The Ohio Supreme Court filed in favor of NASCAR’s holding company in a dispute with the state tax commissioner over an audit assessment that determined that the licensing, broadcast, media, and sponsorship income was subject to the Commercial Activity (CAT) tax. NASCAR Holdings Inc currently pays tax on its commercial activities in Florida, besides specific income derived from events held in other states. In the initial audit, Ohio determined that a proportion of the income derived from NASCAR’s contracts with television advertisers should be allocated to Ohio for the purposes of the gross income based on the percentage of television viewers based in the state out of the total television viewers in the United States. The state also argued that the licensing fees charged by NASCAR for the use of the brand on products should be allocated to Ohio based on the volume of the sales of items under these licenses occurring in Ohio.
In its ruling, the court agreed with NASCAR’s argument that the contracts signed to allow use of their intellectual property by other companies did not constitute the right to use intellectual property in Ohio, as the agreements did not specify the state of Ohio or use in Ohio at any point but allowed broad use in the United States. The court determined that the receipts could be sourced to Ohio only in “to the extent that they are based on the right to use the property in Ohio.” Because the broadcasters would have paid the same amount regardless of whether they used the intellectual property in Ohio or not, the gross receipts could not be “based on” the right to use the property in Ohio.”
Though Intellectual Property may be subject to gross receipts taxes like the Ohio CAT and not sales tax, as many states expand their tax bases in our increasingly digital economy the specific language of contracts and how they allow use by the purchaser becomes a increasingly vital issue to understand for many tax types. Whether the issue is multiple points of use of software, or the income used to calculate a gross receipts tax, looking at how different states can interpret contract language and communication between legal, accounting, and sales departments is key. (NASCAR Holdings Inc. v. McClain, Slip Opinion No. 2022-Ohio-4131; Case No. 2021-0578)