In a decision rendered on September 2, 2008, the Ohio Court of Appeals (the "Court") held that, as it applies to gross receipts from certain food sales, Ohio's new Commercial Activity Tax (CAT) violates the state constitution. Ohio Grocers Ass'n v. Wilkins,2008-Ohio-4420. Ohio lawmakers adopted the CAT as the centerpiece of a sweeping tax reform package enacted in 2005. In general, the CAT is imposed on gross receipts from (among other things) sales of tangible personal property received by purchasers in Ohio. In Ohio Grocers, a group of food sellers challenged the constitutionality of the tax insofar as it applied to certain wholesale and retail sales of food.
The Ohio Constitution prohibits the state from imposing any excise tax on wholesale food sales or retail sales of food for human consumption off the premises where the food is sold. In this case, the food sellers argued that, as it applied to their sales, the CAT is an illegal excise tax because the tax requires them to use gross receipts to determine tax owed. The State countered that the CAT is not an excise tax on individual sales but rather a franchise tax imposed on the privilege of doing business in Ohio. The trial court concluded that the CAT is a franchise tax, which it described as a form of excise tax, but upheld its constitutionality on grounds that the tax is not a prohibited transactional or sales tax.
The Court reversed its decision, focusing on the nature and operation of the tax, rather than on its statutory nomenclature (i.e., as a tax imposed "for the privilege of doing business" in Ohio). The Court held that the CAT in its application to the sale of food is indeed operating as an excise tax. In relevant part, the Court opined:
…by its very operation when applied to gross receipts from the sale of food, the CAT becomes a transaction tax because the tax is measured solely by gross receipts and is based on aggregate sales, including those from the sales of food. Because the CAT is not based on each transaction or each individual sale, appellee contends the CAT is constitutional. However, though not based on individual sales at the time they are made, the CAT is merely based on the aggregate of all sales within a specified time frame. If the legislature is prohibited from collecting a tax on the individual sale, it logically follows the legislature would be prohibited from collecting a tax on the aggregate of those same sales.
The Court, thus, held that when applied to gross receipts from the wholesale sale of food and from the retail sale of food for human consumption off premises where sold, the CAT operates as, and is, an excise tax levied or collected upon the sale or purchase of food, which is prohibited by Sections 3 and 13 of Article XII of the Ohio Constitution. The judgment of the trial court was reversed and the cause remanded for further proceedings consistent with this opinion. The decision could be appealed to the Ohio Supreme Court.