On November 17, 2016, the Ohio Supreme Court ruled in Crutchfield Corp. v. Testa that a bright-line presence nexus standard as it applies to the Commercial Activity Tax (CAT) satisfies the substantial nexus requirement under the U.S. Constitution’s Commerce Clause.
The court issued its opinions based on cases that challenged the Ohio CAT bright-line economic presence test. The bright-line economic presence test under the Ohio CAT statutes is defined as an entity that has substantial nexus with Ohio if it has a bright-line presence. A bright-line presence for Ohio is defined, in part, as having taxable gross receipts of at least $500,000 in the state.
The court upheld the Board of Tax Appeals CAT assessments against an out-of-state retailer without a physical state presence. The court found that because the $500,000 sales receipts threshold was met, the burdens imposed by the CAT on interstate commerce aren’t excessive in relation to the state’s legitimate interest in evenhandedly imposing the tax on the sales receipts of in-state and out-of-state sellers. As a result, the tax satisfies the substantial nexus standard under the dormant Commerce Clause.
Based on Quill Corp. v. North Dakota, the court determined the physical presence requirement recognized by the U.S. Supreme Court for use tax collection doesn’t extend to business privilege taxes such as the CAT. Further, the court held that, under the Commerce Clause, an interstate business’s physical presence within the state isn’t a necessary condition to impose the obligations of the CAT law as long as the privilege tax is imposed with an adequate quantitative standard that ensures the taxpayer’s nexus with the state is substantial. Here, the quantitative standard is the $500,000 sales-receipt threshold.
Contact your BKD advisor if you have questions regarding the Ohio Supreme Court’s decision and its effect.