On March 6, 2014, the Ohio Board of Tax Appeals ruled in favor of the Ohio Department of Taxation in determining that L.L. Bean, Inc. owed commercial activity tax (CAT) on sales made into Ohio even though L.L. Bean has no physical connections with Ohio.
L.L. Bean makes sales through 26 retail stores, none of which are located in Ohio, through catalogs mailed to consumers in Ohio, and by an internet website located on a server in Freeport, Maine. All goods are delivered into Ohio by common carriers.
L.L. Bean was assessed commercial activity tax for the period from July 1, 2005 through March 31, 2008. According to Ohio Revised Code 5751.02 (A) “…there is hereby levied a commercial activity tax on each person with taxable gross receipts for the privilege of doing business in this state. For the purposes of this chapter, ‘doing business’ means engaging in any activity, whether legal or illegal, that is conducted for, or results in, gain, profit, or income, at any time during the calendar year. Persons on which the commercial activity tax is levied include, but are not limited to, persons with substantial nexus with this state.”
As it applies to L.L. Bean, substantial nexus for CAT purposes includes a person that has taxable gross receipts of at least $500,000. ORC 5751.01(I)(3)
L.L. Bean’s main argument against the imposition of tax is that the receipts are not subject to taxation under R.C. 5751.02(A) because L.L. Bean lacks “substantial nexus” with Ohio under the United States Constitution. Specifically, L.L. Bean argued that the imposition of the tax would violate the Company’s rights under the Commerce Clause of the United States Constitution.
The question of what constitutes “substantial nexus” for sales tax purposes has been decided by the United States Supreme Court on numerous occasions. In Quill Corp. v. North Dakota (1992), 504 U.S. 298 (1992), the U.S. Supreme Court reaffirmed previous decisions stating that in order for a company to have “substantial nexus” for sales tax purposes, a company must have a physical presence within the state. While economic nexus satisfies the nexus standard under the Due Process Clause of the U.S. Constitution, it does not satisfy the “substantial nexus” standards required under the Commerce Clause.
In its ruling, the Ohio Board of Tax Appeals stated that it does not have the authority to rule on the constitutionality of a statute. Instead, it may only serve as a gatherer of evidence. The BTA ruled in favor of the Ohio Tax Commissioner since the assessment was lawful under Ohio statutes. L.L. Bean is appealing the decision to the Ohio Supreme Court. The question to be answered is whether or not physical presence is required in order for a state to impose a business privilege tax.
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