United States: 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.


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 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

Authority to Consider Constitutional Challenges

According to the BTA, the burden of proof is on the party challenging a finding of the Ohio Tax Commissioner and the findings of the Commissioner are presumptively valid. The retailers requested the BTA to hold that the assessments based on factor presence nexus were a violation of their rights under the Commerce Clause of the U.S. Constitution. According to the retailers, the BTA had the authority to determine whether an assessment violates the Commerce Clause because both lacked sufficient nexus with Ohio. In rejecting the retailers' arguments, 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

In both cases, 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 decisions focused solely on whether Newegg and Crutchfield had nexus with Ohio for purposes of the CAT. Both argued that their gross receipts could not be taxed under the CAT statutes because they 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. Following the precedent established in L.L. Bean,11 Newegg and Crutchfield had substantial nexus with Ohio because their gross receipts exceeded the statutory threshold for the relevant periods.


Similar to the L.L. Bean case, these cases are significant because they concern 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,12 the constitutionality of this type of nexus test has become increasingly important, especially to businesses like Newegg and Crutchfield 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.

In light of the L.L. Bean decision, the outcome of these particular appeals is not surprising. The Commissioner stated in his final determinations that he was without jurisdiction to rule on the constitutionality of the substantial nexus provisions of the CAT. Likewise, the BTA, as a quasi-judicial body, had the same jurisdictional limitations. Both Newegg and Crutchfield may appeal these decisions to the Ohio Supreme Court. If such appeals are made, and the Court grants certiorari for review, the Court would have its first 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, as L.L. Bean recently settled with the Ohio Department of Taxation on appeal.13


1 Newegg, Inc. v. Testa, Ohio Board of Tax Appeals, No. 2012-234, Feb. 26, 2015; Crutchfield, Inc. v. Testa, Ohio Board of Tax Appeals, Nos. 2012-926, 2012-3068, 2013-2021, Feb. 26, 2015.

2 L.L. Bean, Inc. v. Levin, Ohio Board of Tax Appeals, No. 2010-2853, March 6, 2014 (settled on appeal, Nov. 20, 2014). For a discussion of this case, see GT SALT Alert: Ohio Board of Tax Appeals Holds Out-of-State Retailer with Significant Gross Receipts Has Substantial Nexus for CAT.

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); Cleveland Gear Co. v. Limbach, 520 N.E.2d 188 (Ohio 1988); Roosevelt Properties Co. v. Kinney, 465 N.E.2d 421 (Ohio 1984); Herrick v. Kosydar, 339 N.E.2d 626 (Ohio 1975); S.S. Kresge Co. v. Bowers, 166 N.E.2d 139 (Ohio 1960).

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

9 Quoting L.L. Bean, 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 L.L. Bean, Inc. v. Levin, Ohio Board of Tax Appeals, No. 2010-2853, March 6, 2014 (settled on appeal, Nov. 20, 2014).

12 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). In 2014, New York enacted an economic nexus standard for purposes of the corporation franchise tax and the metropolitan tax (MTA) surcharge for tax years beginning on or after January 1, 2015 (N.Y. TAX LAW §§ 209.1(b); 209-B.1(a)).

13 According to the BTA, L.L. Bean settled on November 20, 2014.

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