Ohio Tax Appeals Board Rules on Factor Presence
 

Ohio Tax Appeals Board Rules on Factor Presence

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In L.L. Bean Inc. v. Levin, the Ohio Board of Tax Appeals affirmed the decision of the Tax Commissioner finding that an out-of-state retailer had substantial nexus with state through its sales ...

In L.L. Bean Inc. v. Levin, the Ohio Board of Tax Appeals affirmed the decision of the Tax Commissioner finding that an out-of-state retailer had substantial nexus with state through its sales attributable to Ohio customers for purposes of the Commercial Activity Tax even though it did not have any physical presence in the state (Case no. 2010-2853 (2014)).

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    Ohio Tax Appeals Board Rules on Factor Presence Ohio Tax Appeals Board Rules on Factor Presence Document Transcript

    • 1 | P a g e April 16, 2014 Ohio Tax Appeals Board Rules on Factor Presence In L.L. Bean Inc. v. Levin, the Ohio Board of Tax Appeals (“BTA”) affirmed the decision of the Tax Commissioner finding that an out-of-state retailer had substantial nexus with state through its sales attributable to Ohio customers for purposes of the Commercial Activity Tax (“CAT”) even though it did not have any physical presence in the state (Case no. 2010-2853 (2014)). Overview L.L. Bean, Inc. (“Bean”) is an apparel and consumer goods retailer that did not have a physical presence in Ohio but remotely sold over $500,000 in goods into the state. In an earlier administrative hearing, the Ohio Tax Commissioner rejected Bean’s assertion that physical presence was required before Ohio could impose a filing requirement under the CAT (In Re: L.L. Bean, Ohio Department of Taxation, 8/10/2010). The Commissioner ruled that the physical presence nexus requirement only applied to sales and use taxes and that the CAT was not the functional equivalent of a sales tax. Consequently, the Commissioner held that Bean did have nexus under Ohio Rev. Code Ann. § 5751.01(I) due to its continuous, systematic and significant solicitation and exploitation of the state through catalogs and advertising as demonstrated by the fact that the taxpayer exceeded the statutory threshold of $500,000 in Ohio sales. On appeal, the BTA did not adjudicate any constitutional issues because it lacked jurisdiction. Therefore, it focused exclusively on whether the statute in question was applied correctly. Not surprisingly, the BTA affirmed the Commissioner’s decision finding that Bean had nexus for CAT purposes because it exceeded the statutory threshold of $500,000 in Ohio sales. CBIZ Observations The Bean litigation is important because it represents the first time that a taxpayer has challenged the constitutional validity of factor presence nexus. However, the opinions issued thus far have provided little guidance or insight into these constitutional issues. It should be noted that Ohio Rev. Code Ann. § 5751.31 provides that any constitutional matter relating to this bright-line rule could have been appealed directly to the Ohio Supreme Court if the Commissioner had chosen to do so. Now that a decision by the BTA has been made, almost four years later, we will finally see whether the Supreme Court of Ohio will address the constitutional issues as Bean has petitioned the Court for review. Further, taxpayers in other factor presence states, such as California, Michigan, Connecticut, Colorado, Washington and New York (beginning in 2015), will likely receive persuasive authority on how such matters may be adjudicated in those states. Meanwhile, the Ohio Department of Taxation has continued to strictly enforce the factor presence standards of Ohio Rev. Code Ann. § 5751.01(I). Out-of-state businesses selling to customers in Ohio should consider the implications of Ohio’s factor presence rules while we await final resolution to the Bean litigation. Questions If you have any questions concerning nexus issues in Ohio or any other states, please contact your local CBIZ MHM tax advisor who can connect you with one of our state and local tax specialists. Copyright © 2014, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. To ensure compliance with requirements imposed by the IRS, we inform you that—unless specifically indicated otherwise—any tax advice in this communication is not written with the intent that it be used, and
    • 2 | P a g e in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).