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November 10, 2020

Ohio Supreme Court upholds constitutionality of centralized filing and administration of municipal net-profits tax

In City of Athens v. McClain,1 the Ohio Supreme Court (Court) held that the Ohio General Assembly was authorized to enact the centralized system for filing and administering municipal net-profits taxes, but the 0.5% fee retained by the Ohio Department of Taxation (Department) for administering those taxes was unconstitutional.


In 2017, the Ohio General Assembly enacted House Bill 49 (HB 49), allowing businesses to elect to file a single municipal net-profits tax return via a centralized filing system administered by the Department. A taxpayer using the centralized system can file a single return, covering all municipalities in which it is required to file, through the Ohio Business Gateway. The Department handles all administrative functions for the returns and distributes funds, less a statutorily authorized 0.5% administrative fee, to the appropriate municipalities. The first year that taxpayers could use the centralized system was 2018.

Groups of municipalities filed separate lawsuits arguing that the state's adoption of the centralized system impermissibly limited or interfered with the municipalities' right to self-govern. Article XVIII, Sections 3 and 7 of the Ohio Constitution (the Home Rule Amendment) authorizes municipalities to adopt or amend a charter for their government and to exercise all powers of local self-government. In prior decisions, the Court identified taxation as one of those powers of self-government delegated to municipalities.2 Section 13 of Article XVIII of the Ohio Constitution, however, authorizes the Ohio General Assembly to limit the power of municipalities to levy taxes for local purposes.3

Centralized system upheld, administrative fee found unconstitutional

The Court held that enacting the centralized filing and administration system was within the Ohio General Assembly's power to limit or restrict the municipalities' power of taxation. The Court rejected the municipalities' argument that the state could prevent municipalities from imposing a specific tax, but could not prevent them from determining taxpayer liabilities and collecting taxes under a validly enacted municipal tax. Instead, the Court concluded that the term "levy" bears a broader, rather than a more restrictive, meaning and, as such, refers to administrative as well as legislative acts. Moreover, the Court concluded that the centralized system was within the Ohio General Assembly's authority to "limit" the municipalities' power of taxation.

While upholding the validity of the centralized system, the Court found the provision allowing the Department to retain a 0.5% administrative fee unconstitutional because this authorization was not a limitation or restriction of the municipalities' power of taxation. The Court, however, determined that the fee provision was severable from the other provisions in HB 49. Accordingly, the Court's invalidation of the administrative fee did not invalidate the rest of HB 49, including the centralized system.


Prior to the centralized system, the costs of filing returns for some businesses exceeded the tax that was being reported to an individual municipality. The centralized system was enacted to reduce compliance costs by filing a single return instead of filing returns with many individual municipalities. The Court's decision gives businesses certainty about the validity of the centralized filing and administration system.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Bill Nolan (


1 City of Athens v. McClain, Slip Opinion No. 2020-Ohio-5146 (Ohio Nov. 5, 2020).

2 See e.g., Cincinnati Bell Tel. Co. v. Cincinnati, 81 Ohio St.3d 599 (1998).

3 Ohio Const., Art. XVIII, sec. 13 ("Laws may be passed to limit the power of municipalities to levy taxes and incur debts for local purposes, and may require reports from municipalities as to their financial condition and transactions, in such form as may be provided by law, and may provide for the examination of the vouchers, books and accounts of all municipal authorities, or of public undertakings conducted by such authorities.")