With Ohio experiencing record tax revenues and a budget surplus, state lawmakers have been eagerly looking for a way to cut taxes. Along with a reduction to the individual income tax rates, the Ohio Commercial Activity Tax (CAT) emerged as one of the major targets of these designs. Changes to the CAT came to fruition under Am. Sub. House Bill 33, which is the state operating budget for fiscal years 2024-2025.
Starting Jan. 1, 2024, businesses will see major rollbacks to the CAT. The taxable gross receipt exclusion expands from $1 million to $3 million in 2024 and then to $6 million starting in 2025. The new law also eliminates the annual CAT filing and requires CAT returns to be filed on a quarterly basis. In addition, the CAT minimum annual tax is eliminated starting in 2024. This change effectively eliminates the CAT for taxpayers under the gross receipts threshold.
Unless the taxpayer takes the necessary steps to cancel their CAT account, taxpayers should be warned that the changes don’t exempt a registered taxpayer that has Ohio taxable gross receipts less than the increased CAT exclusion from filing returns. An account may be cancelled through the Ohio Business Gateway or by filing Form BA UF with the Department. Additionally, it’s anticipated the 2023 CAT annual return (due in May 2024) and the 2023 fourth quarter return (due in February 2024) will both have a checkbox allowing a taxpayer to cancel the account retroactively to Dec. 31, 2023.
Although there were significant increases to the CAT exclusion, the CAT rate of 0.26% remains unchanged. Aside from tax cuts, Am. Sub. House Bill 33 also made changes to Ohio’s research and development (R&D) tax credit, which is claimed against the CAT. The law empowers the Ohio Department of Taxation to audit qualified R&D expenses and requires taxpayers to maintain records substantiating the credit for four years. In addition, the credit will be required to be calculated on a member-by-member basis across an affiliated group.
Along with the legislative CAT changes, there have been several recent CAT court cases:
Aramark Corp. v. Harris
The Ohio Board of Tax Appeals (BTA) found that the Tax Commissioner required Aramark Corporation to include gross receipts from certain contracts in its CAT liability rejecting Aramark’s challenge to be considered an agent. Aramark provides food services to businesses and other institutions with two primary service models:
- Profit and loss contract: Aramark operates independently of the client and makes a profit or loss based on sales. This issue was not contested by Aramark.
- Management fee contract: Customer bears the risk of profitability. Aramark purchases food and supplies but the customer pays a management fee and reimburses Aramark for the food and supplies.
The commissioner asserted that Aramark and its clients were in a business relationship instead of an agency relationship because Aramark had no authority to bind its customers to suppliers if Aramark did not pay for food purchases. Moreover, the Commissioner argued that Aramark’s contracts allowed it to operate without the client’s actual authority related to food and supply purchases.
Ultimately, the BTA sided with the Commissioner and found that Aramark failed to demonstrate that it was acting as an agent of its clients. Therefore, the reimbursements of food and supplies under these contracts could not be excluded from the gross receipts for the CAT. While this case is currently on appeal to the Ohio Supreme Court, the case highlights the significant obstacles taxpayers face in proving that an agency relationship exists for purposes of claiming the CAT exclusion.
Jones Apparel Group/Nine West and VVF Intervest
Recently, the BTA issued a pair of decisions regarding the situs of sales of tangible personal property. Both cases involve out-of-state businesses that make use of customers’ Ohio distribution centers. Goods are shipped and stored temporarily at these distribution centers before they are shipped to customers’ retail locations within and outside of Ohio. The dispute centers on whether the taxpayer sources the gross receipts from that sale to Ohio, or to the final customer’s destination.
Historically, the department required proof of contemporaneous knowledge of the ultimate destination of the goods in order to situs sales outside of Ohio. However, the BTA found that direct interpretation of R.C. 5751.033(E) does not support the requirement of contemporaneous knowledge. In other words, the BTA found that taxpayers that ship to Ohio distribution centers do not need to prove they knew at the time of the sale that the final destination of the goods were outside of Ohio.
In Jones Apparel Group/Nine West, the BTA found that the taxpayer did not provide sufficient evidence to prove that Ohio was simply a “temporary pit stop” for the goods on the way to their final destination. The data provided by the taxpayer covered a time period that was shorter than and did not encompass the audit period. Thus, taxpayers claiming the destination of the goods is outside of Ohio must consider if they have sufficient documentation to support the out-of-state sale.
In VVF Intervest, the taxpayer shipped products to a third-party distribution center in Ohio. The distribution center would subsequently sell the products to another party and shipped some of the goods outside of Ohio. In this case, the BTA indicated that a second sale between the seller’s customer and an additional customer may not disrupt this chain of transportation to the final destination.
Both cases are currently on appeal to the Ohio Supreme Court. Taxpayers that previously included receipts shipped to Ohio distribution centers as taxable gross receipts may consider filing a protective refund claim to exclude these receipts if the necessary documentation is available.
NASCAR Holdings
The Ohio Supreme Court has found that the CAT could not be applied to a portion of the revenue a taxpayer derived from nationwide contracts licensing the rights to use its intellectual property. The taxpayer is the sanctioning body of stock car racing and is headquartered in Florida. The company had no offices in Ohio, owned no property in Ohio, and employed no workers in Ohio.
Generally, intellectual property receipts are sitused to Ohio only to the extent that they are “based on” the right to use the property in Ohio. None of the taxpayer’s contracts tied payments to the right to use property in Ohio. Furthermore, Ohio was not even mentioned in the contracts.
In its analysis, the court found the payments were contingent not on the right to use in Ohio but, rather, solely on the right to use the property. Because none of the taxpayer’s revenue categories were based on the right to use the taxpayer's property in Ohio, the Supreme Court sided with the taxpayer and sourced the taxpayer's receipts from broadcast revenue, media revenue, licensing fees, and sponsorship fees outside of Ohio.
Over the past several months, the Ohio CAT has undergone a number of significant technical changes. If you have any questions on how the legislative or case law changes impact your business or any other state and local tax questions, please contact your tax advisor.
