This week, the Ohio Supreme court heard oral arguments in a case that one of the justices suggest will not be decided with their decision. The question involves the Ohio Commercial Activity Tax and the state’s imposition of it on out-of-state retailers.
A state’s authority to tax a business or an individual is typically tied to that person or entity’s contacts with the state. For in-state businesses, the contacts are obvious. Traditionally, out-of-state retailers have been immune from taxation from states where they have no significant contacts. This usually means they have no physical assets located in the state, like stores, warehouses, factories or sales people.
Ohio, like most states, is interested in obtaining a cut of the immense volume of dollars that now flow through online retailers. Ohio’s solution was the creation of the Commercial Activity Tax, which it claims is a tax on the privilege of doing business in Ohio. In this case, the “privilege” appears to be the privilege of being taxed by the Department of Taxation.
Ohio also argued that the online retailers use of some businesses that have assets in Ohio also qualify as part of the equation of contacts that provide the authority to tax. The difficulty of this argument is that it would seemingly mean an endless search for connections, no matter how tenuous, to locate taxing authority.
Such a ruling would create a completely new meaning to the words “tax planning” for businesses that sold products across state lines.
No matter the ruling, it is likely the losing side will appeal and that the U.S. Supreme Court will ultimately decide this issue.
Source: wcbe.org, “ Ohio’s Commercial Activity Tax,” Karen Kasler, May 4, 2016