Ohio: Department of Taxation updates its nexus standards

In September 2001, the Ohio Department of Taxation issued an information release describing the standards it would apply to determine whether an out-of-state seller is required to collect Ohio's use tax. The department periodically updates this information, as it did this month to address the changes that were included in the budget bill for fiscal year 2018-19, H49.

The original Information release, ST 2001-01, contains two amendments to the safe harbor exceptions, pursuant to which the department will not require an out-of-state seller to collect and remit Ohio’s use tax from its Ohio customers. There are 16 such exceptions, all addressing the nature of the out-of-state seller’s contacts with the state that will trigger the safe harbor. For example, if the out-of-state seller has an agency relationship with a telemarketer for the purpose of solicitation of customers in other states, then there is no tax collection and remittance obligation. Likewise, when the out-of-state seller merely conducts meetings in this state with suppliers of goods or services, there is no nexus.

The two amendments are these:

• Before Jan. 1, 2018, the safe harbor applies when the out-of-state seller grants a license to use software in Ohio, but only if the out-of-state seller and its agents, representatives, or any affiliated person, do not provide, from or at a location in Ohio, any technical assistance or other support. Beginning January 1, 2018, the out-of-state seller must have less than $500,000 in gross receipts for this safe harbor to apply.
• Before Jan. 1, 2018, the safe harbor applies when the out-of-state seller maintains a website on a server or similar electronic equipment in this state, unless the equipment itself is owned, leased or rented by the out-of-state seller or any member of a controlled group of which the seller is a part. Beginning Jan. 1, 2018, the out-of-state seller must have less than $500,000 in gross receipts for this safe harbor to apply.

Supplemental Information Release

The department issued Information Release ST 2017-02 in October to supplement ST 2001-01. This one covers the above-mentioned software and network related activities that will generate compliance obligations in more detail, as follows:

In-state Software Nexus: This will exist when:

• A seller uses in-state software to sell or lease taxable tangible personal property or services to consumers.
• When the seller has gross receipts in excess of $500,000 in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in Ohio, or from providing services the benefit of which is realized in Ohio.

The department illustrates this rule with the following scenario:

[A] large out-of-state seller (Seller A) that retails clothing to individual consumers through a website, also provides for the sale of the clothing through a catalog application which is downloaded onto the customer’s computer or cell phone. The catalog application is software, as is the html and java script coding used in displaying the seller’s website on the customer’s computer or cell phone. It is the presence of this software owned by Seller A in Ohio that is significantly associated with Seller A’s ability to establish and maintain its market and that meets the physical presence standard set forth in [the Supreme Court case] Quill. In 2017, Seller A had $2 million of gross receipts related to the sale of clothing to consumers in Ohio. Beginning January 1, 2018, it is presumed that Seller A has substantial nexus with Ohio and should register and begin collecting and remitting tax on purchases by Ohio consumers in 2018. Seller A’s first return would be due on February 23, 2018 for the January 1, 2018 to January 31, 2018 tax period

We described this aspect of H49 in an earlier post in July.

Network Nexus: This will exist when the seller provides or enters into an agreement with another person to provide a content distribution network in this state to accelerate or enhance the delivery of the seller’s website to consumers. The seller must have gross receipts in excess of $500,000 in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in this state or from providing services the benefit of which is realized in this state.

Here is the department’s illustration of network nexus:

[A]n out-of-state seller (Seller B) sells security services and enters into a contract with a provider of interconnected servers that accelerates the delivery of the seller’s website to consumers (Provider CDN). Provider CDN has three servers in Ohio that it will utilize to provide security for uninterrupted service and enhance delivery of Seller B’s website and/or web-based services to consumers in Ohio and surrounding states. Seller B also has $800,000 in sales of taxable security services to Ohio consumers in 2017. Beginning January 1, 2018, it is presumed that Seller B has substantial nexus with Ohio and should register and begin collecting and remitting tax on purchases by Ohio consumers in 2018. Seller B’s first return would be due on February 23, 2018 for the January 1, 2018 to January 31, 2018 tax period.

In addition, supplemental Information Release ST 2017-02 explains registration and filing requirements, and the duration of these requirements.