CAT Update: Ohio Supreme Court Issues Two Decisions Addressing Shipment Of Goods To An Ohio Distribution Center

February 2, 2026

In two recent decisions, the court struck down the Department of Taxation’s “contemporaneous knowledge” requirement and addressed the subsequent removal of goods from Ohio distribution centers.

Background

Since Ohio enacted the commercial activity tax (CAT) in 2005, many manufacturers and wholesalers that ship goods into Ohio distribution centers have struggled to apply the sourcing provisions set forth in R.C. 5751.033(E), the so-called “ultimate destination” rule. On one hand, this statute is almost identical to the sales factor rules under the old corporation franchise tax (which was phased out as part of that same 2005 legislation), and there is case law interpreting and applying those provisions. On the other hand, the Ohio Department of Taxation almost immediately attempted to insert language in those provisions that the General Assembly did not include – the so-called “contemporaneous knowledge” requirement. See Information Release 2005-17. Under this questionable proposition, a taxpayer could source its receipts to the ultimate destination after all transportation was complete, but only to the extent that the destination was “known by the seller at the time of the sale.” Under this position, a taxpayer who shipped goods to an Ohio distribution center, including one known to ship most or all goods to subsequent locations outside Ohio, was required to source 100% of those sales to Ohio unless the taxpayer could show that they knew the out-of-state locations at the time it shipped the goods to Ohio.

A year after enacting the CAT, the General Assembly added an exclusion for “qualifying distribution center receipts.” To qualify for this exclusion, the operator of an Ohio qualified distribution center (QDC) meeting certain qualifications must pay a $100,000 application fee. In exchange, the Department of Taxation will certify the distribution center’s “Ohio delivery percentage.” Sellers who ship into a QDC can then report their taxable gross receipts in accordance with that percentage, and avoid the angst of applying R.C. 5751.033(E) and the contemporaneous knowledge requirement. Although the QDC laws purport to give sellers an exclusion from taxable gross receipts, one could argue that they effectively substitute an alternative sourcing rule.

VVF Intervest, L.L.C. v. Harris (The ‘Second Sale’ case)

In VVF Intervest, the Ohio Supreme Court found that a subsequent shipment out of an Ohio distribution center by the purchaser (to fulfill the purchaser’s sale to another party) was not to be considered in determining the “ultimate destination” of the seller’s original sale. The court emphasized that the critical question was where the purchaser received the goods, and in this case, the purchaser’s subsequent sale and shipment to its customer did not control the seller’s sourcing of the first sale to the purchaser.

In this case, VVF (the seller) is a contract manufacturer of bar soap. VVF manufactured the soap in a Kansas facility, and High Ridge Brands (HRB), also known as the purchaser in this case, directed a third-party contract carrier to pick up the soap and transport it to a third-party warehouse in Ohio. The soap typically remained in the warehouse for about two months, then HRB would ship it to HRB’s customer (e.g., Target).

VVF filed CAT refund claims, sourcing its receipts based on the ultimate destination of the soap, i.e., the locations of HRB’s customers outside Ohio. The Tax Commissioner denied the refunds, but the Board of Tax Appeals found that the Ohio warehouse was “just one leg of HRB’s transportation and continuous delivery process” that terminated outside Ohio. The court disagreed, finding that HRB received the soap in Ohio and that “the statutory analysis does not follow the goods indefinitely; it stops when the seller’s delivery obligation is fulfilled, and the purchaser receives the property.” The court seemed to place weight on the fact that the goods were not transported directly out-of-state, but remained in the warehouse for some time.

The court rejected VVF’s argument that imposing CAT on its receipts, while not imposing CAT on a hypothetically identical taxpayer who sells into a QDC, would violate the Equal Protection Clause. Notably, the QDC laws do not differentiate between shipments out of Ohio to a third party (i.e., a second sale) or shipments out of Ohio to another location of the purchaser. Both types of shipments reduce the Ohio delivery percentage. In finding there was no Equal Protection violation, the court said the General Assembly could have plausibly intended to make Ohio friendlier for suppliers who do business with a large distribution center, and that is within the General Assembly’s discretion.

Jones Apparel Group / Nine West Holdings, Inc. v. Harris (The ‘Contemporaneous Knowledge’ Case)

There are two important takeaways from Jones. First, the court unambiguously rejected the Tax Commissioner’s “contemporaneous knowledge” requirement. Second, a taxpayer still needs to present competent and probative evidence that supports their sourcing of gross receipts and, in the case of a refund, ties closely to the specific amount claimed.

In this case, Jones sold shoes to DSW and shipped the shoes to DSW’s Ohio warehouse. DSW subsequently shipped the shoes to DSW’s retail stores across the country. Jones did not know the specific locations where DSW would send the shoes, and initially reported all sales to Ohio for CAT purposes. Jones later filed refund claims for 2010-2016 and presented evidence of the shoes’ ultimate destination that Jones gathered after the sales (none of which was provided by DSW). Jones presented testimony of one of its financial executives, who asserted that at least 80% of Jones’ shoes were shipped out of Ohio based on his personal observations and various calculations, which showed that it would have been basically impossible for DSW to have sold 100% of Jones’ shoes in Ohio stores. Jones also presented testimony from a consultant who opined that 3.85% of the shoes had likely been shipped to Ohio stores based on his use of a software application to query the availability of the shoes in Ohio stores during three months in 2018.

The Tax Commissioner argued that a taxpayer’s subjective knowledge, as evidenced by its records created at or near the time the transactions occurred (e.g., a shipping label), should control situsing under R.C. 5751.033(E). The court correctly found no support for that position in the statute. The court was likewise unmoved by the Tax Commissioner’s equitable justifications for her position (e.g., the administrative burden of auditing information that might have been produced by the purchaser rather than the seller). The court rejected the Tax Commissioner’s call to exceed its constitutional role by adding words to the statute.

However, the court found that Jones had not carried its burden of showing that it was entitled to a refund. Jones, the Tax Commissioner, and even the court all agreed that some, if not most, of the shoes were likely shipped to DSW stores outside Ohio. However, the court agreed with the Board of Tax Appeals that the evidence did not support a specific amount of refund. While the Jones executive was sure that at least 80% of the shoes went out of state, that assertion, combined with his other calculations based on public information, did not rise to a quantitative showing in the court’s eyes. Further muddying the evidentiary waters, Jones’ consultant said about 96% of the shoes went out of state, but the court found his sample size was too small and based on data outside the refund periods.

Takeaways

Many taxpayers (and practitioners alike) will appreciate the Ohio Supreme Court jettisoning the contemporaneous knowledge requirement and providing some clarity on subsequent transportation by the purchaser out of the Ohio distribution center. However, the court also reminded taxpayers that evidentiary standards must still be met, and those standards require a reasonable degree of precision in identifying goods that leave Ohio.

To discuss how these decisions might impact your company’s CAT reporting, contact your GBQ SALT advisor.

By John Petzinger, J.D., State & Local Tax