Today, the Ohio Supreme Court issued its much-anticipated slip opinions in the three companion cases challenging Ohio’s Commercial Activity Tax (CAT) economic nexus standard. See Crutchfield Corp. v. Testa, Slip Op. No. 2016-Ohio-7760; Newegg, Inc. v. Testa, Slip Op. No. 2016-Ohio-7762; and Mason Cos., Inc. v. Testa, Slip Op. No. 2016-Ohio-7768.
In ruling 5-2 in favor of the state, the Ohio Supreme Court first held that physical presence is not a necessary condition for imposing the CAT because the CAT’s $500,000 sales-receipts threshold is adequate quantitative standard that ensures that taxpayer’s nexus with Ohio is substantial under the dormant Commerce Clause. In reaching this conclusion, the court specifically stated that “[o]ur reading of the case law indicates that the physical-presence requirement recognized and preserved by the United States Supreme Court for purposes of use-tax collection does not extend to business-privilege taxes such as the CAT.” (emphasis in original) Note that the court held this was the case regardless of whether the business-privilege tax is measured by income or receipts. In rebuking the taxpayer’s argument that Tyler Pipe affirmatively required some physical presence in the taxing state, the court held that physical presence is a sufficient (but not necessary) condition for imposing a business-privilege tax. See our prior blog on the oral argument for a more detailed description of the Tyler Pipe argument.
Second, the Ohio high court viewed the burdens imposed by the CAT on interstate commerce as not clearly excessive in relation to Ohio’s legitimate interest in imposing the CAT evenhandedly on sales receipts of in-state and out-of-state sellers. Citing these two bases, the Ohio Supreme Court affirmed the Board of Tax Appeals’ (BTA) decisions affirming the CAT assessments against the three appellants. The dissenting opinion viewed Quill as the proper standard for the Ohio CAT, and would have remanded the cases to the BTA for a determination of whether the taxpayer had physical presence.
These companion cases were viewed by many as a potential vehicle to seek review of the continued viability of the Quill physical presence requirement (as Justice Kennedy called for in his widely-cited DMA concurrence last year). However, the narrow scope of the Ohio Supreme Court’s decision makes it difficult for this case to become the vehicle for the US Supreme Court to review Quill’s continuing viability for sales and use tax nexus.