Ohio: Challenge to imposition of the CAT on out-of-state retailers settles

The Buckeye State imposes a commercial activity tax (CAT) for the privilege of doing business in the state, as measured by a company’s gross receipts from Ohio consumers. All businesses with $500,000 or more in annual sales to Ohio consumers are subject to the CAT.

In the case Crutchfield Corp. v. Testa, internet retailers Crutchfield, Newegg, and Mason Companies all challenged the CAT under the dormant Commerce Clause doctrine and Due Process Clause of the U.S. Constitution; at issue was the collective sum of more than $200,000 in taxes, interest and penalties. Their position was that they should not be subject to the CAT because they have no physical presence in Ohio.

The Ohio Supreme Court issued an important decision in this lawsuit last November. We explained that the court had concluded, in a 5-2 decision, that the $500,000 threshold is sufficient to create nexus with the state, rendering imposition of the CAT constitutional, regardless of whether or not there was physical presence in the state. The issue that mattered most to the court was the nature of the tax: the physical presence requirement, set forth in the 1992 United States Supreme Court case Quill Corp. v. North Dakota, applied to sales and use taxes. But, the court reasoned, the CAT is a business privilege tax that is not subject to the Quill physical presence requirement for sales and use taxation.

The two justices who disagreed with this conclusion observed that Quill does not expressly state that the physical presence standard is limited to sales and use taxation. These dissenting justices would have remanded the case to determine whether the Internet retailers have a physical presence in Ohio.

Determined to fight for a different outcome, the plaintiffs took their case to the United States Supreme Court, where they received two extensions of time to file their petition for a writ of certiorari; the last deadline was April 16, 2017. Bloomberg revealed that just prior to the deadline, the parties settled, the Internet companies dropped their lawsuit, and will take the necessary steps to pay Ohio’s CAT after all.

This is sure to disappoint some stakeholders who were hoping for a reversal of the conclusion that Ohio can tax out of state retailers on their in-state gross receipts. In addition, Bloomberg noted that Louisiana, Oklahoma, Oregon and West Virginia all are considering taxing commercial activities, so for them, the Supreme Court’s affirmation of the taxing scheme would have been helpful.

As for the future of business tax collections without a physical presence, one commentator has suggested that Quill would actually have little impact at all, because it is about sales and use taxes, not commercial activity taxes.