June 7, 2022
Ohio Department of Taxation issues final determination effectively applying look-through sourcing on asset management services
In a Final Determination (Determination)1 on the Ohio Commercial Activity Tax (OH CAT), the Ohio Department of Taxation (Department) sitused a global investment firm's gross receipts from providing asset management services to mutual funds to the locations of the investors in those mutual funds. In so doing, the Department appears to have effectively applied a "look-through sourcing" method to assign gross receipts from providing asset management services for purposes of the OH CAT.
The taxpayer is a global investment firm that is headquartered in California and provides asset management services to customers worldwide. At issue is the proper method under the OH CAT for situsing gross receipts from the asset management services the taxpayer performs for the mutual funds. Under the OH CAT statute (Ohio Rev. Code 5751.033(I)), gross receipts from services are 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." The statute further states that the "physical location where the purchaser ultimately uses or receives the benefit of what was purchased shall be paramount" in determining situs.
During an audit of its OH CAT returns, the taxpayer disagreed with the method the Department used to situs its gross receipts. The taxpayer contended that the gross receipts from its asset management services should be sourced to the locations where the mutual funds for which it was providing the asset management services were located, most of which were not in Ohio. The Department, however, disagreed and sitused the gross receipts to the locations of the investors in those mutual funds, more of which were in Ohio. Upon receiving and paying the assessment, the taxpayer filed a refund claim with the Department, which was denied. Subsequently, the taxpayer appealed to the Department's Office of Appeals.
In issuing its Determination upholding the denial of the refund, the Department appears to go a step beyond the express statutory language by applying a "look through" method of situsing the gross receipts from the sale of the taxpayer's asset management services. It appears that the Department recast the transactions from which the gross receipts were derived by concluding that the investors, not the mutual funds that actually paid the asset management fees directly to the taxpayer, were effectively the "purchasers"2 of the taxpayer's asset management services. The Department stated that the mutual funds were "simply a collection of stocks, bonds, and other investments" and that investors in a particular mutual fund are in fact the customers "hiring" the taxpayer to provide the asset management services. As such, they "indirectly" pay the fees for those services to the taxpayer out of their assets' income.
In its Determination, the Department also distinguished the Minnesota Supreme Court's decision in Lutheran Brotherhood Research Corp. v. Commissioner, 656 N.W.2d 375 (Minn. 2003), on the ground that the Minnesota statutory scheme differed from the OH CAT situsing statute. Finally, the Department rejected the taxpayer's constitutional arguments in support of its contentions.
The taxpayer has appealed3 the Determination to the Ohio Board of Tax Appeals (BTA).
The taxpayer's hearing before the BTA is scheduled for January 2023, so it will likely be some time before the BTA actually issues its decision. Any BTA decision can be appealed directly to the Ohio Supreme Court. The Department's Determination is interesting because it appears to have disregarded the form of the transactions at issue and recast them to effectively apply a "look-though" situsing approach, which appears to be inconsistent with the statute.
1 Ohio Dept. of Taxn., Final Determination (issued Feb. 28, 2022).
2 The Department arrived at this conclusion based on a review of the taxpayer's website, which it uses to solicit investors for the mutual funds it manages. In the Determination, the Department found that the website provided contact information for the taxpayer but not for the mutual funds themselves. The Department also found that the taxpayer uses its website to market its asset management services to investors and not the mutual funds themselves.
3 Appeal No. 2022-510 (Ohio Bd. Tax App. filed April 29, 2022).