In a highly anticipated decision, the Ohio Supreme Court recently held that the physical presence of a taxpayer in Ohio is not a prerequisite for the imposition of the Ohio Commercial Activity Tax (or CAT). This decision will likely signal a “green light” for revenue-hungry states seeking additional to shore up budget deficits.
Effective in 2005, the CAT imposes a tax on the privilege of doing business in Ohio. For purposes of this tax, a taxpayer is presumed to have “substantial nexus” and, therefore, subject to tax, if the taxpayer:
- owns property in the state with an aggregate value of $50,000;
- has payroll in the state of at least $50,000;
- has taxable gross receipts in the state of at least $500,000; or
- has at least 25% of its total property, total payroll or total gross receipts attributable to the state.
Ohio refers to these tests as their “bright line presence” standards.
The taxpayer in the case, Crutchfield Corp., was a Virginia-based online retailer of many types of consumer goods. Crutchfield argued that in order to be subject to the CAT it needed to be physically present in Ohio. To hold differently, contended Crutchfield, would run afoul of the U.S. Constitution. In its 1992 decision of Quill Corp v. North Dakota, the United State Supreme Court concluded that a prerequisite for the imposition of sales tax was the physical presence of the taxpayer in the taxing state. Crutchfield had no payroll or property attributable to Ohio. Crutchfield’s only connection to Ohio was that it had taxable gross receipts from Ohio sources in excess of $500,000. This, without some tangible physical presence, contended Crutchfield, was insufficient to uphold the CAT assessment.
In its ruling, the Ohio Supreme Court held that the physical presence of the taxpayer in Ohio was not needed in order to impose the CAT. Further, the Court stated that the $500,000 receipts threshold was consistent with the recent decisions of the United States Supreme Court. The Court distinguished the Quill decision by noting that it dealt solely with sales taxes – the CAT is not a sales tax.
Since the Quill decision, the online marketplace has exploded. Retailers no longer need a brick-and-mortar storefront to have substantial economic presence in a taxing jurisdiction. As more and more retail business has moved online, states have scrambled to capture lost sales tax revenue. States, such as Ohio, have taken the position that all that is needed to support taxing jurisdiction – in the absence of physical presence – is a substantial economic presence. For example, the states of California, Colorado and Washington have similar nexus standards. Once can expect additional revenue-seeking states to follow suit.