Ohio Supreme Court Decisions Give Greater Weight to the Factor Presence Nexus Standard

The Ohio Supreme Court recently reached similar decisions in three cases, Crutchfield1, Mason2, and NewEgg3, whereby taxpayers were challenging the state's factor presence nexus standard. The court ruled that online/catalog retailers without a physical presence in Ohio are subject to the state's Commercial Activity Tax ( "CAT") as long as their gross receipts generated from sources in the state (i.e. Ohio customers) exceed the statutory annual minimum of $500,000 regardless of whether or not those retailers had any physical presence in the state. This marks one of the most significant recent decisions regarding factor presence nexus, and whether the physical presence standard established in the U.S. Supreme Court decision of Quill v. North Dakota (1992)4 extends to taxes outside of sales and use taxes.

The three online/catalog retailer taxpayers, Crutchfield, Mason, and NewEgg, had no property or personnel within Ohio. However, all three had annual sales in excess of $500,000 to customers within the state. Ohio Revised Code § 5751.01 contains a similar bright line nexus standard to the standard set forth by the Multistate Tax Commission in 2002 and adopted by several other states in recent years whereby sales into the state in excess of $500,000 on an annual basis create nexus (i.e. a filing obligation) for CAT purposes.

In citing the U.S. Supreme Court's decision in Quill, the taxpayers took the position that they did not have nexus in Ohio for filing the CAT due to the lack of a physical presence in the state. Ohio ultimately issued assessments to all three taxpayers, which the taxpayers appealed to the Ohio Board of Tax Appeals, and then ultimately the Ohio Supreme Court. The taxpayers' arguments to the court were that they lacked a "substantial nexus" with the state due to a lack of physical presence, and such substantial nexus is a prerequisite to taxation under the dormant Commerce Clause of the U.S. Constitution.

The Tax Commissioner put forth a two prong argument. First, that the Commerce Clause does not impose a physical presence requirement. Second, even if there was a physical presence requirement under the Commerce Clause, the taxpayers' computerized connections with the state were enough to constitute a physical presence.

The justices in reaching their decisions agreed with the first prong of the Tax Commissioner's argument (the Commerce Clause does not impose a physical presence requirement), and as such did not address the second prong. They also concluded that the state's bright line nexus standard "constitutes a sufficient guarantee of the substantiality of an Ohio nexus for purposes of the dormant Commerce Clause". With regards to Quill, it was determined that the physical presence standard does not apply to business privilege taxes, such as the CAT.

These decisions are significant in that they will potentially impact the decisions of other states who are considering implementing factor presence nexus standards. Taxpayers generating significant revenue in states without a physical presence will now have to be even more mindful as to whether sales alone into a state will subject them to tax in that state.

For further detail on all three cases, please see the links below:

To learn more about how this may impact your state tax filings, contact your tax advisor or one of the DHG SALT Team professionals listed below.

Jack Small, Director | DHG State & Local Tax
404.681.8215 | jack.small@dhg.com

John Iannotti, Partner | DHG State & Local Tax
704.367.7068 | john.iannotti@dhg.com


1 Crutchfield Corp. v. Testa, Slip Opinion No. 2016-Ohio-7760
2 Mason Cos., Inc. v. Testa, Slip Opinion No. 2016-Ohio-7768
3 Newegg, Inc. v. Testa, Slip Opinion No. 2016-Ohio-7762
4 Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992)