November 12, 2018 Ohio Supreme Court issues decision on CAT agency exclusion On November 7, 2018, the Ohio Supreme Court (Court) issued its decision in Willoughby Hills Development and Distribution, Inc.,1 holding that a gasoline distributor was not eligible for a gross receipts exclusion from the Ohio Commercial Activity Tax (CAT) because it was not acting as an agent of a manufacturer/supplier when selling gasoline to retailers. The taxpayer (Willoughby Hills Development and Distribution, or WHDD) was a purchaser and reseller of gasoline to retailers throughout Northeastern Ohio. WHDD's purchasing activities with Sunoco, Inc. (Sunoco) and its reselling activities with a retailer Sopinski Enterprises, Inc. (Sopinski) were at issue in the case. WHDD negotiated an agreement with Sunoco under which WHDD purchased branded motor fuel from Sunoco. The parties agreed that WHDD's purchase and resale of the fuel would be consistent with Sunoco's brand and image requirements. The agreement memorialized WHDD's understanding of the importance of the image conveyed to the public by retailers authorized to use Sunoco's intangible assets. The agreement provided that WHDD was an independent contractor and precluded WHDD from acting as Sunoco's agent. WHDD also negotiated a product sales agreement with Sopinski where Sopinski later agreed to purchase its fuel requirements from WHDD. The agreement precluded WHDD from directing or controlling Sopinski's operations. WHDD filed an application for a CAT refund based on an agency relationship with Sunoco. Ohio Rev. Code Section 5751.01(F)(2)(l) excludes amounts received by an agent over the agent's commission or fee. The Ohio Department of Taxation (Department) denied the refund claim, concluding that no agency relationship existed. The denial was predicated on the language of the agreement that described WHDD as an independent contractor and not Sunoco's agent. In so doing, the Department rejected WHDD's contention that Sunoco exercised sufficient control over WHDD to determine an agency relationship existed. The Ohio Board of Tax Appeals affirmed the denial of the refund claim. On appeal, the Court first analyzed which of WHDD's activities mattered for purposes of determining whether it was Sunoco's agent. The Court indicated that WHDD's argument rested on the claim that it was responsible for managing and protecting Sunoco's intangible assets. WHDD called the Court's attention to language in the agreement that directed it to use its best efforts to require retailers to operate its retail locations in a manner consistent with Sunoco's requirements as to brand image. The Court, agreeing with the Department, said that these activities had nothing to do with WHDD's generation of gross receipts. The relationship between the parties, as evidenced by the agreement, caused the Court to conclude that WHDD was selling its own gasoline, not Sunoco's, to Sopinski. Accordingly, those sales of gasoline were included in WHDD's CAT gross receipts. The Court also rejected WHDD's additional claims that it was, in fact, providing services to Sunoco (i.e., protection of intangible assets). The Court then turned to whether WHDD was an agent for purposes of the CAT exclusion. Ohio Rev. Code Section 5751.01(P) defines an "agent' as a "person authorized by another person to act on its behalf to undertake a transaction for the other." In analyzing this definition, the Court first considered whether WHDD was a "person authorized" to act on Sunoco's behalf. The Court looked to its prior decision in Cincinnati Golf Mgt., Inc.2 in which it said that the proper inquiry was derived from common law concepts that the agent had actual authority to bind a principal. The Court then considered the language in the agreement, which specified that WHDD was an independent contractor when selling gasoline and not Sunoco's agent. The contract also provided that WHDD was not authorized to make any commitments, or incur any expenses or other obligations, without Sunoco's approval. Further, WHDD was not permitted to bind Sunoco, which the Court concluded was an essential feature of an agency relationship. Ultimately, the Court concluded that WHDD was acting as a principal, not an agent, when selling fuel. Finally, the Court rejected WHDD's argument that Sunoco exercised control over its responsibilities for managing and protecting Sunoco's intangible assets, noting that the contract allowed WHDD to select its own customers and set its own selling prices and terms. Implications The CAT agency exclusion is a frequent audit issue, especially when expenses are incurred by one party and "passed through" to another. The Willoughby Hills Development case is another example showing that Ohio courts will construe the exclusion strictly and look to common law principles in determining whether an agency relationship exists for purposes of the CAT exclusion. While labels used in a contract may not be controlling, it is anticipated that one would be hard-pressed to sustain the application of the exclusion when the contract expressly provides the relationship is that of an independent contractor. ———————————————
——————————————— 1 Willoughby Hills Development and Distribution, Inc. v. Testa, Slip Opinion No. 2018-Ohio-4488 (Ohio S. Ct. Nov. 7, 2018). 2 Cincinnati Golf Mgt., Inc. v. Testa, 132 Ohio St.3d 299, 2012-Ohio-2846. | |||||
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