Ohio Court Rules Gross Receipts Tax on Groceries Unconstitutional

September 19, 2008

Ohio’s Constitution prohibits excise taxes on the sale or purchase of food off premises (art. XII, sec. 3(C)), or wholesale or ingredients (art. XII, sec. 13).

The state recently adopted a statewide CAT gross receipts tax, with all the problems gross receipts taxes have. Back in 2006, we predicted that businesses would react to the pyramiding burden by seeking to carve out exemptions for particular industries and activities.

The Ohio Court of Appeals has now accomplished this, ruling that the CAT’s application to the sale and purchase of food violates the state constitution. The Court of Appeals rejected the state’s argument that the CAT was a “franchise tax” and not an excise tax. Like excise taxes, the CAT is imposed on each transaction and measured by receipts. The Court should be applauded for not merely relying on the label, but instead looking to how the tax operates.

CCH reports: “The court further noted that if the Legislature is prohibited from collecting a tax on the individual sale, it logically follows that the Legislature would be prohibited from collecting a tax on the aggregate of those same sales.”

The CAT is a problematic tax, but so is the state constitutional provision at issue. Exempting a huge class of economic activity from tax just means that the rate on what’s left has to be much higher. (In some states, we’ve estimated that exempting groceries from the sales tax adds a full percentage point to the sales tax on everything else.) If the concern is helping lower-income people buy food, there are more targeted ways of doing it than a wholesale exclusion of economic activity from tax. Food stamps and a food tax credit are less distorting options. Plenty of rich people buy groceries and plenty of poor people buy prepared food, so a grocery sales tax exemption doesn’t even accomplish the stated purpose.

More on Ohio here.

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