Crutchfield Corp. v. Testa

• Decision Date: 17 November 2016
• Docket Number: No. 2015–0386.,2015–0386.
• Citation: 88 N.E.3d 900,2016 Ohio 7760,151 Ohio St.3d 278
• Parties: CRUTCHFIELD CORPORATION, Appellant and Cross–Appellee, v. TESTA, Tax Commr., Appellee and Cross–Appellant.
• Court: Ohio Supreme Court

151 Ohio St.3d 278

88 N.E.3d 900

2016 Ohio 7760

CRUTCHFIELD CORPORATION, Appellant and Cross–Appellee,

v.TESTA, Tax Commr., Appellee and Cross–Appellant.

No. 2015–0386.

Supreme Court of Ohio.

Submitted May 3, 2016.

Decided Nov. 17, 2016.

Brann & Isaacson, Martin I. Eisenstein, David W. Bertoni, and Matthew P. Schaefer ; and Baker Hostetler and Edward J. Bernert, Columbus, for appellant and cross-appellee.

Michael DeWine, Attorney General, and Daniel W. Fausey and Christine Mesirow, Assistant Attorneys General, for appellee and cross-appellant.

Macey, Wilenski & Hennings, L.L.C., and Peter G. Stathopoulos ; and Robert Alt, urging reversal for amici curiae Buckeye Institute for Public Policy Solutions, Mackinac Center for Public Policy, NetChoice, and American Catalog Mailers Association, Inc.

Fredrick Nicely and Nikki Dobay, urging reversal for amicus curiae Council on State Taxation.

Goldstein & Russell, P.C., Eric F. Citron, and Thomas C. Goldstein, urging affirmance for amici curiae National Governors Association, National Conference of State Legislatures, Council of State Governments, National Association of Counties, National League of Cities, U.S. Conference of Mayors, International City/County Management Association, International Municipal Lawyers Association, and Government Finance Officers Association.

Bricker & Eckler, L.L.P., Mark A. Engel, Cincinnati, and Anne Marie Sferra, Columbus, urging affirmance for amici curiae Ohio Manufacturers' Association, Ohio State Medical Association, Ohio Dental Association, and Ohio Chemistry Technology Council.

Bruce Fort, urging affirmance for amicus curiae Multistate Tax Commission.

O'NEILL, J.

{¶ 1} Appellant and cross-appellee, Crutchfield Corporation, appeals from the imposition of Ohio's commercial-activity tax ("CAT") on revenue it has earned from sales of electronic products that it ships into the state of Ohio. Crutchfield is based outside Ohio, employs no personnel in Ohio, and maintains no facilities in Ohio. The business Crutchfield does in this state consists solely of shipping goods from outside the state to its consumers in Ohio using the United States Postal Service or common-carrier delivery services. In this appeal, Crutchfield contests the issuance of CAT assessments against it, arguing that Ohio may not impose a tax on the gross receipts associated with its sales to Ohio consumers, because Crutchfield lacks a "substantial nexus" with Ohio. Crutchfield argues that a substantial nexus within a state is a necessary prerequisite to imposing the tax under the federal dormant Commerce Clause. Further, citing case law interpreting this substantial-nexus requirement, Crutchfield argues that its nexus to Ohio is not sufficiently substantial because it lacks a "physical presence" in Ohio—i.e., property in the state or agents or employees acting in the state in connection with its sales.

{¶ 2} Appellee and cross-appellant, the tax commissioner, advances a two-pronged defense. First, he argues that the Commerce Clause case law does not impose a physical-presence requirement and that as a result, the $500,000-sales-receipts threshold set forth in the Ohio CAT statute satisfies the Commerce Clause requirement of a substantial nexus. Second, even if the Commerce Clause does impose a physical-presence requirement, the tax commissioner argues, Crutchfield's computerized connections with Ohio consumers involve the presence of tangible personal property owned either by Crutchfield or by contractors acting specifically on Crutchfield's behalf and the presence of that property on computers located in Ohio constitutes physical presence in this state.

{¶ 3} We agree with the first prong of the tax commissioner's argument, and we therefore do not address the second one. Our reading of the case law indicates that the physical-presence requirement recognized and preserved by the United States Supreme Court for purposes of use-tax collection does not extend to business-privilege taxes such as the CAT. We further conclude that the statutory threshold of $500,000 of Ohio sales constitutes a sufficient guarantee of the substantiality of an Ohio nexus for purposes of the dormant Commerce Clause. We therefore affirm the decision of the Board of Tax Appeals ("BTA") and the assessments issued by the tax commissioner against Crutchfield.

The CAT's Statutory Bright–Line–Presence Standard

{¶ 4} The CAT is imposed under R.C. 5751.02(A), which levies "a commercial activity tax on each person with taxable gross receipts for the privilege of doing business in this state." To determine what constitutes "taxable gross receipts," we look to R.C. 5751.01(G), which defines them as "gross receipts sitused to this state under section 5751.033 of the Revised Code." In the case of sales of tangible personal property like those made by Crutchfield, R.C. 5751.033(E) informs us that the sales are "sitused to this state if the property is received in this state by the purchaser." The statute specifies that when property is delivered "by motor carrier or by other means of transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered the place where the purchaser receives the property." Id. It is the tax commissioner's position that by filling orders initiated on computers in Ohio and arranging for its products to be transported into Ohio, the receipts from Crutchfield's sales qualify as "taxable gross receipts" under this provision.

{¶ 5} Next, we turn back to the imposition of the CAT under R.C. 5751.02(A) on the "privilege of doing business." The statute defines "doing business" as "engaging in any activity, whether legal or illegal, that is conducted for, or results in, gain, profit, or income, at any time during a calendar year." Specifically, the statute states that the CAT is imposed on "persons with substantial nexus with this state," id., a phrase defined at R.C. 5751.01(H)(3) to include persons having a "bright-line presence in this state." R.C. 5751.01(I)(3) includes within the bright line of taxability those persons having "during the calendar year taxable gross receipts of at least five hundred thousand dollars."

{¶ 6} There are other statutory bases for imposing the CAT, but the bright-line standard of receipts from sales into the state that amount to $500,000 per calendar year is the one that is relevant in this appeal. We refer to this basis for imposing the CAT as the $500,000-sales-receipts threshold in this opinion.

Factual Background

{¶ 7} This is an appeal from a decision issued by the BTA on February 26, 2015, in consolidated case Nos. 2012–926, 2012–3068, and 2013–2021. The three BTA cases were appeals from three separate final determinations of the tax commissioner:

• In BTA case No. 2012–926, the tax commissioner issued 19 assessments covering audit periods that extended from July 1, 2005 (the inception of the CAT) to June 30, 2010. The assessments amounted to $65,689 in tax, $5,659.94 in preassessment interest, and $37,128.23 in penalties, for a total assessed amount of $106,239.43.

• In BTA case No. 2012–3068, the tax commissioner issued five assessments for five quarterly periods beginning July 2010 and ending September 2011. The assessments were based on estimated tax amounts of $10,000 per period; the total amount assessed with interest and penalties was $60,988.50.

• In BTA case No. 2013–2021, the commissioner issued assessments for the last quarter of 2011 and the first two quarters of 2012 based on estimated tax amounts of $10,000 per quarter. The assessments consisted of tax plus interest and penalties for a total amount of $39,703.01.

{¶ 8} In each instance, Crutchfield contested the original assessments, advancing statutory and constitutional challenges. The tax commissioner issued three final determinations covering all the assessments.

{¶ 9} The final determinations are substantially the same. Each final determination notes that Crutchfield is "a corporation based in Virginia," that it functions as "a direct marketer that sells consumer electronics through the Internet from locations entirely outside of Ohio," and that it "ships its merchandise via the U.S. Mail or using common carriers." The final determinations rejected Crutchfield's objections on the grounds that the taxpayer "has 'substantial nexus with this state,' as that phrase is defined in R.C. 5751.01(H)," inasmuch as Crutchfield "satisfies the third and/or fourth conditions in that division, and therefore is a person on whom the tax is levied."¹

{¶ 10} Next, the final determinations found that Crutchfield "sells consumer goods through orders received via the Internet and telephone orders," noting that Crutchfield "admits that it has customers in Ohio to which it sells and ships these goods." After further discussion of the relevant statutory provisions, the final determinations state that Crutchfield's "overriding assertion is that the Commerce Clause of the United States Constitution precludes the State of Ohio from subjecting it to the commercial activity tax" and that Crutchfield maintains that "the nexus required is a 'physical presence' in the taxing state, which it alleges it did not have during the assessed periods."

{¶ 11} In all three cases, the tax commissioner found that Crutchfield had "more than $500,000 in sales to customers in Ohio" and that Crutchfield "failed to file and pay the commercial activity tax." The commissioner made no factual finding regarding physical presence but instead noted that he lacked authority to "adjudicate the constitutionality of th[e] statutes." At the BTA, Crutchfield stipulated that it did "not contest the amounts of estimated Ohio Commercial Activity Tax set forth on the assessments" but reasserted that it was immune from the tax.

Proceedings at the BTA

{¶ 12} At the BTA, Crutchfield offered the testimony of two company employees, its senior vice president of finance and its director of Internet marketing. The...