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Ohio: Supreme Court holds local income tax preempted for “motor transportation companies”

The Ohio Supreme Court has recently held that the Village of Seville’s (the Village's) income tax on net profits was preempted by a state law when such local income tax was applied to “motor transportation companies.” (Panther II Transp., Inc. v. Seville Bd. of Income Tax Rev.).

In Panther II, the taxpayer, a motor transportation company, requested tax refunds for tax years 2005 and 2006 totaling an aggregate amount of $161,761. The taxpayer argued that former Ohio Revised Code § 4921.25 (now codified as Ohio Revised Code §4921.19(J)) preempted local governments from imposing income taxes on motor transportation companies because the taxpayer was subject to the regulation of the Public Utilities Commission of Ohio (PUCO) and annually paid certain per-vehicle taxes and fees required by state law. The Village argued that the state law’s preemption was only limited to regulatory fees and taxes.

Former Ohio Revised Code § 4921.25 (now codified as Ohio Revised Code §4921.19(J)) provides that:

The fees and charges provided under section 4921.18 of the Revised Code shall be in addition to taxes, fees, and charges fixed and exacted by other sections of the Revised Code * * *, but all fees, license fees, annual payments, license taxes, or taxes or other money exactions, except the general property tax, assessed, charged, fixed, or exacted by local authorities such as municipal corporations, townships, counties, or other local boards, or the officers of such subdivisions are illegal and, are supervised by sections 4503.04, 4905.03, and 4921.02 to 4921.32, inclusive of the Revised Code. (Emphasis added)

The Court determined that given the plain reading of the statute’s expansive language, the General Assembly intended to impose the broadest possible preemption of local taxing power. This preemption, therefore, encompassed local income taxes when applied to motor transportation companies. In addition, the court found that given how broad the General Assembly made the language of the preemption, “it became necessary to expressly permit the property tax to be imposed.” This demonstrated that the General Assembly was aware of the preemption’s broad reach and still chose to only exempt property taxes.

The Village argued that because local income taxes did not exist in Ohio at the time the statute was passed, the preemption did not apply to such taxes. However, the court dismissed the argument because the statute’s terms did not limit its reach to only taxes that were effective on the date of the statute’s enactment. Rather, the statute “broadly preempt[ed municipalities] without regard to when the municipality might choose to pass a new tax ordinance.”

As an aside, although not addressed by the court, when the General Assembly revised the statutes regulating motor transportation companies in 2012, it did not add local income taxes as a carve out from the preemption language. This suggests that even assuming the Village’s argument regarding the nonexistence of income taxes at the time of the statute’s enactment, the General Assembly still chose to not add income taxes as an exception.

This case is an example of how state laws that regulate industries may preempt certain local taxes and why companies in such regulated industries should seek advice to determine their local tax obligations.

Maryland: Intangible out-of-state holding companies potentially have corporate income tax nexus according to recent Maryland high court decision

On March 24, 2014, Maryland’s highest state court, the Maryland Court of Appeals (the Court), affirmed lower court decisions finding that two subsidiary holding companies incorporated in Delaware, were liable for corporate income taxes in Maryland (Gore Enterprise Holdings, Inc. v. Comptroller of Treasury). The Court held that the subsidiary holding companies had corporate income tax nexus in Maryland because they did not have real economic substance separate from their parent company. Furthermore, the Court found that the Maryland comptroller’s deviation from the standard regulatory apportionment formula was allowable under the exceptions in the laws, which permit the comptroller to use a different formula to more accurately assess a corporation’s tax liability generated from business conducted in the State of Maryland. Had the comptroller used the standard apportionment formula, the subsidiary holding companies’ tax liability would have been zero.

Factual background

The parent company was W.L. Gore & Associates, Inc. (Gore), a manufacturing company known for its patented “EPTFE” material used in fabrics, medical devices, electronics, and industrial products. Gore operates factories in many states including Maryland. The subsidiaries involved in this case were Gore Enterprise Holdings, Inc. (GEH) and Future Value, Inc. (FVI).

GEH was created by Gore in 1983 to manage Gore’s portfolio of patents. Gore assigned its entire patent portfolio to GEH and then GEH licensed back the patent portfolio to Gore, requiring Gore to pay a royalty equal to 7.5 percent of all sales made by Gore. GEH also paid Gore’s attorneys to perform various activities related to patent prosecution, patent defense and patent licensing. Gore employees generate research and ideas, which are sent to GEH for patent application filing. Beginning in 1995, GEH had one employee who was the patent administrator, tasked with managing the portfolio, implementing the decisions of the GEH board of directors, and reporting GEH’s activities to the board. Also beginning in 1995, GEH paid Gore to rent office space for this employee.

Similarly, FVI was created by Gore in 1996 to perform investment management services for Gore. In this role, FVI extended a line of credit to Gore. Two members of the Gore board and the vice president of GEH comprised the FVI Board. As of 2008, FVI had three employees who handled all activities of the company.

Following the comptroller’s audit of Gore, GEH and FVI, it assessed tax, interest and penalties as follows: $26,436,315 against GEH for 1983-2003; $2,608,895 against FVI for 1996-2003; and $193,178 against Gore for 2001-2003. GEH and FVI challenged these findings in the Maryland Tax Court. The case underwent several appeals which were ultimately heard by Maryland’s highest court, the Maryland Court of Appeals.

Income tax nexus with the State of Maryland

The subsidiary companies argued that they lacked sufficient nexus with Maryland for the comptroller’s assessment of taxes to be constitutional under the Due Process and Commerce Clauses. Under Maryland case law, the courts have concluded that there is sufficient nexus with the State of Maryland to justify taxation if the out-of-state subsidiaries have no real economic substance as separate business entities from the parent company. The Court pointed to the following specific facts (among others) showing that GEH and FVI had no real economic substance as separate business entities from Gore:

  • GEH and FVI depend on Gore for their existence.
  • Gore controls GEH and FVI through stock ownership, as well as common employees, directors and officers.

  • GEH relied on Gore for inventions and discoveries described in the patent applications.

  • GEH and FVI relied on Gore personnel, office space and corporate services.

  • There was a circular flow of money among the entities through royalties, dividends and loans.

The Court concluded that in applying the test it previously established in the factually similar case of Comptroller of the Treasury v. SYL, Inc., the Gore subsidiaries had no economic substance as separate business entities. The Court did not find persuasive GEH’s and FVI’s arguments that they were separate business entities for taxation purposes because they were created for legitimate business reasons, engaged in substantial activities, and entered into transactions with Gore on an arm’s length basis or at market rates.

The Court also discussed the applicability of the unitary business principle to determine how much the state could tax of the company’s entire income. The unitary business principle provides for states to tax the portion of value that the business derived from its operation within the state. The unitary business principle becomes applicable when a parent and subsidiary company present characteristics of “functional integration, centralized management, and economies of scale.” However, the Court was explicit in stating that the unitary business principle could only be used to determine how much a state can tax an out-of-state company, it could not be used to satisfy nexus for constitutional requirements.

The Maryland comptroller’s apportionment formula change

The subsidiary companies also argued that the comptroller used a prohibited formula to determine the apportionment tax liability owed by each subsidiary. They argued that the comptroller did not use the formula set out in Maryland statutory and regulatory law which used solely payroll and property to determine liability; thus, they argued the amount assessed was improper. Had the comptroller used the formula set forth in Maryland law, the subsidiaries apportioned tax liability in Maryland would have been zero. The Court rejected this argument, stating that Maryland law provided exceptions to this set formula, which allowed the comptroller to alter “if circumstances warrant, the methods [of apportionment calculation] or [if the apportionment formula] does not fairly represent the extent of the corporation’s activity in [the] State[.]”

Looking forward

The takeaway companies should have from this case is the indication that a separate economic substance analysis may be key in imposition of out-of-state tax liabilities, and they should plan accordingly. Companies should consider ways in which they can establish separate economic substance for their subsidiaries in order to create separate and distinct business entities for state tax purposes. 

Wyoming: Paying tax to sleep in Wyoming? Giants of online travel arrangements lose tax case with significant implications

What did,,, Hotwire, Orbitz, and all have in common this past month? No, not that they were the websites you consulted when beginning your summer travel plans (although they may have been). The correct answer is they were joint petitioners and lost in the Supreme Court of Wyoming on their tax case: LP v. Wyoming Dept. of Rev., No. S-13-0076, --- P.3d ---- (Wyo. April 3, 2014).

The many questions presented in this case can be summarized into one concept: Can Wyoming impose its sales tax obligations applicable to lodging on out-of-state online travel companies?

This article will address a few of the questions presented and answered, but first it is important to understand the general background of this case.

Background,,, Hotwire, Orbitz, and are online travel companies (OTCs) which allow the public to book hotel rooms, airline reservations, and other travel-related services. The appeal before the Court in this case involved only the tax on Wyoming hotel rooms reserved through the OTC websites.

The facts in the case were not in dispute. None of the OTCs, their employees or their servers are located in Wyoming. None of the OTCs own or control any hotels in the state.

Hotels generally use revenue managers to set and adjust room rates and select distribution channels necessary to secure reservations. If these managers decide to use OTCs to fill rooms, they enter into agreements that allow them to market reservations for a certain number of rooms at a specified rate. The hotel controls the price and availability of rooms. Major hotel brands have central reservation systems through which OTCs use to determine rates and available rooms. Hotels without central reservation systems can accomplish the same task by uploading data to the respective OTC’s extranet. Hotels may increase or decrease the number of rooms available or close them out entirely.

There are five “models” by which hotel rooms are rented. First, the hotel can rent the room itself. The entire transaction would then be taxed at a maximum rate of 10 percent under current rates. Second, a travel agent may book the room for the traveler. In this “agency model” transaction, the hotel charges the traveler for the room and pays tax on the entire room rental, but remits a commission to the travel agent. As such, the amount of the travel agent’s commission is taxed because it is paid in the total room rate. A third model, the “modified merchant model,” is where the customer pays the OTC to occupy a room with a credit card and the OTC also collects tax on the full amount of the rental. The OTC then remits all the funds to the hotel, the hotel pays the OTC a commission, and the hotel pays tax on the entire amount paid to the OTC.

None of these first three models are at issue in this case.

The fourth model, the “merchant model,” is where the hotel is not informed of the total amount paid to the OTC by the customer for a room. The customer does not know the net rate the hotel has agreed upon or the amount of tax collected upon it. Without an audit, the state and local taxing authorities are unable to determine the basis for the tax collected on each transaction. In such a structure, only the OTC knows the amount of the markup.

The fifth model, the “opaque model,” is also used by some OTCs. This is a variant of the merchant model where the customer does not learn the identity of the hotel until the reservation is made and payment is received. The reservation normally cannot be cancelled nor can the payment be refunded. The OTC then remits the net rate and the estimated tax on that amount before the date of the traveler’s stay. The OTCs retain the markup and do not pay sales tax on it. Because the opaque model has the same tax shortcomings (in the Court’s view) as the merchant model, it decides to only address the merchant model.

The following chart is a depiction of the Wyoming Department of Revenue’s (the Department’s) view on the various models:



Gross Amount Paid by Customer

Net Rate Charged by Hotel


Direct Rental by Hotel




Agency (Travel Agent or OTC)




Modified Merchant




Merchant and Opaque




Analysis and findings

a. The OTCs are “vendors” subject to sales/lodging tax

While the tax on lodging is imposed upon the purchaser of the lodging, a “vendor” is the person responsible for collecting and remitting such tax. A “vendor” is “any person engaged in the business of selling at retail or wholesale tangible personal property, admissions or services which are subject to taxation . . . .” Wyo. Stat. Ann § 39-15-101(a)(xv). Although other courts in other states have found that OTCs are not vendors or in the business of providing lodging services under particular statutes, the Court did not agree with the OTCs’ argument that in order to be “vendors” they must own or possess the lodging they provide to guests.

In those states that found in favor of the OTCs, however, the statute generally imposed taxes on the person “operating” the hotel (i.e., that person is the “vendor”). The Court found Wyoming’s tax applies to “the sales price paid,” which is different than imposing tax obligations on the operator of a hotel.

b. The OTCs’ portion of the fees charged for lodging are part of the “sales price paid”

Another argument advanced by the OTCs was that the sales tax is only imposed on the “sales price paid” for a hotel room. The OTCs argued that their business is providing services related to helping the traveler find a hotel room, not actually providing the lodging. The Court also did not accept this argument. The Court concluded that such services are offered by the OTCs for free, and that all the charges by the OTCs are “charges by the seller for any services necessary to complete the sale” and is not deductible from the sale price—such fees are part of the sales price.

c. The OTCs have sufficient attributional nexus with Wyoming

As for whether such OTCs had the requisite nexus with Wyoming in order to enable the state to impose sales tax obligations on the OTCs, the Court found that sufficient nexus existed. The Court reasoned, in part, that the OTCs had established physical presence in the state through its arrangements in the state. Physical presence is generally what a seller must have in a state before a state can require such seller to comply with its sales tax statutes under the US Constitution. In this case, the Court found “attributional nexus” existed because the OTCs’ business’ activities established and maintained a market within the state. The Court found that the OTCs’ relationships with the hotels, affiliates or other partners in the state, both in fact and contractually, provided sufficient nexus to require the OTC to collect sales taxes.

d. Application of the sales/lodging tax to the OTCs did not violate the Internet Tax Freedom Act

Finally, the Court addressed whether the application of Wyoming sales tax to the gross amount OTCs receive from customers violates the Internet Tax Freedom Act, P.L. 105-277, Div. C, Tit. XI § 1101 (Oct. 21, 1998). The Internet Tax Freedom Act prohibits discrimination against electronic commerce. A tax discriminates against electronic commerce if it “imposes an obligation to collect or pay tax on a different person or entity than in the case of transactions involving similar property, goods, services, or information accomplished through other means.” Because this case focused on the OTCs’ “merchant model” and the OTCs did not show any evidence where other in-state sellers using the same model were treated differently, the Court found that no violation of the Internet Tax Freedom Act was shown.


The Court found that the sales/lodging tax statutes are applicable to the entire amount the OTC customer pays such OTC for the right to occupy a hotel room in Wyoming.

While the OTCs in this case suffered from many factual aspects against them, we have seen many out-of-state business subject themselves to a state’s tax statutes by fairly minor activity which could have been avoided entirely. As such, we are available to discuss your business with you and your potential exposure to sales tax liability, as well as other federal, state and local taxes. If your business plans to expand into a new territory or add a new activity, it is important to understand your exposure in advance and plan accordingly.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our

multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.