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Economic Incidence: Consumers May Not Remit Ohio’s Tax on Grocery Sales, But They Pay It

13 min readBy: Justin Burrows, Maurice Thompson, Joseph Bishop-Henchman

Download Tax Foundation-Buckeye Institute Brief – Ohio Grocers Association v. Wilkins – Ohio Supreme Court

Executive Summary
With the Buckeye Institute for Public Policy Solutions, the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation co-authored a brief filed in the case of Ohio Grocers’ Association v. Wilkins, pending before the Ohio Supreme Court. The case involves Ohio’s constitutional prohibition against excise taxes on food and whether Ohio’s new Commercial Activities Tax (CAT), a gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. imposed on sales but remitted by the seller, violates that provision.

The Buckeye Institute/Tax Foundation brief reviews how excise taxes operate, and emphasize that the court should look at who bears the burden of the tax, not just whomever the legislature made responsible for remitting it. Because gross receipts taxes like the CAT impose hidden tax burdens on the purchase of products like groceries, and because the constitutional provision is designed to prevent such burdens, the brief concludes that the CAT as applied violates the Ohio Constitution.

The CAT and the Constitution
In 2008, Ohio residents paid 10.4% of their income in state-local taxes, 7th highest in the United States. The state ranks 47th worst in business friendliness, according to the Tax Foundation’s 2009 State Business Tax Climate Index. The state has steadily risen to a high-tax burden state despite being a low-tax burden state not too long ago (in 1977, the state ranked 45th in state-local tax burden).

In response to lackluster economic growth attributed to the tax burdens, Ohio set out to reshape its tax system in 2005 while raising additional revenue. The net result was a package that neither improved the state’s tax burden nor business tax climate. Ohio’s high individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rates were reduced in phases and business taxes on inventory and net worth were eliminated, but the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. was increased and the state adopted a problematic new gross receipts tax: the CAT.

The CAT is levied on a business’s gross receipts-that is, the total revenue the firm receives from the sale of its products or services. Under the previous corporate franchise tax, a company would pay tax either on its net income (revenue minus expenses) or its net worth (book value of its capital surplus). By contrast, gross receipts taxes lead to harmful “tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. ” (layers of taxes on taxes).

Article XII, Section 13 of the Ohio Constitution authorizes the General Assembly to enact “excise and franchise taxes” but provides that “no excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. shall be levied or collected upon the sale of purchase of food for human consumption off the premises where sold.” Furthermore, it states that “no sales or other excise taxes shall be levied or collected upon any wholesale sale or wholesale purchase of food for human consumption, its ingredients or its packaging.” These provisions were “aimed at ‘consumer’ purchases” and were intended to prohibit the levying of taxes and their burdens “upon food purchased by the public at the grocery store.”[1]

The question before the Court is whether the CAT violates this provision.

Determining Whether a Charge is a Tax Depends on Type and Effect, Not Labels
The state argues that the CAT is not an excise tax, in part relying on the legislature’s decision to describe the CAT as a “franchise tax.” State and federal courts, including Ohio’s, have historically looked beyond such labeling, instead examining how the charge actually operates. As Justice Brandeis wrote for the U.S. Supreme Court in 1921, “[t]he name by which the tax is described in the statute is, of course, immaterial.”[2] Since that time, a litany of federal courts have reached this same conclusion: when ascertaining the nature or character of a tax, its “substance,” “incidence,” “operation,” “essential nature,” and “real object purpose and result,” are determinative (see full brief for a list of citations).

Courts of other states also look to the substance of a tax when analyzing its type, nature, and constitutionality. These courts hold that “the true economic impact of a tax is what ultimately determines its nature.”[3] Another clear expression of this principle, in the analogous tax/fee analysis, is as follows: “[t]he tax/fee question is a legal determination, based on an independent review of the facts and regardless of the terminology used by the government.”[4]

Ohio courts have followed this line of reasoning. In 1952, in State, ex rel. Gordon, v. Rhodes, the Ohio Supreme Court scrutinized whether revenues derived by a municipality from on-street parking meters were taxes or fees.[5] The court ruled that “[w]e recognize that simply labeling an assessment a fee does not preclude constitutional inquiry by this court. While there is no single dominant factor that mandates finding that the assessments are fees, a number of pertinent facts, taken in the aggregate, are persuasive.”[6] The court further concluded that “[w]e must examine the substance of the assessments and not merely their form.[7]

In 1978, the Ohio Supreme Court disregarded the label affixed by a local legislature that sought to cast unlawful taxes as lawful fees.[8] The Court looked to the operative effect and result of the charge in establishing the rule that “[w]ater charges that exceed the cost of the service constitute taxes.[9] In 1990, the Supreme Court of Ohio yet again established a tax/fee distinction based upon the substance of the charge: “a ‘fee’ is in fact a ‘tax’ if it exceeds the ‘cost and expense’ to government of providing the service in question.”[10]

An Analogy with Florida’s Prohibition of Income Taxation
Ohio argues that it may impose a “privilege of doing business in Ohio” tax that is measured by the amount of food sold, and that it may do so without violating the constitutional proscription against sales and excise taxes on food. A simple illustration demonstrates this position to be subterfuge: imagine that Ohio’s Constitution contained an absolute prohibition on income taxation, and that the tax commissioner sought to levy a tax on the “privilege of living in Ohio, as measured by income.” Would anyone seriously entertain the argument that such a tax was anything other than an income tax?

In Florida, where taxation of income is prohibited by the state constitution, the courts look beyond labels to the substance of a tax. In the 1930s, the City of Tampa attempted to impose a “licensing fee” on attorneys as measured by the attorney’s income.[11] The provision in dispute, much like the Ohio CAT, imposed a graduated tax, measured by earnings. The Florida Supreme Court concluded that “the receipts, either net or gross, cannot be classified as an excise tax, sales tax or tax on the privilege of practicing law within the meaning of Section 11 of Article IX whereby it is unlawful to levy on the income of citizens or residents of Florida on the part of the State of Florida.”[12]

Just as Tampa’s “license tax as measured by income” amounted to an unconstitutional income tax, Ohio’s “tax on the privilege of doing business in Ohio as measured by gross receipts” is unconstitutional as applied to food. Tax receipts collected from Ohio grocers are a direct product of the amount of food sold by Ohio grocers.

The History of Excise Taxes Demonstrates that the CAT is an Excise Tax
The Tax Commissioner’s recitation of the history of Ohio’s excise taxes[13] is incomplete. It neglects to note the historically disfavored status of excise taxes in the United States of America, and the historical recognition that any tax that ostensibly results in the consumer paying a higher price is an excise tax. The English Parliament first imposed excise taxes on items such as liquor, tea, coffee, soap, and salt in 1641, during the English Civil War, as a temporary measure.[14] Parliament later infamously expanded such excise taxes to the American Colonies, thereby precipitating the American Revolution.[15] Because such taxes impacted the price of commodities, they were greatly unpopular: famous writer Samuel Johnson defined “excise” in his Dictionary of the English Language as “a hateful tax levied upon commodities, and adjudged not by common judges of property, but by wretches hired by those to whom the excise is paid.”[16]

The first excise tax adopted by the United States government-indeed, the first federal tax of any kind-was the excise tax on whiskey adopted in 1791. Following the suppression of the Whiskey Tax Rebellion in 1794, where farmers had refused to pay the tax, additional taxes were imposed on carriages (1794), and later liquor, snuff, sugar refining, auction sales, and salt.[17]

Mostly repealed by the Jefferson Administration, federal excise taxes were readopted and expanded in scope during the War of 1812, the Civil War, the Spanish-American War, World War I, the Great Depression, World War II, and the Korean War, leaving the federal system primarily with major excise taxes on liquor, tobacco, and gasoline, and minor ones on other items (such as transportation facilities). These taxes are recognized, in light of the above history and understanding, to be excise taxes, even though they often tax the producer of the product directly, and therefore the consumer, indirectly.

Historically, excise taxes (or sometimes simply “excises”) are a class of taxes distinct from property taxes, income taxes, and poll taxes.[18] The United States Supreme Court has clarified that excise taxes are imposed on “consumption” (the purchase of commodities) but generally not remitted directly by the consumer: “[e]xcise is defined to be an inland imposition, sometimes upon the consumption of the commodity, and sometimes upon the retail sale; sometimes upon the manufacturer, and sometimes upon the vendor.”[19]

The CAT levies a monetary imposition upon vendors of food, and ostensibly, upon consumers. By legal definition, it is thus an excise tax.

Principles of Economics Dictate That the CAT is an Excise Tax
Excise taxes may be imposed in the form of general excise taxes (such as Hawaii calls their sales taxes) or selective excise taxes (e.g., taxes on the sale of particular products). Most sales taxes purport to tax the universe of consumption less exclusions, although the net result is that few sales taxes apply to even a majority of goods and services.[20] Whether the tax starts by taxing everything and subtracts items out (such as with general sales taxes or gross receipts taxes, including the CAT), or lists each item individually (as in selective excise taxes), it falls under the category of excise taxation. Typically, an excise tax is not paid directly by the consumer to the government. Even though excise taxes are legally remitted by a collector, their cost is substantively borne, at least in part, by consumers of the taxed good or service.[21]

All taxes are paid by people, regardless of who physically remits the check to the government. The actual economic incidence of taxes remitted by businesses falls upon one of three categories of actors: (1) owners or shareholders, in the form of reduced profits; (2) employees, in the form of lower wages; and (3) consumers, in the form of higher prices.[22]

Gross receipts taxes “tax all transactions” that generate the revenue that is used to determine the taxpayer’s liability.[23] Just as with excise taxes, “gross receipts taxes have long been recognized as being non-neutral,” in that they “distort the composition of goods produced in the economy, as well as the structure of firms that provide them.”[24] In other words, gross receipts taxes impose additional costs on the commodities or services that they are levied against, forcing the market to compensate for those additional costs and resulting in an allocation of that tax burden. It is generally accepted that the burden of a tax will typically fall “on those least able to alter their behavior in response to the tax.”[25]

Here, consumers are least able to alter their behavior in response to the tax. It is impossible for lawmakers to craft an economically neutral gross receipts tax that will somehow not impact consumers involved in the taxed transactions. As a tax that substantively applies to Ohio grocers’ sales of food, the CAT increases the cost of completing those individual transactions, and thus passes higher prices on to the consumers.

The purpose of Ohio’s constitutional prohibition against levying excise taxes on the sale of food was to leave food free from taxation, and the increased financial burden imposed by the CAT violates that intended purpose. If Ohio’s constitutional prohibitions were “aimed at ‘consumer’ purchases” and were intended to prohibit the levying of taxes and their burdens “upon food purchased by the public at the grocery store,”[26], then the CAT undermines that purpose as well.


[1] Cameron Coca-Cola Bottling Co. v. Tracy (July 28, 1993), Franklin Co. C.P. 93CVH02-729 (Ex. 20, Appx. at A-178) at 25.

[2] Dawson v. Kentucky Distilleries & Warehouse Co., 255 U.S. 288, 292 (1921).

[3] Owens v. Fosdick, 153 Fla. 17, 13 So.2d 700 (1943); State ex rel. McKay v. Keller, 140 Fla. 346, 191 So. 542 (1939).

[4] Issac v. City of Los Angeles (1988), 66 Cal.App.4th 586, at 596.

[5] State, ex rel. Gordon, v. Rhodes (1952), 158 Ohio St. 129, 48 O.O. 64, 107 N.E.2d 206.

[6] State, ex rel. Petroleum Underground Storage Tank Release Comp. Bd. v. Withrow (1991), 62 Ohio St.3d 111, 579 N.E.2d 705.

[7] State, ex rel. Petroleum Underground Storage Tank Release Comp. Bd. v. Withrow (1991), 62 Ohio St.3d 111, 579 N.E.2d 705, citing Shkurti, supra, 32 Ohio St.3d at 428, 513 N.E.2d at 1336. Emphasis Added.

[8] Cincinnati v. Roettinger (1922), 105 Ohio St. 145.

[9] Cincinnati v. Roettinger (1922), 105 Ohio St. 145.

[10] Granzow v. Bur. of Support of Montgomery Cty. (1990), 54 Ohio St.3d 35, 38.

[11] State ex rel. McKay v. Keller, 140 Fla. 346, 191 So. 542.

[12] Id.

[13] Appellant’s Brief, pp. 6-8.

[14] See, e.g., Brenda Elvington, “Excise Taxes in Historical Perspective,” in William F. Shughart II, Taxing Choice: The Predatory Politics of Fiscal Discrimination 33 (1997).

[15] Id.

[16] Samuel Johnson, Dictionary of the English Language (1785).

[17] See Elvington, “Excise Taxes in Historical Perspective,” 34-35.

[18] Cf. Hylton v. United States, 3 U.S. 171, 176 (1796) (Iredell, J., seriatim op.) (classifying federal taxes into the categories of (1) “direct taxes” on people or property, (2) “duties, imposts, and excises” on “articles,” and (3) other indirect taxes); Brushaber v. Union Pac. R.R. Co., 240 U.S. 1, 10-11 (1916) (describing the income tax as a “hitherto unknown power of taxation” but a direct taxA direct tax is levied on individuals and organizations and cannot be shifted to another payer. Often with a direct tax, such as the personal income tax, tax rates increase as the taxpayer’s ability to pay increases, resulting in what’s called a progressive tax. on individuals).

[19] Pacific Ins. Co. v. Soule, 74 U.S. 433, 445 (1868), citing Bateman’s Excise Law, 96; 1 Story’s Constitution, § 953; 1 Blackstone’s Commentary, 318; 1 Tucker’s Blackstone, Appendix, 341. See also Saviers v. Smith, 101 Ohio St. 132, 137-138 (Ohio 1920) (defining excise tax as “a tax imposed on the performance of an act,” the “engaging in an occupation, or. . .the enjoyment of a privilege.”). Emphasis added.

[20] See John L. Mikesell, State Retail Sales Tax Burdens, Reliance, and Breadth in Fiscal 2003, State Tax Notes 125 (Jul. 12, 2004) (estimating that the median state sales tax in the U.S. applies to 43.3% of consumption, with Ohio’s applying to 39.5% of consumption).

[21] See generally John R. McGowan, Excise Taxes and Sound Tax Policy, Tax Foundation Background Paper No. 18 at 4 (May 1997), available at

[22] See, e.g., John Mikesell, Gross Receipts Taxes in State Government Finances: A Review of Their History and Performance, Tax Foundation Background Paper No. 53 (Jan. 2007), available at

[23] See generally Andrew Chamberlain, Patrick Fleenor, Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes, Special Report No. 147, Tax Foundation, Dec. 2006 available at

[24] Special Report No.147 at 6; see also John R. McGowan, Excise Taxes and Sound Tax Policy, Tax Foundation Background Paper No. 18 at 6 (May 1997), available at (stating that excise taxes inherently impose additional burdens on participants in competitive markets).

[25] Tax Foundation, Fiscal Fact No. 101: Q & A on Carried Interest Debate, Sept. 7, 2007 available at

[26] Cameron Coca-Cola Bottling Co, (July 28, 1993), Franklin Co. C.P. 93CVH02-729 (Ex. 20, Appx. at A-178) at 25.