Ohio taxpayers initiated action with the Franklin County Court of Common Pleas during July 2012, seeking a determination that the erroneous way the city of Gahanna, Ohio and the Regional Income Tax Authority (“RITA”) have interpreted the Gahanna City Code has resulted in an over-collection of taxes from Gahanna residents who work in municipalities outside Gahanna that assess municipal tax rates higher than the 1.5 percent charged by Gahanna. The class action suit was filed on behalf of all individual taxpayers who resided in the City of Gahanna, had taxes withheld or paid to a municipality other than Gahanna at a tax rate greater than 1.5%, and who filed a municipal tax return with Gahanna on or after July 3, 2008. This week, the matter was remanded to the trial court for further proceedings[1].

The US Supreme Court’s 5-4 ruling[2] that Maryland’s failure to allow tax credits for personal income taxes Maryland residents paid to other states[3] violates the Commerce Clause, and could cost Maryland $200 million in lost revenues. The credits for taxes paid by residents to other states on their out-of-state income are intended to be a partial remedy for multiple taxation.  Maryland’s scheme creates an incentive for taxpayers to opt for intrastate rather than interstate economic activity. The Commerce Clause[4] restricts the authority of states to discriminate in interstate commerce by imposing double taxation or by providing a direct commercial advantage to local businesses without the authorization of Congress. The Court previously struck down state tax schemes that might have resulted in the double taxation of income earned out of the State and that discriminated in favor of intrastate over interstate economic activity as unconstitutional[5].

The Maryland decision could affect the tax laws in Ohio and other states. If Ohio resident taxpayers have an income tax incentive to switch from interstate to intrastate transactions, then the non-neutral tax system may be regarded in the same light as Maryland’s tax system. A taxpayer victory in Gahanna, Ohio could mean taxpayers have the opportunity to file for refunds for overpaid taxes for millions of dollars.

Contact a Barnes Dennig tax specialist today to see how you might be affected.

 

[1]Douglas P. LaBorde et al., Plaintiffs-Appellees, v. City of Gahanna et al., Defendants-Appellants. Douglas P. LaBorde et al., Plaintiffs-Appellees, v. The City of Gahanna et al., Defendants-Appellees, (Regional Income Tax Agency, Defendant-Appellant).

[2]Opinion of the Court: Chief Justice John Roberts, Justices Samuel Alito, Stephen Breyer Anthony Kennedy, and Sonia Sotomayor. Dissenting: Justices Ruth Bader Ginsburg, Elena Kagan, and Antonin Scalia, and Clarence Thomas.

[3]Comptroller of the Treasury of Maryland v. Wynne.

[4] U.S. Constitution, Art. I, § 8, cl. 3.

[5] J. D. Adams Mfg. Co. v. Storen, 304 U. S. 307 (1938), Gwin, White & Prince, Inc. v. Henneford, 305 U. S. 434 (1939), and Central Greyhound Lines, Inc. v. Mealey, 334 U. S. 653 (1948).