Constitutionality of Bright-line Standard Upheld for Ohio Commercial Activity Tax
On November 17, 2016, the Ohio Supreme Court upheld the constitutionality of the Ohio Commercial Activity Tax’s (CAT) bright-line nexus standard in three consolidated tax cases: Crutchfield, Newegg, and Mason Companies. The companies had argued that the state’s $500,000 bright-line standard, which required a company with more than $500,000 in sales to the state to file a CAT return, was unconstitutional.
The Court concluded that physical presence in Ohio is not required because the Ohio CAT is a business-privilege tax and that Quill, a use tax case, doesn’t apply.
As noted in the November 2016 decision in the Crutchfield Corp Case, “Quill’s holding that physical presence is a necessary condition for imposing the tax obligation does not apply to a business-privilege tax such as the CAT, as long as the privilege tax is imposed with an adequate quantitative standard that ensures that the taxpayer’s nexus with the state is substantial.” In Ohio, that quantitative standard is the $500,000 sales receipts threshold.
Additionally, the Court found that business-privilege taxes should be distinguished from transaction taxes such as the sales and use tax. The Court also held that the $500,000 sales receipts threshold complies with the substantial nexus requirements as decided in other cases, such as Complete Auto.
It seems likely that these taxpayers would bring this case before the U.S. Supreme Court, although the U.S. Supreme Court could opt not to hear the case, as with Gillette California MTC as discussed in a prior Marcum Tax Flash. Additionally, Ohio is not the only state with a bright-line standard, so this ruling and a potential ruling from the U.S. Supreme Court could impact a number of states.
The Court’s decision did seem to imply that the physical presence standard in Quill would still apply to sales and use tax. It is worth noting that Ohio recently passed click-through nexus provisions, not requiring physical presence for nexus, which could be challenged based upon this ruling.
Taxpayers having greater than $500,000 in sales should continue to file Ohio CAT returns. If you or your business have not been filing returns, but have over $500,000 in sales, we would suggest reviewing your nexus profile.
Please contact your Marcum tax professional to address any questions regarding this case or any other tax matter.