U.S. Supreme Court Won’t Get Look at Ohio Receipts Tax

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By Jennifer McLoughlin

A challenge over Ohio’s commercial activity tax won’t go to the U.S. Supreme Court after the parties reached a settlement.

Counsel for Crutchfield Corp., Newegg Inc. and Mason Companies Inc. told Bloomberg BNA April 14 that the companies have dropped their challenge to the constitutionality of Ohio’s business-privilege tax and will register to pay the CAT.

“The companies continue to believe that the sales-only reporting requirement of other state laws violates the U.S. Constitution,” Martin I. Eisenstein, managing partner with Brann & Isaacson, said by email. “In my opinion, the Commerce Clause of the United States Constitution places limits on the ability of a state to export its taxes to companies located outside of the state. The Framers of the Constitution assigned to Congress, not the states, the responsibility for regulating interstate commerce.”

The CAT, imposed under Ohio Revised Code § 5751.02(A), levies “a commercial activity tax on each person with taxable gross receipts for the privilege of doing business in this state.” Persons with “substantial nexus” are subject to the tax—and those with taxable gross receipts totaling at least $500,000 annually are deemed to have substantial nexus.

The out-of-state companies contested assessments under the statutory tax, claiming they don’t have substantial nexus with Ohio. Their argument was premised on the U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, 504 U.S. 298, which prohibits states from imposing sales and use tax collection obligations on remote retailers without an in-state physical presence.

The state prevailed before the Ohio Supreme Court in November. A divided 5-2 court ruled that the physical presence requirement doesn’t extend to business-privilege taxes such as the CAT. The majority further found that the $500,000 receipt threshold complies with the federal commerce clause.

With the companies forgoing a petition for review before the U.S. Supreme Court, which was due April 16, the state ruling remains in place.

Disappointment for States?

Several states have been eyeing the outcome in the Ohio CAT challenge as a testing ground for gross receipts regimes that are gaining in popularity. While it wasn’t a certainty that the high court would grant review, the CAT settlement likely is a disappointment for states seeking affirmation of the Ohio decision, or at the very least, guidance from the high court.

Other states facing budget deficits and considering a gross receipts tax this year include Louisiana, Oklahoma, Oregon and West Virginia.

Not ‘Quill’ Case

Many practitioners also wondered whether the Ohio CAT case would translate into the long-awaited opportunity for the Supreme Court to reconsider the often-maligned Quill physical presence rule.

However, an Ohio official hadn’t expected the CAT challenge would prompt reversal of that 25-year-old decision.

“I personally don’t think this is going to be a vehicle for overturning Quill, simply because, first of all, the court said Quill doesn’t apply,” Christine Mesirow, chief of the taxation section in the Ohio Attorney General’s office, said during the Federal Bar Association’s Tax Law Conference in March. “And it isn’t a sales tax collection case.”

Perhaps the high court is seeking a way to comment on Quill, Mesirow said, but she didn’t think it was going to be in the CAT case.

‘Continue to Push Back’

Despite the settlement of the CAT challenge, retailers aren’t shying away from future challenges.

“While a majority of the Supreme Court of Ohio upheld the tax against the retailers’ constitutional challenge last November, two dissenting judges stated that ‘companies should not be forced to comply with Ohio’s CAT based solely on the fact that Ohioans choose to buy products from them,’” Eisenstein said.

“When states seek to expand their authority in violation of the Commerce Clause, retailers will continue to push back hard to protect their constitutional rights,” he added.

Cases directly challenging Quill are advancing in South Dakota, where the issue has reached the state supreme court, and in Alabama and Tennessee.

To contact the reporter on this story: Jennifer McLoughlin in Washington at jmcloughlin@bna.com

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

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