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The Supreme Court of Ohio Clarifies When Out-of-State Sellers Owe Commercial Activity Tax
In Ohio, the Commercial Activity Tax (CAT) is a tax on gross receipts for the privilege of doing business in the State of Ohio. CAT applies to all business structures, such as sole proprietorships, partnerships, LLCs and corporations, and applies to businesses of all kinds if the business has taxable gross receipts from sales and services in Ohio. This includes out-of-state taxpayers who have gross receipts sitused to the State of Ohio. Under Ohio Revised Code 5751.033(E), gross receipts from the sale of tangible personal property will be sitused to Ohio if the property is received in Ohio by the purchaser and Ohio is the place at which the property is ultimately received after all transportation has been completed.
Two Separate Sales
The language of the statute called into question whether the property received by the purchaser in Ohio but subsequently sold by the purchaser to out-of-state retailers would be sitused to Ohio. In VVF Intervest, L.L.C. v. Harris, the Supreme Court of Ohio held the sale of goods to the purchaser in Ohio who will subsequently ship the goods to unrelated out-of-state purchasers does not remove the receipts from being subject to CAT based on a “two separate sale” theory. The taxpayer, VVF Intervest, L.L.C. (VVF) contracted with High Ridge Brands (HRB) for VVF to manufacture HRB’s soap at its Kansas City, Kansas, facility. VVF then shipped the soap to a third-party distribution center in Columbus, Ohio, as directed by HRB (the first sale). HRB would subsequently ship the soap to out-of-state retailers (the second sale), but VVF did not know where the soap would be sent after it arrived at the Columbus distribution center. VVF argued that even though the soap was received by HRB in Ohio, the subsequent sale/second sale to the out-of-state purchasers removed the transaction from CAT.
When A Purchaser is The Purchaser
However, as the Supreme Court points out, the subsequent sale to out-of-state retailers is not the relevant transaction for the purposes of CAT liability. The relevant transaction under Ohio Revised Code 5751.033(E) is the sale to the purchaser (the first sale), not a purchaser that may receive the property from a subsequent sale (the second sale). The first sale here was VVF’s sale and delivery of the soap to HRB at the distribution center in Columbus. Once HRB received the soap in Ohio, it had total control over the soap and any subsequent purchasers it sold to in a second sale. VVF was not a party nor had any control over the subsequent sale to out-of-state retailers and in fact had no knowledge of where the soap would be sent once it was delivered to the distribution center. The statutory analysis does not follow the goods indefinitely, it stops when the seller’s delivery obligation is fulfilled and the purchaser received the property. Postdelivery movement does not alter where the purchaser received the goods from the seller.
While the statute does provide exemption from CAT for goods that merely pass through Ohio, the goods VVF shipped to HRB in Columbus were not directly transported to an out-of-state location. The soap remained in the warehouse until HRB sold the soap to its own purchasers in a sale unrelated to the contract with VVF, and thus not relevant to the situsing inquiry required by the CAT statute.
VVF’s Constitutional Arguments/Substantial Nexus
VVF also argued the application of CAT to its sale to HRB would violate its constitutional rights under the Due Process Clause, Commerce Clause and Equal Protection Clause of the U.S. Constitution. VVF argued it did not have a sufficient connection/substantial nexus to Ohio for the State to exercise its taxing power as VVF had no physical presence in Ohio, no marketing activities directed toward Ohio, risk of loss of the property passed to HRB in Kansas when VVF delivered the goods to HRB’s designated carrier, and it lacked interaction with Ohio customers. However, a business does not have to have a physical presence within the state to be subject to the State’s taxing power. VVF did not have a physical presence in Ohio, but it availed itself of Ohio’s economic market when it prepared the bill of lading for the soap, directly shipping the soap to Ohio and placing the soap onto trucks for transport to Ohio. The Supreme Court rejected all of VVF’s arguments that applying CAT to VVF’s transaction with HRB would violate the Constitution.
Qualified Distribution Centers
It is important to note there is an exception to CAT for Qualified Distribution Centers (QDC). If your company ships qualified products to a QDC in Ohio, those shipments will not be subject to the CAT on “qualifying distribution center receipts.” A QDC is a distribution center that has obtained QDC status under Ohio Revised Code 5751.40 and qualifying distribution center receipts are those the supplier realizes from delivery of qualified property to the QDC, “multiplied by a quantity that equals one minus the Ohio delivery percentage.”
What This Means for Your Business
If your company sells and ships goods to a purchaser in Ohio, the gross receipts your company realizes on that transaction may be subject to CAT, even if you are located outside of Ohio or if the purchaser later reships the goods outside of Ohio. Before undertaking a transaction involving a purchaser in Ohio, you may wish to consult legal counsel regarding any tax ramifications.
Should you have any questions regarding how CAT may affect your business, please contact Ms. Rubin or Ms. Rowland.
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Disclaimer: This alert has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.