OHIO SUPREME COURT UPHOLDS CAT BRIGHT-LINE NEXUS

A long-awaited decision rendered by the Ohio Supreme Court last week will allow Ohio’s Department of Taxation to continue to impose the commercial activity tax (CAT) on out of state companies that sell services or products to Ohioans even if they have no physical presence in the state.

By a 5-2 decision, the court decided the U.S. Constitution’s commerce clause does not prohibit a state from imposing a “privilege to do business tax.” In a majority decision, Justice O’Neill concluded Ohio’s threshold of $500,000 in annual sales meets the requirements. These taxpayers now have 90 days to appeal to the United States Supreme Court.

The ruling comes in a trio of cases with similar facts. Crutchfield Corp. from Virginia, Newegg Inc. located in California and Wisconsin-based Mason Co. had appealed rulings from the Ohio Board of Tax Appeals affirming the correctness of the tax collections.

The statute in question establishes three ways that Ohio can subject a company to paying the CAT:

1.) If the company has at least $50,000 in payroll, or

2.) $50,000 in property, or

3.) $500,000 in taxable gross receipts in the state.

The court only looked at the third prong. This is the concept of a bright-line economic nexus.

Why does this matter to you as a member? The CAT was enacted in part to help Ohio-based companies sell their products/services in other states without having to pay an Ohio tax and to make Ohio more attractive to other out of state companies. An underlying premise of that purpose was that Ohio would have authority to legally pursue companies that make sales to Ohio customers and require them to pay the CAT despite the fact they had no physical presence here. The court upheld the statutory provision that provided that if a company had at least $500,000 in annual sales in Ohio, that fact alone makes them an Ohio taxpayer. This decision merely affirms the current practice of out of state entities being subject to the CAT if they meet one of the nexus tests.

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