- The Ohio Supreme Court decision in NASCAR Holdings, Inc. v. McClain is an Ohio commercial activity tax case that provides another recent example of state courts wrestling with how to apply statutory language to source revenue from intangible property.
- This case could provide persuasive authority for sourcing issues in other states (including recent legislative changes in Pennsylvania) and for other taxes, including sales and income taxes.
- The court's focus on contract language provides a guide to planning opportunities.
On Nov. 22, 2022, the Supreme Court of Ohio issued a much-anticipated opinion addressing the sourcing of gross receipts from transactions involving intangible property. In NASCAR Holdings, Inc. v. McClain, 2022-Ohio-4131, the court held that broadcast revenue, media revenue, licensing fees and sponsorship fees that NASCAR generates are not subject to the Ohio commercial activity tax (CAT). The court unanimously rejected an assessment as to CAT assessed for broadcast revenue, media revenue and sponsorship fees. A three-judge minority joined an opinion concurring in part and dissenting in part, on the basis that the licensing fees were properly sitused to Ohio. The court's decision will have significant implications for taxpayers earning revenue from intangible property.
NASCAR is the sanctioning body for stock car racing worldwide and is headquartered in Daytona Beach, Florida. The Ohio Tax Commissioner assessed NASCAR under the CAT for four categories of gross receipts as discussed in turn below:
- Broadcast Revenue. FOX Broadcasting Company paid $1.664 billion to NASCAR for the right to broadcast a set number of races over eight years. FOX obtained the rights to broadcast the races in the U.S. and its territories and sometimes in Mexico, the Caribbean basin and Canada.
- Media Revenue. NASCAR generated revenue from licensing the right to use its brand in operating its official website and other online marketing efforts, including an online store and fantasy games and nonracing games using its brand.
- Licensing Fees. NASCAR generated fees from licensing the right to use its trademark to manufacturers, insurance companies, banks, food companies and others. The NASCAR logo could be used on flags, mugs, grill covers, hood ornaments and fuzzy dice, for example.
- Sponsorship Fees. Sponsors paid NASCAR for the right to advertise itself as a partner with the organization. AFLAC Inc., for example, paid $5.5 million for its status as the exclusive supplemental-insurance partner for NASCAR in the U.S.
Upon audit, the commissioner sitused the broadcast and media revenue to Ohio based on the ratio of Ohio cable TV households to U.S. cable TV households, using Nielsen ratings data. The licensing and sponsorship fees were sitused to Ohio based on the ratio of Ohio population to total U.S. population, using census data. NASCAR appealed the assessment to the Board of Tax Appeals (BTA), but the BTA upheld the assessment.
Receipts Not Based on Right to Use Property in Ohio
The Ohio Supreme Court held that the revenue streams in question should not be sitused to Ohio because they were not based on the right to use NASCAR's property in Ohio. The court reversed and remanded the case to the BTA. Justice Patrick DeWine, speaking for the court, observed that the tax commissioner "focuses more on the general principle underlying the CAT – to source receipts based on where the market for the sale is located – than on the actual statutory language." ¶ 37. The court identified R.C. 5751.033(F) as the applicable situsing provision. This statute treats receipts as sitused to Ohio only "to the extent" that they "are based on the right to use the property in [Ohio]." The court ruled that none of the sample contracts under review, as representative of the categories of receipts in question, connected the payments under the contracts to the right to use intellectual property in Ohio. As a result, the court held that because none of the revenue streams were based on the right to use the property in Ohio, the receipts could not be sitused to Ohio. The court found it significant that the contracts did not expressly discuss Ohio and instead allowed the right to use property over large geographic areas that included Ohio.
The dissenting opinion objected only to the treatment of the licensing fees. Three justices took the view that the licensing fees were properly sitused to Ohio under R.C. 5751.033(F) as based in part on the amount of sales making use of the trademarks in Ohio, and computed on that basis, rather than using a fixed fee. The three justices found that NASCAR did not meet its burden to show that the tax commissioner overstated the portion of licensing fees attributable to Ohio.
Emphasis on Contracts
Issues regarding the sourcing of receipts for CAT purposes have taken on increased significance in recent years. Sourcing issues also increasingly arise in the sales tax and income tax contexts. The NASCAR decision may contribute to the conversation about states sourcing revenues based on the location of a customer's customer rather than the customer itself, as the Ohio Tax Commissioner attempted to do in NASCAR. Contracts often take center stage in these discussions, and taxpayers should examine their contracts to determine the impact of the contract terms on sourcing revenue.
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