At a Glance…

On October 20, the Ohio Department of Taxation (the “Department”) issued an information release (“ST 2017–02”) explaining Ohio’s standard for “software” and “network” nexus for sales and use tax, which will take effect January 1, 2018. ST 2017–02 supplements a prior information release on sales and use tax nexus that the Department recently revised (“ST 2001–01”).2


The Department’s release of ST 2017–02 comes on the heels of the enactment of Ohio House Bill 49 earlier this year. That bill requires Internet sellers with more than $500,000 of annual Ohio gross receipts to collect sales tax on sales to Ohio customers.3 (For more information on House Bill 49, see our prior coverage.)

Earlier this month, the Department issued a revised version of a prior information release – ST 2001–01 – that describes Ohio’s new nexus standard under House Bill 49 generally, and the implications of that standard for sales and use tax purposes. In particular, ST 2001-01 provides a list of activities, such as soliciting sales in Ohio, delivering property to Ohio, or negotiating franchising or licensing agreements with Ohio customers, which create nexus for out-of-state sellers. However, ST 2001-01 provides that the Department will not require taxpayers to collect and remit tax if the out-of-state seller’s contacts are limited to one of a series of “safe harbor” activities.4 In the revised version of ST 2001-01, the Department also promised that a separate information release would be issued that focused specifically on the software and network nexus provisions of House Bill 49. The Department has wasted no time in fulfilling that promise – issuing ST 2017-02 within the same week as the revised version of ST 2001-01.

Summary of ST 2017–02

According to the Department, the purpose of ST 2017–02 is to provide more specific guidance on House Bill 49’s software and network nexus provisions. In ST 2017-02, the Department notes that under House Bill 49, the “use of software in Ohio, including software located on the consumers’ computers, mobile devices, and the servers of third party service providers,” is sufficient physical presence to meet the Supreme Court’s substantial nexus standard for sales and use tax purposes.5 In the Department’s view, the fact that the new nexus standard only applies to Internet sellers with Ohio sales in excess of $500,000 ensures that a seller’s connection to the Ohio market is substantial.6

ST 2017–02 demonstrates the Department’s intent to enforce House Bill 49 broadly. For example, the information release contains an example indicating that a seller has substantial nexus with Ohio merely as a result of creating a software application that Ohio customers can download onto their phones and use to place orders. Another example provides that a seller who engages an Ohio service provider to obtain server security services – in order to ensure uninterrupted access to the seller’s website – has nexus with Ohio if they pay the Ohio service provider more than $500,000 per year.7

As the Department notes in ST 2017–02, nexus is an “evolving area.” As a consequence, ST 2017-02 “is not intended to be an all-encompassing or all-inclusive description” of nexus.8 Thus, sellers can expect more (and more expansive) nexus guidance from the Ohio Department of Taxation, as Ohio and other states continue to push the boundaries of Quill’s physical presence standard.9