NASCAR Holdings, Inc. v. McClain, Tax Commr., 2021-0578

CourtUnited States State Supreme Court of Ohio
Writing for the CourtDeWine, J.
Citation2022 Ohio 4131
PartiesNASCAR Holdings, Inc., Appellant, v. McClain, Tax Commr., Appellee.
Docket Number2021-0578
Decision Date22 November 2022


NASCAR Holdings, Inc., Appellant,

McClain, Tax Commr., Appellee.

No. 2021-0578

Supreme Court of Ohio

November 22, 2022

Submitted January 25, 2022

Appeal from the Board of Tax Appeals, No. 2015-263.

Taft, Stettinius & Hollister, L.L.P., Jeremy A. Hayden, Aaron M. Herzig, and Brian A. Morris, for appellant.

Dave Yost, Attorney General, Benjamin M. Flowers, Solicitor General, John L. Rockenbach, Deputy Solicitor General, and Christine T. Mesirow and Raina Nahra Boulos, Assistant Attorneys General, for appellee, Tax Commissioner Jeffrey McClain.

Kevin Shimp, urging reversal for amicus curiae, Ohio Chamber of Commerce.

DeWine, J.

{¶ 1} Millions of fans worldwide watched on television as rookie driver Austin Cindric crossed the finish line to win the 2022 Daytona 500. Some of those viewers were in Ohio. They were able to watch because NASCAR had sold the


broadcast rights to FOX Broadcasting Company and FOX had licensed those rights to local television stations, streaming services, and cable providers who made the race available to Ohio viewers. Beyond television, the NASCAR brand reaches Ohio in many ways. Ohioans buy NASCAR grill covers, they watch ads aired by companies that brag of being NASCAR's "official partner," and they visit the website owned by Turner Broadcasting, to name just a few.

{¶ 2} In 2011, the Ohio Tax Commissioner suspected that NASCAR owed monies under Ohio's commercial-activity tax ("CAT"), R.C. 5751.01 et seq. The Ohio Department of Taxation conducted an audit and determined that NASCAR had improperly failed to pay the tax from 2005 to 2010 and owed the state over a half-million dollars in back taxes and penalties.

{¶ 3} In this appeal, NASCAR's holding company contests the bulk of that assessment. The question is whether Ohio may apply its CAT to a portion of the revenue NASCAR derived from nationwide contracts licensing the rights to use its intellectual property. The relevant statute allows Ohio to tax NASCAR's receipts from the rights to use its intellectual property "to the extent the receipts are based on the right to use the property in [Ohio]." R.C. 5751.033(F). Applying this language to the contracts at issue, we conclude that most of the tax assessment was unlawful.

I. Background

A. The commercial-activity tax

{¶ 4} The General Assembly enacted the CAT in 2005. Am.Sub.H.B. No. 66, 151 Ohio Laws, Part II, 2868. The idea was to make Ohio a more attractive place to do business by replacing the existing business-tax regime with "a broad-based, low rate business privilege tax measured by gross receipts." Ohio Department of Taxation, Ohio Budget Bill (Fiscal Years 2006-07): Major Ohio Tax Law Changes (June 29, 2005), available at

2 (accessed Aug. 10, 2022) [].

{¶ 5} The CAT is imposed on "taxable gross receipts for the privilege of doing business in this state." R.C. 5751.02(A). "Gross receipts" are "the total amount realized, * * * without deduction for cost of goods sold or expenses incurred, that contributes to the production of gross income." R.C. 5751.01(F). In other words, instead of being imposed on a net income, the CAT is applied to all funds received from business transactions. See R.C. 5751.03.[1]

{¶ 6} The CAT law defines as "taxable gross receipts" only those receipts that are "gross receipts sitused to this state." (Emphasis supplied.) R.C. 5751.01(G). The amount of "gross receipts sitused to this state" is important for two reasons. First, gross receipts are used to determine whether a business is subject to the CAT; those subject to the CAT include businesses with a "substantial nexus" to Ohio. R.C. 5751.02. Among the ways a business can have a substantial nexus to Ohio is to have $500,000 of annual taxable gross receipts. R.C. 5751.01(H)(3) and (I)(3); see Crutchfield Corp. v. Testa, 151 Ohio St.3d 278, 2016-Ohio-7760, 88 N.E.3d 900, ¶ 5, 21. Second, gross receipts are used to determine how much tax is owed; liability is calculated by applying the base tax rate to "taxable gross receipts." R.C. 5751.02. The dispute in front of us boils down to whether certain receipts are properly sitused to Ohio.

{¶ 7} Receipts are sitused to Ohio according to taxable categories. See R.C. 5751.033. Relevant here, the situsing law provides that gross receipts from the right to use intellectual property "shall be sitused to [Ohio] to the extent that the receipts are based on the right to use the property in [Ohio]." R.C. 5751.033(F). A separate, catchall provision provides that "all other gross receipts not otherwise


sitused under this section, shall be sitused to [Ohio] in the proportion that the purchaser's benefit in [Ohio] with respect to what was purchased bears to the purchaser's benefit everywhere with respect to what was purchased." R.C. 5751.033(I).

B. NASCAR's presence in Ohio

{¶ 8} NASCAR is the preeminent sanctioning body of stock-car racing. Its holding company, NASCAR Holdings, Inc., is headquartered in Daytona Beach, Florida.

{¶ 9} NASCAR races are held at over 100 racetracks across 39 states and Canada and are broadcast in over 150 countries. During the audit period, NASCAR did not hold any of its premier Sprint Cup Series events in Ohio. It did hold seven smaller events in Ohio-four Craftsman Truck Series races and three regional events. NASCAR kept no permanent offices in Ohio, owned no property in Ohio, and employed no permanent workers in Ohio. NASCAR was not registered for Ohio's commercial-activity tax. NASCAR pays taxes on its commercial activities in Florida, except for some event-derived revenue that is taxed at the location of the event.

{¶ 10} In 2011, the Ohio Department of Taxation decided to audit NASCAR's commercial activity in Ohio for the period of July 1, 2005, through December 31, 2010 ("the audit period"). To conduct the audit, the department reviewed NASCAR's taxable gross receipts from the following revenue streams: broadcast revenue, media revenue, licensing fees, sponsorship fees, sanction fees, memberships, and competition. The parties stipulated to sample agreements to serve as representative contracts for each category. See R.C. 5751.09(G); Ohio Adm.Code 5703-29-03. The categories are explained below.

{¶ 11} Broadcast Revenue. NASCAR sold to FOX Broadcasting Company the rights to a set number of races over eight years. FOX paid $1.664 billion for the right to broadcast these races in the United States, its territories, and sometimes


in Mexico, the Caribbean basin, and Canada. FOX had complete editorial control over the broadcasts. FOX entered into third-party agreements disseminating the television rights to local markets and home-television screens. These third-party agreements did not directly affect NASCAR's contract revenue.

{¶ 12} The tax commissioner sitused the broadcast revenue under the catchall provision. The commissioner determined that the provision requires gross receipts to be sitused to Ohio based on the proportion of the television audience that is located in Ohio. To approximate this number, the commissioner used Nielsen data on the total number of cable-TV households, broken down by state. The commissioner then apportioned receipts to Ohio based on the ratio of Ohio cable-TV households to all United States cable-TV households. For example, Nielsen reported that Ohioans made up 4.31254 percent of American cable-TV viewers in 2007, so the tax commissioner determined that the same percentage of NASCAR's broadcast revenue should be sitused to Ohio for that year.

{¶ 13} Media Revenue. NASCAR earned media revenue by licensing the right to use its brand in marketing efforts and the right to operate NASCAR's website. The sample agreement for this category granted Turner Broadcasting System, Inc., the exclusive right to operate the official NASCAR website and the nonexclusive right to use NASCAR's brand online. This included the right to create an online store, NASCAR fantasy games, and NASCAR-branded nonracing games. In consideration for those rights, which spanned the entire World Wide Web, Turner paid $6 million over six years.

{¶ 14} The commissioner sitused gross media receipts under the intellectual-property provision using the same methodology as for the broadcast revenue: the ratio of Ohio cable-TV households to United States cable-TV households. The final audit report lumped the broadcast and media revenues together for a total of $139,470,294 in taxable gross receipts over the audit period.


{¶ 15} Licensing fees. NASCAR earned fees by licensing the right to use its trademark and trade name to manufacturers, insurance companies, banks, food companies, and more. Under the sample agreement, the merchandising company, BSI Products, Inc., obtained the right to use the NASCAR logo on various products, including flags, barbeque sets, and keychains. BSI could sell its NASCAR-licensed products anywhere in "the United States of America, its territories and possessions, the Commonwealth of Puerto Rico, United States military bases abroad and Canada." BSI paid NASCAR an advance payment and royalties and provided a minimum annual guarantee. Using United States census data-taking Ohio's population as a proportion of the national population-the commissioner determined NASCAR's taxable gross receipts from licensing to be $10,230,588 over the audit period.

{¶ 16} Sponsorship fees. NASCAR collected fees from corporate sponsors. The sample agreement granted AFLAC, Inc., the exclusive right to advertise itself as NASCAR's supplemental-insurance partner in the United States. AFLAC agreed to pay NASCAR nearly $5.5 million over 3.5 years for the sponsorship. The commissioner again used Ohio's population as a proportion of the national population as a basis for the assessment, situsing to Ohio...

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