On November 17, 2016, the Ohio Supreme Court ruled that the U.S. Constitution does not prevent the State of Ohio from imposing its Commercial Activity Tax (“CAT”) on online retailers who have no physical presence in Ohio. See Crutchfield Corp. v. Testa
, Slip Opinion No. 2016-Ohio-7760.
In July 2005, the General Assembly adopted the CAT, which is imposed on every person with taxable gross receipts for the “privilege” of doing business in Ohio. The General Assembly applies the CAT only if a business earns $500,000 or more in annual gross sales in Ohio.
The Substantial Nexus Requirement
In Complete Auto Transit Inc. v. Brady
, the U.S. Supreme Court held that an out-of-state company’s transactions must have a “substantial nexus” with a state in order to be taxed. In order for the CAT to be imposed on out-of-state retailers, it must have an adequate connection that ensures a taxpayer’s connection to a state is substantial. According to the Ohio Supreme Court, the $500,000 minimum annual gross sales that Ohio requires in order to impose the CAT meets this test.
Arguments by Tax Commissioner and Crutchfield
Crutchfield Corporation is a Virginia corporation that sells consumer electronics online in the state of Ohio. The Ohio Tax Commissioner audited Crutchfield and determined that it owed $106,000 for the CAT, including interest and penalties, from 2005-2010. The Commissioner determined that goods purchased by Ohio consumers online and transported into Ohio by an out-of-state company make that company’s sales “taxable gross receipts.” The Commissioner argued that the $500,000 level of annual gross sales amounts to a “bright-line presence” that met the substantial nexus requirement for companies that have no physical presence in Ohio. The Ohio Supreme Court agreed.
Crutchfield relied on Quill Corp. v. North Dakota
, a U.S. Supreme Court decision, to argue that a physical presence is required to meet the “substantial nexus.”
The Ohio Supreme Court’s Decision
The Ohio Supreme Court distinguished Quill
, however, because that case dealt with a state’s requirement that out-of-state sellers act as agents of a state by charging, collecting, and remitting sales or use tax when in-state buyers order items for delivery. In Quill
, North Dakota was imposing an “administrative obligation” for regularly marketing and selling its products in North Dakota. The Ohio Supreme Court held that unlike the obligation to collect a use tax, which imposes an administrative obligation on the out-of-state company, a business-privilege tax does not. Therefore, while physical presence is one way to determine substantial nexus, it is not a requirement for a “privilege” tax like the CAT.
If you would like us to help you evaluate how this decision may affect your business or organization, please contact Frantz Ward partner Mark Rodio