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State & local tax alert: Ohio Commercial Activity Tax bright-line nexus standard upheld

November 28, 2016 Article 1 min read
Authors:
Stephen Palmer
If your company has annual gross taxable receipts totaling $500,000 or more in Ohio, you may be subject to the state’s Commercial Activity Tax — even if the business has no physical presence in the state.

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On November 17, 2016, the Supreme Court of Ohio issued its opinions in the three cases that challenged the Ohio Commercial Activity Tax bright-line economic presence test1. The Court affirmed the Board of Tax Appeal’s decision upholding the state’s ability to levy the Commercial Activity Tax (“CAT”) on out-of-state retailers with Ohio taxable gross receipts of at least $500,000, despite lacking physical presence in the state.

The Court held that the physical-presence requirement recognized by the United States Supreme Court for purposes of use tax collection in Quill v. North Dakota2 does not extend to business privilege taxes such as the CAT. Since the Court ruled that physical presence is not required for imposition of the CAT, it then had to decide whether $500,000 in Ohio taxable gross receipts meets the substantial nexus requirement under the Commerce Clause of the U.S. Constitution.

The Court concluded the substantial nexus requirement was satisfied since the CAT did not impose an excessive burden on out-of-state sellers, and the tax is applied equally to both in state and out-of-state sellers. The Court commented that Ohio was prescient in establishing the $500,000 taxable gross receipts threshold, since in the absence of the threshold the state would have been at risk of placing an undue burden on out-of-state sellers with minimal sales.

The Supreme Court of Ohio held that the physical-presence requirement recognized by the U.S. Supreme Court…didn’t extend to business privilege taxes like the CAT. 

The taxpayers may file an appeal petitioning the United States Supreme Court to review the Supreme Court of Ohio ruling. However, the United States Supreme Court is not required to accept the appeal. In the event the United States Supreme Court declines review of the state decision, the ruling by the Supreme Court of Ohio becomes binding precedent for all taxpayers with Ohio taxable gross receipts of at least $500,000. Businesses meeting this Ohio gross receipts threshold that have not previously been tax filers for the CAT should evaluate participation in the Ohio Department of Revenue’s CAT voluntary disclosure program to mitigate the taxes due and assessment of penalties.

 1 See Crutchfield Corp. v. Testa, Slip Op. No. 2016-Ohio-7760; Newegg, Inc. v. Testa, Slip Op. No. 2016-Ohio-7762; and Mason Cos., Inc. v. Testa, Slip Op. No. 2016-Ohio-7768.
2 Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed2d 91 (1992)

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not renderinglegal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever inconnection with its use.

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