This Week in State Tax

The Ohio Supreme Court recently upheld the state financial institutions tax (FIT) against a constitutional challenge to its regressive rate structure. The FIT is imposed on the equity holdings of a bank or other financial institution, apportioned based on gross receipts from its business activities in each state. The rate structure is regressive, with the marginal rate decreasing as a bank’s Ohio-apportioned equity capital increases. The taxpayer, a chartered federal savings bank, contended that this structure violated the dormant Commerce Clause of the U.S. Constitution and requested a refund of FIT paid in open years. The Tax Commissioner and the Board of Tax Appeals both demurred, each asserting that it lacked authority to consider constitutional claims. The taxpayer appealed to the Ohio Supreme Court.

Under U.S. Supreme Court dormant Commerce Clause jurisprudence, a state may not impose a tax that discriminates against interstate commerce. The taxpayer argued that the FIT failed the internal consistency test put forth in Complete Auto Transit because if every state imposed such a tax, as required by the test, a taxpayer conducting multistate operations would pay more tax in the aggregate than a person conducting the same amount of business concentrated within a single state. The Ohio high court upheld the constitutionality of the FIT rate structure, concluding that the FIT neither discriminates against interstate commerce nor results in double taxation. In the court’s view, because the FIT is imposed only on Ohio-apportioned equity capital, if every state applied the FIT structure, each state would tax only the portion of equity capital attributable to the bank’s business in that state. Thus, there is no double taxation. Moreover, the tax is imposed only on the bank’s total Ohio equity capital, regardless of whether the bank operates in interstate commerce or solely in one state. Thus, there is no unfair discrimination.

The court also rejected the taxpayer’s aggregation approach to the internal consistency test. The taxpayer argued that if all states employed a structure like that in Ohio, a company that operated in several states would pay more in the aggregate than it would if it operated solely in a single state. The court found that use of an aggregation approach was unsupported by U.S. Supreme Court precedent and would prohibit the use of an inverted or regressive rate structure which the U.S. Supreme Court had never done. The Ohio court noted that the U.S. Supreme Court had previously upheld flat business fees against internal consistency challenges, even though such fees necessarily result in higher aggregate payments than would be imposed if a taxpayer operated in only a single state, as well as tax policies designed to serve as “fair encouragement of in-state business,” which the court identified as the asserted purpose of the FIT rate structure.

Contact Brandon Erwine or Heidi Newton with questions about Dollar Bank, FSB v. Harris.

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The Supreme Court of Ohio recently concluded that a company providing electricity submetering services in Ohio operated as an “electric light company,” and therefore, is classified as a public utility under Ohio law. The submetering company operated a business in which it secured from apartment building landlords the exclusive rights to purchase electricity in the company’s own name, install and maintain distribution and metering equipment on the properties, supply electricity to the tenants, bill tenants directly, collect payment, and disconnect service from tenants in the event of nonpayment.

A public utility provider filed a complaint with the Public Utilities Commission of Ohio (PUCO), claiming that the submetering company was unlawfully operating as a public utility. PUCO’s jurisdiction extends to an “electric light company” that is “engaged in the business of supplying electricity…to consumers within this state.” In its disposition of the claim, PUCO accepted the submetering company’s position that the landlords, not the tenants, were the “consumers” of the electricity it provided and that the submetering company merely acted as the landlords’ agent. This interpretation placed the company outside the definition of an electric light company and outside PUCO’s jurisdiction. The utility provider appealed the matter to the Ohio Supreme Court.

On review, the supreme court rejected the PUCO analysis and instead applied a plain-language interpretation of the term “electric light company.” In the court’s view, the economic reality was that the submetering company supplied electricity to thousands of occupants whose relationship with the company mirrored the relationship between a traditional electric utility and its customers. Further, although contracts designated the submetering company as the landlords’ agent, the substance of the relationship was such that the submetering company had purchased a monopoly right to resell electricity to the landlords’ tenants. The company was engaging in business on its own behalf and with its own profit motive. As such, it was acting as an electric light company subject to state regulation as a public utility.

Though this case involves Ohio public utility regulation, the court’s reasoning may have broader implications for others involved in submetering, an arrangement not uncommon across certain industries. To the extent Ohio tax statutes and guidance rely on public utility or electric light company status, the classification could influence certain sales and use tax exemptions and personal property taxes.

Please contact Dave Perry with questions about In re Complaint of Ohio Power Co. v. Nationwide Energy Partners, L.L.C., 2026-Ohio-1406.

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The Commonwealth Court of Pennsylvania recently addressed whether a beef processing operation qualifies for the manufacturing exclusion under the Local Tax Enabling Act (LTEA), which would exempt its receipts from a local Business Privilege Tax (BPT). Affirming the trial court, the Commonwealth Court concluded that converting live cattle into cuts of boxed beef does not "substantially transform" the original material into a "new, different, and useful article," and therefore falls outside the LTEA manufacturing exclusion.

The dispute arose from a local school district audit of the taxpayer and related businesses, which resulted in an assessment of additional BPT for tax years 2014- 2022. The taxpayer operates a large-scale facility that slaughters and processes hundreds of cattle per day into boxed beef products. After the school district denied its request for the manufacturer exclusion, the taxpayer appealed to the trial court, which found that the taxpayer applies labor and skill but does not engage in manufacturing, concluding that its operations "start and end with beef." The taxpayer appealed to the Commonwealth Court of Pennsylvania.

Under the LTEA, a business qualifies as a manufacturer only if skill, labor, and science are involved, and a new, different, and useful product is created. There was no dispute that the taxpayer’s process involved skill and labor. The taxpayer argued that its operation differs from older "dead carcass" precedents because it begins with live animals; transforming a live animal into packaged edible beef and offal is a substantial transformation rather than mere processing. The court disagreed, relying on a long line of Pennsylvania meatpacking decisions holding that fabricating a carcass into cuts of meat does not create a new or different product. The key factor, the court emphasized, is the degree of transformation, not whether the process begins with a live animal. Because the taxpayer's cuts remained beef "to be used as food," the operation did not meet the transformation requirement. The court also rejected the taxpayer's claim that the assessment violated the Uniformity Clause of the Pennsylvania constitution, arguing that the district improperly treated an industrial-scale bakery as an exempt manufacturer while denying the taxpayer the same status. The court determined that a bakery transforms raw ingredients into commercially different baked goods, whereas a meat processing operation that "starts and ends with beef" does not.

For more information on Nicholas Meat, LLC v. Keystone Central School District, please contact Robert Weyman or Andrew Stocker.

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