Key Takeaways:
- The Ohio Supreme Court recently issued a decision that provides important guidance regarding the application of the agency exclusion to the definition of gross receipts for Ohio Commercial Activity tax purposes.
- The Ohio Supreme Court in Aramark Corporation v. Harris declined to follow prior case law on the CAT and the decision suggests that taxpayers should focus on the language of the CAT statute more so than general principles of agency law.
- CAT taxpayers may consider tailoring the language of their contracts and other business records to show a separation of reimbursements from a management fee.
The Ohio Supreme Court issued a decision on June 18 that Ohio Commercial Activity Tax (CAT) taxpayers should consult for insights that may strengthen their ability to claim the exclusion from the CAT for money or revenue received as an agent. The case is Aramark Corporation v. Harris, Slip Opinion No. 2025-Ohio-2114.
Aramark provides food services to customers and facilities in industries such as education, sports and entertainment, business dining, healthcare and corrections. Aramark purchases food, labor and materials (for example packaging) from third parties. The Court in ¶5 of the decision outlined the two types of contracts – management fee contracts and profit and loss contracts – that Aramark used:
- "Under a management-fee contract, the client reimburses Aramark for its purchase of food, labor, and miscellaneous materials from third-party vendors—thus, taking ownership of the inventory—and pays Aramark a management fee. Because the management-fee client owns the inventory, it earns a profit or suffers a loss depending on whether its register receipts (i.e., sales) exceed its expenses.
- By comparison, under a profit and loss contract, Aramark maintains ownership of the inventory and keeps the receipts earned at the register, thus bearing the risk of loss."
Only the management fee contracts were at issue in the Aramark case.
In a 5-2 decision, the Supreme Court denied Aramark's request for refund. While the majority decided against the taxpayer, the decision provides useful guidance to help taxpayers plan to achieve a favorable result.
The majority focused very specifically on the language of the statute providing the exclusion. While a general feature of the CAT is that a taxpayer may not deduct expenses, "gross receipts" for purposes of the CAT agency exclusion does not include "[p]roperty, money, and other amounts received or acquired by an agent on behalf of another in excess of the agent's commission, fee, or other remuneration." In that context, "'[a]gent' means a person authorized by another person to act on its behalf to undertake a transaction for the other, including . . . [a] person retaining only a commission from a transaction with the other proceeds from the transaction being remitted to another person."
Aramark, according to the Court, failed to prove that it "passed on to its third-party vendors the reimbursement it received from its management fee clients." ¶14. As a matter of economics, one could argue that the only profit Aramark received was the management fee and that the purchases from third parties reimbursed by the client were a wash. The Court, in its analysis of the agency exclusion, focused both on the statutory requirements of the CAT and the manner in which the relationship between Aramark and its customers was expressed and accounted for in its records.
Significantly, the majority also declined to follow its earlier decision in Willoughby Hills Dev. & Distrib., Inc. v. Testa, 2018-Ohio-4488, where the Court stated that a taxpayer was required to demonstrate actual authority to bind the principal in order to successfully assert the agency exclusion to the CAT.
The Aramark decision thus suggests that taxpayers should focus on the language of the CAT statute more so than general principles of agency law. In addition, there may be opportunities for CAT taxpayers to tailor the language of the contracts and other business records to show the separation of the reimbursements from the management fee.
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.
