Out-of-state businesses with little-to-no connection with Ohio owe commercial activity tax based upon their customers’ subsequent shipment of products to Ohio.
Ohio’s 10th District Court of Appeals affirmed the Board of Tax Appeals’ decision upholding commercial activity tax (CAT) assessments issued to a Georgia business with no activities in Ohio and minimal (if any) direction towards the state’s market. The Court held that application of the Ohio CAT’s market-based situsing principals to the taxpayer’s, Greenscapes Home & Garden Products, gross receipts from sales of products delivered to the customer for subsequent shipment to Ohio was proper and did not violate the U.S. Constitution.
In Greenscapes Home and Garden Products v. Testa, 2019-Ohio-384, the taxpayer initially asserted that gross receipts from products delivered directly to customers in Georgia were not subject to Ohio CAT. Although the taxpayer delivered the products to the customer or its designee in Georgia, those products were shipped by the customer to distribution centers in Ohio. The taxpayer was aware the products would be shipped to Ohio since it had prepared the shipping labels and bills of lading. Under the CAT’s situsing statute – R.C. 5751.033(E) – gross receipts are sitused to Ohio if the purchaser ultimately receives the products in Ohio after all transportation has been completed. Based upon some old corporate franchise tax cases, similar statutory language was interpreted to encompass a customer’s shipment of products following acceptance thereof.
Greenscapes did not present evidence that Ohio was not the final destination of the goods, as the customers shipped the goods again after arriving at their Ohio distribution center. Instead, Greenscapes relied on constitutional arguments to preclude the application of the CAT to its receipts. It argued that the CAT violated the Commerce Clause and the Due Process Clause since Greenscapes lacked sufficient connections to Ohio. But Greenscapes knew that its products were destined for Ohio when the orders were placed. The evidence presented established that the products were ultimately received in Ohio and, therefore, Greenscapes had substantial nexus under Ohio’s statutory definition because it had more than $500,000 of Ohio gross receipts. R.C. 5751.01(I).
This is certainly not the end of Ohio’s sluggish development of laws governing the sourcing of sales of tangible personal property. This decision highlights the critical importance of documentary evidence of the ultimate destination of a seller’s products. We discussed the BTA’s decision in our previous post, which left open the possibility of establishing a non-Ohio situs based upon further shipments outside Ohio by the customer.
Please contact us if you have any questions regarding the situs of your business’ gross receipts for CAT purposes or any other Ohio tax questions.
Attorney Steven A. Dimengo is Managing Partner of Buckingham, Doolittle & Burroughs, LLC and chair of the taxation practice group. He helps clients with complicated tax challenges including Ohio sales/use, income, commercial activity and federal taxes and has represented clients before the Ohio Supreme Court. Steve can be reach at [email protected] or 330.258.6460.
Buckingham Partner Richard B. Fry III is a member of the taxation practice group with a focus on state and local tax compliance and controversies, including Ohio and multistate sales/use tax, commercial activity tax, and personal income tax issues. He also represents clients in federal income tax controversies with the Internal Revenue Service (IRS). Rich can be reached at [email protected] or 330.258.6423
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