An Ohio appeals court dealt two wins to the Tax Commissioner in recent cases involving the state’s Commercial Activity Tax (CAT) and out-of-state retailers. Both cases showcase Ohio’s successful attempts to situs gross receipts from out-of-state transactions to Ohio.
In Defender Sec. Co. v. Testa, Defender solicited home security sales contracts from Ohio customers. Defender then sold the contracts to a home security service provider (ADT) outside Ohio in exchange for a cut of the fees that ADT collected directly from Ohio customers. Defender argued that its gross receipts from the sale of the contracts should be sitused to outside Ohio because ADT receives and services the contracts outside the state. The Tax Commissioner, the Board of Tax Appeals and the appeals court disagreed. Defender’s receipts are sitused to Ohio because the service contracts originate in Ohio and ADT, as the purchaser of the contracts, receives the benefit of the security contracts when it services Ohio customers.
Greenscapes Home & Garden Prods., Inc. v. Testa exposes the uphill battle out-of-state retailers face when they challenge the constitutionality of Ohio’s CAT. This case considered where to situs the gross receipts Greenscapes receives when it sells goods to big-box retailers outside Ohio, which the retailers subsequently ship to Ohio distribution centers and retail outlets. The appeals court upheld the BTA’s determination that the ultimate destination of the product sold by Greenscapes controls where the sales are sitused. The court rejected Greenscapes’ constitutional arguments, concluding that situsing gross receipts to the destination state create nexus in Ohio. This does not violate the Commerce Clause so long as the gross receipts exceed the CAT’s bright-line nexus threshold. Additionally, Greenscapes’ systematic sale of tangible personal property that will be delivered to Ohio satisfies the 14th Amendment’s due process requirements. As a result, out-of-state retailers should be mindful that Ohio will situs gross receipts to the destination forum, rather than the place where title passes.
These cases highlight the potential exposure out-of-state retailers face when their goods or services travel to Ohio. If you are affected by Ohio’s situsing rules, GBQ SALT professionals are available to analyze your tax situation and guide you through Ohio CAT compliance.