Country / Language

Ohio Supreme Court Affirms Economic Nexus Presence for Imposition of the Ohio Commercial Activity Tax


1/3/2017
 
Synopsis
 
The Supreme Court of Ohio (the “Court”) recently ruled that the commerce clause of the United States Constitution does not prevent Ohio from imposing its Commercial Activity Tax (“CAT”) on internet retailers and that the statutory $500,000 sales receipt threshold satisfies the commerce clause requirement of substantial nexus. 
 
Issue
 
The Court decided a commerce clause challenge to the Ohio CAT brought by three out-of-state retailers with no physical presence in Ohio: Crutchfield, Inc., Newegg, Inc., and Mason Companies, Inc. (collectively, “Taxpayers”).  Each retailer brought separate challenges to the Ohio CAT on commerce clause grounds, as is more fully discussed below. However, the separate challenges were consolidated on appeal. See Crutchfield Corp. v. Testa, Slip Opinion No. 2016-Ohio-7760.
 
Background
 
In Complete Auto Transit, Inc.v. Brady, the U.S. Supreme Court established the rule that a state is precluded, by the commerce clause, from imposing a tax on any business that does not have “substantial nexus” with the state.  In 1992, in Quill Corp. v. North Dakota, the US Supreme Court ruled, in a decision involving the imposition of a sales/use tax, that the “substantial nexus” threshold established in Complete Auto Transit required a taxpayer to have physical presence in the taxing state to be subject to a sales/use tax.
 
In 2005, the State of Ohio enacted a gross-receipts tax, commonly referred to as the CAT, on any business having more than $500,000 of Ohio gross receipts (e.g., the CAT imposition statutes do not require that a taxpayer have a physical presence in Ohio to be subject to such tax). As is relevant here, the Taxpayers sold their products to customers in Ohio. However, none of the Taxpayers  maintained any facilities or had any employees or representatives in Ohio (e.g., the Taxpayer’s Ohio business operations consisted solely of shipping goods to Ohio consumers using the United States Postal Service or common-carrier delivery services).
 
Taxpayers’ Argument
 
Relying on Quill, the Taxpayers challenged the imposition of the CAT on them arguing that (1) the Taxpayers did not have “substantial nexus” with Ohio and (2) a physical presence is required to subject a taxpayer to a gross-receipts type tax.  
 
Ohio Supreme Court Decision
 
The Court rejected the Taxpayer’s arguments holding that (1) a physical presence standard is not required for imposing a gross-receipts tax and (2) the $500,000 sales receipts threshold complies with the substantial nexus requirement established in Complete Auto Transit.  The Court also held that Quill has not and should not be extended beyond the sales and use tax context.  
 
What Does CohnReznick Think?
 
Today, the state tax “nexus” rules are extremely complex and more and more states have adopted and are adopting an “economic nexus” threshold for imposing their taxes.  Given the differing rules and fast changing state tax landscape, taxpayers should ensure that they understand the “doing business” rules in the jurisdictions in which they have clients.
 
Contact
 
For more information, please contact Eddie Delgado, Principal, State and Local Tax Services, at eddie.delgado@cohnreznick.com or 310-843-8246, or Henry Chiwaya, Director, State and Local Tax Services, at henry.chiwaya@cohnreznick.com or 301-280-1812, Kai Alabi, Senior Tax Associate, State and Local Tax Services, at kai.alabi@cohnreznick.com or 301-280-3091.
 
 
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.

READ MORE

Learn about our upcoming events.

READ MORE

Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


People

The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More

Services

We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More

Industries

Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more

Insights

CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More