United States: 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.


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 bright-line presence in Ohio; or (4) otherwise have nexus with Ohio to an extent the person can be required to remit the CAT under the U.S. Constitution.5 A person has a bright-line presence in Ohio for a reporting period if such person: (1) has property in the state with an aggregate value of at least $50,000; (2) has payroll in the state of at least $50,000; (3) has gross receipts of at least $500,000; (4) has at least 25 percent of its total property, payroll or gross receipts in the state; or (5) is domiciled in the state.6

BTA Lacked Authority to Consider Constitutional Challenges

The BTA stated the burden of proof is upon the taxpayer challenging a finding of the Ohio Tax Commissioner and that the findings of the Commissioner are presumptively valid. L.L. Bean attempted to persuade the BTA that it was not directly challenging the constitutionality of the Ohio CAT statute. Rather, L.L. Bean requested the BTA to hold that the Commissioner's assessment based on factor presence nexus was a violation of its rights under the Commerce Clause of the U.S. Constitution. According to L.L. Bean, the BTA had the authority to determine whether an assessment violates the Commerce Clause because L.L. Bean lacked sufficient nexus with Ohio. In rejecting L.L. Bean's argument, the BTA stated it was well-established that it could not decide matters of constitutionality because it lacked proper jurisdiction. The BTA cited Ohio Supreme Court precedent clarifying that the BTA's role is to be that of evidence collector when questions of constitutionality are raised in a notice of appeal to the BTA.7

The BTA acknowledged that an out-of-state seller must have "substantial nexus" with a taxing state under Quill,8 but it also was aware that the Ohio statute provides that substantial nexus exists if certain thresholds are met. Because the BTA did not have jurisdiction to consider constitutional issues, it could not decide the constitutionality of the statute that imposes nexus upon an out-of-state seller by virtue of its gross receipts, without consideration of its in-state presence. Therefore, the BTA made no findings with regard to the constitutional questions presented.9

Bright-Line Presence in State

The BTA's decision focused solely on whether L.L. Bean had nexus with Ohio for purposes of the CAT. L.L. Bean argued that its gross receipts could not be taxed under the CAT statutes because it lacked the in-state presence necessary to establish substantial nexus under the Commerce Clause.10 However, the BTA did not interpret the Ohio CAT statutes to impose an in-state presence requirement. Under a plain reading of the statutes, an entity has substantial nexus with Ohio if it has a bright-line presence, which is defined in part as having taxable gross receipts of at least $500,000 in the state. L.L. Bean had substantial nexus with Ohio because its gross receipts exceeded the statutory threshold for the relevant periods.


This case is significant because it concerns the extent to which a bright-line presence test may be used to determine nexus for purposes of a corporate tax in lieu of physical presence. The bright-line presence test in the CAT statute is similar to the Multistate Tax Commission's factor presence nexus standard model statute that was approved in 2002. Because several states have adopted a factor presence nexus standard,11 the constitutionality of this type of nexus test has become increasingly important, especially to taxpayers that have concentrated their physical operations in a small number of jurisdictions and sell to a national marketplace. It can be argued that the objective thresholds used to decide whether substantial nexus exists conflict with the judicial concept of determining substantial nexus on a case-by-case basis.

The outcome of this particular appeal heard by the BTA was in large part expected and more or less a formality. In the Commissioner's final determination, the Commissioner stated that he was without jurisdiction to rule on the constitutionality of the substantial nexus provisions of the CAT.12 Likewise, the BTA, as a quasi-judicial body, had the same jurisdictional limitations. L.L. Bean will probably appeal this decision to the Ohio Supreme Court. If such appeal is made, and the Court grants certiorari for review (the likelihood of which is relatively high, given the prominence and novelty of the issue in the state), the Court would have the opportunity to fully evaluate whether the "bright-line presence" standards as currently articulated in the Ohio Revised Code are in violation of the Commerce Clause of the U.S. Constitution. It is unclear as to how this evaluation may unfold, as there is a lack of case law concerning the constitutionality of the substantial nexus provisions of the CAT.


1L.L. Bean, Inc. v. Tax Commissioner, Ohio Board of Tax Appeals, No. 2010-2853, March 6, 2014.

2 In re L.L. Bean, Inc., Ohio Department of Taxation, Aug. 10, 2010.

3 OHIO REV. CODE ANN. § 5751.02(A).

4 Id.

5 OHIO REV. CODE ANN. § 5751.01(H).

6 OHIO REV. CODE ANN. § 5751.01(I).

7 MCI Telecommunications Corp. v. Limbach, 625 N.E.2d 597 (Ohio 1994), citing Bd. of Edn. of South- Western City Schools v. Kinney, 494 N.E.2d 1109 (Ohio 1986).

8 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

9 The BTA explained that the constitutional arguments "may only be addressed on appeal by a court which has the authority to resolve constitutional challenges."

10 Citing Quill Corp. v. North Dakota, 504 U.S. 298 (1992); Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, 483 U.S. 232 (1987).

11 In 2009, California enacted a factor presence nexus standard for its corporation franchise tax that is effective for tax years beginning on or after January 1, 2011. CAL. REV. & TAX CODE § 23101. In 2010, factor presence nexus standards were adopted for Colorado's corporate income tax (1 COLO. CODE REGS. § 39-22-301.1) and Washington's business and occupation (B&O) tax for purposes of service and royalty income (WASH. REV. CODE §§ 82.04.066; 82.04.067).

12 In re L.L. Bean, Inc., Ohio Department of Taxation, Aug. 10, 2010.

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