Ohio Supreme Court decides Commercial Activity Tax gross receipts are sitused based on the taxpayer’s sale to its customer, the “first” sale, not on its customer’s sale to its customer, the “second” sale.
In a 6-1 decision, the Supreme Court of Ohio affirmed the Ohio Tax Commissioner’s $327,000 imposition of Ohio commercial activity tax (CAT) regarding transactions that it found were properly sourced to Ohio in VVF Intervest LLC v. Harris, Slip Opinion No. 2025-Ohio-5680. The taxpayer, VVF Intervest, asserted that the gross receipts from the sale of its products were not sitused to Ohio for purposes of the CAT (a gross receipts tax on the privilege of doing business in Ohio measured by receipts sourced to Ohio) because its products were merely passing through a warehouse on their way to customers in other states.
The Court stated the Ohio Board of Tax Appeals (BTA) conflated VVF’s sales to the purchaser, High Ridge Brands (HRB) – the “first sale”, with HRB’s “second sale” of products in its Ohio warehouse to retailers around the country. Under R.C. 5751.033(E), the CAT applies to property received in Ohio by the purchaser – HRB.
Facts
VVF made soap in Kansas as a contract manufacturer for HRB. It then directed HRB to send a commercial carrier to pick it up in Kansas. VVF labeled the shipments to direct them to HRB’s Columbus, Ohio warehouse. From there, HRB contracted with retailers to purchase the soap. HRB then sent approximately 96% of the soap outside of Ohio.
VVF asserted that while the soap was initially transported to a warehouse in Columbus, Ohio, the soap was later sent to out-of-state retailers by HRB and should not be subject to CAT. The Ohio tax commissioner asserted that the shipment from the warehouse to retailers was a “second sale” by HRB to its customers and not one long single sale of VVF-made products to retailers.
Board of Tax Appeals’ initial conclusion
As we wrote in our previous VVF Buzz, the BTA ruled the shipment to the warehouse was “one leg” of HRB’s transportation of the soap from Kansas to its final destinations outside of Ohio, and generally rejected the Ohio tax commissioner’s “second sale” assertion.
Ohio Supreme Court overturns BTA’s decision
The Court agreed with the tax commissioner’s “second sale” theory and rejected the BTA’s position. Under R.C. 5751.033(E), property received in Ohio “by the purchaser” is a sale that permits Ohio to tax the seller on those gross receipts. While the sourcing statute indicates that receipt takes place when all transportation is completed, the Court came to its conclusion because the law focuses on where the property is received by the purchaser, not where a purchaser may subsequently send it as a result of a “second sale.”
The BTA had initially based its conclusion on where the purchaser, HRB, ultimately sent the property purchased from VVF. However, the law concentrates on where the purchaser (not the purchaser’s purchaser) ultimately received the property, the Court’s opinion noted.
“After HRB received the goods in Columbus, it assumed full control over the property, including the responsibility for directing subsequent deliveries to third parties. At that point, HRB ceased to act in the capacity of purchaser in relation to VVF and began acting as a seller in a second transaction,” the Court wrote.
In a dissenting opinion, Chief Justice Sharon L. Kennedy asserted that the delivery of the goods occurred in Kansas, not Ohio, and should therefore not be sitused to Ohio. Focusing her analysis on a phrase from the fourth sentence of the statute that says “direct delivery outside this state to a person or firm designated by a purchaser does not constitute delivery to the purchaser in this state,” the Chief Justice concluded that both delivery and receipt were in Kansas, because the purchaser, HRB, not VVF, “designated the motor carrier that picked up the goods in Kansas,” and also “assumed full control over the property there.” Additionally, the Chief Justice read the third sentence of the statute as providing support for the result reached by the BTA.
ZHF Observations
- It is important to note that the Court noted in footnote 5 that the facts in VVF are clearly different than the facts in the Jones Apparel Group/Nine West Holdings v. Harris, Case No. 2023-1288:
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- The situation here is clearly different from that in another case currently pending before this court, Jones Apparel Group/Nine West Holdings v. Harris, case No. 2023-1288. In that case, the purchaser (DSW, Inc.) shipped goods it received in Ohio to its own retail stores nationwide; it did not resell the goods to independent retailers, as HRB did here.
The Court has not issued its opinion in Jones Apparel as of the writing of this Buzz. Stay tuned because that matter did not involve a “second sale.”
- It is also important to note that the Court did not address in VVF the “contemporaneous knowledge” or “at the time of sale” argument, an argument the tax commissioner raised in the Jones Apparel case.
In Jones Apparel, the BTA decided that contemporaneous knowledge by the taxpayer was not required and, in the right set of circumstances, a “taxpayer could present evidence that it obtained after transportation was complete that would successfully demonstrate that the goods were ultimately received outside of Ohio.” But the BTA also held that Jones Apparel did not meet its burden of proof to show that the goods were received outside of Ohio, under the evidence. Jones Apparel appealed the BTA’s decision to the Supreme Court. The tax commissioner, for her part, filed a cross-appeal to the Supreme Court regarding the BTA’s holding that contemporaneous knowledge was not required. The Court will likely address the “contemporaneous knowledge” or “at the time of sale” argument when it issues its opinion in Jones Apparel.
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