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By Alex Ebert
The U.S. Supreme Court could take up a dispute about federal courts’ jurisdiction over Ohio’s commercial activity tax.
The high court distributed the case between Diversified Ingredients Inc., a St. Louis-based company, and the Ohio tax commissioner to a June 8 conference ( Diversified Ingredients, Inc. v. Testa , U.S., No. 16-1266, distributed for conference 6/8/17 ).
The food ingredient distributor has argued that Ohio has no authority to tax “transactions that have no actual relationship to the State of Ohio,” but a Missouri federal district court and the Eighth Circuit Court of Appeals agreed with the Ohio tax commissioner that federal court isn’t the proper venue for the company’s commercial activity tax (CAT) challenge under the Tax Injunction Act. Both courts ruled that any challenge must be heard in state court.
The Ohio commissioner waived the right to respond to Diversified Ingredients’ petition, and the Supreme Court likely won’t review the case if it doesn’t request a response. Under the Supreme Court’s rules, a brief opposing a petition for review isn’t mandatory—however, in practice, the court won’t accept a case without a response.
For now, companies affected by Ohio’s CAT must first file a “petition for reassessment” with the Ohio tax commissioner, from which they can appeal to the Ohio Board of Tax Appeals and then to the Ohio Supreme Court.
The status quo goes beyond a home-court advantage for the state and places an unreasonable burden on out-of-state companies, Daniel Doyle, attorney for Diversified Ingredients and attorney at Lashly & Baer in Missouri, told Bloomberg BNA.
“Even though my client does no business in Ohio, he has to go to court in Ohio and hire an attorney in Ohio just because a customer asked for goods to be shipped to an Ohio warehouse,” Doyle said. “Federal courts should exercise jurisdiction to protect companies from being dragged into state court on such specious grounds.”
In their briefs, Diversified Ingredients and Ohio have relied on competing federal laws to argue the proper jurisdiction for state tax matters. Ohio argues that the Tax Injunction Act, 28 U.S.C. § 1341, and principles of comity prohibit federal courts from hearing cases that would disrupt state tax administration. Diversified Ingredients relies on the Interstate Income Act to argue it can bring a federal case to prevent Ohio from collecting taxes on goods manufactured and shipped from outside Ohio to locations in-state.
Ohio is represented by Eric Murphy, state solicitor for the Ohio Attorney General’s Office. The attorney general declined to comment on the case, but spokesperson Dan Tierney told Bloomberg BNA that if the high court called for a response, Ohio would provide a brief.
Ohio’s statutory commercial activity tax recently came under attack in litigation that ultimately settled before reaching the U.S. Supreme Court on appeal—and many practitioners foresee more states mimicking Ohio’s business privilege tax. Several out-of-state companies— Crutchfield Corp., Newegg Inc., and Mason Companies Inc.—challenged the constitutionality of the statutory tax. The state prevailed before the Ohio Supreme Court in November 2016.
During a May 24 webinar on Bloomberg BNA’s 2017 Survey of the State Tax Departments, Fred Nicely, senior tax counsel for the Council On State Taxation, said the Ohio litigation raised a challenge over the “facial constitutionality” of the state’s factor presence law. However, while the Ohio Supreme Court sustained the law, “that does not prevent a taxpayer from coming back and saying that, as this is applied to our fact situation, we think this is unconstitutional. We do not have enough contacts with the state for them to be able to impose their tax.”
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