Supreme Court Rejects Constitutional Challenge to Different Tax Rates for Large, Small Rental Properties
Holds Legislature Had ‘Rational Basis’ for Different Treatment
2009-0213. Ohio Apt. Assn. v. Levin, Slip Opinion No. 2010-Ohio-4414.
Board of Tax Appeals, No. 2006-A-861. Decision affirmed and cross-appeal overruled.
Brown, C.J., and Lundberg Stratton, O'Connor, O'Donnell, Lanzinger, and Cupp, JJ., concur.
Pfeifer, J., dissents.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2010/2010-Ohio-4414.pdf 
View oral argument video of this case.
(Sept. 23, 2010) The Supreme Court of Ohio today upheld as constitutional rules adopted by the state tax commissioner to implement 2005 legislation that granted a 10 percent property tax rollback to owners of single-family, two-family and three-family rental properties, but did not extend a similar tax break to owners of apartment buildings with four or more residential units.
The Court’s 6-1 decision, authored by Justice Robert R. Cupp, affirmed a ruling by the State Board of Tax Appeals (BTA).
As part of Amended Sub. H.B. 66, a 2005 overhaul of the state’s business tax structure, the legislature amended a statute, R.C. 319.302, that had previously granted a 10 percent property tax exemption or “rollback” for all real property in the state occupied by residential dwellings regardless of the number of units on that property. The amended statute limited the partial tax exemption to properties occupied by single-family, two-family or three-family residential dwellings, and classified properties occupied by four or more residential rental units as “intended primarily for use in a business activity” and therefore not eligible for the 10 percent rollback.
After the legislature adopted the amended statute, the state tax commissioner adopted administrative rules establishing definitions, policies and procedures for administering the revised rollback provision.
The Ohio Apartment Association (OAA), which represents owners and operators of multi-unit apartment buildings across the state, filed a complaint with the BTA invoking that body’s authority under R.C. 5307.14 to review administrative rules adopted by the tax commissioner and to bar the enforcement of such rules if the board determines that they are not “reasonable.” The BTA ruled that the challenged rules were reasonable and therefore enforceable. The OAA invoked its right to appeal the BTA’s ruling directly to the Supreme Court.
In today’s decision, the court first declined to reach the merits of the OAA’s challenge to the rules under Section 2, Article XII of the Ohio Constitution because an earlier decision of the court had rejected a similar challenge, and the OAA failed to establish that the earlier case should be overruled.
Justice Cupp also wrote: “Appellants contend that Ohio Adm.Code 5703-25-18 and 5703-25-10 violate the Equal Protection Clause of the Ohio Constitution because rules that treat residential rental property that contains four or more units differently than property containing three or fewer units are arbitrary and unreasonable. … A statutory classification that involves neither a suspect class nor a fundamental right, as here, does not violate the Equal Protection Clauses if it bears a rational relationship to a legitimate governmental interest. … The rational basis standard requires a high degree of judicial deference to legislative enactments. ... Moreover, it is well settled that assessment of taxes is fundamentally a legislative responsibility, and ‘[t]his already deferential standard “is especially deferential” in the context of classifications arising out of complex taxation law.’ … States have broad leeway in making classifications and drawing lines that in their judgment produce reasonable systems of taxation.”
“Appellants … contend that the administrative rules violate the Equal Protection Clause because rental properties containing three units receive the ten percent rollback but four-unit rental properties do not. According to appellants, this distinction by number of units is illusory, and there is no evidence of any other reasonable basis for distinguishing between rental properties. … (T)hat claim overlooks the following evidence. Testimony before the BTA indicated that the line was drawn between three- and four-unit properties because properties with three or fewer units were more characteristic of residential property, and properties with four or more units more closely resembled commercial property. Other testimony reflected that from 1993 to 2007, single-family homes, duplexes, and triplexes appreciated in value at very similar rates. In contrast, the rate of appreciation for rental properties of four or more units was 25 to 30 percent less over the same period. And property that is classified as residential continues to appreciate at a higher rate than commercial property, thereby justifying the different tax treatment.
“Appellants further contend that three-unit owners and four-unit owners (1) have the same responsibilities (e.g., maintenance and ‘peaceful enjoyment’), (2) are treated the same for tax purposes, and (3) may own rental properties of both sizes. But this evidence does not rebut the tax commissioner’s evidence that properties with four or more units (1) are generally more commercial in nature and (2) appreciate at a lower rate than single-family homes, duplexes, and triplexes. Our job is simply to determine, with great deference, whether there is a rational basis for the General Assembly’s taxation decisions. … We find that providing tax relief to property owners whose property values are increasing at a higher rate than appellants’ properties constitutes a rational basis for the different classifications. As appellants have failed to negate that basis, their claim here is denied.”
Justice Cupp’s opinion was joined by Chief Justice Eric Brown and Justices Evelyn Lundberg Stratton, Maureen O’Connor, Terrence O’Donnell, and Judith Ann Lanzinger.
Justice Paul E. Pfeifer entered a dissent in which he wrote: “Section 2, Article XII of the Ohio Constitution states that ‘[l]and and improvements thereon shall be taxed by uniform rule according to value …’ The tax in this case is not uniform, because a ten percent rollback provision applies to apartment buildings with three or fewer units but does not apply to apartment buildings with four or more units. … I would reverse the decision of the Board of Tax Appeals.”
Contacts
Mark I. Wallach, 216.622.8344, for the Ohio Apartment Association et al.
Lawrence D. Pratt, 614.995.3753, for the State Tax Commissioner.
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