Ohio Commercial Activity Tax: NASCAR laps the field as Ohio Supreme Court rules broadcast and media revenue is not subject to Ohio tax.
The Ohio Supreme Court has ruled that NASCAR’s broadcast, media, licensing, and sponsorship revenue is not subject to Ohio’s Commercial Activity Tax (“CAT”). Ohio’s CAT statute situses gross receipts from intellectual property to Ohio only “to the extent” they are “based on the right to use the property” in Ohio. R.C. 5751.033(F) (emphasis added). The Court interpreted this provision as requiring the receipts to have a causal connection with the right to use the IP specifically in Ohio. Since none of the sample contracts “tied payments to the right to use property in Ohio” and, in fact, did not mention Ohio at all, such a relationship was lacking. Instead, the contracts “granted broad rights to use NASCAR’s intellectual property over large geographic areas,” typically the United States and its territories. See Nascar Holdings, Inc. v. McClain, Slip Opinion No. 2022-Ohio-4131.
The Court applied the plain statutory language to distinguish receipts from the right to use IP in Ohio from fixed fee payments to use IP in larger areas that included Ohio. Since the receipts at issue – broadcast, media, sponsorship, and licensing fees – were not tied to the actual use of the intellectual property in Ohio, they did not have the necessary connection to Ohio to justify taxation under the situsing statute. In other words, the right to use the IP in the United States for a fixed fee, irrespective of location, did not mean the receipts were based on the right to use IP in Ohio. Due to lack of contractual support, the Tax Commissioner would not have prevailed even if he taxed receipts rationally connected to actual Ohio use of the intellectual property.
The case involved multiple sources of NASCAR’s IP-related revenue from: (1) granting networks the right to air NASCAR races (Broadcast Revenue); (2) media sponsors incorporating NASCAR in marketing campaigns (Media Revenue); (3) royalties for NASCAR-branded products and services (License Fees); and (4) fees from corporate sponsors (Sponsor Fees). The Ohio Board of Tax Appeals previously determined that NASCAR’s receipts from the use of its intellectual property was properly sitused to Ohio based upon either the ratio of Ohio viewership using Nielsen rating or U.S. Census data, as more fully explained in our previous post. The Ohio Supreme Court disagreed, however, because NASCAR’s revenue was not based on any right to use the property specifically in Ohio.
The NASCAR ruling significantly hinders Ohio’s ability to impose tax on revenue from granting broad intellectual property rights and provides taxpayers a planning technique to avoid CAT on their IP-related revenue. If you have questions about how this ruling’s impact on situsing gross receipts or disputing revenue apportionment or any other questions pertaining to Ohio’s commercial activity tax, do not hesitate to contact us.
Attorney Steven A. Dimengo is Managing Partner of Buckingham, Doolittle & Burroughs, LLC. He helps clients with complicated tax challenges including Ohio sales/use, income, commercial activity and federal taxes and has represented clients before the Ohio Supreme Court. Steve can be reach at [email protected] or 330.258.6460.
Richard B. Fry III is a partner and Buckingham’s Taxation Practice Group Chair. He focuses on state and local tax compliance and controversies, including Ohio and multistate sales/use tax, commercial activity tax, and personal income tax issues. Rich can be reached at [email protected] or 330.258.6423.
Nathan M. Fulmer is an associate in Buckingham’s Taxation Practice Group. He represents clients on a broad range of tax planning and controversy matters. His joint degree in taxation allows him to provide unique solutions when assisting clients on business matters. Nate can be reached at [email protected] or 330.258.6464.