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.

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 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.

Commentary

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.

FOOTNOTES

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions