Applying Commercial Activity Tax to Receipts From
Motor Fuel Alleged Unconstitutional

Mark A. Engel
Bricker & Eckler LLP
March 2008

Full text of the complaint

A declaratory judgment action was filed in Franklin County Common Pleas Court, challenging the validity of the commercial activity tax ("CAT"). The Complaint alleges that under the Ohio constitution, proceeds from the CAT, as an excise tax on motor fuel, must be devoted to highway purposes only. Since the proceeds are devoted to the general revenue fund, it is claimed the tax violates this provision of the Ohio constitution. Beaver Excavating Co. v. Levin, Franklin Comm. Pl. No. 08CVH03-3921 (filed March 14, 2008).

The Complaint:  Ten of the 12 Plaintiffs include companies that generate gross receipts relating to fuel used to propel vehicles on public highways. The other two Plaintiffs are county engineers who allege that their budgets for road improvements depend, in part, on proceeds from taxes relating to motor fuel.

The CAT is imposed upon gross receipts from taxpayers with substantial nexus with Ohio. R.C. 5751.01 et seq. It is acknowledged that the tax is an excise tax imposed upon the privilege of doing business in Ohio under R.C. 5751.02. Although receipts from motor fuel were initially excluded from the CAT on a temporary basis, that temporary exemption expired on July 1, 2007, and was not renewed. The CAT, including that relating to gross receipts from motor fuel, is deposited into various state treasury funds, none of which relates to infrastructure improvements or safety on the public highways. R.C. 5751.20.

Ohio Constitution Art. XII, Section 5a provides that:

No moneys derived from fees, excises, or license taxes relating to . . . fuels used for propelling [vehicles on public highways], 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.

Plaintiffs allege the application of the CAT to receipts from motor fuel violates Section 5a, Art. XII, in that the CAT is an excise tax and because the moneys derived from the tax are not expended exclusively on the objects set forth in Section 5a.

Relief Sought:  Plaintiffs seek declarations that:

1. The CAT is an excise tax, such that applying it to motor fuel constitutes an excise tax relating to fuel used for propelling vehicles on public highways;

2. Section 5a, Art. XII, requires all moneys collected by the State from the CAT and relating to motor fuel can be expended only for the purposes set forth in Section 5a, Art. XII;

3. As it relates to motor fuel, the CAT is unconstitutional; and

4. The tax commissioner should be enjoined from levying, collecting or enforcing the CAT as it relates to motor fuel.

Discussion:  This is the second suit alleging that the CAT violated some provision of the Ohio Constitution relating to the imposition of excise taxes on certain products. In Ohio Grocers' Assn. v. Wilkins, Franklin Comm. Pl. No. 06CVH02-2273, the Plaintiffs alleged that the CAT was an excise tax imposed upon the sale of food consumed off the premises where sold, and on sales of various food products. It was claimed that Ohio Constitution Art. XII, Section 3(C) prohibits the imposition of an excise tax on the sale of food consumed off the premises where sold, while Art. XII, Section 13 prohibits the imposition of an excise tax on the sale of various food packaging materials.

In Ohio Grocers', the trial court first ruled that while the CAT is an excise tax, it is an excise on the privilege of engaging in business, and not on the sale of food or food packaging materials. The trial court observed that so long as the incidence of the tax was not imposed directly on the sale of food or food packaging, it did not run afoul of the prohibitions.

It noted that decisions of the Ohio Supreme Court recognized that an excise tax can be measured by receipts or income from the sale of food, so long as the excise being taxed was not the sale, itself. In the view of the trial court, a similar situation was presented with respect to the CAT. Since the privilege being taxed was that of engaging in business, the fact that the extent of the tax was measured in part from proceeds related to the sale of food did not violate the Ohio Constitution. That decision has been appealed to the court of appeals for Franklin County.

A similar situation is presented in the Beaver Excavating Company case. As noted by the Plaintiffs, the CAT is an excise tax imposed upon the privilege of doing business in Ohio. The question to be answered will be whether such an excise, to the extent it is measured by sales of motor fuel, violates Art. XII, Section 5a. Based on the Ohio Grocers' decision, one would think that question might be answered in the negative. However, it is only a trial court decision, and the court of appeals may reach a different conclusion before a decision is reached in this case.