The Supreme Court of Ohio recently issued two significant and related decisions, VVF Intervest, LLC v. Harris and Jones Apparel Group/Nine West Holdings v. Harris, concerning the situs of receipts from the sale of tangible personal property for Ohio Commercial Activity Tax (CAT) purposes. These rulings affect taxpayers selling goods that are initially received by a purchaser in Ohio before being shipped to other states.
In VVF Intervest, LLC v. Harris, the taxpayer was a contract manufacturer of personal care products produced at its facility in Kansas. VVF Intervest sold the products to its wholesale customer in Ohio, where the wholesale customer stored the inventory at a third-party distribution center until the products were subsequently resold to customers both within and outside Ohio. The taxpayer sought a refund for commercial activity taxes paid during the years in question. That refund was initially approved by the Ohio Board of Tax Appeals (BTA) finding that the products ultimately were transported outside of Ohio and that the sales of the taxpayer were not completed until the ‘second sale’ of the products by the wholesale customer. According to the BTA, the initial sale into Ohio was part of a continuous delivery process to the final out-of-state customer.
The Supreme Court of Ohio reversed the BTA finding instead that the gross receipts have situs in Ohio when a taxpayer sells goods to a purchaser receiving the goods at an Ohio location, regardless of whether the purchaser subsequently resells and ships those goods to its own third-party customers. The Court stated that the taxpayer’s sale (the first sale) is completed upon receipt by its purchaser in Ohio. The Court further noted that the purchaser’s subsequent resale (the second sale) breaks the chain of transportation for purposes of sourcing the original taxpayer’s receipts.
In Jones Apparel Group/Nine West Holdings v. Harris, the taxpayer was a manufacturer of footwear, apparel and accessories which were sold and delivered to customers through a number of platforms, including national retailers with distribution centers in Ohio. The retailer customer of the taxpayer, in turn, would ship the product to its retail stores both within and outside Ohio. The taxpayer initially paid the CAT on its sales shipped to Ohio distribution centers, but then sought a refund claiming that a large portion of the sales did not have situs in Ohio. The BTA affirmed the Ohio Department of Revenue’s denial of the refund, and the Supreme Court of Ohio affirmed the BTA’s denial of the refund claim. The Court noted that under Ohio law “situsing is based on where the purchaser receives the property after all transportation is complete.” That is, receipts from goods shipped through Ohio would be excluded from the CAT. However, in this case, the taxpayer failed to provide sufficient quantitative evidence to prove the quantity of goods ultimately received outside of Ohio. While the taxpayer offered estimates about the amount of goods shipped outside Ohio from the Ohio-based distribution centers, the court held such evidence insufficient to support the claim for refund.
These two cases affect taxpayers selling into Ohio and seeking an exemption from the CAT for property moving through Ohio. Under VVF Intervest, taxpayers selling products to a customer who takes possession and title in Ohio will likely face CAT liability even if that customer ultimately resells the products to customers outside of the state. Taxpayers should proactively review their sales, supply chain models and current sourcing methodology for the tax.
The Jones Apparel case presents a different problem. Taxpayers selling to a customer in Ohio who then ships the products out of state will have to keep detailed, contemporaneous records of the quantity of products that their customer ships out of state. Since the amounts that will be shipped will occur after the sale in Ohio, taxpayers will have to be diligent in working with its customers to ascertain those amounts. At a minimum, taxpayers should consider contractually requiring purchasers to provide documentation or certifications regarding the ultimate destination of goods.
Also note that in similar fact patterns, taxpayers may be required to source sales to states outside of Ohio, for corporate income tax purposes, to the extent that state law would look to the ultimate destination of the product. This could result in the taxpayer sourcing sales to both Ohio for CAT purposes and other states for corporate income tax purposes. Taxpayers with questions about Ohio sourcing or these two decisions should speak with their Ohio tax advisers.
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