On November 17, 2016, the Ohio Supreme Court handed down a decision which held, in effect, that Ohio’s Commercial Activity Tax (“CAT”) may be charged on the gross receipts of an out-of-state business' Internet sale of goods to Ohio customers if those receipts exceed $500,000.

In Crutchfield Corp. v. Testa, Slip Opinion No. 2016-Ohio-7760, the Ohio Supreme Court was presented with these facts: Crutchfield Corp. sold merchandise to Ohio consumers via the Internet and paid no CAT on its gross receipts from such sales. Crutchfield was not based in Ohio and had no employees, stores, warehouses, or other facilities in Ohio. The Tax Commissioner (Ohio Department of Taxation) found that, by filling orders initiated in Ohio and arranging for the transport of its goods into Ohio, the receipts from the Crutchfield’s sales qualified as "taxable gross receipts" under Ohio’s CAT law. Consequently, the Tax Commissioner assessed CAT on Crutchfield’s gross receipts from Ohio sales. Crutchfield appealed that assessment to the Board of Tax Appeals ("BTA"). That court upheld the Tax Commissioner’s tax assessment and Crutchfield appealed to the Ohio Supreme Court. The Ohio Supreme Court determined that the CAT, as applied to Crutchfield, was constitutional, affirmed the decision of the the BTA, and upheld the CAT assessments against Crutchfield.

Existing case law required that a business had to have a physical presence in Ohio for there to be a “substantial nexus” (or constitutionally-sufficient connection) sufficient for  Ohio to be allowed to charge a sales or use tax on goods which an out-of-state business sold in the state. In finding that it was constitutional for the CAT to be charged on Crutchfield’s gross receipts, Ohio Supreme Court (1) distinguished the CAT from the state sales tax or use tax on the basis that the CAT is a tax on the “privilege of doing business in Ohio”  rather than a tax based on the sale or use of goods and (2) found that the CAT tax’s threshold requirement that the out-of-state business have taxable gross receipts of at least $500,000 was adequate to ensure that a taxpayer had a constitutionally-sufficient “substantial nexus” with Ohio and to eliminate any requirement for a physical presence in the state.

Out-of-state businesses that sell a substantial amount of goods in Ohio via the Internet would be well served to discuss the implications of this decision with an accountant or attorney familiar with Ohio’s CAT obligations.