Ohio Court Upholds Tax Applied To Food Sales

COLUMBUS, Ohio -- The Ohio Supreme Court ruled the state can continue to collect a business tax when it's applied to grocery store food sales, avoiding what could have been an $188 million annual hole in the state budget.

In a 6-1 decision, the court upheld the collection of the Commercial Activities Tax on food sold by grocery stores and others for offsite consumption. The Ohio Grocers Association had argued that applying the tax to food sales violated the state Constitution, which prohibits sales taxes on the sale of food that's taken off store premises to eat.

The tax amounts to 26 cents per $100 in sales over $1 million, or a flat rate of $150 for the first $1 million in sales, as long as sales are above $150,000. State tax officials estimate the portion of the tax collected on food receipts would amount to about $188 million a year.

Lawmakers have called the tax as one levied on the privilege of doing business in Ohio, but grocers argued the payment amounted to a sales tax.

The court rejected that argument, noting that state laws are given a strong presumption of constitutionality and that the court was required to uphold the tax if it may "plausibly be determined as permissible."

Writing for the majority, Justice Maureen O'Connor said the state Constitution does not prohibit the state from using a measurement - such as gross receipts - to determine how much in taxes a business should pay for the privilege of doing business.

Justice Paul Pfeifer was the lone dissenter, agreeing with the grocers' argument that the tax was like a sales tax on food.

"It is an incontrovertible fact that if a retailer has sales over $1 million and he sells an additional 40 gallons of milk at $2.50 per gallon, for a total of $100, a tax of 26 cents is levied upon him and the state collects 26 cents," Pfeifer wrote. "Is this not a tax 'levied or collected upon the sale or purchase of food?"'

The outcome represents Attorney General Richard Cordray's first victory arguing a case in the Ohio Supreme Court since he took office. It was also the first time he had argued a case himself since becoming attorney general.

Those opposed to the grocers' efforts feared that a ruling in their favor would lead to other successful industry challenges to the business tax, creating more consequences for the budget.

"I am thankful for the Supreme Court's decision, which protects the integrity of Ohio's reformed tax code and upholds the broad-based, low-rate structure that gives Ohio the lowest business taxes in the Midwest," Gov. Ted Strickland said in a statement Thursday.

The Commercial Activities Tax was enacted as part of a broad tax overhaul beginning in 2005 to replace a corporate franchise tax that had become riddled with loopholes and exemptions.

The tax was first collected in the 2006 fiscal year and will be fully phased in this fiscal year.

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