CSH’s Jesse MacDonald contributed to this article.
On November 17, the Supreme Court of Ohio rendered a groundbreaking decision that will have a major impact on the tax liabilities of out-of-state businesses that ship goods to consumers in Ohio. In Crutchfield Corporation v. Testa, the only connection that Crutchfield, an out-of-state business, had with Ohio was shipping electronic goods into Ohio through the U.S. Postal Service or by common carrier. Crutchfield was not based in Ohio, did not have any employees in Ohio, and did not have any warehouse or other facilities in Ohio. Because of the lack of physical connections with Ohio, Crutchfield argued that it lacked substantial nexus with Ohio and therefore, the state could not impose the Commercial Activity Tax (“CAT”) on its gross receipts. But this case raised the principal question of whether the CAT threshold of $500,000 in receipts satisfied the substantial nexus requirement of the Commerce Clause.
In a 5-2 decision, the Supreme Court held that the $500,000 threshold of the CAT constituted substantial nexus in conformance with the Commerce Clause. The Court distinguished the Ohio CAT, a tax on the “privilege of doing business,” from a state sales or use tax. While the Quill Corp. v. North Dakota case requires some sort of physical presence for there to be substantial nexus for the imposition of sales or use tax, the same substantial nexus requirements do not apply to a privilege tax such as the CAT. The Court found that the CAT’s $500,000 gross receipts threshold was an adequate quantitative standard to ensure that a taxpayer had substantial nexus with Ohio, and no physical presence was required to establish substantial nexus for such a privilege tax.
The implications of the Crutchfield case are far-reaching for out-of-state businesses that make shipment sales to Ohio customers. Any business located outside Ohio that has at least $500,000 in gross receipts from sales sourced to Ohio, no matter how tangential its connections are to the state, will be subject to the CAT. The holding extends to businesses that operate entirely online. The Crutchfield decision creates a great deal of new CAT liabilities and reporting requirements for out-of-state businesses that ship goods to customers in Ohio. If you have questions about how this decision might affect your business, contact your CSH advisor.
The entire opinion can be found at http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2016/2016-Ohio-7760.pdf