Ohio court rejects business tax on fuel sales

ANDREW WELSH-HUGGINS AP Legal Affairs Writer Published:

COLUMBUS, Ohio (AP) -- The application of the state's updated business tax to gasoline sales is unconstitutional, the Ohio Supreme Court ruled Friday as it accepted arguments that the tax is wrongly diverting $140 million annually from fuel sales to non-roadwork accounts for schools and cities.

Builders, contractors, construction companies and engineers had sued over the tax, claiming that Ohio voters have repeatedly rejected the notion of diverting taxes raised from fuel sales to non-road work.

The court said in a 6-1 decision that the Commercial Activity Tax cannot be applied to companies that make money selling fuel. They came to a different conclusion three years ago in a similar lawsuit brought by grocers over the tax's application to grocery store food sales.

The Ohio Constitution "explicitly prohibits the expenditure of revenue derived from excises on motor-vehicle fuel for any purpose other than highway purposes," Justice Robert Cupp wrote for the majority.

Groups opposed to the tax had argued the Ohio constitution bars money raised from the sale of fuel from being used on anything but highway upkeep.

"The diversion of any of these excise taxes undermines the will of the people to preserve the Motor-Vehicle-Fuel-related excise tax base for public road repair and construction," Anthony Ehler, an attorney representing both construction companies and county engineers whose budgets rely on fuel taxes, said in a March 20 court filing.

At issue is a 2005 rewrite of Ohio's tax code that taxes a wide variety of business activity, not just a company's revenue.

Lawmakers approved the tax as an alternative to the state's former business tax, which was criticized as having high rates but numerous loopholes -- it was sometimes dubbed a "Swiss cheese" approach -- that reduced its ability to raise revenue.

The new tax is low -- 0.26 percent -- but is applied to as many businesses as possible with fewer exemptions.

The debate doesn't involve the 28-cent state gasoline tax, whose revenues are distributed automatically to the state, counties and local governments for road work.

The state argued that the CAT is not on gasoline itself, but on companies that make money selling fuel. It also said opponents of the tax are disguising their objections to paying it "as a crusade to save highway spending."

"The CAT relates to doing business, and it does not 'relate to' motor fuels any more than it relates to selling food, widgets, or anything else," Stephen Carney, an assistant Ohio attorney general, said in a May 9 filing with the court.

In 2009, the court ruled the state could continue to collect the same tax when it's applied to grocery store food sales. In a 6-1 decision, the court upheld the collection of the CAT on food sold by grocery stores and others for off-site consumption. The Ohio Grocers Association had argued that applying the tax to food sales violated the state constitution, which prohibits sales tax on the sale of food that's taken off store premises to eat.

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Andrew Welsh-Huggins can be reached on Twitter at https://twitter.com/awhcolumbus.