Detailed Ohio Development
The Ohio First District Court of Appeals recently addressed whether a City of Cincinnati tax ordinance, which set forth the requirements for filing consolidated City income tax returns, was preempted by a state statute. The taxpayer filed an amended consolidated Cincinnati income tax return, which included the taxpayer and its various subsidiaries. After reviewing the amended return, the City assessed additional income tax on the basis that certain subsidiaries included in the consolidated return were not doing business in the City, and thus should not have been included in the consolidated return. After a local review board held in the City’s favor, the taxpayer appealed. The Ohio Board of Tax Appeals ruled that the City was required under state law to accept a consolidated return that included all members of an affiliated group and not just those members that were subject to the City income tax. The City appealed.
The Ohio statute in effect for the tax years at issue provided that a municipality imposing an income tax on corporations must accept a consolidated income tax return from any affiliated group of corporations if the affiliated group filed a consolidated return for federal purposes pursuant to IRC section 1501. Under the Cincinnati ordinance in effect at the time, an affiliated group that filed a federal consolidated return was allowed to file a City consolidated return, but only corporations subject to tax by the City were to be included in the City consolidated return. The City’s regulation further clarified that a consolidated return included only those members of an affiliated group that were conducting business in the city. At the outset, the court observed that although Cincinnati was a home rule jurisdiction, which is a self-governing authority with the power to tax, the City’s taxing powers were limited by the Ohio Constitution and the General Assembly. If the General Assembly exercised is power to limit or restrict the home rule jurisdiction, it must do so expressly. Given this background, the question really became one of statutory construction and whether the state statute expressly limited the powers of the City. In the court’s view, it did. The state law specifically identified the type of consolidated returns Cincinnati must accept (i.e., those from an affiliated group that filed a consolidated federal tax return), and the City ordinance and regulation directly conflicted with the state statute when it limited inclusion in the group to only affiliates that were conducting business in Cincinnati. The court held that the State General Assembly took clear measures to limit the City’s authority to impose the income tax, and such action was an appropriate exercise of its constitutional power. The City also argued, in the alternative, that the state statute was impermissibly compelling the City to tax beyond its borders. The court disagreed, holding that “a municipality may act extraterritorially where granted such authority by statute.” For more information on Time Warner Cable, Inc. v. City of Cincinnati, please contact Brandon Erwine at 614-249-1877.
This Week's Developments
To view past weeks of TWIST that you may have missed, please visit our TWIST homepage.
To receive the TWIST e-mail each Monday, make sure that State and Local Tax is checked off as one of your topics of interest on the KPMG Tax subscription site.