Ohio Income Tax On Capital Gains of Non-Resident of Ohio Held Unconstitutional

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By Edmund G. Kauntz, Esq.

Ohio tax law generally provides that capital gain from the sale of an ownership interest in an entity is allocated to the State in which the owner resides. Thus, non-residents of Ohio generally do not pay Ohio income tax on the sale of stock or other entity ownership interests. However, Ohio Revised Code Section 5747.212 imposes Ohio income tax on capital gains realized by a non-resident of Ohio from the sale of an ownership interest in an entity if (i) the entity is a pass-through entity or meets certain ownership tests, (ii) the entity conducts business in Ohio, and (iii) the non-resident directly or indirectly owned at least 20% of the ownership interest in the entity at any time during the current or 2 preceding years. Typically, this means that Ohio income tax will apply to the capital gain realized by an owner who moves out of Ohio and then sells his ownership interest in an entity operating wholly or partially in Ohio.

In Slip Opinion No. 2016-Ohio-2805, the Ohio Supreme Court held that Section 5747.212 violates the Due Process Clause of the 14th Amendment of the United States Constitution as applied to a non-resident who sold his 79.29% in a limited liability company (LLC) which operated in Ohio and other States. The owner was a managing member of the LLC, but was not involved in the day-to-day operations and lived outside of Ohio. The Court found that in the absence of any evidence that the business of the owner and the LLC were a “unitary business”, Ohio had no constitutional right to tax the owner’s very substantial capital gain on sale.  

This decision represents a huge win for non-resident owners of Ohio businesses. 

Should you want further details Mr. Kauntz can be contacted by phone at (216) 292-5807 or by email at ekauntz@smdklaw.com.