In a ruling that could have far-reaching consequences for businesses selling products in Ohio, the state’s supreme court decided that Ohio could tax out-of-state businesses that have no contacts with the state beyond selling $500,000 in goods here.
The commercial activities tax (CAT) had been challenged by three companies based outside of Ohio but who were assessed tax on their sale of goods within the state via catalog and internet websites. The U.S. Supreme Court has consistently ruled that for a state to tax a business, that business must have a “substantial nexus” with the state. This has typically required a physical presence, such as stores, factories or warehouses or the presence of employees.
The Ohio Supreme Court found that by using the minimum sales-receipts threshold, the state properly avoided an adverse impact on many businesses outside of the state. However, as one of the dissenting justices noted, the order of a single $500,000 machine by one business would force an out-of-state company to suddenly be subjected to Ohio’s taxing authority. Such a burden could change some companies sales practice and it is possible they would avoid Ohio sales to avoid this complexity.
It was unclear if the three companies involved in the suit would appeal the decision to the U.S. Supreme Court. Such a case could allow the court to make a ruling that could settle some of the issues of states taxing out-of-state internet based businesses and reduce the uncertainty that surrounds the issue. However, given the politically charged atmosphere around the court at this time and its reduced size, whether the court would take such a case is far from certain.
For now, the Ohio ruling stands, and any business with more than $500,000 in sales to Ohio residents will find itself obligated to pay Ohio Revenue the CAT.