In Nissan North America, Inc. v. McClain,¹ the Ohio Board of Tax Appeals (BTA) held that the Ohio Department of Taxation (Department) abused its discretion in denying a retroactive consolidated election for purposes of the Ohio Commercial Activity Tax (CAT).

The BTA's decision appears to rebuke a long-standing Departmental policy denying requests for retroactive consolidated status after CAT audits begin. The decision may result in the Department giving more consideration to such requests.

Ohio CAT — combined v. consolidated taxpayer groups

The CAT is imposed on the privilege of doing business in Ohio, measured by gross receipts from business activities in Ohio. The CAT has a "bright-line presence" nexus standard that applies if, among other factors, a person has $500,000 or more in Ohio-sourced gross receipts.²

Ohio Rev. Code Section 5751.012 requires persons having nexus with Ohio that are more than 50% commonly-owned to file a single CAT return as a combined taxpayer. Further, Ohio Rev. Code Section 5751.012(B) precludes a combined taxpayer from excluding intercompany gross receipts.

To provide relief from the imposition of CAT on intercompany receipts, Ohio Rev. Code Section 5751.011 allows eligible taxpayers to join in electing to file as a single consolidated elected taxpayer. The election can be made by persons that qualify at either a 50% or 80% ownership threshold and must include all members commonly-owned, without regard to whether they have nexus with Ohio.³ One of the most significant benefits of making such an election is that transactions between members of the consolidated group are eliminated in determining their CAT liabilities.⁴ Ohio Rev. Code Section 5751.011(D) requires the consolidated election to "be made on or before the due date for filing the first return after the election applies." Ohio Admin. Code 5703-29-04(B)(4)(b) treats a consolidated election as " … effective prospectively unless a retroactive application has been requested by the taxpayer and approved by the tax commissioner."

The Department has historically denied requests for retroactive consolidated elections, particularly when made by taxpayers during an audit after the failure to make the election is discovered. In some cases, the denial of retroactive elections has resulted in sizeable CAT assessments.

BTA's analysis and decision

Nissan was audited for CAT from 2009 through 2011. During the audit, the Department focused on the taxability of certain intercompany transactions.⁵ If Nissan's request for a retroactive consolidated election had been respected, those issues would have been moot, as they would have been eliminated. The Department denied Nissan's request for a retroactive consolidated election, citing the statute, its administrative rule, and its policy of prohibiting changes in filing status if the request follows the commencement of an audit. On appeal, the BTA focused on the Department's denial of the request for the consolidated election.

The BTA observed that the statute provides (i) that a taxpayer seeking consolidated status must do so in writing on the form prescribed by the Department, and (ii) for prospective application of consolidated filing status. The statute, however, does not expressly foreclose retroactive applications. Further, the Department's administrative rule provides for a process for retroactive applications. The BTA observed that Nissan's intent to file as a consolidated taxpayer was evident from the substance of its return, in which it excluded intercompany transactions. The BTA concluded that the Department had discretion to grant a retroactive election even after the audit began and that its denial of Nissan's request was an abuse of its discretion. The BTA remanded the matter back to the Department for further proceedings consistent with its decision.

Implications

The Department's long-standing policy has been to deny retroactive CAT consolidated elections generally, and virtually always if requested after an audit commences. The BTA's decision should result in the Department providing more consideration when such requests are made even after an audit has begun. The decision also suggests that the time may be ripe for amendments to the CAT statute and/or the administrative rule to provide more guidance as to the circumstances under which such relief may be granted.

EY will continue to monitor developments in this area.

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ENDNOTES

¹ Nissan North America, Inc. v. McClain, Ohio BTA Case No. 2016 - 1076 (Ohio Bd. Tax App. Oct. 9, 2019).

² See Ohio Rev. Code Section 5751.01(G)(3) and (I).

³ For example, a commonly-owned person may have $300,000 in Ohio gross receipts and no other presence in Ohio (e.g., property or payroll in Ohio). That entity would not have nexus because it does not meet the bright-line receipts threshold of $500,000 (or any of the other thresholds) and, as such, would not be included in the CAT combined taxpayer group. If the commonly-owned group filed a CAT consolidated election, however, the commonly-owned person would be included in the Ohio CAT consolidated group. As a result, the $300,000 in Ohio gross receipts would be subject to CAT even though they would have been otherwise excluded had the consolidated election not been made.

⁴ See Ohio Rev. Code Section 5751.011(C).

⁵ At issue were sales of leased vehicles by Nissan Infiniti Lease Trust either at end of the lease term or as part of a purchase option in the lease. The Department asserted that these transactions were not otherwise excluded sales of assets described in IRC Section 1231. See Ohio Rev. Code Section 5751.01(F)(2)(c). In addition, Nissan Motor Acceptance Corporation engaged in asset-backed securitization transactions in which it packaged retail installment contracts and sold them using a bankruptcy-remote entity to generate additional capital. The taxpayer argued that the sales were a transfer of a marketable instrument excluded under Ohio Rev. Code Section 5751.01(F)(2)(d) or, alternatively, were not sourced to Ohio.