A three-judge panel struck down Ohio's income tax credit for new in-state investment based on the fact that it discriminated against interstate commerce. At the same time, the court sustained the state's personal property tax exemption for new in-state investment.
Forecasting what might happen next in the courts and legislatures is always a risky business, and this case may be far from resolved. The decision has widespread implications because virtually every state in the union has some form of tax credit or incentive that may now be under a constitutional cloud. Moreover, many businesses throughout the state and across the country have relied on these incentives in making in-state investment decisions, and have billions of dollars at stake in the resolution of this controversy.
In 1997, DaimlerChrysler entered into an agreement with the city of Toledo and the state of Ohio to construct a new vehicle-assembly plant near an existing (but aged and outdated) Jeep facility in exchange for various tax incentives. Estimating that it would invest approximately $1.2 billion in the project, DaimlerChrysler also calculated that its investment would provide the region with several thousand jobs.
In response to DaimlerChrysler's anticipated investment in the region, government offered two significant incentives.
* The city and two local school districts agreed to give DaimlerChrysler a 10-year, 100 percent property tax exemption.
* The state permitted DaimlerChrysler to use an investment tax credit of 13.5 percent against the state corporate franchise tax for certain qualifying investments.
A group of homeowners and small businesses filed a lawsuit on Dec. 8, 1999, arguing that the deal discriminated against interstate commerce by encouraging companies already in Ohio to expand there rather than in other states, and therefore violated the Federal Commerce Clause and the state constitution's equal protection clause.
The plaintiffs started their case in state court and moved it to U.S. District Court, where it was dismissed for failing to state a claim. The court felt that although a corporation's increasing investment in Ohio would increase potential incentives, expanding out of state instead would not reduce the benefits. Thus, the district court held that the property tax exemption and the investment tax credit did not discriminate against interstate commerce.
The plaintiffs then pursued the issue through the federal appellate court. Three years later, the 6th Circuit upheld the property tax exemptions but not the investment tax credit. The court ruled that the investment tax credit coerced businesses into expanding in Ohio, as opposed to other states, in order to reduce a pre-existing income tax liability, and thereby demonstrating discrimination against interstate commerce.
In contrast, the court upheld the property tax exemption because the exemption did not reduce a pre-existing liability; it reduced a potential new liability.
The full impact of Cuno is yet to be known, but it creates immediate and significant uncertainty regarding the availability of credits and similar incentives in Ohio and many other states. The 6th Circuit also includes Kentucky, Michigan and Tennessee, thus calling into immediate question the validity of similar incentives offered in those states.
The Ohio Department of Taxation said that, at present, taxpayers may continue to claim this and other credits administered directly or indirectly by the department while the issue remains on appeal. The Ohio Department of Development has issued an open letter explaining that it will "continue to inform qualified companies of the availability of the credit."
The Ohio Attorney General has participated in an appeal of the decision by seeking a rehearing by the entire 6th Circuit. If Ohio loses, both sides of the litigation are prepared to seek U.S. Supreme Court review by a petition for certiorari.
Debra J. Nel, CPA, is a manager in the Tax Group at Saltz, Shamis & Goldfarb Inc., the tax and accounting division of SS&G Financial Services Inc. (www.SSandG.com). Reach her at (440) 248-8787 or at DNel@SSandG.com.