New Ohio Supreme Court Case Will Have Major Impact on Taxes for Out-of-state Businesses
On Nov. 17, 2016, the Supreme Court of the State of Ohio rendered a groundbreaking decision that will have a major impact on tax liability for many of our clients who operate out-of-state but ship goods to consumers in Ohio.
In the case of Crutchfield Corporation v. Testa, the only connection that Crutchfield, an out-of-state business, had with Ohio was shipping electronic goods into Ohio through the U.S. Mail or by common carrier. Crutchfield was not based in Ohio, did not have any employees in Ohio, and did not have a warehouse or any other facilities in Ohio.
Under old law, because Crutchfield had no physical connections with Ohio, it lacked what was known as a “substantial nexus” with Ohio and, therefore, Ohio could not impose taxes (sales tax, use tax, commercial activity tax) on Crutchfield’s sales in Ohio.
However, the Crutchfield case raised the principle question of whether or not the Ohio CAT tax (the Commercial Activity Tax) with a threshold of $500,000 in receipts, satisfied the substantial nexus requirement under the commerce clause of the Constitution.
In a split decision, the Ohio Supreme Court held that the $500,000 threshold for the Ohio CAT tax constituted a substantial nexus in conformance with the commerce clause of the Constitution. In other words, the Supreme Court decided that Ohio can charge the CAT tax to an out–of-state company that has no physical connection with the State of Ohio.
The Court distinguished the Ohio CAT tax, which is a tax on the “privilege of doing business in Ohio” from the state sales tax or use tax. The Court found that the CAT tax’s $500,000 gross receipts threshold was an adequate quantitative standard to ensure that a taxpayer had a substantial connection with Ohio before the CAT tax would apply, and that no physical presence was required to establish the substantial nexus for the privilege tax.
The implications of the Crutchfield case are far reaching for out-of-state businesses that make sales or ship goods to Ohio customers. Any business located outside of Ohio that has at least $500,000 in gross receipts from sales sourced in Ohio, no matter how limited its physical connections are to the State of Ohio, will be subject to the CAT tax. The holding even extends to businesses that are operating entirely offline.
For more information
If you have any questions regarding this decision or how it might affect your business, please contact Mark Reis at 513-241-0400.