Ohio Franchise Tax Investment Credit Declared Unconstitutional

The United States Court of Appeals for the Sixth Circuit found the franchise tax credit granted by R.C. 5733.33(B)(1) unconstitutional because it violated the Commerce Clause of the United States Constitution, Art. I, 8, cl. 3. At the same time, the September 2, 2004, decision in Cuno v. DaimlerChrysler, Inc., No. 01-3960, 2004 U.S. App. LEXIS 18550, the Court of Appeals upheld Ohio's Enterprise Zone personal property tax exemption found in R.C. 5709.62 and R.C. 5709.631 against constitutional challenges under the Commerce Clause.

DamilerChrysler's New Vehicle Assembly Plant

In 1998, DaimlerChrysler entered into an agreement with the city of Toledo, Ohio, to build a $1.2 billion new vehicle assembly plant near its existing Toledo plant, in exchange for various state tax incentives estimated to total $280 million. The plaintiffs challenged both the franchise tax investment credit and the ten year 75% personal property tax abatement for machinery and equipment "first used in business at the project site" pursuant to R.C. 5709.62(C)(1)(a).

The federal district court upheld both Ohio tax incentives. On appeal, the Court of Appeals reversed the decision concerning the franchise tax credit but affirmed the remainder of the District Court's rationale and decision.

The Franchise Tax Credit Encouraged Further In-State Ohio Economic Investment As Against Economic Development In Other States.

The threshold inquiry was whether the franchise tax credit discriminated against interstate commerce under the United States Supreme Court's decision in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1999). In that seminal case, the Court held that a state tax passed Commerce Clause scrutiny if:

the activity taxed has a substantial nexus with the taxing state;

the tax is fairly apportioned to reflect the degree of activity that occurs within the state;

the tax does not discriminate against interstate commerce; and

the tax is fairly related to benefits provided by the state.

The plaintiffs did not dispute that both the investment tax credit and the Enterprise Zone tax abatements satisfied the nexus, apportionment and "fair relation" tests, but they argued that both types of tax incentives were discriminatory.

The Court of Appeals analyzed a number of U.S. Supreme Court decisions, relying mainly upon Boston Stock Exch. v. State Tax Comm'r., 429 U.S. 318 (1977), and Westinghouse Elec. Corp. v. Tully, 466 U.S. 388 (1984). The Court concluded that "...