In a much-anticipated decision concerning the situsing of receipts from intangibles for Ohio commercial activity tax (CAT) purposes, the Ohio Supreme Court rejected the Ohio Department of Taxation'sattempt to situs NASCAR Holdings, Inc.'s broadcast revenue, media revenue, licensing fees, and sponsorship fees to Ohio. The court's opinion in NASCAR Holdings, Inc. v. McClain, Slip Op. No. 2022-Ohio-4131 (Nov. 22, 2022), confirms that under Ohio law receipts based on the right to use intellectual property may be sitused to Ohio only if the receipts, i.e., the underlying payments, are tied to a specific right to use the property in Ohio.
NASCAR sanctions and produces stock car racing events in the United States and around the world. Off the racetrack, NASCAR generates revenue from licensing its intellectual property rights. NASCAR's revenue streams during the years at issue included the following:
- Broadcast revenue, from selling the broadcast rights to its racing events to FOX;
- Media revenue, from licensing its brand for marketing efforts, including operation of the NASCAR website;
- Licensing fees, from licensing its trademark and trade name to manufacturers, insurance companies, banks, and others; and
- Sponsorship fees, from selling companies the right to advertise themselves as NASCAR sponsors or partners.
Although NASCAR held some races in Ohio during the years at issue, it was headquartered in Florida and maintained no permanent offices, property, or employees in Ohio.
The CAT is a gross receipts tax imposed on taxpayers for the privilege of doing business in Ohio, and it only applies to gross receipts sitused to Ohio. Ohio law has different rules for situsing different types of receipts, such as receipts from sales of tangible personal property, gross rents and royalties, and services. Under Ohio Rev. Code Ann. § 5751.033(F), gross receipts from the right to use intellectual property are sitused to Ohio "to the extent that the receipts are based on the amount of use of the property in [Ohio]." (Emphasis added.) If the receipts are not based on the amount of use of the intellectual property but instead on the right to use the property, then the receipts are sitused to Ohio "to the extent the receipts are based on the right to use the property in [Ohio]." A catchall provision, Ohio Rev. Code Ann. § 5751.033(I), requires gross receipts not otherwise sitused under a more specific rule to be sitused to Ohio in the proportion that the purchaser's benefit in Ohio bears to the purchaser's benefit everywhere.
The Department audited NASCAR and assessed CAT on NASCAR's four aforementioned revenue streams. The Department determined the company's broadcast revenue should be sitused under the catchall provision in Section 5751.033(I) and its media revenue under the intellectual property provision in Section 5751.033(F). The Department sitused both revenue streams to Ohio based on the proportion of the television audience in Ohio using Nielsen data, specifically the ratio of Ohio cable-TV households to all U.S. cable-TV households. The Department determined NASCAR's licensing fees and sponsorship fees should be sitused under the intellectual property provision in Section 5751.033(F), and sitused both to Ohio based on the ratio of Ohio's population to the total U.S. population using census data.
NASCAR appealed the assessment to the Ohio Board of Tax Appeals, which upheld the assessment (although it concluded that all of the revenue streams at issue should be sitused under Section 5751.033(F)). NASCAR subsequently appealed to the Ohio Supreme Court, challenging the assessment on various grounds, including that the plain language of Section 5751.033(F) prohibited the Department from situsing NASCAR's intangible receipts to Ohio and the CAT violated the Commerce Clause as applied.
The Ohio Supreme Court agreed with NASCAR that the Department improperly sitused the broadcast and media revenue and licensing and sponsorship fees and reversed the Board of Tax Appeals. The court held that the revenue streams were not based on the right to use NASCAR's intellectual property in Ohio, emphasizing that none of the licensing contracts in evidence explicitly tied payments to the right to use property in Ohio or referred to Ohio in any way. The contracts merely "granted broad rights to use NASCAR's intellectual property over large geographic areas—most often the United States and its territories—that include Ohio." As the court explained, no "causal connection" existed between the receipts at issue and the right to use NASCAR's intellectual property in Ohio. In addition, the court rejected the Department's position that, notwithstanding the plain language of Section 5751.033(F), underlying the CAT is the general principle that receipts must be sitused to the location of the market for the sale. The court commented, "To the extent that the commissioner believes that the statutory language fails to adequately reflect the policies underlying the CAT, he is free to take up that matter with the legislature."
Because the court resolved the case on statutory grounds, it did not reach NASCAR's constitutional claim.
The case is NASCAR Holdings, Inc. v. McClain, Slip Op. No. 2022-Ohio-4131 (Nov. 22, 2022). The slip opinion is available here.
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