Ohio and L.L. Bean: CAT and Nexus?
In a recent determination (No. 0000000198, 8/10/2010), the Ohio Tax Commissioner held that L.L. Bean's ("Bean") continuous, systematic, and significant solicitation and exploitation of the economic marketplace in Ohio is sufficient to satisfy the "substantial nexus" requirement of the Commerce Clause.
Bean continually sends thousands of catalogs to Ohio residents by mail, and engages in numerous other forms of advertising in Ohio in various media, including print and television.
The determination states, "the depth of Bean's success in penetrating the economic marketplace in Ohio is demonstrated by their level of gross receipts from Ohio sales of tangible personal property, which for the periods assessed (7/1/05 to 3/31/08) exceeded $100,000,000 in the aggregate." According to the Commissioner, this level of activity is "substantial."Bean argues that its activity in Ohio does not reach the level of "substantial nexus" and therefore, Ohio's imposition of its Commercial Activities Tax (CAT) is not constitutional.
Bean also argues that the physical presence standard set in Quill Corp. v. North Dakota (1992), 504 U.S. 298 should apply to the commercial activity tax. The Ohio Commissioner rebuts that argument with the fact that the Ohio Supreme Court recently ruled that the CAT is not the functional equivalent of a sales tax (Ohio Grocers Ass'n v. Levin (2009)).So What?
Bean is likely to appeal the Tax Commission's determination to the Ohio Board of Tax Appeals. If Bean does appeal, and eventually wins, many other companies in similar situations may be eligible for refunds.
This could be the battle for determining the constitutionality of "bright line presence" standards that impose taxes (regardless of tax type) on out of state companies that lack physical presence.
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at firstname.lastname@example.org.
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