State appeals judges focused on the definition of "levy" and whether the state's imposition of a fee on centralized collections is permissible during a hearing Wednesday on a lawsuit challenging Ohio's new law on municipal taxation of business income.

The FY18-19 state budget, HB49 (R. Smith), allowed taxpayers to opt to file their municipal net profits tax returns with the state rather than individually with each city in which they did business. Dozens of Ohio cities and villages sued the state after enactment of HB49, alleging it violates their constitutional home rule powers. The communities lost at trial in cases filed in Lorain and Franklin counties.

Special counsel for the state, Jeffrey Miller of the firm Brennan Manna & Diamond, said home rule does not strip the General Assembly of its sovereign authority over taxation. He noted that the state has required centralized collection of municipal taxes on electricity and phone companies for years, and as with the new requirement also collects an administrative fee to cover expenses.

Judge William Klatt, sitting on the 10th District appellate panel alongside Judges Gary Tyack and Lisa Sadler, asked if the central collection requirement for electricity and telephone companies had ever been challenged. Miller said he did not believe so.

Tyack asked Miller if, in defending the 0.5 percent administrative fee lawmakers authorized in HB49, he was arguing that the state has the power to tax municipalities. If so, Tyack asked, what would prevent the state from levying a fee of as much as 20 percent?

"That opens a host of other potential arguments … that would depend, your honor, on the circumstances of the enacted legislation," Miller replied.

Thaddeus Boggs of the firm Frost Brown Todd, speaking for a group of 160-plus communities that includes some of Ohio's largest cities, said the Ohio Constitution broadly grants municipalities the power of self-government, including taxation, while giving the General Assembly only limited authority to preempt those powers. He noted the holding of the 1998 Ohio Supreme Court case Cincinnati Bell Telephone Co. v. Cincinnati, in which justices ruled that state authority to limit municipal taxing power should be interpreted so as not to "engulf" communities' general taxing powers.

"This argument by the state is the first step of what would be the death knell of home rule," Boggs said.

Klatt asked the attorneys for both sides about the language of Article 18, Section 13 of the Ohio Constitution, which says lawmakers can "limit the power of municipalities to levy taxes." He asked specifically about the meaning of "levy" in that context, and whether it encompasses not just imposition of the tax, but collection and administration efforts.

"At least on the home rule part of this, that is the key question," Klatt said.

Miller said precedent holds that courts should use the plain meaning of the word. "The trial court used common sense on what it means to limit the power to levy tax," he said, and determined it included collection, administrative and related functions.

Darrell Clay of the firm Walter-Haverfield, representing a group of Northern Ohio jurisdictions that filed in Lorain, said Section 13 lets the state set "guardrails" for local taxing powers. "But inside those guardrails, that's all powers of local self-government, and when the municipality exercises those, it is not just commensurate with the state, it is higher than the state," he said, because it's done under constitutional home rule authority.

Clay also said the Lorain trial court had erred in consolidating a decision on the merits with its consideration of a motion for preliminary injunction, without giving notice to the parties. That prevented the plaintiffs from pursuing discovery, making motions for summary judgement and other avenues of pressing their case, he said. Sadler and Klatt asked Clay to specify what he could have accomplished through those avenues. "You're not articulating any basis for why this matters. You can't point to any kind of specific discovery you wanted," Klatt said.