[This opinion has been published in Ohio Official Reports at
77 Ohio St.3d 409.]
ARDIRE ET AL., APPELLANTS, V. TRACY, TAX COMMR., APPELLEE.
[Cite as Ardire v. Tracy, 1997-Ohio-5.]
Taxation--Income tax--Credits against income tax otherwise due--Taxpayer not
entitled to resident income tax credit under former R.C. 5747.05(B) on
that portion of adjusted gross income that was subjected to Michigan’s
Single Business Tax.
(No. 95-1535--Submitted November 12, 1996--Decided February 12, 1997.)
APPEAL from the Board of Tax Appeals, No. 94-K-347.
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{¶ 1} During 1988, Philip and Donna Ardire, appellants, received income
from Simplex Communications Corporation (“Simplex”), a Subchapter S
corporation which engaged in business in Michigan and California.1 For tax year
1988, Simplex had filed, on behalf of its shareholders, a California Corporation
Franchise or Income Tax Return and a Michigan Single Business Tax Annual
Return. Thus, when appellants filed their 1988 Ohio Individual Income Tax Return,
they claimed a resident income tax credit of $19,076.41 for taxes that had been paid
by Simplex to Michigan and California. Specifically, appellants claimed a resident
income tax credit of $1,302.28 for that portion of their adjusted gross income from
1. Subchapter S of the Internal Revenue Code (Section 1361 et seq., Title 26, U.S.Code) permits
the owners of qualifying corporations to elect a special tax status under which the corporation and
its shareholders receive conduit-type taxation that is comparable to partnership taxation. For tax
purposes, a Subchapter S corporation differs significantly from a normal corporation in that the
profits generated through the S corporation are taxed as personal income to the shareholders. The
taxable income of an S corporation is computed essentially as if the corporation were an individual.
Section 1363, Title 26, U.S.Code. Items of income, loss, deduction, and credit are then “passed
thru” to the shareholders on a pro rata basis and are added to or subtracted from each shareholder’s
gross income. See, generally, Section 1366, Title 26, U.S.Code. The income appellants received
from Simplex during 1988 was apparently profits generated through the S corporation and “passed
thru” to appellants as shareholders.
SUPREME COURT OF OHIO
Simplex which had been subjected to the California Corporation Franchise or
Income Tax, and a resident income tax credit in the amount of $17,774.13 for that
portion of their adjusted gross income which had been subjected to the Michigan
Single Business Tax. In their personal income tax return, appellants indicated that
they were entitled to a tax refund in the amount of $19,749.22, which they
eventually received. However, following an audit of appellants’ 1988 tax return,
appellee Roger Tracy, the Tax Commissioner, disallowed the entire amount of the
resident income tax credit that had been claimed by appellants. Thus, on October
26, 1991, the commissioner issued a tax assessment against appellants in the
amount of $19,076.41, plus interest of $5,306.38, for a total tax assessment of
$24,382.79.
{¶ 2} On November 25, 1991, appellants filed a petition for reassessment
pursuant to R.C. 5747.13. After reviewing appellants’ petition, the commissioner
modified the tax assessment by allowing appellants to take the previously claimed
resident income tax credit for that portion of their adjusted gross income which had
been subjected to a tax on income or a tax measured by income in the state of
California. The commissioner also reduced the amount of preassessment interest
to $910.62. However, the commissioner denied appellants’ petition with respect to
that portion of the resident tax credit claimed by appellants for the taxes paid by
Simplex to Michigan, finding that the Michigan Single Business Tax was not a tax
on income or a tax measured by income. The commissioner modified the tax
assessment to reflect a total balance due of $18,684.75.
{¶ 3} On appeal, the Board of Tax Appeals (“BTA”) affirmed the order of
the commissioner. The cause is now before this court upon an appeal as of right.
Phillips & Co., L.P.A., and Gerald W. Phillips, for appellants.
Betty D. Montgomery, Attorney General, Robert C. Maier and Steven L.
Zisser, Assistant Attorneys General, for appellee.
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January Term, 1997
DOUGLAS, J.
{¶ 4} The sole issue that has been properly presented for our consideration
is whether appellants were entitled to a resident income tax credit under R.C.
5747.05(B) on that portion of their adjusted gross income which was subjected to
Michigan’s Single Business Tax (“SBT”), Mich.Comp.Laws Ann. 208.1 et seq.
Resolution of this issue hinges on the question whether the SBT is either a tax on
income or a tax measured by income. For the reasons that follow, we find that the
decision of the BTA upholding the Tax Commissioner’s denial of the resident
income tax credit for that portion of appellants’ adjusted gross income which was
subject to the SBT was neither unlawful nor unreasonable and, accordingly, we
affirm the decision of the BTA.
{¶ 5} R.C. 5747.02 levies an annual tax on every individual residing in or
earning or receiving income in Ohio. The annual tax in the case of an individual is
measured by adjusted gross income less certain exemptions. R.C. 5747.05 allows
certain tax credits against adjusted gross income, including a resident income tax
credit for those portions of the adjusted gross income of a resident taxpayer that in
another state or in the District of Columbia are subjected to a tax on income or a
tax measured by income. As it existed in 1988, R.C. 5747.05 provided, in part:
“The following credits shall be allowed against the income tax imposed by
section 5747.02 of the Revised Code:
“…
“(B)(1) The amount of tax otherwise due under section 5747.02 of the
Revised Code on such portion of the adjusted gross income of a resident taxpayer
that in another state or in the District of Columbia is subjected to a tax on income
or measured by income[.]” (Emphasis added.) Am.Sub.H.B. No. 171, 142 Ohio
Laws, Part II, 2170, 2380.2
2. The current version of R.C. 5747.05 is substantially similar to the 1988 version of that statute in
allowing a resident income tax credit. The current version of R.C. 5747.05 provides, in part:
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{¶ 6} The parties agree that the SBT is not a tax on income. Indeed, the fact
that the SBT is not a tax on income is a well-established principle of Michigan law.
In Trinova Corp. v. Dept. of Treasury (1989), 433 Mich. 141, 149-150,
445 N.W.2d
428, 431-432, affirmed (1991),
498 U.S. 358,
111 S.Ct. 818,
112 L.Ed.2d 884, the
Michigan Supreme Court described some of the components of the SBT and
specifically determined that the SBT is a value-added tax and not a tax on income:
“The single business tax is a form of value added tax, although it is not a
pure value added tax. … ‘Value added is defined as the increase in the value of
goods and services brought about by whatever a business does to them between the
time of purchase and the time of sale.’ [Haughey, The Economic Logic of the
Single Business Tax (1976), 22 Wayne L.Rev. 1017, 1018.] In short, a value added
tax is a tax upon business activity. The act [the Michigan Single Business Tax Act]
employs a value added measure of business activity, but its intended effect is to
impose a tax upon the privilege of conducting business activity within Michigan.
It is not a tax upon income. MCL [Mich.Comp.Laws] 208.31(4); MSA
[Mich.Stat.Ann.] 7.558(31)(4).
“…
“The computation of the tax involves several steps beginning with the
calculation of the taxpayer’s tax base. Under the act, ‘tax base’ is defined as
business income (or loss) before apportionment subject to certain adjustments.
“As used in this section, ‘income tax’ includes both a tax on net income and a tax measured
by net income.
“The following credits shall be allowed against the income tax imposed by section 5747.02
of the Revised Code:
“…
“(B) The lesser of division (B)(1) or (2) of this section:
“(1) The amount of tax otherwise due under section 5747.02 of the Revised Code on such
portion of the adjusted gross income of a resident taxpayer that in another state or in the District of
Columbia is subjected to an income tax. …
“(2) The amount of income tax liability to another state or the District of Columbia on the
portion of the adjusted gross income of a resident taxpayer that in another state or in the District of
Columbia is subjected to an income tax. …” (Emphasis added.)
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January Term, 1997
MCL 208.9; MSA 7.558(9). ‘Business income’ is essentially federal taxable
income. MCL 208.3(3); MSA 7.558(3)(3). Common adjustments to business
income include additions to reflect the business consumption of labor and capital.
Those include adding back compensation, depreciation, dividends, and interest paid
by the taxpayer to the extent deducted from federal taxable income. Common
deductions from business income include dividends, interest, and royalties received
by the taxpayer to the extent included in federal taxable income. This income is
deducted for the purpose of value added computation because it does not result
from capital expenditure by the taxpayer. Kasischke, Computation of the Michigan
single business tax: Theory and mechanics, 22 Wayne L R 1069, 1081 (1976).”
(Emphasis added in part; footnotes omitted in part.) See, also, Trinova Corp. v.
Michigan Dept. of Treasury (1990), 498 U.S. 358, 362-368,
111 S.Ct. 818, 823-
826,
112 L.Ed.2d 884, 896-901 (recognizing that the SBT is a value-added tax as
opposed to a tax on income); Mobil Oil Corp. v. Dept. of Treasury (1985),
422
Mich. 473, 496-497,
373 N.W.2d 730, 741, and fn. 14 (finding that the SBT is a
consumption-type value-added tax); Caterpillar, Inc. v. Dept. of Treasury (1992),
440 Mich. 400, 408,
488 N.W.2d 182, 185 (same principle); Gillette Co. v. Dept.
of Treasury (1993),
198 Mich.App. 303, 308-309,
497 N.W.2d 595, 597-598
(holding that the SBT is a consumption-type value-added tax and not a tax on
income); Town & Country Dodge, Inc. v. Dept. of Treasury (1986),
152 Mich.App.
748, 753-754,
394 N.W.2d 472, 475 (recognizing that the SBT is a tax imposed
upon business activity rather than upon the income which results from that activity);
and Wismer & Becker Contracting Engineers v. Dept. of Treasury (1985),
146
Mich.App. 690, 696,
382 N.W.2d 505, 507 (“The single business tax is a tax upon
the privilege of doing business and not upon income.”).
{¶ 7} In Trinova, 498 U.S. 358,
111 S.Ct. 818,
112 L.Ed.2d 884, the United
States Supreme Court described some of the general differences between a value-added tax (a “VAT”) and a corporate income tax:
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SUPREME COURT OF OHIO
“A VAT differs in important respects from a corporate income tax. A
corporate income tax is based on the philosophy of ability to pay, as it consists of
some portion of the profit remaining after a company has provided for its workers,
suppliers, and other creditors. A VAT, on the other hand, is a much broader
measure of a firm’s total business activity. Even if a business entity is unprofitable,
under normal circumstances it adds value to its products and, as a consequence, will
owe some VAT. Because value added is a measure of actual business activity, a
VAT correlates more closely to the volume of governmental services received by
the taxpayer than does an income tax. Further, because value added does not
fluctuate as widely as net income, a VAT provides a more stable source of revenue
than the corporate income tax.” Id. at 363-364,
111 S.Ct. at 824,
112 L.Ed.2d at
898.
{¶ 8} Although the SBT is clearly not a tax on income, appellants contend
that the SBT is a tax “measured by income.” Specifically, appellants suggest that
the tax base of the SBT is essentially federal taxable income and that the SBT is
therefore based upon, computed, and measured by a taxpayer’s net income.
Conversely, the commissioner argues that “[a]lthough the MSBT starts its
calculation with federal taxable income, numerous adjustments are made to that
amount in order to derive the Michigan tax base. Among those adjustments are
additions of salary, depreciation, rent, interest, and other expenses that were
deducted by the corporation for purposes of computing its federal taxable income.
Those adjustments are so significant that any relationship that the starting point for
the MSBT may have had to ‘income’ was lost on the way to computing the MSBT
base.” Thus, the commissioner urges that the SBT is not a tax measured by income.
{¶ 9} In Gillette, 198 Mich.App. 303,
497 N.W.2d 595, a Michigan
appellate court specifically addressed the question whether the SBT is a tax
“measured by net income.” In Gillette, the Gillette Company (“Gillette”)
challenged certain single business tax assessments that had been issued against it
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January Term, 1997
by the Michigan Department of Treasury. Gillette challenged the assessments
based on Section 381, Title 15, U.S.Code, which prohibits states from levying a
“net income tax” on certain interstate commerce. Section 383, Title 15, U.S.Code
defines “net income tax” as “any tax imposed on, or measured by, net income.”
Thus, the issue presented in Gillette was whether the Michigan SBT is a tax
imposed on, or measured by, net income. The court in Gillette found that the SBT
is a consumption-type value-added tax and not a tax on income. Id. at 308-309,
497 N.W.2d at 597-598. The court then turned its attention to the question whether
the SBT is a tax measured by net income:
“Next, we consider whether the single business tax is a tax ‘measured by’
net income. The computation of the single business tax begins with the calculation
of the taxpayer’s tax base. ‘Tax base’ is defined as business income (or loss) before
apportionment subject to certain adjustments. MCL 208.9; MSA 7.558(9);
Trinova, supra … [433 Mich. 141, 150,
445 N.W.2d 428, 432]. ‘Business
income’ is essentially federal taxable income. MCL 208.3(3); MSA 7.558(3)(3).
Adjustments to business income include additions to reflect business consumption
of labor and capital. Additions to business income include adding back
compensation, depreciation, dividends, and interest paid by the taxpayer to the
extent deducted from federal taxable income. Common deductions from business
income include dividends, interest, and royalties received by the taxpayer to the
extent included in federal taxable income. This income is deducted for the purpose
of value added computation because it does not result from capital expenditure by
the taxpayer. MCL 208.9; MSA 7.558(9); Trinova, supra, 433 Mich. [at 150-151,
445 N.W.2d at 432]. Once the tax base is calculated, the portion of the value added
that is attributable to Michigan must be determined. MCL 208.45; MSA 7.558(45).
After the tax base has been apportioned and subjected to certain adjustments, it is
multiplied by 2.35 percent to determine the taxpayer’s tax liability. MCL
208.31(1); MSA 7.558(31)(1).
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SUPREME COURT OF OHIO
“It is clear from the theory underlying the single business tax and the
methods used to calculate the tax base and the apportionment formula, that the
single business tax is not a tax ‘measured by net income.’ Although business
income or federal taxable income is a starting point for and a component of the tax
base, because of the extensive adjustments required to compute the single business
tax, we cannot say that the tax is ‘measured by’ net income. Accordingly, we
conclude that the restriction imposed by … [Section 381, Title 15, U.S.Code]
does not apply to taxes imposed under the Single Business Tax Act.” (Emphasis
added in part; footnotes omitted.) Gillette, 198 Mich.App. at 309-311,
497 N.W.2d
at 598-599.
{¶ 10} Therefore, the Michigan appellate courts have clearly determined
that the SBT is neither a tax on income nor a tax measured by income. Research
reveals that a number of authorities throughout this country agree with the view
that Michigan’s SBT is neither a tax on income nor a tax measured by income. See,
e.g., Kellogg Sales Co. v. Dept. of Revenue (1987), 10 Ore. Tax Rep. 480; In re
Appeal of Dayton Hudson Corp. (Feb. 3, 1994), Cal. Bd. of Equalization Nos. 89A-
0405-JV and 90R-0247-JV, unreported; and In re Ruling Request (Oct. 17, 1994),
Va.Dept. of Tax. No. P.D. 94-313, unreported. See, also, Revenue Cabinet v. Gen.
Motors Corp. (Ky.App. 1990), 794 S.W.2d 178. We find no compelling reason to
deviate from the Michigan decisional law on this issue. Accordingly, we follow
the lead of the Michigan appellate courts in finding that the SBT is not a tax on
income or a tax measured by income.
{¶ 11} The BTA determined that the SBT is neither a tax on income nor a
tax measured by income and that, therefore, appellants were not entitled to a
resident income tax credit under former R.C. 5747.05(B) relative to the single
business taxes paid by Simplex to Michigan. The decision of the BTA is neither
unlawful nor unreasonable and, accordingly, we affirm.
Decision affirmed.
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January Term, 1997
MOYER, C.J., RESNICK, F.E. SWEENEY, PFEIFER, COOK and LUNDBERG
STRATTON, JJ., concur.
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