As we continue in these difficult times, we can expect that States, which are hard hit by falling revenues, will be looking to new sources of income even more strongly than they previously were. We have seen Colorado implement a use/sales tax on all goods sold in Colorado, irrespective of the location of the selling entity. We are now looking at Ohio and Oklahoma and potentially others reaching out for tax revenues. Here is an overview of the major issues. We strongly urge you all to discuss these issues with your tax lawyers or accountants to make sure that you are fully informed and can make decisions which are in the best interests of your business. We bring these issues to your attention but we are not trained to provide the appropriate counsel to guide your decisions.
Ohio – Since 2005 Ohio has had a “Commercial Activity Tax” on the books. Ohio defines this tax as a cost for the privilege of doing business in Ohio. The generally accepted understanding of who is subject to a sales or use tax has been governed by the Supreme Court Quill decision in 1992 which required a physical presence of an entity in a State in order to be subject to its sales or use taxes. Ohio claims that the commercial activity tax is not a sales or use tax and is therefore not bound by Quill. For that reason, Ohio has developed its own definition of “presence,” which it calls “bright line.”
Ohio claims all entities with “bright line” presence in the State are subject to the tax. Presence is defined by:
- At least $50,000 in Property in this state; or
- A payroll in this state of at least $50,000; or
- Taxable gross receipts sitused to (sold into) Ohio of at least $500,000; or
- 25% of total property or total payroll or total gross receipts within this state; or
- Being domiciled in this state.
This tax is receiving attention now because Ohio has decided to pursue out of state merchants more aggressively. The law cannot be tested in court until it has been appealed before the Board, but to date there has been no appeal.
In the last few days, we have seen news articles that L.L.Bean has been hit with a $210,000 assessment for back taxes and penalties. According to the Dayton Daily News, Ohio’s Deputy Tax Commissioner Rick Anthony said nearly 100 companies without a physical presence in the state have appealed findings that they owe the CAT. The issue has not been reviewed in any court so far. Altogether, about 200,000 companies are registered for the CAT, Anthony said. L.L.Bean contends it does not owe the tax since it does not have a physical presence in the state. It has 60 days to appeal the assessment decision to the state Board of Tax Appeals, a three-member commission. A decision from the board can be appealed to a state appeals court or directly to the Ohio Supreme Court.
The rate of the tax has been phased in over 5 years and in 2009 reached its highest rate of 0.26% of total gross sales into Ohio. A company which meets any of the bright line criteria must decide whether to register or not (http://tax.ohio.gov/divisions/commercial_activities/cat_general_information.stm). By registering, a company may implicitly be accepting Ohio’s definition of presence in the state as well as opening itself up to assessment of back taxes and penalties. But not registering does not protect a company from being assessed.
Oklahoma – Oklahoma has instituted a use tax similar to that in Colorado, except there are no reporting obligations on out of state merchants. Sellers must post notification on its website and in its catalog that makes Oklahoma buyers aware of the buyers’ obligation to pay the use tax. The notice on the website and in the catalog must say: The non-collecting retailer is not required and does not collect Oklahoma sales or use tax; the purchase is subject to Oklahoma sales and use tax unless specifically exempt; the purchase is not exempt merely because it was conducted over the Internet or remotely; Oklahoma purchasers must report and then pay tax on purchases that were not taxed; and consumers can find the necessary forms and instructions at the Oklahoma Tax Commission website.
Colorado – The DMA is pursuing its lawsuit regarding the constitutionality of the Colorado law. A discussion of the law’s requirements can be found on the Marketsmith website at http://www.marketsmithinc.com/2010/07/update-on-colorado-salesuse-tax-legislation/.
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