The Ohio Supreme Court recently upheld the “bright-line” factor presence test in Ohio’s Commercial Activity Tax (CAT) law. The taxpayers argued that imposition of the CAT gross receipts tax on out-of-state sellers with no physical presence in Ohio violated the Commerce Clause. Sellers are subject to the CAT if they have at least $50,000 in payroll, $50,000 in property, or $500,000 in taxable gross receipts attributable to Ohio during a calendar year. The physical presence requirement for sales and use taxes was confirmed in 1992 by the United States Supreme Court in Quill v. North Dakota . The Ohio Supreme Court ruled that the Quill opinion on physical presence does not apply in the case of the CAT, since the CAT is not a sales or use tax. The CAT is considered a business privilege tax, and physical presence is not required for substantial nexus to be met.

The Commerce Clause apportionment requirement is designed to limit the states powers to tax and avoid double taxation. Companies doing business in more than one state must first understand where nexus exists. Nexus standards vary by state depending on whether an income, gross receipts or franchise tax is imposed. Next, multistate businesses must apportion their income according to varying rules in each state. Some states may allow a credit against taxes for taxes paid to another state. It is critical that taxpayers understand the differences between each state’s nexus and apportionment rules to avoid tax exposure, and minimize state taxes.

Taxpayers doing business in multiple states who make sales via catalogues or the internet, and sell into Ohio may have CAT tax nexus and outstanding taxes due for multiple years. The Ohio Voluntary Disclosure Program is available for taxpayers to come forward anonymously to resolve CAT liabilities and move into compliance. In return, the Department of Taxation limits their audit lookback period to three years, and waives penalties.

Contact Us
For more information on Ohio’s Commercial Activity Tax or how this may impact your company, have a member of the Barnes Dennig team contact you here, or call 513-241-8313.

 

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[1] Crutchfield Corp. v. Testa, Slip Op. No. 2016-Ohio-7760;

Newegg, Inc. v. Testa, Slip Op. No. 2016-Ohio-7762;

Mason Cos., Inc. v. Testa, Slip Op. No. 2016-Ohio-7768.

[1] Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed2d 91 (1992)