The Ohio Board of Tax Appeals (BTA) recently issued its decision in Greenscapes Home and Garden Products, Inc. v. Testa, BTA Case No. 2016-350 (July 19, 2017). The BTA's decision is its first one analyzing the application of the situsing rule for sales of tangible personal property for Commercial Activity Tax (CAT) purposes provided in Ohio Rev. Code §5751.033(E).

The taxpayer is a wholesaler of lawn and garden products based in Georgia. The taxpayer's sales were made primarily to "big box" retailers. After an audit, an assessment of CAT was made. The assessment, and eventual Tax Commissioner Final Determination, was based on sales information showing "ship to" addresses in Ohio. At the BTA hearing, the taxpayer presented testimony that it sold its products directly to the customer by providing its product at its Georgia location, loading it onto the customer's selected mode of transportation and provided a bill of lading to the truck driver that indicated the ultimate ship-to address. After that, the taxpayer no longer tracked the location of the product.

Ohio Rev. Code §5751.033(E) provides the following situsing rule:

Gross receipts from the sale of tangible personal property shall be sitused to this state if the property is received in this state by the purchaser. In the case of delivery of tangible personal property 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. For purposes of this section, the phrase "delivery of tangible personal property by motor carrier or by other means of transportation" includes the situation in which a purchaser accepts the property in this state and then transports the property directly or by other means to a location outside this state. Direct delivery in this state, other than for purposes of transportation, to a person or firm designated by a purchaser constitutes delivery to the purchaser in this state, and direct delivery outside this state to a person or firm designated by a purchaser does not constitute delivery to the purchaser in this state, regardless of where title passes or other conditions of sale.

In upholding the Tax Commissioner's determination, the BTA noted that the CAT situsing rule for tangible personal property was nearly identical to the situsing rule utilized for the now phased-out corporation Franchise Tax. Accordingly, the BTA looked to the Ohio Supreme Court's (Court) decision in Dupps Co. v. Lindley, 62 Ohio St.2d 305 (1980) for guidance in applying the CAT situsing rule. Dupps was a Franchise Tax case that presented the opposite situation before the BTA. In Dupps, the taxpayer was an Ohio-based manufacturer whose sales were picked up at its facility by its customers and transported out of Ohio. The Court held that the Franchise Tax apportionment statute looked to the ultimate destination of the goods after all transportation was completed. The Court concluded that the sales were sitused outside Ohio. The Court also said that whether the seller or the buyer designated the common carrier was irrelevant in making that determination.

Applying Dupps to the facts before it, the BTA concluded that, "[a]t the time the taxpayer sold the goods to its customers, it knew their ultimate destination to be Ohio, based on its customer's orders and the bills of lading it provided to the drivers transporting the product." The BTA acknowledged that it may be possible that the taxpayer's customers, after the shipment to Ohio, could ultimately ship those same goods to retail stores outside Ohio. The BTA, however, dismissed that line of reasoning as the taxpayer did not present any information about such subsequent transportation.

It is unknown at this time whether the taxpayer will appeal this decision.

Implications

The BTA's decision clarifies that case law under the old Franchise Tax will be influential in applying the CAT situsing rule. Accordingly, situsing will depend on the "ultimate destination" of the tangible personal property "after all transportation is completed." How the BTA will view when transportation is completed remains to be seen. For example, the BTA's analysis seemed to leave open the possibility that some of the goods may have been sitused outside Ohio if the taxpayer would have provided additional information proving that the customer subsequently transported the goods to retail stores outside Ohio. In audits of CAT taxpayers, the Department of Taxation (Department) has historically resisted such an interpretation based, in part, on language in Information Release CAT 2005-17, "Taxable gross receipt," defined (Revised April 2006). The Information Release¹ requires the taxpayer to know "at the time of sale" where the goods are going to be ultimately shipped. This contemporaneous knowledge requirement is not in the statute, but presents a difficult burden² to meet. While the BTA's analysis was based on what the taxpayer knew at the time of the sale, it did not expressly indicate that it viewed the statute as requiring contemporaneous knowledge.

There are other situsing cases coming before the BTA. In one, International Intimates, Final Determination (October 11, 2016), the Department indicated that the determination of "ultimate" destination is only made by reference to the purchaser of the goods and not the ultimate buyer. In International Intimates, the taxpayer sold apparel to a logistics company that was a subsidiary of a large retailer. The logistics subsidiary then sold the apparel to a retail affiliate that took the goods outside Ohio. The taxpayer presented evidence of the percentage of goods that ultimately went outside of Ohio. The Department rejected the evidence, concluding that the situsing statute's use of the term "purchaser" refers to the buyer in each and every sale. Accordingly, the location of the ultimate purchaser is irrelevant.³

There also is the issue of when tangible personal property is considered to have arrived at its destination. In Butler Color Press, Inc., Final Determination (November 25, 2016), the Department analyzed the sales of a printer of advertising inserts. The printer had one large customer to which it sent a large number of advertisements to a third-party fulfillment center to be bundled with newspapers or other advertising inserts and then sent to retail stores of the printer's customer. The fulfillment center printed the addresses on the flyers based on instructions provided by the printer as received by the printer's customer. The taxpayer argued that transportation was complete at the fulfillment center because the form and value of the property was changed there. The Department rejected this argument, concluding that the printer's customer did not take possession of the flyers at the fulfillment center. In addition, there was no requirement in the situsing statute that the item sent must stay in the same form as received to still be considered in-transit. Finally, the Department concluded that the fulfillment center was merely an intermediate point⁴ on the flyers' pre-set location.

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ENDNOTES

¹ It should be noted that Information Releases do not carry the weight of law, but merely represent the Department's interpretation of the applicable statutes. Renacci v. Testa, 148 Ohio St.3d 470, 2016-Ohio-3394.

² See e.g., 4 What It's Worth Inc., Final Determination (February 8, 2017) in which the Department acknowledged that property shipped to a purchaser's distribution center in Ohio and then subsequently shipped to the same person's retail stores outside Ohio would not be an Ohio-sitused sale. The Department, however, rejected the taxpayer's usage of a ratio of its Ohio retail stores over all of its retail stores as a proxy for situsing sales. This Final Determination indicates that general estimates based on number of stores or other approximations will not be sufficient to support situsing goods outside Ohio. This case was not appealed to the BTA.

³ See also Lexmark International, Inc., Final Determination (September 22, 2015). This case had been appealed to the BTA, but the parties ultimately entered into a private settlement.

⁴ In 2012, EY received informal, non-binding guidance from the Department coming to a different conclusion on a similar set of facts. The facts presented to the Department dealt with a manufacturer and distributor of pharmaceutical products. The company maintained a manufacturing facility in Ohio, but all products manufactured in Ohio were shipped to the company's distribution center in another state where shipments are made to ultimate customers. There were no end-user shipments from the Ohio manufacturing facility. The company purchased products from a foreign affiliated company. These products were initially shipped to the Ohio facility where they were repackaged from large containers into smaller containers. This was done because the Ohio facility had the capacity to perform the repackaging. The products were not subjected to further manufacturing or processing. Once repackaged, the products were sent to the distribution center outside Ohio where shipment was made to the ultimate users. The fact that the products were to be ultimately shipped outside Ohio was known, at the time of the transaction, to the company and its foreign affiliated company. The Department's guidance indicated that the situs was Ohio because the goods were received by the purchaser in Ohio notwithstanding the fact that the goods were only in Ohio for a short period of time for repackaging and shipment outside Ohio.