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The Dayton Daily News will stay with this story until the Ohio Supreme Court makes its decision on the state’s commercial activity tax. The decision could impact how much the state generates in tax revenue.
The Ohio Supreme Court will begin hearing arguments today between three online retailers and the state tax administration that experts say could provide a crucial test for whether states will be allowed to tax revenues generated in the state by companies that do not have a physical presence here.
At issue is the state’s commercial activity tax, or CAT, which applies to most businesses conducting business in Ohio, including retailers, wholesalers, service businesses and manufacturing companies.
The CAT is imposed on all businesses with more than $150,000 in taxable gross receipts at a rate of 0.26 percent, which has generated millions of dollars in revenues for the state since it was passed in 2005 as part of a sweeping overhaul of Ohio’s state tax system.
But three online sellers — California-based Newegg Inc., Virginia-based Crutchfield Corp., and Wisconsin-based Mason Cos. — are challenging Ohio’s right to impose the state’s commercial activity tax on them since they don’t have any stores, facilities or other physical presence in the state.
The retailers argue that since they don’t have a connection to Ohio, they shouldn’t be responsible for any Ohio tax in accordance with the The Commerce Clause of the U.S. Constitution that gives Congress the power to regulate commerce among states and with foreign countries.
Zach Schiller, research director for the non-profit think-tank, Policy Matters Ohio, said the case could have wide-ranging implications.
“On some level, this kind of challenge was expected when the CAT was approved in 2005,” Schiller said. “It’s almost a little surprising that it has taken this long for it to come to the Ohio Supreme Court.”This is going to be an important decision for the state because (CAT) brings in upwards of a million and a half dollars a year in revenue, and it’s the only major general business tax that the state has.”
The 2005 tax overhaul eliminated the Ohio Corporate Franchise Tax and the Ohio Personal Property taxes for businesses, leaving Ohio as one of only six states that no longer has a corporate income tax.
According to the Ohio Department of Taxation, “The CAT is an annual tax imposed on the privilege of doing business in Ohio, measured by taxable gross receipts from most business activities. Most receipts generated in the ordinary course of business are subject to the CAT. The CAT only applies to those gross receipts that are sourced to Ohio.”
The CAT is unlike tax laws that have already been sanctioned by several other states, requiring large online retailers to collect sales tax even with no physical presence in the state.
The CAT “is not directly borne by the consumer because it’s not a sales tax,” said Paul Pahoresky, a certified public accountant from suburban Cleveland who has been following the case. “But it’s especially problematic for low-margin, high-volume businesses because it cuts into their profit margin and increases the cost of doing business. On the flip side, if you’re an Ohio company and you sell outside of Ohio, those sales outside of Ohio are exempt from CAT.”
To level the playing field, Ohio proposed applying the CAT to companies without a physical presence in the state only if they had at least $500,000 in gross receipts from sales in Ohio when the CAT was started on July 1, 2005 and the the Ohio Corporate Franchise Tax and the Ohio Personal Property taxes for businesses were both phased out.
Each of the out-of-state companies in the Ohio Supreme Court case were found to have surpassed that threshold and were among a group of companies found not to have paid CAT bills from 2005 through 2012, according to a state tax audit.
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