Summary
In Ohio Fin. Co. v. Toledo (1955), 163 Ohio St. 81, 83, 56 O.O. 74, 75, 125 N.E.2d 731, 732, the court held that"[i]t is apparent therefore that the General Assembly has occupied a field which includes taxation of the income yield from intangibles."
Summary of this case from Fisher v. NeusserOpinion
No. 34049
Decided March 23, 1955.
Taxation — Financial institutions — Dealers in intangibles — Net profits from income yield of intangibles — Municipal income tax may not be imposed thereon.
In view of the provisions of the state tax laws, providing generally for a tax against the owner of 5 per cent on the income yield from his intangibles but then providing for taxation of the shares of a dealer in intangibles at 5 mills of their fair value and further providing that such latter tax should be in lieu of all other taxes on property such as intangibles owned by such a dealer, a municipality may not impose an income tax on such portion of the net profits of such a dealer as are derived from the income yield of intangibles owned by such dealer.
APPEAL from the Court of Appeals for Lucas County.
The Ohio Finance Company, appellant herein, is an Ohio corporation engaged in what is commonly known as the small-loan business with an office in the city of Toledo.
It instituted an action for a declaratory judgment in the Court of Common Pleas of Lucas County naming the city of Toledo as defendant and asking for a declaration that its net profits are exempt from the 1 per cent income tax imposed by ordinances 18-46 and 689-50 of such city.
Those activities in which the finance company is principally engaged are making direct loans of money to borrowers, taking in return interest bearing promissory notes, and purchasing from merchants interest bearing promissory notes or other similar instruments which represent the unpaid purchase price of articles sold by such merchants to their customers.
Submission of the cause to the trial court was upon the pleadings, a stipulation of facts and the arguments of counsel.
That court found for the plaintiff.
An appeal on questions of law was taken by the city to the Court of Appeals which court reversed the judgment below and rendered final judgment for the city on the ground that the tax imposed by statute on the shares of stock of the finance company is essentially a property tax different in character and effect from the direct income tax levied on the company's net profits by the city and hence those net profits are subject to the municipal income tax.
The cause comes to this court for review and final determination upon an appeal as of right and the allowance of a motion to require the Court of Appeals to certify its record.
Messrs. Effler, Eastman, Stichter Smith, for appellant.
Mr. John J. McCarthy, director of law, and Mr. William D. Driscoll, for appellee.
A small-loan company, such as appellant, may have profits from sources of income other than its income-producing intangibles. For example, such a company may purchase a promissory note for less than its face value, and may make a profit, in addition to the income received by way of interest thereon, when such note is paid in full or when it is sold for more than its purchase price. Since the question has been neither raised nor argued in the instant case, we will express no opinion with respect to the right of Toledo to tax such profits of a small-loan company derived from sources other than the income received from its income-producing intangibles.
In the intangible tax law, the General Assembly generally defined "investments" so as to include all the intangibles from which appellant receives income. See Section 5323, General Code. In the instant case, the parties apparently concede that the income so received provides all the net profits of appellant that Toledo seeks to tax.
By Section 5638, General Code, it is provided so far as pertinent:
"Annual taxes are hereby levied on the kinds and classes of intangible property, hereinafter enumerated * * * at the following rates, to wit:
"Investments, five per centum of income yield or of income * * *."
Similar provisions are contained in Section 5638-1, General Code.
It is apparent therefore that the General Assembly has occupied a field which includes taxation of the income yield from intangibles. Even though the intangible tax may be a property tax, the tax generally levied on intangibles is a tax of five percent of such income yield.
The doctrine of pre-emption of a field of taxation by the state, as preventing occupation of such field by a municipality, is based on the apparent intention of the General Assembly, which is inferred from its occupation of a particular field of taxation. Thus, when the General Assembly does occupy a particular field of taxation, it may reasonably be inferred that it intends to exclude municipalities from such field. It has authority to do this under Section 13 of Article XVIII, and Section 6 of Article XIII, of the Ohio Constitution. Angell v. City of Toledo, 153 Ohio St. 179, 91 N.E.2d 250; Haefner, a Taxpayer, v. City of Youngstown, 147 Ohio St. 58, 68 N.E.2d 64.
It is contended however that, because the General Assembly has provided in effect that a dealer in intangibles such as appellant is not required to pay this tax of five per cent on income received from intangibles owned by it, the state has not occupied that particular part of the field of taxation of income received from intangibles.
Whether it has left this particular part of the field of income taxation open or not open, necessarily depends on the expressed intention of the General Assembly as found in several statutes.
In the chapter relating to listing of personal property, Section 5366, General Code, provides in part:
"As used in this chapter:
"* * *
"`Taxpayer' excludes all individuals, partnerships, corporations, associations, and joint stock companies, their executors, administrators and receivers, in this title defined * * * as dealers in intangibles * * *."
This obviously relieves the dealer in intangibles from the obligation of listing his income-yielding intangibles as taxpayers are generally required to list them by Section 5368, General Code. However, the reasons for that statutory provision become apparent on consideration of the provisions of Sections 5414-1 to 5414-7, inclusive, General Code, with respect to dealers in intangibles and especially of Section 5414-3, General Code, which provides:
"The real estate of a dealer in intangibles shall be taxed in the place where it is located, in like manner as the real estate of other persons is taxed; but the tax provided for in this chapter shall be in lieu of all other taxes on the other property and assets used in the business of such a dealer." (Emphasis added.)
By Section 5414-2, General Code, the shares of such a dealer in intangibles are to be assessed for taxation at their fair value.
When the statutes providing for rates of taxation on intangible property are analyzed, it is apparent that the General Assembly did not intend to permit the owners of shares of such dealers to bear a lesser burden of taxation than that imposed upon other owners of intangible property.
Thus, "unproductive investments" are taxed generally at two mills on the dollar. It may be observed that the tax on a productive investment yielding a four per cent return on its value would be equivalent to a tax of two mills on that value. However, shares of dealers in intangibles are taxed at five mills on each dollar of their fair value. See Sections 5638 and 5638-1, General Code.
This clearly demonstrates a legislative intent to put a tax burden on the owners of shares of such dealers at least substantially equivalent to that borne by other owners of intangibles. Because the shares of such a dealer are not included within the definition of investments (see Section 5323, General Code), it is fair that not only two mills be levied on account of intangibles owned by the dealer but also two mills on account of the tax that the dealer's shareholders are not otherwise required to pay by reason of their ownership of the stock of a dealer in intangibles. The additional one mill was undoubtedly added because owners of intangibles generally cannot deduct their debt liabilities in listing their intangibles for taxation, although such debt liabilities of dealers in intangibles will necessarily be deducted in determining the fair value of their shares at the fair value of the capital, surplus and undivided profits of such a dealer. See Section 5414-5, General Code.
It is apparent, therefore, that the General Assembly meant what it said in Section 5414-3, General Code, when it stated that "the tax provided for in this chapter shall be in lieu of all other taxes on the other property and assets used in the business of such a dealer."
In our opinion, the General Assembly has thus clearly expressed an intent that no tax shall be imposed on the income which a dealer in intangibles receives from intangibles that he owns. Such an expressed legislative intention should be just as effective a limitation on the power of a municipality to tax that subject ( i.e., income received from intangibles owned) as the limitation which would be implied from the exaction by the state of a tax on that subject.
The judgment of the Court of Appeals is reversed and the cause is remanded for further proceedings in accordance with this opinion.
Judgment reversed.
WEYGANDT, C.J., STEWART and BELL, JJ., concur.
MATTHIAS, HART and ZIMMERMAN, JJ., dissent.
It seems to the writer that the majority opinion places too strict a limitation upon the taxing powers of a municipality and reaches a result which the statutes of Ohio do not require.
There can now be no question as to the general validity of the income tax legislation enacted by the city of Toledo. That was settled in the case of Angell v. City of Toledo, 153 Ohio St. 179, 91 N.E.2d 250.
However, appellant insists, and the majority opinion herein agrees, that its net profits are immune from such municipal income tax for the reason that the General Assembly has enacted tax laws affecting appellant which have pre-empted this field of taxation.
Admittedly, the state has imposed no direct income tax on the incomes of its citizens and inhabitants, but has it, by other forms of taxation, to which the appellant is amenable, invaded the field to such an extent as to preclude the appellee from subjecting appellant's net profits to its income tax?
It is well established in this state that municipalities have the power to levy both excise and income taxes to raise revenues for purely local purposes, but it is equally true that under Section 13, Article XVIII of the Ohio Constitution, such power is subject to limitations either by express statutory provisions or by statutes which impliedly limit the exercise of such power. Haefner, a Taxpayer, v. City of Youngstown, 147 Ohio St. 58, 68 N.E.2d 64; Angell v. City of Toledo, supra.
This brings us to an examination of the statutes relating generally to the taxes levied on intangibles. Under Section 5323, General Code (Section 5701.06, Revised Code), "investments" include interest bearing obligations for the payment of money such as shares of corporate stock and promissory notes.
Sections 5638 and 5638-1, General Code (Sections 5707.04 and 5707.03, Revised Code), levy a tax on investments. Productive investments are taxed at 5 per cent of their income yield. In other words, the tax is measured by the returns from such investments. It would, therefore, seem apparent that, under these statutory provisions, the tax is actually against income, no matter what nomenclature such tax may be given. Consequently, it logically follows that the income of the ordinary taxpayer which he derives from investments is not subject to a municipal income tax.
But what is the taxing situation with regard to appellant, which is engaged in business as a dealer in intangibles, within the definition contained in Section 5414-1, General Code (Section 5725.01, Revised Code)? See Capital Finance Corp. v. Glander, Tax Commr., 153 Ohio St. 50, 90 N.E.2d 673.
Under Section 5323, General Code (Section 5701.06, Revised Code), the shares of stock of dealers in intangibles are expressly excepted from the definition of investments, and Section 5366, General Code (Section 5711.01, Revised Code), excludes dealers in intangibles from the definition of the term, "taxpayer."
Under Section 5414-2, General Code (Section 5725.13, Revised Code), there is no direct tax on dealers in intangibles, but "all the shares of the stockholders in an incorporated dealer in intangibles * * * shall be listed and assessed at the fair value thereof and taxed only in the manner prescribed in this chapter."
By the provisions of Section 5638-1, General Code (Section 5707.03, Revised Code), "shares in and capital employed by dealers in intangibles [are taxed at the rate of] 5 mills on the dollar."
Surely, this indicates a property tax based on value and not an income tax.
Appellant, as does the majority opinion, lays stress on Section 5414-3, General Code (Section 5725.26, Revised Code), which provides that "the real estate of a dealer in intangibles shall be taxed in the place where it is located, in like manner as the real estate of other persons is taxed; but the tax provided for in this chapter shall be in lieu of all other taxes on the other property and assets used in the business of such a dealer."
It is contended by appellant and the majority opinion holds that by virtue of the latter part of the quoted section the General Assembly has occupied the entire field of taxation relating to intangibles and that it did not intend to leave any part of that field open to other forms of taxation.
However, as the writer reads that section, it means simply that a dealer in intangibles is relieved from reporting and paying a state property tax as an ordinary business corporation and excuses shareholders of a dealer in intangibles from reporting and paying the tax usually required to be reported and paid by ordinary shareholders. But it does not operate to place either the dealer or its shareholders in a better position than ordinary business concerns.
The writer's conclusion is that the taxes imposed by Section 5414-1 et seq., General Code (Section 5725.01, Revised Code), are on the shares of a dealer in intangibles and represent purely a property tax. On the other hand, the Toledo income tax is directed against the dealer on the net profits realized by such dealer from the business he transacts in the municipality, which profits are not otherwise subjected to taxation by the state. It would appear to the writer that in order to say that the state has pre-empted a field of taxation to the exclusion of a municipality the situation should be confined to those instances where both the state and the municipality have imposed the same or a similar tax on the same taxpayer.
It is sometimes difficult to determine whether the state has pre-empted the field of taxation to the exclusion of a municipality. This court has been confronted with the problem on a number of occasions and has reached different conclusions depending on whether the state has invaded the field at all or whether a tax levied by the state and one levied by a municipality are of the same character and rest on the same taxpayer. See State, ex rel. Zielonka, City Solicitor, v. Carrel, Aud., 99 Ohio St. 220, 124 N.E. 134; Globe Security Loan Co. v. Carrel, Aud., 106 Ohio St. 43, 138 N.E. 364; Marion Foundry Co. v. Landes, Aud., 112 Ohio St. 166, 147 N.E. 302; City of Cincinnati v. American Telephone Telegraph Co., 112 Ohio St. 493, 147 N.E. 806; Firestone v. City of Cambridge, 113 Ohio St. 57, 148 N.E. 470; Stredelman v. City of Cincinnati, 123 Ohio St. 542, 176 N.E. 215; City of Cincinnati v. Cincinnati Oil Works Co., 123 Ohio St. 448, 175 N.E. 699; Haefner, a Taxpayer, v. City of Youngstown, supra; and Youngstown Municipal Ry. Co. v. City of Youngstown, 154 Ohio St. 311, 95 N.E.2d 585.
With respect to the instant case, the following conclusions seem justified:
1. That appellant, engaged primarily in the business of loaning money, is not an "investor" under the intangible tax laws and pays no tax to the state as such;
2. That the state does not tax or attempt to tax appellant on the basis of its earnings; and
3. That the state has not levied any tax on appellant or its property of a kind which precludes the city of Toledo from levying its income tax against appellant's net profits derived from its business activities in such city.
The judgment of the Court of Appeals should be affirmed.
MATTHIAS and HART, JJ., concur in the foregoing dissenting opinion.