United States

Ohio Supreme Court affirms commercial activity tax on remote sellers

Bright-line receipts threshold satisfies substantial nexus standard


UPDATE (4/14/2017): On April 14, 2017, the parties in Crutchfield Corp. v. Testa settled their dispute regarding the constitutionality of Ohio’s factor-presence economic nexus test. As a result of the settlement, Crutchfield, Newegg, and Mason will register for and pay Ohio’s Commercial Activity Tax. Businesses with receipts from Ohio sources should determine whether those receipts exceed the state’s factor-presence threshold and consider filing options.

ORIGINAL (11/21/2016): On Nov. 17, 2016, the Ohio Supreme Court issued its decision in Crutchfield Corp. v. Testa, finding a physical presence was not required in order for the state to impose the commercial activity tax (CAT) on out-of-state businesses with taxable receipts in Ohio. The Crutchfield decision was filed with two companion cases with identical claims, Newegg, Inc. v. Testa and Mason Cos., Inc. v. Testa.

The CAT is not considered an income tax or transaction tax, but instead a tax imposed on the gross receipts from doing business in the state. Accordingly, taxpayers are subject to the tax on gross receipts sitused in Ohio exceeding a bright-line threshold of $500,000, regardless of whether the taxpayer is actually physically present in the state.


The taxpayer was a Virginia corporation and online retailer that sold electronic products throughout the country and into Ohio. The taxpayer had no offices, facilities or personnel otherwise located in Ohio and all products were delivered into the state by common-carrier or United States Postal Service.

The taxpayer appealed various CAT assessments for the periods from July 2005, through the first two quarters of 2012—all periods in which the taxpayer’s annual gross receipts exceeded $500,000. On appeal to the Ohio Board of Tax Appeals (BTA), the taxpayer argued that its Ohio gross receipts could not be subject to the CAT under the Commerce Clause of the U.S. Constitution because at no time during the periods at issue did the taxpayer maintain a physical presence in the state. The BTA ultimately concluded that the CAT’s $500,000 threshold established substantial nexus under the statute in order for the state to impose the tax on out-of-state taxpayers. The BTA also noted that it did not have the authority to address the taxpayer’s constitutional claims. In addition, the BTA cited to L.L. Bean Inc. v. Levin, a similar 2014 BTA decision that found the taxpayer at issue satisfied the CAT’s bright-line presence standard. L.L. Bean was ultimately settled before a court could address the constitutional claims.

Ohio Supreme Court appeal

Legislative intent of the CAT statute

On appeal to the Ohio Supreme Court, the taxpayer made a number of arguments concerning the application of the CAT statute in order to avoid an unconstitutional result. First, the taxpayer contended that the ‘doing business’ provision of the statute should be strictly construed by finding that the taxpayer’s lack of physical presence means it could not be doing business in the state. The court quickly dismissed this argument finding that the legislative intent of the provision was to impose the tax on those who meet the $500,000 receipts threshold—an unambiguous interpretation which provided no requirement for the taxpayer to perform any in-state activities.

The taxpayer also argued that a provision excluding certain gross receipts from the CAT, which would be prohibited to be taxed under state law and the U.S. Constitution, should be construed to pre-empt imposition of the CAT based on the receipts threshold. The court found this argument irreconcilable with the statute itself, which specifically imposed the tax on those ‘including but not limited to’ entities with substantial nexus with the state. Substantial nexus is defined in the CAT statutes to include the bright-line presence of the receipts threshold. Therefore, the legislature did not intend to create an exception to the substantial nexus definition, but rather exclude certain receipts by their character, i.e., whether the receipts were exempt from taxation by the U.S. Constitution or other state law.  

Substantial nexus requires a local incidence

The taxpayer cited to case law contending that a taxable ‘local incident’ was required before the CAT could be imposed. Essentially, the taxpayer contended that the local incident equated to substantial nexus under Complete Auto Transit, Inc. v. Brady because a local incident was required for state taxation under the concept that engaging in interstate commerce was immune from state taxation. However, the court made clear that Complete Auto abolished any prohibition against levying a tax on the privilege of engaging in interstate commerce. Therefore, no local incident was required to impost the CAT on a remote retailer.

Application of Quill to the CAT

The Ohio Supreme Court next performed a review of Quill Corp. v. North Dakota, finding that while physical presence may establish substantial nexus, physical presence is not a necessary requirement to impose a business-privilege tax as long as the tax requires an ‘adequate quantitative standard’ in determining substantial nexus. The court supported this finding by noting that the U.S. Supreme Court in Quill specifically stated that the physical presence requirement was not articulated by the court for other types of taxes. Additionally, subsequent cases did not adopt the physical presence requirement for other taxes.

The Ohio Supreme Court noted that case law after Complete Auto established that business privilege taxes should be distinguished from sales and use taxes for purposes of applying the four-prong Commerce Clause test. Citing to Oklahoma Tax Comm. V. Jefferson Lines, Inc., the court determined that the U.S. Supreme Court found that a gross receipts tax should be viewed similarly to an income tax. Finally, the court noted that a number of state courts have rejected the extension of the physical presence standard to income taxes.

Application of Tyler Pipe

The court then looked to Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue, finding that a taxpayer’s physical presence in a state is a sufficient bases to impose a business-privilege tax, but was not a requirement to impose such a tax—an interpretation consistent with Complete Auto and Quill. The court pointed to a number of state gross receipts cases where a physical presence was found, and concluded that a reading of the U.S. Supreme Court cases did not necessarily support a position that physical presence was a requirement in imposing a gross receipts tax in those cases.

Adequacy of the CAT receipts threshold for substantial nexus

Finally, the Ohio Supreme Court concluded that the $500,000 threshold was adequate to establish the substantial nexus requirement of Complete Auto for purposes of imposing the CAT. The court noted that the Commerce Clause required more than a ‘definite link’ to satisfy due process. While imposition of the CAT on remote sellers could impact interstate commerce, the state’s legislature attempted to prevent any burden on that interstate commerce by establishing a minimum sales threshold.


The Ohio Supreme Court provided a rather detailed analysis of nexus-related case law in finding the receipts threshold of the CAT permissible. The decision should not come as a surprise as it was consistent with previous BTA findings, and for now, settles the question of whether physical presence was necessary to be subject to the CAT.

It is also worth noting that the dissent relies on Quill as the ‘last word’ from the U.S. Supreme Court on nexus issues, finding no meaningful difference between substantial nexus for gross receipts taxes and sales and use taxes. Furthermore, the dissent explained that the physical presence standard is the “lynchpin of a substantial nexus between the business and the state,” thus a state’s ability to tax an out-of-state business depends on substantial nexus created by physical presence.

U.S. Supreme Court Justice Kennedy has suggested a re-evaluation of Quill in his Direct Marketing Association v. Brohl concurrence. The U.S. Supreme Court may address a Quill challenge if it chooses to review the substantive issues in Direct Marketing or one of the likely challenges coming out of recently enacted state statutes and regulations that essentially impose a collection requirement on remote sellers without a physical presence. Crutchfield may also be appealed to the U.S. Supreme Court and adds to a very active docket of cases questioning the extent and applicability of the physical presence standard in state taxation of remote retailers.


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