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

In two similar cases decided on the same day, the Ohio Board of Tax Appeals (BTA) has upheld Commercial Activity Tax (CAT) assessments levied upon two out-of-state retailers under Ohio's "bright-line presence" standards, despite the fact that neither had a physical presence in Ohio.1 The retailers satisfied the bright-line presence standard because each had annual gross receipts in Ohio that exceeded $500,000. Following its previous decision in L.L. Bean,2 the BTA determined that Ohio's statutory bright-line nexus standard had been met, and reiterated that it did not have authority to consider the retailers' constitutional arguments.

Background

Newegg, Inc. and Crutchfield, Inc. are retail businesses that have no physical presence in Ohio. Newegg is headquartered in California and describes itself as a pure online retailer that only sells its products online via a Web site located on servers in California and New Jersey. Newegg has physical presence in Tennessee, California and New Jersey. Crutchfield is headquartered in Virginia and describes itself as a direct marketer of consumer electronics. The company server, warehouse and distribution center are all located in Virginia. During the relevant tax periods, both retailers' annual gross receipts to customers in Ohio exceeded $500,000. The retailers both acknowledged selling and shipping goods to customers in Ohio, but argued that they had no activities or contacts in Ohio that were sufficient for Ohio to constitutionally impose the CAT. The retailers did not file Ohio CAT returns. Subsequent to Ohio's assessment, Newegg and Crutchfield both filed petitions for reassessment.

Newegg appealed from a final determination of the Tax Commissioner which had affirmed six CAT assessments relating to periods from July 1, 2005 through the first quarter of 2011. Crutchfield appealed from three final determinations of the Tax Commissioner which affirmed multiple CAT assessments relating to periods from July 1, 2005 through June 30, 2012.

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...