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The CAT Takes a Swat at Quill

On August 10, the Ohio Department of Taxation issued a decision upholding the Commercial Activities Tax’s

On August 10, the Ohio Department of Taxation issued a decision upholding the Commercial Activities Tax’s (CAT) statutory “bright-line presence” nexus test and concluded that L.L. Bean had substantial nexus with the state solely based upon the volume of its sales to Ohio customers. This is the first known ruling addressing a taxpayer’s challenge to the constitutionality of Ohio’s statutory bright-line imposition.

The CAT’s bright-line test is similar to the model rule adopted by the Multistate Tax Commission and provides that taxpayers are subject to the CAT if they meet any one of the following thresholds:

  1. At least $50,000 of property in the state
  2. At least $50,000 of payroll in the state
  3. At least $500,000 of sales to customers in the state
  4. 25% or more of its total property, payroll and receipts in the state
  5. The taxpayer is domiciled in the state

L.L. Bean contended that this test violates the physical presence requirement for substantial Commerce Clause nexus as set forth in National Bellas Hess v. Ill. Rev. Dep’t, 386 U.S. 753 (1967) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

Although the Department lacks jurisdiction to determine the constitutionality of statutes, it addressed L.L. Bean’s challenge to the statutory bright-line test on the merits. The Department reached the following conclusions:

  • Quill’s physical presence requirement applies only to sales taxes and does not extend to other taxes, such as income taxes or gross receipts taxes.
  • The CAT is not functionally equivalent to a sales tax, referencing the Supreme Court of Ohio’s decision in Ohio Grocers Ass’n v. Levin, 123 Ohio St.3d 303 (2009), which held that the CAT was not an excise tax on the sale or purchase of food.
  • L.L. Bean met the “substantial nexus” requirement of the Commerce Clause because of its “continuous, systematic, and significant exploitation” of the Ohio marketplace, pointing to L.L. Bean’s continuous catalog deliveries and advertising in the state and its more than $100 million in Ohio sales during the three-year assessment period.

Taxpayers challenging CAT nexus decisions can appeal final determinations of the Tax Commissioner directly to the Supreme Court of Ohio. O.R.C. 5751.31. The issue of whether the CAT is subject to Quill’s physical presence requirement or the economic presence standard set forth in Ohio’s bright-line rule is likely to draw much national attention, particularly because the CAT in many ways resembles a sales tax. Notwithstanding the uniqueness of the CAT, the outcome of this potential appeal will likely affect other challenges to similar “bright-line” nexus rules.

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