Stay up to date with sales tax: Join our mailing list!


The Ohio Supreme Court has issued 3 decisions upholding commercial activity tax (CAT) assessments on out-of-state retailers with no physical presence in Ohio. In each case, the Ohio Board of Tax Appeals found the out-of-state online retailer to have more than $500,000 in gross receipts in Ohio sales over the periods at issue, therefore meeting the bright-line presence test for nexus with Ohio.

 

The retailers contested the CAT assessments, arguing that they lacked substantial nexus with Ohio. The retailers argued that their nexus in Ohio was not sufficiently substantial because they lacked physical presence in Ohio. On appeal to the Ohio Supreme Court, the Tax Commissioner argued that the Commerce Clause does not impose a physical-presence requirement and accordingly, the $500,000 sales receipts threshold set forth in the Ohio CAT statute satisfies the Commerce Clause requirement for substantial nexus.

 

The Court agreed with the Tax Commissioner’s argument, stating that its reading of the case law indicated that the physical-presence requirement recognized and preserved by the U.S. Supreme Court for purposes of use tax collection does not extend to business-privilege taxes such as the CAT. The Court determined that Quill v North Dakota’s holding that physical presence is a necessary condition for imposing the tax obligation does not apply to a business-privilege tax like the CAT, as long as the privilege tax is imposed with a quantitative standard that ensures that the taxpayer’s nexus with the state is substantial. The Court felt that the quantitative standard is the $500,000 sales-receipts threshold. The Court concluded that the statutory threshold of $500,000 of sales in-state constitutes a sufficient guarantee of the substantial nexus for purposes of the Commerce Clause. It is expected that these cases will be appealed to the U.S. Supreme Court.  Given the Ohio Supreme Court’s finding that the physical presence test determined in Quill does not apply to a business privilege tax, a decision if the cases were to be heard might not resolve the longstanding sales and use tax nexus question.  We will continue to monitor these cases and their relevance to sales and use tax collection responsibility.  (Crutchfield, Inc. v. Testa, No. 2016-Ohio-7760, Ohio Supreme Court, November 17, 2016; Newegg, Inc. v. Testa, No. 2016-Ohio-7762, Ohio Supreme Court, November 17, 2016; and Mason Companies, Inc. v. Testa, No. 2016-Ohio-7768, Ohio Supreme Court, November 17, 2016)

(12/20/2016)

Ohio has enacted legislation that specifically exempts digital advertising services from Ohio sales and use tax. For purposes of the exemption, "digital advertising services" means providing access, via telecommunications equipment, to computer equipment that is used to enter, upload, download, review, manipulate, store, add, or delete data for the purpose of electronically displaying promotional advertisements to potential customers. The legislation also exempts certain business-related automatic data processing, computer services, and electronic information services if they are provided in conjunction with digital advertising services but are merely incidental or supplemental to the advertising service.(H.B. 466, Laws 2016, effective October 12, 2016)

(09/28/2016)

On August 25, 2016, House Judiciary Committee Chairman Robert Goodlatte released a discussion draft of the Online Sales Simplification Act of 2016. The legislation would implement a “hybrid origin” approach for remote sales. Under the legislation, states could impose sales tax on remote sales if the origin state participates in a clearinghouse.In this case, the tax is based on the origin state’s baseand taxability rules. The rate would be the origin state rate, unless the destination state participates. In that case, the rate used would be a single state-wide rate determined by each participating destination state. A remote seller would only remit sales tax to its origin state for all remote sales. Only the origin state would be able to audit a seller for remote sales. Non-participating states would not be able to receive distributions from the clearinghouse. Sellers would be required to provide reporting for remotes sales into participating states to the Clearinghouse so it can distribute the tax to the destination state. We will continue to monitor activity and update when the official bill is introduced.  (Discussion draft of Online Sales Simplification Act of 2016)

(09/08/2016)

On July 14, 2016, Rep. Jim Sensenbrenner (R-WI) introduced the No Regulation Without Representation Act of 2016.  Taking the opposite approach of the Marketplace Fairness Act and Remote Transactions Parity Act, this proposed bill would limit the ability of states to require remote sellers to collect use tax. If enacted, the Act would codify the physical presence requirement established by the US Supreme Court in Quill Corp v. North Dakota.  The bill would define physical presence and create a de minimis threshold. If enacted, the bill would preempt click-through nexus, affiliate nexus, reporting requirements and marketplace nexus legislation. The bill would be effective as of January 1, 2017. The bill defines “seller” and provides that states and localities may not:

 

  • Obligate a person to collect a sales, use or similar tax; 
  • Obligate a person to report sales; 
  • Assess a tax on a person; or 
  • Treat the person as doing business in a state or locality for purposes of such tax unless the person has a physical presence in the jurisdiction during the calendar quarter that the obligation or assessment is imposed.

 

Persons would be considered to have a physical presence only if during the calendar year the person: 

 

  • Owns or leases real or tangible personal property in the state; 
  • Has one or more employees, agents or independent contractors in the state specifically soliciting product or service orders from customers in the state or providing design, installation or repair services there; or 
  • Maintains an office in-state with three or more employees for any purpose.

 

Physical presence would not include: 

 

  • Click-through referral agreements with in-state persons who receive commissions for referring customers to the seller; 
  • Presence for less than 15 days in a taxable year; 
  • Product delivery provided by a common carrier; or 
  • Internet advertising services not exclusively directed towards, or exclusively soliciting in-state customers.

 

The bill defines seller to exclude marketplace providers; referrers; third-party delivery services in which the seller does not have an ownership interest; and credit card issuers, transaction or billing processors or financial intermediaries.Marketplace Providers are defined as any person other than the seller who facilitates a sale which includes listing or advertising the items or services for sale and either directly or indirectly collects gross receipts from the customer and transmits the amounts to the marketplace seller. (No Regulation Without Representation Act of 2016 (H.R. 5893))

 

UPDATE: This bill failed to pass during the 114th Congressional Session running from January 3, 2015 to January 3, 2017.  Therefore, this bill has died and would need to be reintroduced to be considered and voted on.

(08/23/2016)

A taxpayer’s purchase of items including a burglar/fire alarm, outdoor illuminated sign, electrical wiring and switches, security/surveillance system, store remodeling, and air compressor were subject to Ohio use tax since the items were considered to be business fixtures. The taxpayer argued that the items were tax exempt since they were incorporated into real property. According to the “business fixture” statute, signs and equipment that are permanently attached to the land and that benefit the specific business conducted thereon are taxableas personal property not real property. The taxpayer did not provide any documentation or supporting testimony to substantiate that the items were not business fixtures. The commissioner acknowledged that some of the items assessed as “store remodeling” could potentially be categorized as realty. However, the taxpayer did not provide sufficient detail to allow the commissioner to separate the taxable from the non-taxable items. Since the taxpayer failed to meet its burden of demonstrating the error in the tax assessment on the items purchased, they were considered to be taxable business fixtures. (Pep Boys - Manny, Moe & Jack of Delaware, Inc. v. Testa, Ohio Board of Tax Appeals, No. 2015-706, April 4, 2016)

(05/10/2016)

Pages

Scroll to Top