This is an appeal on questions of law and fact from a judgment of the Court of Common Pleas of Franklin County in favor of the defendant, appellee herein, city of Columbus. Benua filed a petition seeking a declaratory judgment in the Common Pleas Court, and at the conclusion of the case all issues were decided against him and in favor of the city of Columbus. Benua filed his notice of appeal, and the matter is before this court for determination upon the pleadings, transcript of docket and journal entries, bill of exceptions, certain stipulations, exhibits, papers, briefs and the arguments of counsel.
The questions presented in the petition have to do with the validity of the Columbus ordinance imposing an income tax, and particularly with reference to their application to Benua. *Page 356
In his petition Benua alleges that he is a resident of Bexley, that the city of Columbus is a municipal corporation, that he owns several tracts of real estate located in the city of Columbus, all of which are rented and for which he is paid the agreed rental periodically as provided in the various leases.
In the amended petition, and by stipulation, the several ordinances having to do with Columbus income tax are made a part of the record in full together with instructions promulgated in connection therewith.
Benua says the city of Columbus insists that he include in his individual tax return to be filed with the City Income Tax Division all income received as rent from the several tracts of land owned by Benua and located within the city. It is Benua's contention that the rent from the tracts is not subject to the several ordinances enacted by the city of Columbus levying a city income tax, initially one-half of one per cent and later increased to one per cent.
Benua says, and the city admits, that he has exhausted his administrative remedies. He further contends that the city of Columbus threatens civil and criminal action against him with reference to including such rental income in his city income tax return.
Benua asks for a declaration of his rights and duties and, with reference to the income tax ordinance and such rentals, whether or not they are (a) subject to the city income tax; (b) exempt by the state's pre-emption of the right to tax plaintiff's real estate; (c) exempt by tax statutes enacted by the state; (d) exempt under the Constitution of Ohio; and (e) exempt by implication of the statutes and laws of Ohio. He also asks for a permanent injunction against the enforcement of the several city income tax ordinances.
The answer filed by the city of Columbus admits most of the operative facts but denies the legal conclusions.
The record contains the several ordinances having to do with the levying of the Columbus income tax from the time of its first enactment until the filing of the amended petition. The rate (or percentage) imposed is not in controversy. The questions here raised appear to be substantially the same when considered under either the earlier or later forms of the ordinance *Page 357 involved. We shall therefore refer to the city of Columbus Ordinance 1073-56, passed July 30, 1956, and identified herein as Exhibit E.
Referring to the introductory portion of the ordinance we find that it has for its purpose the levying of a tax "on the net profits earned on all businesses, professions or other activities conducted in the city of Columbus by nonresidents." In Section 2 thereof it provides in part as follows:
"* * * there be and is hereby levied a tax at the rate of one (1) per centum per annum upon the following:
"* * * (3) (b) on the net profits earned on and after January 1, 1957, of all unincorporated businesses, professions, or other activities conducted in the city of Columbus by nonresidents * * *."
In Section 1 of the ordinance there are definitions which are applicable to the question now before the court. The word, "business," is defined as follows:
"An enterprise, activity, profession, or undertaking of any nature conducted for profit or ordinarily conducted for profit, whether by an individual, copartnership, association, corporation, or any other entity."
The words, "net profit," are also defined in Section 1 as follows:
"The net gain from the operation of a business, profession, or enterprise, after provision for all costs and expenses incurred in the conduct thereof, either paid or accrued in accordance with the accounting system used, and without deduction of taxes based on income."
As before stated, the facts are not in dispute, and it is admitted that plaintiff is a nonresident of the city of Columbus residing in another municipal corporation of Franklin County, to wit, Bexley. It is likewise admitted that plaintiff is the owner of several parcels of improved or unimproved real estate located in Columbus and is the one entitled to and actually receiving the income therefrom in the form of periodic leasehold rent. It is further not disputed, and the plaintiff introduced tax bills to show, that a tax upon real property was paid by him as to each of the parcels in question. The principal objection advanced by plaintiff is that the levying of a tax upon the *Page 358 earnings of real estate is identical with a tax upon the real estate itself, and that the city is forbidden to do so because the state has already made such a levy, thereby pre-empting such field to itself. In other words, plaintiff claims that the city is barred from levying an income tax on rental income due to the fact that a tax has already been levied against real estate in the form of the general property tax, and, as a result, the state has pre-empted this field of taxation. If this argument by plaintiff be sound, the city might well be without power to levy income tax against such rental income, payable either to nonresidents of Columbus or to owners who are residents of Columbus.
Counsel for Benua places much weight upon a decision of the United States Supreme Court handed down in 1895 in the case ofPollock v. Farmers' Loan Trust Co., 157 U.S. 429,39 L. Ed., 759, 15 S. Ct., 673. In that case the fifth and a portion of the seventh paragraphs of the syllabus are as follows:
"A tax on the rents or income of real estate is a direct tax, within the meaning of that term as used in the Constitution of the United States.
"So much of the act `to reduce taxation, * * *' * * * as provides for levying taxes upon rents or income derived from real estate, * * * is repugnant to the Constitution of the United States and is invalid."
The report of the syllabus, facts, arguments of distinguished counsel, opinion of the court, concurring opinion, dissenting opinion joined in by two Justices, and an additional dissenting opinion of one of them, occupies 230 pages in the volume of United States Supreme Court Reports just above referred to.
There are a number of difficulties in applying the Pollockcase, supra, to the question now before this court. In the first place, it was an act of Congress which was being construed, and the question decided was that a tax upon the income or rent from land was a direct tax and therefore required to be apportioned among the several states in proportion to the census or enumeration of population. It must be remembered that the decision in the Pollock case, supra, was handed down long before the enactment of the Sixteenth Amendment to the United *Page 359 States Constitution specifically authorizing federal income taxes and in fact was one of the principal reasons why it was necessary to enact the so-called income tax amendment. In handing down the decision in the Pollock case, supra, the United States Supreme Court relied upon language found in the Constitution of the United States, Section 9, Article I, which provides in part as follows:
"No capitation or other direct tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken."
The income tax before the court in 1895 was not apportioned among the states on the basis of population, and, being a direct tax, the court had no difficulty in finding it in conflict with the language of Section 9, Article I.
No question of pre-emption or the right of a state to levy an income tax or the right of a municipal corporation to levy an income tax was before the court in the Pollock case, supra (157 U.S. 429).
The effect of the decision in the Pollock case, supra, was nullified when in 1913 the several states in the United States adopted the so-called income tax or Sixteenth Amendment to the Constitution of the United States reading as follows:
"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."
Thus it will be seen that the constitutional foundation for the Pollock case, supra (157 U.S. 429), is now completely gone. Furthermore, at least so far as the levying of a tax by a state is concerned, the United States Supreme Court in 1937 announced a decision, arriving at a different result, which is said by the court to distinguish the Pollock case, supra. This was the case of New York, ex rel. Cohn, v. Graves, 300 U.S. 308,81 L. Ed., 666, 57 S. Ct., 466, 108 A. L. R., 721, in which a tax-payer residing in the state of New York challenged the right of that state, by a state income tax law, to tax rental income arising from land located outside the state of New York but payable to the New York resident as the owner thereof. The tax-payer also objected to paying New York income tax upon interest *Page 360 received by him on bonds which were not within the state of New York and which were secured by mortgages upon land also outside the state of New York. Paragraphs one to six, inclusive, of the syllabus in the Graves case, supra, are as follows:
"1. A state may tax her citizen upon the income he receives by way of rents from lands situate in another state and by way of interest on bonds secured by mortgage on lands situate in another state.
"2. The receipt of income by a resident is a taxable event.
"3. Domicil itself affords a basis for such taxation.
"4. Enjoyment of the privileges of residence in the state and the attendant right to invoke the protection of its laws are inseparable from responsibility for sharing the costs of government.
"5. Neither the privilege nor the burden is affected by the character of the source from which the income is derived. For that reason income is not necessarily clothed with the tax immunity enjoyed by its source.
"6. A tax on the income from land is not a tax on the land (Pollock v. Farmers' Loan Trust Co., 157 U.S. 429, distinguished), and taxation of both, by the same or different states, is not double taxation."
Thus, it will be seen that the persuasive force of thePollock case, supra (157 U.S. 429), is practically nil at this time.
There has been a great amount of litigation involving the many questions arising under federal and state income tax laws and local ordinances. In the early days of income taxes the argument frequently was advanced that all income is a form of property and hence that constitutional provisions in the several states limiting the rate or amount of taxation on property were applicable to income taxes. It also was argued and sometimes decided that income taxes were required to be considered along with other taxes in determining whether the limits upon taxation had been exceeded. In a great majority of the cases examined, such theories are rejected. See Opinion of Justices (1915),77 N.H., 611, 93 A. 311, that a tax on income is not a tax on property, and a multitude of cases annotated in11 A. L. R., 313; 70 A. L. R., 468; and 97 A. L. R., 1488. In the overwhelming majority of cases cited, a clear distinction has been *Page 361 recognized between taxes on land and on the rent or income from land. For further discussion as to what are property taxes, see 103 A. L. R., 18.
Further considering the question in general of the right to tax nonresidents under a state income tax statute, the rule is stated in 15 A. L. R., 1329, as follows:
"State statutes imposing a tax upon incomes of nonresidents earned or accruing within the taxing states have been upheld as against practically all constitutional objections which have been raised.
"It has been held that a state may, consistently with due process of law, impose an annual tax upon the net income derived by nonresidents from property owned by them within the state, and from any business, trade, or profession carried on by them within its borders. * * *"
In a supplemental annotation in 90 A. L. R., 486, with reference to state statutes, it is said:
"A state may constitutionally impose a tax upon the net income of a nonresident derived from property owned and business carried on in the taxing state. * * *"
Again in 156 A. L. R., 1373 (1945), in a supplemental annotation referring to state statutes, it is said:
"Nonresident individuals may be subjected to a state tax on income earned within the state, Atkinson v. State Tax Commission (1937), 156 Or. 469, 67 P.2d 161 (reversing on rehearing [1936], 156 Or. 461, 62 P. [2d], 13, affirmed in [1938],303 U.S. 20, 82 L. Ed., 621, 58 S. Ct., 419); Scobie v. Wisconsin TaxCommission (1937), 225 Wis. 529, 275 N.W. 531. A state may impose an income tax on nonresident individuals in respect of income derived from business or property located in the taxing state or from services performed there.* * *"
Coming now to the question of the power of a municipal corporation to levy a tax upon property within its limits, it is stated in 38 American Jurisprudence, 78, Municipal Corporations, Section 389:
"It is well settled that a municipality which has been given the power of taxation by the Legislature has the power to subject *Page 362 all property within the corporate limits to municipal taxation. * * *"
Further, in the same authority at page 79, Section 390, it is said:
"It is now almost universally held that property within the limits of a municipal corporation is subject to municipal taxation, even if it is so situated that it cannot and does not derive any benefit from the expenditure of the money so raised."
There can no longer be any question in Ohio as to the power of municipal corporations to levy an income tax. In 1944 Williams, J., in a concurring opinion in State, ex rel. Arey, v.Sherrill, City Mgr., 142 Ohio St. 574, 53 N.E.2d 501, at page 588 stated:
"* * * The power of a municipality to adopt an excise exists so long as the state has not invaded or pre-empted this particular field by passing a law providing for the same kind of excise. See State, ex rel. Zielonka, City Solicitor, v.Carrel, Auditor, 99 Ohio St. 220, 124 N.E. 134; City ofCincinnati 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. Compare Hall v. Industrial Commission,131 Ohio St. 416, 3 N.E.2d 367."
This, of course, was directly contrary to a statement in a case decided much earlier. See State, ex rel. Zielonka, CitySolicitor, v. Carrel, Auditor, 99 Ohio St. 220, 124 N.E. 134, where at page 228 the court said:
"It may be said in this connection that it is clearly to be implied from the Constitution that municipalities are without power to levy an income or inheritance tax."
Another landmark in the field of municipal income taxation is the case of Haefner v. City of Youngstown, 147 Ohio St. 58,68 N.E.2d 64, where an ordinance of the city of Youngstown was invalidated. That ordinance sought to levy a tax of two and one-half per cent upon the net rate charged for certain public utility services including natural gas, electricity, water and telephone.
The ordinance was held unconstitutional under the doctrine of pre-emption. The opinion stated that the state already had levied a tax on the gross receipts of utility companies and *Page 363 that this had the effect of pre-empting this field of taxation in favor of the state and deprived municipalities of the right to enter such field.
As to the general power of municipalities to levy such taxes within limits, paragraph three of the syllabus of the Haefnercase, supra, provides as follows:
"3. Municipalities have power to levy excise taxes to raise revenue for purely local purposes; but under Section 13, Article XVIII of the Constitution, such power may be limited by express statutory provision or by implication flowing from state legislation which pre-empts the field by levying the same or a similar excise tax."
Williams, J., in the course of the opinion in the Haefnercase, supra, states categorically there is no express grant of taxing power to municipalities so to do. At pages 60 and 61, he wrote as follows:
"The power to tax has not been expressly conferred upon municipalities and, were there no binding precedents, the question as to the existence of any such power would present some difficulty, as was pointed out by Judge Robinson in City ofCincinnati v. American Telephone Telegraph Co., 112 Ohio St. 493,147 N.E. 806."
Directly bearing upon the question of taxing of a nonresident is the case of Angell v. City of Toledo, 153 Ohio St. 179,91 N.E.2d 250. This case involved the question of the power of the city of Toledo to levy an income tax upon a nonresident who worked in and was paid in the city of Toledo. The decision of the court held that the city of Toledo had such power and that there was no valid objection, either pre-emption or otherwise, to the assessment and collection of such tax against such a nonresident. The court also approved the withholding features of the Toledo ordinance.
The court in the course of the opinion was careful to limit its holding to the two express questions above set forth. As to the question of nonresidence of the plaintiff, the court points to the benefits accruing to both plaintiff's employer and plaintiff while at work resulting from services furnished by the city of Toledo. At page 185 of the opinion by Turner, J., it is stated:
"The municipality certainly does afford protection against *Page 364 fire, theft, et cetera, to the place of business of plaintiff's employer and the operation thereof without which plaintiff's employer could not as readily run its business and employ help. In other words, the city of Toledo does afford to plaintiff not only a place to work but a place to work protected by the municipal government of Toledo."
One of the more recent cases, where the pre-emption doctrine is upheld, is Ohio Finance Co. v. City of Toledo, 163 Ohio St. 81, 125 N.E.2d 731, decided March 23, 1955, by a four to three decision. In that case the syllabus is as follows:
"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."
It was stated that the Ohio Finance Company was engaged principally in making small direct loans to borrowers, taking in return interest-bearing promissory notes, and purchasing from mercantile establishments interest-bearing promissory notes representing the unpaid purchase price of articles sold by such merchants to their customers.
The Common Pleas Court had held in favor of the finance company but was reversed by the Court of Appeals on the ground that the tax imposed by the state law on the shares of stock in the finance company is essentially a property tax and not a direct income tax. This decision of the Court of Appeals was reversed by the Supreme Court of Ohio upon the ground that, under the doctrine of pre-emption, the levying of a state tax, either on income or value of intangibles and expressly exempting them from other taxes barred the city from levying its income tax against plaintiff. Zimmerman, J., in a strong dissenting opinion in the Ohio Finance Company case, supra, starting at page 86, disagreed with the majority of the court and his dissenting opinion is concurred in by Hart and Matthias, *Page 365 JJ. Whether or not there has been a pre-emption is admittedly a question difficult to determine in some cases.
A number of income tax cases discuss allegedly discriminatory features such as granting exemptions to corporations having their principal places of business inside the city from profits earned outside the city, while the income of residents of the same city whose earnings come from outside the city limits are not exempted. See City of Springfield v. Krichbaum, 88 Ohio App. 329, 100 N.E.2d 281, the second paragraph of the syllabus reading as follows:
"2. A municipal ordinance levying an income tax is not discriminatory by reason of a provision therein that corporations having a principal place of business within the city are exempt on that portion of their income earned outside the city, whereas individuals residing in the city and earning wages elsewhere are not so exempt."
The taxpayer in that case attempted to raise the question as to the right of the city to tax his earnings where the employment was outside the city, but the court held the question was not properly raised by the pleadings.
The principal questions before us have to do with the power of Columbus to tax income from land and improvements within the city of Columbus and, if it has such power, whether it can be made to extend to the income arising from land and improvements thereon inside the city limits, where the owner is a nonresident of Columbus.
Many decisions by courts within Ohio and elsewhere have been reviewed. One of the most enlightening discussions of the power to tax incomes from the standpoint of the state and political subdivisions thereof, as limited by the residence or nonresidence of the taxpayer inside the boundaries of the taxing authority and particularly as to income on property inside a municipality owned by a nonresident taxpayer, may be found in 1 Cooley on Taxation (4 Ed.). At page 218 thereof, it is stated:
"* * * The political jurisdiction of a state does not extend beyond its territorial limits, and therefore it cannot lawfully impose taxes upon persons, natural or artificial, or property, residing or situated beyond such limits. A state cannot tax *Page 366 where it has jurisdiction over neither the owner nor the property. In such a case the state affords no protection, and there is nothing for which taxation can be equivalent. But it isnot necessary that both person and property should be within thejurisdiction in order to be taxable; it is sufficient if eitheris, subject to the rules as to taxable situs laid down inanother chapter. If tangible property is within the jurisdiction, so as to acquire a taxable situs therein, the residence of the owner is immaterial. For instance, all real estate of a nonresident is taxable where it lies, though the tax will be a lien upon the land only, and cannot be made a personal charge upon the nonresident owner. So in case of intangible personal property which is taxable where the owner resides, the location of the written evidences of such property outside the state is no bar to taxing such property. * * *." (Emphasis added.)
There is admittedly a dearth of authority in Ohio upon the precise question now before this court. It is our opinion that, based upon fairness, reasonableness and logic, there is no reason why the income from property owned by a nonresident located within the city should not be taxed exactly the same as it would be if the title were held by a resident of Columbus.
As stated by Cooley (see extract above):
"* * * it is not necessary that both person and property should be within the jurisdiction in order to be taxable; it is sufficient if either is, subject to the rules as to taxable situs * * *."
The benefit of local government to a piece of real property, whether improved or unimproved, which is located within a municipality, is real and substantial. It is neither diminished nor enhanced by the fact that the owner resides outside the city.
An acre of ground located near the center of a great metropolis usually is worth many times that of an acre of ground located in a sparsely populated or inaccessible area. The difference is the population, trade, commerce restrictions, protection and the many other things which make up a municipality, some benefits and some burdens. The exemption of an individual or class within a taxing district from taxation has the effect of increasing the tax burden of those not exempt.
For the reasons above set forth this court agrees with the *Page 367 conclusions reached by Judge Gessaman in the court below, and, coming to answer the prayer of plaintiff for a declaratory judgment upon five specific questions set forth in the amended petition, is of the opinion as follows:
(a) That rents received by plaintiff, a nonresident, from real estate located within the city of Columbus are subject to the Columbus income tax;
(b) That such rents are not exempt from such tax by reason of pre-emption by the state of Ohio and the right to tax plaintiff;
(c) That such rents are not expressly or otherwise exempt from such tax by the statutes of the state of Ohio;
(d) That such rents are not exempt from such tax by virtue of the Constitution of the state of Ohio; and
(e) That such rents are not exempted from such tax by implication of the statutes and laws of the state of Ohio.
This court is of the further opinion that the prayer of the plaintiff for a permanent injunction against the enforcement of the Columbus income tax be, and the same hereby is, denied.
Judgment accordingly.
PETREE, P. J., and MILLER, J., concur.