In Dollar Bank, FSB v. Harris,¹ the Ohio Supreme Court (court) affirmed an Ohio Board of Tax Appeals' (BTA) decision that upheld the Department of Taxation's (Department) denial of a financial institution's request for a refund of Financial Institutions Tax (FIT). The court held that Ohio's FIT "regressive rate" structure does not violate the Dormant Commerce Clause of the U.S. Constitution because it is internally consistent, does not result in double taxation, and does not discriminate against interstate commerce.

Ohio levies the FIT on banks and other financial institutions for the privilege of doing business within the state. The tax is computed by determining a financial institution's total equity capital based on its equity holdings, including stocks and retained earnings. Ohio equity capital is calculated by multiplying total equity capital by an apportionment factor consisting of total gross receipts from Ohio activities compared to total gross receipts from all locations. The FIT then applies a three-tiered rate structure against total Ohio equity capital. The rate structure, which is regressive based on the amount of business the bank does in the state, applies as follows:

• A rate of 0.8% applies to the first $200 million of total Ohio equity capital
• A 0.4% rate applies to total equity in excess of $200 million up to $1.3 billion
• A 0.25% rate on total Ohio equity capital in excess of $1.3 billion.

The taxpayer is a chartered federal savings bank headquartered in Pennsylvania, with branches in Pennsylvania, Ohio, Virginia and Maryland. The taxpayer filed refund claims with the Department for tax years 2016 through 2020, arguing that the FIT was unconstitutional because the rate structure forces interstate banks to pay a higher effective tax rate than a similarly sized bank operating exclusively in Ohio. The Department denied the refund request, noting that it lacks authority to determine the constitutionality of a statute. The BTA affirmed, and the taxpayer appealed to the Ohio Supreme Court.

The court focused on the "fair apportionment requirement" established in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) and the "internal consistency" test most recently articulated in Comptroller of Treasury of Maryland v. Wynne, 575 U.S. 542 (2015). The internal consistency test asks whether the identical application of a tax by every state would place interstate commerce at a disadvantage compared with intrastate commerce.

The court concluded that Ohio's FIT satisfied both the fair apportionment requirement and internal consistency test because the state taxes only the portion of a bank's equity capital attributable to its Ohio business. The court observed that if every state adopted the same formula, each state would tax only the discrete portion of equity capital attributable to business in that state and no part of a bank's equity capital would be taxed by more than one state. Moreover, the court concluded that the FIT applies evenhandedly regardless of whether a taxpayer is an interstate or intrastate business. Two banks with the same amount of Ohio equity capital pay the same Ohio tax rates, irrespective of their operations elsewhere.

The court also addressed the taxpayer's "aggregation" approach, indicating that the taxpayer attempted to "rephrase" the internal consistency test to ask whether a multistate bank would pay more in the aggregate across all states than a bank conducting the same business entirely within a single state. The court noted that the U.S. Supreme Court has never adopted the taxpayer's aggregation approach.²

Finally, the court emphasized that the Constitution imposes no single apportionment formula on the states and that states have "broad discretion to configure their systems of taxation as they deem appropriate." The court noted that the Commerce Clause does not erect a per se barrier against tax policies designed to achieve "fair encouragement of in-state business" or to "compete with other States for a share of interstate commerce."

Implications

This decision is significant for financial institutions operating in Ohio as it confirms the constitutionality of Ohio's FIT rate structure and its policy of incentivizing banks to conduct more business within the state. It is likely that any pending FIT refund claims currently before the Department will be denied given the court's decision. It is unknown if the taxpayer will pursue an appeal to the United States Supreme Court.