Court takes up tax on out-of-state companies’ online sales
COLUMBUS, Ohio (AP) — A likely appeal to the U.S. Supreme Court was on the minds of justices in Ohio on Tuesday as they contemplated how the state’s primary business tax should apply to online sales.
Ohio Supreme Court justices repeatedly raised the issue of a federal appeal during oral arguments in a set of cases that challenge Ohio’s ability to impose its commercial activity tax on companies that do millions of dollars of Internet sales to Ohioans but have no stores or buildings in the state.
That’s because the most often cited precedent-setting case on such matters was decided in 1992 — which, as Justice Paul Pfeifer observed, is “ancient in terms of the world as it exists today.”
Ohio’s commercial activity tax, or CAT, was established in 2005. It generates more than $1.5 billion a year in state revenue.
It is what’s known as a business privilege tax that applies a low rate to all businesses with at least $500,000 in gross receipts in the state. That contrasts with other business taxes on property or profits that state policymakers at the time viewed as potentially harmful to the state’s economy, particularly to manufacturers.
But the businesses that brought suit — California-based Newegg Inc., the largest U.S. online retailer after Amazon; Virginia-based Crutchfield Corp., a car audio retailer; and Wisconsin-based Mason Companies Inc., which sells shoes —contend that mere sales within a state don’t subject them to taxation. They call that a violation of the U.S. Constitution’s commerce clause.
“Customers don’t create and don’t do work for a company,” Martin Eisenstein, the companies’ attorney, told justices. “Customers buy the products of the company.”
He said three states — Washington, New Mexico and Tennessee — impose a similar business privilege-style tax, but none so far has identified sales alone as triggering such a tax.
“So the question is will you open the floodgates to multiple taxes,” Eisenstein said.
Eisenstein said the U.S. Constitution gives Congress sole authority to regulate interstate commerce, and U.S. Rep. Steve Chabot, a Cincinnati Republican, has proposed federal legislation that would address the issue on a national scale.
Daniel Fausey, the state’s attorney, said Tax Commissioner Joe Testa was justified in sending CAT tax bills to the three companies, which all have refused to pay. Testa’s audits determined that Newegg earns more than $269 million a year in sales from Ohioans, Crutchfield earns between $7.2 million and $8.9 million a year, and Mason earns about $6 million a year. The tax bill he sent Newegg from 2005 through 2012 totaled about $700,000, Fausey said.
He said the tax only applies to the portion of their sales that go to Ohioans.
The state has argued that software connections and relationships with in-state partners represent the required physical presence to subject online businesses to the tax under the Constitution. Fausey said there’s no doubt the companies are benefiting from operations within the state.
“So the standard that we’re looking for you to apply here is whether the company has engaged in substantial efforts to grow and develop their marketplace in the state,” he said.
Fausey predicted the Ohio court’s decision would not be taken up by the U.S. Supreme Court. He said the high court has declined to hear several related cases from state courts.