Opinion
No. 34230
Decided June 15, 1955.
Taxation — Municipal income tax — Tax on wages for seven months — Tax on net profits — On basis of seven-twelfths annual net profits — Equality of taxation — Classification of taxpayers not discriminatory.
An income tax ordinance adopted by a municipality and effective over seven months of a particular year is not violative of constitutional provisions or otherwise unlawful by imposing the tax on gross wages, salaries and other compensation of employees for the seven months of the taxing period and by imposing the tax on the net profits of businesses, corporations and self-employed persons on the basis of seven-twelfths of their annual net profits.
APPEAL from the Court of Appeals for Hamilton County.
On February 10, 1954, an ordinance was enacted by the council of the city of Cincinnati entitled "Earned Income Tax Ordinance," effective as to residents of that municipality and nonresidents earning or acquiring money therein.
Such ordinance divides earned income into two general classes: (1) Wages, salaries and other compensation of employees and (2) net profits of businesses, corporations and self-employed persons. The tax as to the first class is imposed at the rate of 1 per cent on gross wages, salaries or other compensation received during the period from April 1 to October 31, 1954, and the tax as to the second class is imposed on net profits or earnings received during the same period. However, it is provided that such net profits shall be computed on the basis of seven-twelfths of the annual net profits.
This action was instituted in the Court of Common Pleas of Hamilton County by Thomas H. Clark, a self-employed attorney at law to enjoin the city of Cincinnati and the ex officio tax commissioner under the ordinance from enforcing the ordinance against him and others similarly situated.
The petition alleges that the method of taxation in the ordinance is discriminatory, unlawful and unconstitutional in that those who receive wages and salaries pay the tax only for the seven-month period from April 1 to October 31, 1954, whereas plaintiff and those in a like position are required to pay the tax on seven-twelfths of their net profits for the entire year of 1954.
Plaintiff was successful in the trial court, but on an appeal on questions of law and fact to the Court of Appeals that court found "that the plaintiff-appellee is not entitled to the injunctive relief prayed for in the petition." The injunction granted by the court below was dissolved and the petition dismissed.
The cause is now in this court for determination pursuant to an appeal as of right.
Mr. Burton E. Robinson, Mr. John F. Hellebush, Mr. James R. Clark and Mr. Bert H. Long, for appellant.
Mr. Henry M. Bruestle, city solicitor, Mr. James W. Farrell, Jr., and Mr. Edgar W. Holtz, for appellees.
Section 3 of the ordinance forms the "bone of contention." It reads as follows:
"Said tax shall be levied, collected, and paid with respect to the salaries, wages, commissions, and other compensation earned during the period April 1, 1954, to October 31, 1954, both inclusive. Said tax shall be levied, paid, and collected with respect to the net profits of corporations, businesses, professions, or other activities earned from April 1, 1954, to October 31, 1954, both inclusive. Provided, however, that a taxpayer whose fiscal year is the same as the calendar year shall pay the tax on seven-twelfths of his net profits for the year 1954; provided, further, that a taxpayer whose fiscal year is different than the calendar year shall pay the tax on that portion of his net profits for each fiscal year part of which falls within the period April 1 to October 31, 1954, determined by dividing his annual net profits for each of said years by twelve (12) and multiplying the quotient by the number of months within the period April 1 to October 31, 1954, in such fiscal year."
Plaintiff claims that the provision whereby net profits for the taxing period are computed on the basis of seven-twelfths of annual net profits is discriminatory and invalid because it creates inequalities with respect to those within and without the class. He claims further it is retroactive or postactive in that it taxes profits realized before and after the taxing period specified in the ordinance.
It will thus be seen that the vital issue in the case as far as plaintiff is concerned is the validity or invalidity of that part of the section which provides that the profits subject to tax shall be determined by taking seven-twelfths of annual net profits.
A perusal of section 3 discloses that the tax is imposed as to both the affected classes from April 1 to October 31, 1954, but different methods of calculation are employed. As to wage earners and salaried persons, the tax is imposed on the gross wages or salaries they receive over the months specified in the ordinance; as to plaintiff and those in the class to which he belongs and whose receipts fluctuate from month to month, the tax is imposed on the basis of seven-twelfths of their annual net profits. A design is therefore apparent to balance the tax burden as between the two classes.
Is such classification unlawful or invalid?
As we view the matter, the seven-twelfths provision of section 3 is not a tax on any definite amount, but is merely a formula for fixing net profits subject to the tax over a specified period during the year. In other words, it is a standard or norm applied to receipts which are fluctuating and seasonal to the end that the tax will be borne as uniformly as possible as to each of the two classes involved.
As has been observed, the ordinance provision in issue as it touches plaintiff and those of his class does not levy a tax on any particular income; rather it represents a standard of measurement whereby the net annual profits realized by plaintiff and those in a similar position are allocated to the taxing period of the ordinance for the purpose of equalizing the tax burden among all those affected by the tax.
Plaintiff argues that such method is discriminatory as to him since a higher percentage of his income is received outside the taxing period than within it.
Discrimination in the field of taxation arises when persons of the same class are taxed differently or where there is an unreasonable and arbitrary classification of taxpayers subject to the same tax.
The basic purpose of an income tax is to raise funds to operate the government and it should be levied in such a way that the burden will be distributed with as much uniformity and equality as is possible among all those amenable to the tax.
It is well settled that taxpayers may be divided into classes for the purpose of income taxation. A classification of those whose income is derived from wages and salaries on the one hand and a classification of those who are engaged in business or are self-employed on the other is unobjectionable as long as the impact of the taxes levied on each of such classes is substantially uniform. See Walters v. City of St. Louis, 347 U.S. 231, 98 L. Ed., 660, 74 S. Ct., 505; 11 Ohio Jurisprudence (2d), 13, Section 672.
An analysis of section 3 of the ordinance shows that its purpose is to treat both classes of taxpayers on a basis of equality. One class, consisting of wage earners and salaried persons, pays a tax on what, in most instances, is the equivalent of seven-twelfths of their annual income. The second class pays the tax on an amount measured by seven-twelfths of their annual net profits.
Obviously, the tax is not discriminatory as to the class of which plaintiff is a member. If, as he contends, income is variable and seasonal in certain businesses and professions, there would be some in that class who would receive most of their income during the months included in the taxing period, whereas others might receive only a small portion of their income during the same period. Therefore, the ordinance provision relating to a tax on seven-twelfths of annual net profits is not discriminatory but actually makes for equality of taxation in that class.
Surely a more equitable and reasonable method of taxation than the one evolved in section 3 could hardly have been devised. Both classes of taxpayers are taxed on a basis which makes for equality of taxation, and, considering section 3 as a whole, the results achieved under the formula adopted lack the elements of discrimination and unlawfulness.
It having been determined that the part of the ordinance which plaintiff complains is unfair to him and others similarly situated does not impose a tax but operates as a yardstick for the allocation of income to the taxing period to bring about an overall equality of taxation, the validity or invalidity of a retroactive or postactive tax is beside the point.
We find no error in the judgment of the Court of Appeals, and such judgment is, accordingly, affirmed.
Judgment affirmed.
MATTHIAS, STEWART, BELL and TAFT, JJ., concur.
WEYGANDT, C.J., and HART, J., dissent.
"In the one case the taxpayer would be required to pay an amount greater than the amount of tax levied and, in the other case, the taxpayer would pay an amount less than the amount of tax levied. This means simply, that a greater percentage or rate of tax is attempted to be imposed upon one taxpayer within a class or group than upon another taxpayer within the same class or group. This is inconsistent with the provisions of Section 8 of Article XII of the Constitution that income taxes may be either uniform or graduated. Under the ordinance the tax is neither uniform nor graduated."
The tax ordinance in question became effective as of April 1, 1954, and continued over seven months or until October 31, 1954. As to those taxpayers who received wages and salaries, the tax was imposed only on the wages and salaries received during the seven-month period. However, those persons engaged in business, corporations and self-employed persons paid the tax, not on receipts for the seven-month period, but seven-twelfths of their receipts for the entire twelve-month period in the year 1954.
If persons or institutions in the latter class received a greater average monthly income for the three months of January, February and March and the two months of November and December than their average monthly income for the months of April to October, inclusive, as did the plaintiff, they paid tax on a greater amount of taxable income than they received during the tax-assessment period from April to October, inclusive.
A tax levied on total wages and salaries received during the tax period, but on income received by business concerns, corporations and self-employed persons in a greater sum than was received by them during the same tax period, is discriminatory and, in my opinion, is illegal and void.