On November 22, 2022, the Ohio Supreme Court (“Court”) issued its decision in NASCAR Holdings, Inc. v McClain, 2022-Ohio-4131. The Court overturned the April 5, 2021 decision of the Ohio Board of Tax Appeals (“Board”), which we reported on in this Buzz, and determined that all four categories of gross receipts challenged by NASCAR should not be sitused to Ohio for purposes of the Commercial Activity Tax (“CAT”). The four categories of receipts the Court considered were broadcast revenue (payments for the right to broadcast NASCAR events), media revenue (payments for the right to use NASCAR intellectual property in marketing efforts and the right to operate NASCAR’s website), licensing fees (payments by manufacturers and other business for the right to use NASCAR’s trademark and trade name), and sponsorship fees (payments for the right to advertise as being the official NASCAR-designated business).
Naturally, the Court’s decision was based on its interpretation of the CAT situsing statute, though the nature of the contracts providing for NASCAR’s revenue streams was an essential consideration. Therefore, taxpayers will have to consider the nature of their contractual revenue streams before applying this decision to their own circumstances. The revenue at issue in NASCAR related to various uses of intangible property, thus implicating Ohio Revised Code (“R.C.”) 5751.033(F). Although the Tax Commissioner had initially sitused the broadcast revenue under the catch-all language of R.C. 5751.033(I), the Board had determined that R.C. 5751.033(F) was the proper division to apply to all of NASCAR’s receipts at issue in its challenge, which included media, licensing, and sponsorships in addition to broadcast. The Court agreed that R.C. 5751.033(F) was the applicable section, but differed sharply from the Board on its reading of the pertinent language in R.C. 5751.033(F).
In the Court’s analysis, the representative contracts for all four revenue streams “provided for fixed payments for the right to use NASCAR’s intellectual property,” as distinguished from the “amount of use.” NASCAR ¶ 29. (The Court acknowledged at ¶ 44 that “[u]nlike the other categories of receipts, the licensing fees vary based on [the licensee’s] sales,” but followed the tax commissioner’s decision to analyze these receipts under the second, rather than the first, sentence of R.C. 5751.033(F).) Accordingly, four categories of receipts had to be considered under the second sentence of R.C. 5751.033(F), which reads:
If the receipts are not based on the amount of use of the property, but rather on the right to use the property, and the payor has the right to use the property in this state, then the receipts from the sale, exchange, disposition, or other grant of the right to use such property shall be sitused to this state to the extent the receipts are based on the right to use the property in this state.
The Court’s interpretation of this sentence focuses on the phrases “based on” and “to the extent that.” The former phrase is given a strict reading by the Court, in which it “indicates a but-for causal relationship and thus a necessary logical condition.” NASCAR ¶ 31, citing Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 63 (2007). The latter phrase “imposes a limit on the tax commissioner’s authority” because the tax may only be imposed on the intellectual property receipts “in so much as – or to the extent that – they are ‘based on’ the right to use the property in this state.” NASCAR ¶ 32. The reading of the latter phrase is straightforward; it’s the Court’s reading of “based on” that does the heavy lifting when applied to NASCAR’s contracts, and which had clearly been read differently by the Tax Commissioner and the Board.
The contracts, as the Court notes, grant the licensee the right to use the property in various territories, such as, in the case of the broadcast contract with FOX, the United States and its territories and sometimes in Mexico and Canada. This territory includes Ohio, and the Tax Commissioner had argued that “the measure [of the tax base] should reflect the value of the right to use [the broadcast rights] in Ohio.” Under the Tax Commissioner’s reading of the statute, although the revenue is a fixed payment, that payment is for the right to use intellectual property rights in a territory that includes Ohio. FOX would not pay for this right if it did not intend to use it. Therefore, the revenue is “based on” (in this broader sense) the right to use the property in Ohio as a portion of the total territory granted. For this reason, the Tax Commissioner had sitused the broadcast receipts based upon the ratio of Ohio cable-TV households to United States cable-TV households. But in the Court’s narrow interpretation of “based on,” the inclusion of Ohio within the territory does not provide the necessary logical condition for imposition of the tax on these receipts. The fixed fee for the rights paid by FOX “is unchanged regardless of whether any part of NASCAR’s intellectual property even makes it to Ohio.” NASCAR ¶ 34. The Court notes that the Tax Commissioner’s argument focuses on the general CAT principle of sourcing receipts “based on where the market for the sale is located,” NASCAR ¶ 37, but rejects this as conflicting with the language of the second sentence of R.C. 5751.033(F).
The Court applies the same basic analysis to all four of NASCAR’s challenged categories of gross receipts, looking at the language from the sample contracts in light of the Court’s reading of R.C. 5751.033(F)’s second sentence. Only the licensing fees category has a different possible outcome, because this fee varies based on the licensee’s sales. Although the partial dissent from three members of the Court would have applied the first sentence of R.C. 5751.033(F) and required NASCAR to find out “the amount of use of the property in this state” as required by that sentence, the majority’s decision does not take that route because it was not argued by the Tax Commissioner.
Finally, because the Court reversed most of the assessment on statutory grounds, the Court declined to address other arguments raised by NASCAR, including its constitutional arguments. The Court remanded the case to the tax commissioner for a redetermination of the amount of assessment relating to those receipts that NASCAR had not challenged on appeal, plus a recalculation of penalty (if any remained after the reduction of the amount of assessed tax).
Implications for Taxpayers
Taxpayers who derive revenue from the licensing of intellectual property have much to consider from the NASCAR decision. If those licenses are based on fixed fees, it appears that they should not be sitused to Ohio for CAT purposes, so long as the contract does not specifically grant the licensee the right to use the property in Ohio, regardless of whether Ohio is part of the overall territory covered by the grant. Some taxpayers may have refund claims available, depending on whether they have sourced such revenue to Ohio during the past four years.
For contracts where the fee is variable and based on usage, however, it appears the first sentence of R.C. 5751.033(F) would apply. That sentence situses receipts to Ohio “to the extent that the receipts are based on the amount of use of the property in this state.” The “to the extent” and “based on” language is the same as in the second sentence, but “amount of use” appears to require a different metric than “right to use.” While only the partial dissent explicitly states that such revenue should be sitused to Ohio, the Court’s majority opinion does not disagree; it declined to address the question because the argument was not raised by the parties. Contracts based on usage may well be subject to the CAT to the extent of the Ohio usage of the intellectual property involved. Therefore, taxpayers with this type of contract may want to consider working with their licensees to determine the actual usage of licensed property or risk the Tax Commissioner’s use of estimates (based on population proportions or a relevant factor such as television viewing) to determine taxable gross receipts under the CAT.
NASCAR is not the first taxpayer to read a CAT situsing statute differently from the Ohio Tax Commissioner. This Court decision resolves some issues but others remain. If you are uncertain how your contractual revenue is sitused under the CAT, please contact any of our ZHF professionals.