Ohio Supreme Court Upholds Application of Ohio Business Tax on Out-of-State Online Retailer Businesses Having No Physical Presence in Ohio
On November 17, 2016, the Ohio Supreme Court ruled, in Crutchfield Corp. v. Testa, that the Ohio Commercial Activity Tax’s (“CAT”) $500,000 annual sales-receipt threshold is a sufficient basis for finding a substantial nexus for imposition of the CAT on the gross receipts from sales of products and services in Ohio that are received by out-of-state sellers having no physical presence in Ohio. The Court held that while a physical presence in a state may be required for the imposition of an obligation on an out-of-seller to collect a state’s sales and use taxes, the U.S Constitution’s Commerce Clause does not impose a physical presence requirement for the imposition of a business-privilege tax, such as the CAT.
Imposition of the CAT
Ohio enacted the CAT in 2005. The CAT is imposed on every person with taxable gross receipts for the privilege of doing business in the state. The tax commissioner has taken the position that the receipts of an out-of-state seller from filling orders that are initiated on computers in Ohio and arranging for its products to be transported into Ohio constitute “taxable gross receipts.” The CAT is imposed on persons with substantial nexus in Ohio, which includes a “bright-line presence” standard of those persons having taxable gross receipts of at least $500,000 per calendar year.
Background
The taxpayer, Crutchfield Corporation (“Crutchfield”), based in Virginia, sold consumer electronics through the Internet from locations outside of Ohio and shipped its products via U.S. mail or using common carriers. The Tax Commissioner found that Crutchfield had more than $500,000 in sales to customers in Ohio and assessed the CAT on such receipts. Crutchfield challenged the imposition of the CAT on such sales, based on the argument that the $500,000 threshold was unconstitutional under the Commerce Clause. Crutchfield lost at the Board of Tax Appeals and appealed to the Ohio Supreme Court.
Substantial Nexus Requirement
In Complete Auto Transit, Inc. v. Brady, the U.S. Supreme Court determined that an out-of-state company’s transactions must have a “substantial nexus” with a state in order to be taxed. Crutchfield argued that under Quill Corp. v. North Dakota, a physical presence in the state is required to meet the substantial nexus rule.
In Crutchfield, the Ohio Supreme Court held that although a physical presence in the state may be sufficient to establish a substantial nexus, it is not a requirement for a business-privilege tax like the CAT as long as the CAT is imposed with an adequate standard that ensures the taxpayer’s connection nexus with the state is substantial. The Court held that $500,000 minimum sales-receipts threshold meets the test.
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