Ohio Board Of Tax Appeals Holds Out-Of-State Retailer With Significant Gross Receipts Has Substantial Nexus For CAT

As expected, the Ohio Board of Tax Appeals (BTA) has upheld a Commercial Activity Tax (CAT) assessment levied upon L.L. Bean, Inc. under Ohio's "bright-line presence" standards, despite the fact that L.L. Bean had no physical presence in Ohio.1 L.L. Bean satisfied the bright-line presence standard because it had annual gross receipts in Ohio that exceeded $500,000. The BTA determined that L.L. Bean met Ohio's statutory brightline nexus standard, but the BTA did not have authority to consider L.L. Bean's constitutional arguments.

Background

L.L. Bean is based in Maine and sells clothing and consumer goods at retail stores and through orders received by telephone, mail and the Internet. All of L.L. Bean's retail stores as well as its offices, warehouses, call centers and Internet operations are located outside Ohio. During the relevant tax periods from July 1, 2005 through March 31, 2008, L.L. Bean's annual gross receipts to customers in Ohio exceeded $500,000. L.L. Bean acknowledged selling and shipping goods to customers in Ohio, but argued that it had no activities or contacts in Ohio that were sufficient for Ohio to constitutionally impose the CAT. The Ohio Tax Commissioner contended that L.L. Bean engaged in continuous and systematic solicitation of the economic marketplace in Ohio by sending catalogs to Ohio residents by mail, and by engaging in numerous other forms of advertising in Ohio in various media, including print and television. L.L. Bean did not file Ohio CAT returns. Subsequent to Ohio's assessment, L.L. Bean filed petitions for reassessment.

L.L. Bean filed its notice of appeal with the BTA from a final determination of the Ohio Tax Commissioner finding that L.L. Bean satisfied the substantial nexus requirement of the Commerce Clause by its continuous, systematic and significant solicitation and exploitation of the economic marketplace in Ohio.2

CAT Nexus Standards

Under Ohio law, the CAT is imposed on persons with taxable gross receipts for the privilege of "doing business" in Ohio that have substantial nexus with the state.3 "Doing business" in Ohio means engaging in any activity, whether legal or illegal, that is conducted for, or results in gain, profit, or income at any time during the calendar year.4

To meet the substantial nexus standard, a person must: (1) own or use a part or all of the person's capital in Ohio; (2) hold a certificate of compliance authorizing the person to do business in the state; (3) have a...