Ohio AG Seeks to Dismiss, Stay “Cookie” Sales Tax Dispute

By Alex Ebert

Ohio wants a court to discard or pause a challenge to a state use tax until the U.S. Supreme Court reviews the constitutional authority of states to tax remote retailers.

In a brief filed April 3, the Ohio Attorney General reasserted arguments pushing dismissal of an American Catalog Mailers Association lawsuit challenging Ohio’s new “cookie-style” regime requiring collection and remittance of use tax by some remote sellers.

The challenged Ohio law, placed in the 2018-19 state biennial budget bill, works by broadening Ohio’s statutory definition of “substantial nexus.” It extends sales tax to companies selling $500,000 of goods in Ohio and who place “in-state software” on Ohio computers and phones or have servers located in Ohio.

The Attorney General has argued that the case should be dropped for the group’s lack of standing and failure to exhaust administrative remedies. But if the court doesn’t chuck the suit, the state says litigation should be paused while the U.S. Supreme Court rules on states’ authority to tax remote sellers in South Dakota v. Wayfair. Oral argument is scheduled for April 17, and practitioners expect a decision by late June.

“American Catalog claims that it has other bases for declaratory relief to pursue, but, in reality, the Court’s ruling in Wayfair will settle the main issues in this case, and in any event, will vastly narrow any remaining issues for this Court’s consideration,” the Ohio Attorney General’s Office said in its brief.

The Ohio suit is one of several disputes between states and retailers—some of which are in a holding pattern while the Supreme Court re-examines the validity of Quill Corp. v. North Dakota, the 1992 decision in which the court held out-of-state sellers need to have an in-state presence to be subject to state sales tax.

Ohio Doesn’t Pause Enforcement

The Ohio Attorney General sought the ACMA’s consent for a stay, but the ACMA refused because Ohio wouldn’t promise to pause enforcement of the law.

“The Department asked to put the ACMA’s suit on hold without agreeing to suspend enforcement of Ohio’s unconstitutional law during the stay. Because moving forward with enforcement would prejudice ACMA’s members, the ACMA refused to stay the case and opposed the Department’s motion,” the ACMA told Bloomberg Tax in an April 5 email. “We are confident that the suit is properly brought against Ohio’s unlawful ‘software nexus’ and ‘content delivery provider nexus’ theories, which clearly violate existing law.”

The ACMA has argued that proof of the law’s unconstitutionality is in an Ohio Department of Taxation guidance document that says nexus is created when an Ohioan downloads a seller’s catalog app on their phones or computers. “It is the presence of this software owned by Seller A in Ohio that is significantly associated with Seller A’s ability to establish and maintain its market and that meets the physical presence standard set forth in Quill,” the department said in the guidance.

But Hamilton Davison, ACMA’s president and executive director, told Bloomberg Tax in a Jan. 2 email that this approach is unconstitutional. “Its reliance on bits of HTML or javascript coding and apps stored on computers and cell phones in the state clearly violates the Quill physical presence standard,” he said.

The Ohio Attorney General didn’t immediately respond to requests for comment.

The case is American Catalog Mailers Ass’n v. Testa , No. 17 CV 11440, reply in support of motion to dismiss, stay filed 4/3/18 .

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

Copyright © 2018 Tax Management Inc. All Rights Reserved.