On November 21, 2018, the Ohio Supreme Court (court) issued its decision in Cincinnati Reds, LLC v. Testa,¹ and, in reversing the lower tribunal's ruling, held that promotional items distributed at professional baseball games were transferred for consideration and qualified for the sales and use tax resale exemption.

The Ohio Department of Taxation (Department) conducted a use tax audit of the Cincinnati Reds baseball team (Reds) and assessed additional sales and use tax for the Reds' purchases of certain promotional items, including bobblehead dolls that were distributed to fans attending certain ballgames. The Reds identified certain games that might have low attendance and distributed the promotional items to fans free of charge to enhance attendance. Fans came to these games expecting these promotional items. If, for some reason, there were not enough promotional items at the game, the Reds would provide fans other items of comparable value or some other recompense to "make it right." The price of the promotional items were not separately stated on the non-taxable admission charge. The Department deemed that the Reds were the consumer of the promotional items. The Ohio Board of Tax Appeals (BTA) affirmed the Department's assessment finding that the Reds intended to give away the items rather than resell them.

The court, in a 5-2 decision, reversed the BTA's decision as unreasonable and unlawful. The court analyzed whether the Reds purchased the promotional items with the intent to resell them. To have a valid resale exemption the purchaser must show that the items were resold for consideration. The court concluded that consideration existed as the Reds promised to distribute the promotional items and, as such, created a contractual expectation on the part of the fans who purchased the tickets to receive the unique promotional items. The Reds could have offered discounted ticket prices to these less desirable games but, instead, offered the promotional items. The ticket price for those games accounted for both the rights to attend the game and receive the promotional item. The court distinguished these items from other items that a fan may receive when attending a game, such as catching a foul ball or a t-shirt tossed into the stands. In those cases, the fans had no expectation to receive the item as part of the ticket purchase.

The court also addressed an argument made by the Department, relying on Hyatt Corp. v. Limbach,² (Hyatt) to assert that the resale exemption did not apply because the ultimate sale of the ticket was not taxable. In Hyatt, the court held that the provision of industrial laundry service to a hotel were resold as part of the price for transient lodging, which itself is subject to Ohio sales/use tax. The same service sold to the hotel in conjunction with non-taxable long-term stays were not taxable and, as such, not subject to the resale exemption. Whether the linen cleaning services were taxable depended on the nature of the lodging. The court distinguished Hyatt reasoning that whether the promotional items were resold did not depend on whether the tickets were sold as part of a taxable sale. In Hyatt, the linen-cleaning service was not a separate and express "part of the bargain" by which lodging was provided. In the instant case, the promotional items were an express part of the bargain between the Reds and the fans and hence "sold."

The dissenting opinion would have affirmed the BTA's holding. The dissent stated that the BTA's factual findings should have been afforded deference. In addition, the dissent would not have distinguished Hyatt. The dissent asserted that the transfer of a hotel room included the use of clean linens and, as such, was "part of the bargain." To the extent the services were provided in conjunction with taxable transient lodging, they were resold. To the extent they were provided in conjunction with non-taxable long-term lodging, they were not resold. The dissent believed that because the sale of the game tickets were not taxable, there was no sale of the promotional items.

Implications

The court's decision suggests that items that are purchased with the intent to distribute as part of an admission, or for some other consideration, may be exempt under the resale exemption. This may be true even where the ultimate sale is not itself taxable. Taxpayers should consider the application of this decision to their circumstances if under audit or considering requesting a refund. Ohio has a four-year statute of limitations on refunds.

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ENDNOTES

¹ Cincinnati Reds, LLC v. Testa, Slip Opinion No. 2018-Ohio-4669 (Ohio S.Ct. Nov. 21, 2018).

² Hyatt Corp. v. Limbach, 69 Ohio St.3d 537 (1994).