Ohio: Appeals court upholds commercial activity tax levied on Georgia wholesaler

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In recent years the Ohio Department of Taxation has been ramping up audit and enforcement efforts to impose the Commercial Activity Tax (CAT) on remote sellers. The remote sellers often fit the profile of an out-of-state wholesaler. Typically the wholesaler sells to a national retailer that hires a logistics or transportation company to pick up the sale items at the wholesaler’s out-of-state location. The retailer takes title to the items when their logistics or transportation company picks up the items outside Ohio and transports them to a distribution center or retail outlet in Ohio.

Greenscapes Home & Garden Products, Inc.

One such wholesaler is Greenscapes Home and Garden Products, Inc. The Ohio Tenth District Court of Appeals explained that Greenscapes does business outside Ohio as follows:

Greenscapes is a Georgia corporation. It does not have any locations in Ohio and does not employ any agents, representatives, or employees in Ohio. Greenscapes' primary customers are “big-box” retailers such as Walmart, Home Depot, and Lowe's. These retailers have distribution centers located in Ohio. When an order is placed, Greenscapes is provided with a delivery address. It prepares a bill of lading but is not responsible for shipping. The retailer arranges for a carrier to pick up the product at Greenscapes' facility. Once loaded into the carrier's truck, the product becomes the property of the retailer. After the product leaves the facility, Greenscapes cannot track the final destination of the product.

Greenscapes therefore lacks any property or payroll in Ohio and passes title to its products to customers outside Ohio. The company prepared bills of lading and knew products would travel to distribution centers in Ohio or other locations, but were not responsible for shipping.

Greenscapes v. Testa

The Ohio Tax Commissioner audited Greenscapes, leading to a CAT assessment for its sales of products in Georgia for transport to distribution centers in Ohio. The Tax Commissioner relied upon Ohio statutory law, namely Ohio Rev. Code 5751.033(E), and an old Ohio corporation franchise tax case called Dupps Co. v. Lindley (1980) to situs the sales to Ohio for CAT purposes. On appeal the Ohio Board of Tax Appeals, the BTA affirmed the Tax Commissioner based upon its interpretation of R.C. 5751.033(E). The BTA ruled that the ultimate destination of the products sold by Greenscapes after all transportation had been completed controlled is where to situs the sales and, in this case, that ultimate destination was Ohio.  

Greenscapes took an appeal to the Ohio Tenth District Court of Appeals. On Feb. 7, 2019, the Tenth District affirmed the Tax Commissioner and the BTA. But this time the court addressed constitutional issues rather than the meaning of the situsing statute, R.C. 5751.033(E).

The Tenth District reasoned that levying the Ohio CAT did not violate the dormant Commerce Clause doctrine because, in its view, the tax would not result in double taxation. The court reviewed Georgia law that it understood to situs sales to the eventual destination (rather then where title passes) for Georgia corporate income tax purposes.

The Tenth District similarly rejected Greenscapes assertion of its Due Process rights. The court found that Ohio provided a benefit for which it could ask a return through taxation because it provided access to Ohio consumers and its marketplace.  Greenscapes had “purposefully availed” itself to the Ohio marketplace because it prepared the bills of lading and was aware of the Ohio shipping address. Even though some products would continue on to retail locations outside Ohio after the distribution centers in Ohio, the court found the evidence of such lacking.

Appeal to Ohio Supreme Court

On March 25, 2019, Greenscapes filed an appeal to the Ohio Supreme Court. The Supreme Court, however, may refuse to consider the appeal in its discretion. The Ohio Supreme Court’s perspective on this issue would provide helpful guidance because it has become more and more of an issue in light of the Tax Department’s recent audit and enforcement efforts.

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