Cincinnati Reds Bobblehead Tax Gets New Umpires: Ohio Supreme Court

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By Alex Ebert

The Ohio Supreme Court pitched fastball questions to attorneys for the Cincinnati Reds and the Ohio Department of Taxation in an oral argument over whether promotional items like bobbleheads should be exempt from sales tax.

In the June 13 oral argument, attorneys fielded questions ranging from how the team uses promos to entice sales to how Ohio treats toys in McDonald’s Happy Meals. While at times light, the umpires—six justices and one sitting court of appeals judge—dug down into whether a bobblehead qualifies as an exempt “resale” (under R.C. 5739.01(E); R.C. 5741.02(C)(2)) or whether the Major League Baseball team should be collecting and remitting sales tax.

A victory could be a late-game grand slam for sports teams. A state audit claims the Reds owe more than $80,000 in sales tax over a two-year period for these promo items. But the Board of Tax Appeals sided with the state, so a walk-off home run for the Ohio Department of Taxation could mean retailers have to collect sales tax for promo items going forward—even for goodies accompanying the sale of items not subject to tax in Ohio.

The issue boils down to a matter of contract law: are the promo items part of a resale? To be a resale there must be some consideration (payment) received in exchange for the bobblehead—an issue the state and team dispute.

Questions from the bench indicated most of the justices could be in the dugout for the Reds.

“Why do the Reds give away bobbleheads? You’ve got to acquire them some way. And the CFO said that if this didn’t drive sales, we wouldn’t do it,” Chief Justice Maureen O’Connor said. “They wouldn’t do it if it wasn’t a sound business practice. So they get something in return for their bobblehead. Isn’t that their consideration?”

How Do Fans Pay Teams?

Promo items are “resold” at baseball games because teams get paid for the goods, said Reds attorney Steven Dimengo, partner in the Akron office of Buckingham, Doolittle & Burroughs LLC.

The team gets “consideration” for the bobbleheads with money paid for the ticket, and the fan’s attendance. He said this attendance component—you have to show up to get the promo—is important because the team wants people to buy food and drinks. The price of the goodies is factored into the overall ticket prices set for the entire year before the beginning of the season.

“So fans are buying year-long swag, that’s your argument?” Justice Patrick Fischer asked Dimengo.

The Board of Tax Appeals wasn’t sold. It held that the promo gifts had more in common with taxable giveaways, considered goodwill gestures by companies and subject to sales or use tax. The “resale” philosophy for tangible promotions has several flaws, said Kody Teaford, assistant Ohio attorney general and attorney representing the Ohio Department of Taxation.

“Any purchase of tangible personal property is considered taxable. You can get something similar in their gift shops 20 feet away, and those items would be taxable,” he said. “The gave it away without consideration, without charge.”

Across the country, decisions on the issue are mixed. The Missouri Supreme Court decided the Kansas City Royals weren’t responsible for sales tax on their promo items, but the Milwaukee Brewers grounded out in their case before the Wisconsin Supreme Court.

Possible Implications Across Ohio

Because tickets aren’t subject to sales tax, the Reds are asking to exclude promo property from all taxation, Teaford said. But attorneys for both sides agreed the issue is broader than figurines and foam fingers.

“The resale exclusion doesn’t exempt or eliminate a property from taxation. All the resale exclusion is doing is pushing that tax further down the line to the consumer, so it’s not taxed at every stage,” Teaford said. “If the Reds are correct, they should have been collecting sales tax from consumers at that point, and all the other businesses that give away these items.”

Dimengo disagreed, saying this interpretation would impose more taxes on Labor Day sale promos, Happy Meal toys, or any seller that uses a promotional goody to spice up a deal. If the state wants to start taxing the Reds, it will have to tax these other promos also.

Teaford and Dimengo didn’t immediately respond to requests for comment.

The case is Cincinnati Reds, LLC v. Testa , Ohio, No 2017-854, oral argument 6/13/18 .

To contact the reporter on this story: Alex Ebert in Columbus, Ohio at aebert@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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