings of the court’s home-rule analysis, as somewhat less than rigorous legal reasoning but ultimately the correct result. More critically, the executive director of the Ohio Municipal League, Kent Scarrett, laments the .05 percent processing fee that the state will charge municipalities when taxpayers take advantage of central filing. This, he contends, “amounts to forcing cities to pay for a service they don’t want,” reported WHIO.


Scarrett also worries about accuracy, because municipalities will not be able to review or audit the filings. “Once you control the revenue you control a lot of aspects of what happens…It’s the state taking over… eclipsing the powers of our local communities and the decisions they can make.”


Scarrett told WHIO that cities are planning to appeal.

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