Ohio Commercial Activity Tax Bright-line Nexus Constitutional-What to do now?

The Ohio Supreme Court recently held that the bright-line presence nexus standard for Ohio Commercial Activity Tax (“CAT”) does not violate the U.S. Constitution. Many taxpayers have pending audits or appeals at the Board of Tax Appeals regarding this nexus issue. What should these and other CAT taxpayers do now?

First, it is expected the taxpayer will appeal the unfavorable decision in Crutchfield v. Testa to the U.S. Supreme Court. The Court has refused to hear other cases concerning economic nexus in the past. But this case is unique because it is the first case involving a true remote e-Commerce retailer whose only contact with the state is through advertising and common carrier. Additionally, the Court could take this case to clarify that Quill does not apply to business activity taxes – or it could conclude that Quill is no longer applicable to any state taxes. In any event, taxpayers with pending audits or appeals may wish to wait to see if the U.S. Supreme Court will hear this case before taking any action to resolve their audit / appeal.

Nonetheless, the Ohio Department of Taxation has indicated it will continue to offer settlements at the same level offered before. Agreeing to a settlement, however, requires the taxpayer to forego a refund claim if the U.S. Supreme Court ultimately holds that the CAT’s economic nexus standard is unconstitutional.

Many businesses who meet the bright-line presence standard are not yet paying CAT. These businesses could register and begin complying with the CAT, although doing so without addressing past periods could result in an audit by the Ohio Department of Taxation. Another option is to enter into a voluntary disclosure agreement with the Department. This requires the taxpayer to pay the CAT plus interest for the current year and 3 previous years. Contact us to find out if applying for a Voluntary Disclosure Agreement anonymously is the best decision for your business.