Ohio CAT: BTA Predictably Upholds Ohio’s Bright-Line Nexus Standard despite Lack of Physical Presence

The Ohio Board of Tax Appeals (BTA) found L.L. Bean, Inc. to be subject to Ohio commercial activity tax (CAT) because it had greater than $500,000 of Ohio gross receipts from catalog and Internet sales, even though it lacked an Ohio physical presence. L.L. Bean, Inc. v. Levin, BTA Case No. 2010-2853 (March 6, 2014). This was a simple application of Ohio’s statutory “bright-line presence” standard which deems nexus to exist if a taxpayer has at least $500,000 in calendar year gross receipts from Ohio sources. R.C. 5751.01(I).

Although this provision may be unconstitutional on its face or as applied to L.L. Bean, Inc., there was no doubt the BTA would find that substantial nexus existed since it is without jurisdiction to address Constitutional issues. Such determinations are left for the Ohio Supreme Court, where L.L. Bean recently filed its appeal. See L.L. Bean, Inc. v. Testa, Case No. 2014-0456 (Notice of Appeal, March 24, 2014). The BTA’s purpose was simply to create the factual record to be considered by the Supreme Court.

The Supreme Court will now address whether a mere economic presence is sufficient for Ohio to impose the CAT on foreign businesses without a physical presence under the U.S. Constitution’s Commerce Clause substantial nexus requirement enumerated in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 287 (1977). Other states in similar cases have found that the physical presence requirement in Quill Corp. v. North Dakota, 504 U.S. 298, 313 (1992) is limited to sales / use taxes. See e.g., Tax Comm’r v. MBNA America Bank, N.A., 640 S.E.2d 226 (2006) cert. denied FIA Card Services, N.A. v. Tax Comm’r of W. Virginia, 551 U.S. 1141 (2007); and Geoffrey, Inc. v. South Carolina, 437 S.E.2d 13 (1992) cert. denied Geoffrey, Inc. v. South Carolina Dep’t of Rev. and Tax., 510 U.S. 992 (1993).

Even if the CAT can be imposed on businesses without an Ohio physical presence, questions will remain, such as how is the economic presence to be determined / measured and must the business take affirmative acts to develop the Ohio market or is merely making sales into the state sufficient. Stay tuned as the Ohio Supreme Court’s ruling on this issue will be much more important.