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Agency Exclusion Decision Appealed to Ohio Supreme Court

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A recent decision by the Ohio Board of Tax Appeals (“Board”) regarding the commercial activity tax (“CAT”) “agency exclusion” was appealed this week to the Ohio Supreme Court (“Court”). On December 5, 2023, Aramark Corporation (“Aramark”) filed its notice of appeal of the Board’s decision in Aramark Corporation, BTA Case No. 2019-2975 (November 6, 2023) with the Court. Case No. 2023-1540. The “agency exclusion” has been a contested area of the CAT, and despite influential decisions, including Willoughby Hills Dev. & Distrib., Inc. v. Testa, 155 Ohio St.3d 276, 2018-Ohio-4488, Aramark shows that questions still surround this exclusion.

Under management fee contracts, Aramark provides food service, facilities, and uniform services to hospitals, universities, school districts, stadiums, and other businesses around the world. Pursuant to these contracts, Aramark purchases food, supplies, and other items for its clients, who in turn reimburse Aramark for these purchases. Aramark included these reimbursements as gross receipts in its CAT returns but later filed refund claims asserting that the reimbursements were erroneously included in its gross receipts.

Aramark argues that it has an agency relationship with its clients and that reimbursements received under its management fee contracts should be excluded from its gross receipts for purposes of the CAT. Aramark also contended that the reimbursements are not gross receipts under Ohio Revised Code (“R.C.”) 5751.01(F) because they do not contribute to the production of gross income. The Board found that Aramark was not acting as an agent of its clients and rejected Aramark’s argument that the reimbursements were not gross receipts under the definition in R.C. 5751.01(F). Based on these conclusions, the Board upheld the Tax Commissioner’s denial of Aramark’s request for CAT refunds.

The Agency Exclusion

R.C. 5751.01(F)(2)(l) provides that for purposes of the CAT, gross receipts exclude “[p]roperty, money, and other amounts received or acquired by an agent on behalf of another in excess of the agent’s commission, fee, or other remuneration.” As defined by R.C. 5751.01(N) (former R.C. 5157.01(P)), an agent is “a person authorized by another person to act on its behalf to undertake a transaction for the other.” This definition was a focus of the Ohio Supreme Court’s opinion in Willoughby Hills; it held that in determining whether a person is an agent, the question is whether or not the purported agent had the actual authority to bind the principal as the purchaser in the transactions at issue. Willoughby Hills at ¶ 33.

The Willoughby Hills opinion was a focus of the Board’s review in Aramark. To qualify for the exclusion of the reimbursements from its gross receipts, the Board determined that Aramark needed to show that it had “the authority to bind its client for the activities related to the activities that generated those receipts.” In other words, to qualify for the “agency exclusion,” Aramark needed to have the authority to bind its clients to the purchases Aramark made on the clients’ behalf.

As evidence for its argument that it qualified as an agent, Aramark provided contracts for its management fee clients in Ohio. A representative from a client and two account representatives from the company testified at the hearing. The Board determined that the contracts and testimony did not prove an agency relationship between Aramark and its clients and, therefore, Aramark does not qualify for the “agency exclusion.”

Reimbursements not Gross Receipts under R.C. 5751.01(F)

The Board also considered Aramark’s argument that the reimbursements did not constitute gross receipts because they “did not contribute to the production of gross income” as described in R.C. 5751.01(F). The Board rejected that argument stating that they: “* * * find it illogical that repayment for the costs of goods purchased necessary to fulfill its service agreement does not contribute to the production of gross income. R.C. 5751.01(F) includes all gross receipts ‘without deduction for the cost of goods sold or other expenses incurred.’ To exclude reimbursement for the cost of the goods sold would effectively deduct the total receipts to account for those costs, which is expressly prohibited by the statute.” The Board’s decision does not provide an explanation for the phrase “contribute to the production of gross income” nor does it address how including an expense reimbursement clearly reflects Aramark’s franchise within Ohio. Under the former corporation franchise tax, there were cases that excluded expense reimbursements and similar amounts from the sales factor because they were not part of the taxpayer’s business franchise.


Aramark’s appeal could provide taxpayers and their advisors additional guidance from the court regarding the “agency exclusion” and what qualifies taxpayers as agents. If you would like to further discuss the contents of this post, please reach out to any of our professionals.

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