August 28, 2003

Would affirm Village’s right to tax ‘S’ corporations—
Tax issue to appear on fall ballot

Village Council agreed last week to place on the November ballot an issue that would allow the Village to continue to collect taxes on the profits of businesses classified as S corporations.

If approved, the ballot issue would not give the Village more taxing power or increase taxes on corporations. Instead, the issue would allow the Village to maintain its authority to tax S corporations, which, according to John Chambers, the Village solicitor, are often owned and operated by a small group of shareholders.

According to MyCorporation.com, an Internet document filing service, an S corporation is a business which passes its income through its shareholders, who report the company’s income or loss on their individual tax returns.

At its meeting Aug. 18, Council unanimously approved an emergency ordinance placing the issue on the Nov. 4 ballot. The ordinance was considered an emergency because it was approved in one reading, instead of two, which is the typical number of readings.

Council elected to place the issue on the ballot because of a decision by the Ohio General Assembly that created a one-time window allowing Ohio municipalities to adopt this November a ballot issue reaffirming a local government’s right to collect taxes of out-of-state S corporations.

The election here will cover all S corporations. Since the Village believes the state legislature will try to eliminate the collection of taxes of all S corporations, the ballot issue will “reaffirm” Council’s intent to continue to collect such taxes, Council president Tony Arnett said.

Under the state law, an out-of-state S corporation would not have to pay local taxes if the corporation distributes its shareholder earnings as dividends, instead of wages, Chambers said in a memo to Village Manager Rob Hillard.

Last week, Council members said that corporations should have to pay taxes, just like Yellow Springs residents have to. Arnett also expressed frustration with the state legislature. “It’s rather annoying that they would seek to remove the taxing authority that the Village already has in place,” he said.

It’s unclear how much the Village would be affected if it could not collect taxes from out-of-state S corporations. Chambers said that the Village would likely lose a very small amount of revenue if it did not collect taxes on S corporations.

—Robert Mihalek