The Ohio 10th District Court of Appeals today unaimously reversed the trial judge's decision in the case about the unconstitutionality of Ohio's Commercial Activities Tax (CAT) [update] as it applies to the sale of food [/update]. I was an expert witness for the plaintiff and took the position that the CAT was an excise tax on food (and therefore unconstitutional under Ohio's Constitution.) The trial judge rejected my argument and ruled against the plaintiff in summary judgment. Among the arguments cited today, the District Court echoed my view explicitly in paragraphs 21 and 25:

{¶21} Even setting nomenclature aside and focusing on the operation of the CAT, we reach the same conclusion. Though appellee suggests the CAT is a franchise tax and is not equivalent to a sales or transactional tax, by its very operation when applied to gross receipts derived from the sales of food, a transactional tax is precisely what the CAT becomes. This is so 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.

{¶25} However, while in these cases it was deemed permissible to include certain tax exempt properties and incomes when determining an entity's tax liability, it is important to note that the tax exempt property or income was not the only measure of tax liability since the tax liability was based on an entity's net worth. Here, the sole factor being used to determine tax liability is gross receipts, which is simply a group of individual sales or transactions. A tax exempt transaction is not just a factor being considered to determine tax liability, rather before us, a tax exempt transaction is the only factor being used to determine tax liability. Though the United States Supreme Court has upheld franchise taxes "measured by a yardstick" which includes tax-exempt income or property, in the case sub judice, the "yardstick" is comprised solely of transactions that include food sales that are constitutionally prohibited from being taxed.

[Update: Governor Strickland's office says the state will appeal.]