Nine Lives for Ohio's CAT?


The Ohio Supreme Court has been asked to rule on Ohio’s commercial activity tax (CAT) as applied to certain food sales, after the tax was found by a state appeals court to violate the state constitution in that regard.

A gross receipts business tax, the CAT was enacted in 2005 and challenged the following year by the Ohio Grocers Association. It levies $150 on the first $1 million in taxable gross receipts (after exempting the first $150,000) and 0.26% on receipts above that. The grocers pointed to the state constitution’s prohibition of sales or other excise taxes on sales or purchases of wholesale food and food ingredients and on retail sales of packaged food and nonalcoholic beverages. A  trial court ruled for the state, and the Grocers Association appealed. The Court of Appeals of Ohio, Tenth Appellate District, on Sept. 2, 2008, overruled the trial court. The state argued, and the statute states, that the CAT is a franchise tax, imposed for the privilege of doing business in Ohio and therefore is not a sales tax subject to the food tax prohibition. The state appeals court found, however, that because it is applied to gross receipts, the CAT is in effect a sales or excise tax.

In its appeal memorandum to the Supreme Court of Ohio, the state argued that the CAT is necessary to Ohio’s fiscal well-being, since it was part of tax reforms forecast to cut state income taxes by 21% by 2010. Moreover, the decision “has called into question whether Ohio must now utilize the more stringent constitutional nexus standard for transactional taxes—physical presence—rather than the current CAT standard—economic presence—in determining whether the State can impose the CAT on all out-of-state taxpayers doing business in Ohio,” the state said in the memo.

Elsewhere, economic, as opposed to physical-presence, nexus is alive and well, at least for some financial services. On Oct. 20, 2008, the Indiana Tax Court ruled that Delaware-based credit card company MBNA America Bank was subject to that state’s financial institutions tax (FIT) despite its lack of any employees or place of business in Indiana. The court cited the decision on similar facts against MBNA by the Supreme Court of West Virginia in 2006, quoting the West Virginia court’s observation that “electronic commerce now makes it possible for an entity to have a significant economic presence in a state absent any physical presence there.”

 Ohio Grocers Association v. Wilkins, docket no. 2008-2018, Supreme Court of Ohio

 MBNA America Bank v. Indiana Department of State Revenue, docket no. 49T10-0506-TA-53, Indiana Tax Court

By JofA Senior Editor Paul Bonner.


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