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)