Apparel Company’s Method of Sourcing Income Outside of Ohio Rejected by Board of Tax Appeals

The Ohio Board of Tax Appeals decided last month that an apparel company’s appeal of their rejected claim for a refund of Commercial Activities Tax was denied on the basis of the company’s methods to allocate sales to locations outside of Ohio. The apparel company, Nine West, when originally filing their Ohio Commercial Activities Tax returns from 2010 until 2016, allocated all income from product shipped from Ohio locations to Ohio distribution centers in their calculation, including orders where product was destined at the time of shipping to be delivered outside of Ohio. The company was audited after filing a refund claim for these taxes, and the Ohio Department of Revenue granted refunds of taxes for shipments that specifically indicated final addresses outside of Ohio. For two wholesale customers, DSW and Dressbarn, the shipping records for the time period did not indicate the specific final delivery locations, and the Department of Revenue did not accept Nine West’s allocation of these products to locations outside of Ohio based on a sample of more recent shipping data.

In arguing the appeal, the Department rejected claims that the allocation should be accepted based on prior cases where allocation was used to situs income to Ohio, arguing that requests for refunds must rely on information that was available to the taxpayer at the time of their initial shipments. The Board of Appeals rejected this argument, arguing that the Department’s interpretation of previous case law was too narrow and that knowledge obtained after the initial shipment could be sufficient proof that property was not received in Ohio. The Board of Appeals agreed that Nine West’s allocation of shipments was a valid methodology in theory, but that their sample used to determine the allocation was too short and too far removed in time from the periods in question to be sufficient. Ultimately, the Board of Appeals sided with the Department and affirmed the Tax Commissioner’s final determination.

In complex business operations, determining exactly where tax is due on gross receipts is often much more complicated than simply looking at the shipping address for an order. When tax departments are brought in on sales operations early on in a business, they can make sure that the information and the framework to properly pay tax are in place at the time of an order. When information is not available, and tax departments realize they’ve overpaid down the line, the burden of proof becomes much more difficult to meet, and money that was paid in error may not be able to be recovered.

Jones Apparel Group, et al. v. McClain, Case Nos. 2020-53, 2020-54 (Sept. 13, 2023).

Posted on October 18, 2023