Top court hears from both sides on grocers’ tax

The case is batting .500 in the lower courts with one win and one loss.

COLUMBUS — The Ohio Supreme Court will decide whether grocery stores should continue to be forced to pay a tax on food sales, in a closely watched case that has implications for the state’s already-tight budget.

The grocers say the state does not have authority to impose its commercial activity tax, or CAT, on their gross sales, citing provisions in the Ohio Constitution prohibiting taxes on food.

“This court should reject the Legislature’s attempt to circumvent the constitution and uphold what it’s always said, that it is the substance of the tax that matters, not how it is labeled,” said Gerhardt A. Gosnell II, legal counsel for grocers, food wholesalers and the Ohio Grocers association.

But the state counters that the CAT is a franchise tax levied on all businesses for the privilege of operating in Ohio — and justices have consistently upheld such taxes as constitutional.

“The large portions of an entire industry would be pulled out of the [tax] base, and they would pay little or no tax,” said Attorney General Richard Cordray. “It would have to be made up elsewhere. And it is not what the Legislature intended, and others will follow with their challenges. They’re waiting to see the outcome of this case.”

CAT was instituted by lawmakers in 2005 as part of legislation that restructured Ohio’s business taxes.

Lawmakers phased out the corporate-franchise tax (essentially a tax for the privilege of doing business in the state) and tangible personal-property taxes (levied against machinery, equipment, furniture, inventory, etc., used by businesses).

In their place they created the CAT, which was like the corporate franchise tax but figured using gross annual receipts instead of a business’ net worth or profit. The goal of the CAT was to broaden the tax base and lower tax rates.

Businesses with gross annual receipts of $150,000 to $1 million pay a flat $150. Those with more than $1 million pay a percentage based on their total receipts; those with less than $150,000 pay nothing.

For fiscal 2010, the state has estimated CAT will generate about $1.4 billion in revenues. Grocery sales make up about $188 million of that total.

Cordray argued that the constitutional prohibition against food taxation focuses on a specific type of tax — sales taxes paid by consumers at the time of purchase. Ohioans do not pay sales taxes on food purchased for consumption off the premises.

He added that the court has ruled in multiple past cases that such taxes determined in like fashion to the CAT are constitutional.

But grocers filed suit against the CAT collections, saying that the tax against their gross business receipts amounted to a tax on food — something that is specifically prohibited in the state constitution.

“It is the tax on the purchase price of the goods,” Gosnell said. “That is exactly what the gross- receipts tax does.”

They hope to exclude food sales included in their gross receipts from future CAT collections and to force the state to refund past CAT payments they’ve made. The move would end up costing the state more than $700 million — an estimated $188 million from each year of the current biennium and $355 million in refunds.

A trial court found in favor of the state, but an appeals court reversed in favor of the grocers. The state’s high court heard arguments from both sides Tuesday and will issue its ruling in weeks to come.