Board of Tax Appeals Decision a Real CATastrophe for Georgia-Based Wholesaler

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

Tax Policy

Bloomberg BNA regularly spotlights the insights of state and local tax attorneys at KPMG LLP. In this installment, Sarah McGahan discusses the Ohio Tax Appeals Board's Greenscapes decision. In Greenscapes, a Georgia wholesaler sold lawn and garden products to Ohio customers who arranged for shipping and took title in Georgia. The wholesaler did not have a physical presence in Ohio, but was found to have substantial nexus for Ohio's Commercial Activity Tax.

Sarah McGahan

By Sarah McGahan

Sarah McGahan is director in the State and Local Tax group of KPMG LLP's Washington National Tax practice. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

A recent Ohio Board of Tax Appeals decision addresses an interesting issue— the interplay between Ohio's factor-presence nexus provisions and sourcing rules. The Commercial Activity Tax or CAT is imposed on each person with taxable gross receipts for the privilege of doing business in Ohio. For purposes of the CAT, substantial nexus is defined to include persons that have a bright-line presence in Ohio. A person has a bright-line presence in Ohio if it has taxable gross receipts of at least $500,000 attributed to Ohio during the calendar year. Taxable gross receipts are sitused to Ohio under a series of rules that generally look to the location of the market for goods and services. For example, receipts from sales of tangible personal property are sourced to Ohio if the property is received by the purchaser in Ohio. Service receipts are sitused to Ohio if the purchaser receives the benefit of the service in Ohio.

In Greenscapes Home and Garden Products, Inc. v. Testa, the taxpayer at issue was a Georgia-based wholesaler of tangible personal property—lawn and garden products. The taxpayer's retail customers arranged for transportation of the products from the taxpayer's Georgia facility to distribution centers, including certain distribution centers in Ohio. Title to the purchased products was transferred in Georgia when the goods were loaded onto the trucks arranged by the taxpayer's customers. The taxpayer presented the drivers of the trucks with a bill of lading that indicated the ultimate “ship to” address. The Ohio Department of Taxation, on audit, asserted that all of the receipts from sales of goods with a ship to address in Ohio were Ohio-sitused receipts. This meant that the taxpayer had over $500,000 of gross receipts sitused to Ohio and met the substantial nexus requirement.

No Physical Presence

Before the Board of Tax Appeals, the taxpayer argued that it lacked the requisite connection with Ohio under the Due Process and Commerce Clauses to be subject to the CAT. Notably, the taxpayer had no physical presence in the state and did not ship any goods directly to Ohio. However, the Board cannot address constitutional claims, and it observed that the taxpayer's constitutional arguments would have to be addressed by a court. The taxpayer also objected to the situsing position taken on audit because (1) ownership of its product transferred to customers prior to shipment, (2) it did not arrange for shipment of the purchased products, and (3) some of the products bound for Ohio distribution centers were subsequently shipped outside of the state.

Under Ohio law, gross receipts from the sale of tangible personal property are sitused to Ohio if the property is received in Ohio by the purchaser. In the case of delivery of tangible personal property by motor carrier or by other means of transportation, the place at which such property is ultimately received after all transportation has been completed is considered the place where the purchaser receives the property. So, the question was whether the property was received in Georgia when title transferred and the products were loaded onto trucks arranged for by the taxpayer's customers, or whether the products were received when they arrived at the Ohio distribution centers in those same trucks. Additionally, as some of the goods were then removed from the Ohio distribution centers to retail stores outside of Ohio, should those sales be sitused outside Ohio? In a 1980 corporate franchise tax case addressing a similar statute, the Ohio Supreme Court held that goods picked up in Ohio for shipment outside of the state were not Ohio sales. In the Board's view, the opposite was also true; goods picked up outside Ohio that were ultimately destined for Ohio were considered Ohio-sitused sales. The taxpayer presented no evidence that certain of the goods were subsequently removed from the Ohio distribution centers and sent to other states. Thus, the Board concluded that the taxpayer failed to prove that the Commissioner erred in situsing all sales with an Ohio “ship to” address to Ohio.

It remains to be seen whether the taxpayer will appeal, but this case presents some interesting issues, especially with respect to the question of whether the taxpayer was purposefully directing its activities toward Ohio when its customers arranged for shipment of the goods to Ohio distribution centers. Courts have addressed the “dock sale” question in corporate income tax apportionment cases. Here, however, the sourcing or situsing determination did not simply increase the taxpayer's apportionment, but also dictated whether the taxpayer had nexus. And, as the CAT is a gross receipts tax, Public Law 86-272 protection does not apply.

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