Supreme Court To Decide If Online Businesses With No Ohio Offices Must Pay Ohio Business Tax

May 3, 2016

The state’s highest court will decide whether internet retailers which have no offices or employees in Ohio but sell products to Ohio residents have to pay a tax that nearly all Ohio businesses pay. And the question before the court centers on what the definition of doing business in Ohio actually is.

There are three so-called “e-tailers” involved in the lawsuit: the huge California-based computer and electronics retailer Newegg, the second largest online retailer after Amazon, along with Virginia-based audio and video dealer Crutchfield and Wisconsin-based Mason Shoe Companies. The companies sell and mail millions of dollars in products to Ohio residents, but say they should not have to pay the state’s commercial activity tax or CAT, which the law says is imposed “on the privilege of doing business in Ohio”. But the e-tailers’ attorney Martin Eisenstein said they aren’t doing business in Ohio by the state’s legal definition because they have no offices or employees here. Chief Justice Maureen O’Connor sounded doubtful when asking Eisenstein about the packages and communications sent to their customers.  “All the mailings to Ohio residents, whether snail mail or e-mail, were done from outside the state of Ohio. And they were national mailings that went –“ O’Connor jumped in: “That were received in the state of Ohio.” Eisenstein said, “That is absolutely correct.” O’Connor continued: “To addresses physically in the state of Ohio.” Again, Eisenstein said, “That is correct, Your Honor.”

Daniel Fausey argued for the tax commissioner, saying the e-tailers don’t need to have a physical presence in Ohio to be subject to the CAT. But he said they do have data storage and monitoring in Ohio and use third-party advertising here. “We went belt-and-suspenders. So we said, you don’t need physical presence. But if you do, we’ve got it aplenty here,” said Fausey. “So we discussed the content distribution networks. We haven’t yet mentioned in-state affiliates, and those companies would then receive commission on their sales. We talked about the company that hung posters and distributed brochures.”

Eisenstein disputed whether the companies actually did that. But the bottom line for the e-tailers is that previous US Supreme Court cases have said individual states don’t have the authority to impose a tax like the CAT on businesses that aren’t physically located in Ohio. Eisenstein told Justice Judith Lanzinger that’s true even in an age when businesses in one state or even another country can sell to customers anywhere on earth.  “If those things need to be changed as a result of changing times and to be fairer to the other individual retailers in the state, that’s up to Congress to change,” Eisenstein said. “So you’re really arguing the long game here, more than the impact on the clients,” said Lanzinger.  “That’s absolutely right,” replied Eisenstein. “This is a question of the burdens on interstate commerce and that is the long game.”

While Eisenstein said it’s ultimately a national issue, Fausey said the federal government has already weighed in on whether states have the power to levy a tax like Ohio does. “It’s not a national problem because the Supreme Court has already said that states may ask for their fair share from companies doing business in the state. And that’s what the CAT does,” Fausey said. “This isn’t, as it’s been presented, an overreach to grab out-of-staters. The commercial activity tax was a substantial overhaul of Ohio’s tax system.”

Ohio is the first state to impose a standard on out of state businesses paying a tax like the CAT, which means this case has drawn the attention of national business groups. But Justice Paul Pfeifer said he doubts he and his colleagues on the Ohio Supreme Court will have the final word on the issue. “Either outcome – you win or you lose – this case is probably going up because they haven’t addressed these e-commerce issues.” A recent case that went up to the US Supreme Court showed there are 19,000 municipalities and 2,600 counties across the country that could impose sales and use taxes similar to the CAT.