November 30, 2022
Ohio Supreme Court holds a motorsports company's receipts from licensing the rights to use certain intellectual property are not sourced to Ohio
On November 22, 2022, the Ohio Supreme Court held1 that a motorsports holding company's receipts from broadcast, media, licensing and sponsorship agreements were not "based on" the right to use the intellectual property in Ohio and, as such, could not be sourced to Ohio for CAT purposes.
The taxpayer, a motorsports holding company headquartered in Florida (company), entered into agreements giving various parties the rights to use its intellectual property. These agreements included the following:
The Ohio Department of Taxation (Department) audited the company for CAT and determined that a portion of the foregoing intellectual property revenue streams were sourced to Ohio. The Department applied ORC 5751.033(I), which sources "all other receipts" not otherwise enumerated in the statute 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 … ." In applying the statute, the Department used Nielsen data to apportion the broadcast and media revenues to Ohio based on the proportion of Ohio cable-TV households to all US cable-TV households. The Department used US population data to source the licensing and sponsorship fees to Ohio.
The Department issued its assessment, which the company appealed to the Ohio Board of Tax Appeals (BTA). The company argued that the Department applied the incorrect statutory provision to the assessed receipts. Instead of ORC 5751.033(I), the company argued that the Department should have applied ORC 5751.033(F), which sources receipts from intellectual property based on the use of that property in Ohio or "to the extent that the receipts are based on the right to use the property" in Ohio. The BTA agreed with the company that ORC 5751.033(F) applied but concluded that the assessment would have been the same under either provision. In upholding the Department's assessment, the BTA rejected the company's argument that the receipts should have been sourced to its corporate domicile in Florida.
Ohio Supreme Court ruling
The company appealed the BTA's decision to the Ohio Supreme Court. The Court rejected the company's arguments that the BTA erred by affirming the Department's assessment under a different statutory provision than the one cited by the Department. The Court concluded that ORC 5717.03(F) grants the BTA authority to affirm, reverse, vacate, modify or remand an assessment. Accordingly, the modification of the assessment to rely on ORC 5751.033(F) was within the BTA's authority.
Moving to the BTA's application of ORC 5751.033(F) to the various categories of receipts assessed, the Court observed that ORC 5751.033(F) sources receipts to Ohio only to the extent they are based on the right to use the intellectual property in Ohio. As none of the reviewed agreements tied payments to the right to use the intellectual property in Ohio (or even mentioned Ohio), the Court concluded that the Department's sourcing of those receipts to Ohio was problematic.
The Department argued that, although the contracts did not base payment on the right to use the intellectual property in Ohio, the Ohio portion of those receipts could be approximated, and tax assessed on that basis. The Court, however, declined to "stretch the statutory language" that far, stating that ORC 5751.033(F), by "its plain terms," sources receipts from intellectual property to Ohio "based on the right to use the property in Ohio." Noting that its "job is to apply the plain language of the statute," the Court rejected the Department's contention that sourcing is based on where the market for the sale is located. If the Department believes that the statutory language fails to implement good CAT policy, the Court noted, it should "take up the matter with the legislature."
As for the broadcast revenues, media revenues and sponsorship fees, the Court held that the payments the company received were fixed fees and were not tied to the amount of use of, or right to use, the company's intellectual property in Ohio. Regarding the licensing fees, the Court reversed the BTA on the ground that the applicable contracts did not designate any payment to the company based on the right to use the trademarks and tradenames in Ohio. Unlike the other categories of receipts, the licensing fees varied based on the merchandising companies' sales. Neither the Department nor the BTA, however, predicated the assessment of the licensing fees on the "actual use" language of ORC 5751.033(F); instead, they relied on the "right to use" language.3 A partial dissenting opinion would have sourced the licensing fees to Ohio based on "actual use," but the majority opinion opted to "steer clear" of theories for taxability on which neither the Department nor the BTA relied.
In relying on ORC 5751.033(F)'s "plain language," the Court's decision indicates that the sourcing statute called for a narrower reading, rather than what taxpayers may have experienced in CAT audits, especially audits of fixed-fee licensing agreements. For licensing fees contingent on other factors, such as sales, the Department may have more latitude to source those fees to Ohio. Taxpayers should review their intellectual property agreements to determine if they are sourcing receipts based on the application of ORC 5751.033(F) as mandated by the Court. The statute of limitations for CAT refunds is generally four years from the date of payment.
Published by NTD’s Tax Technical Knowledge Services group; Jennifer Brittenham, legal editor
1 NASCAR Holdings, Inc. v. McClain, Slip Opinion No. 2022-Ohio-4131 (Ohio S.Ct. Nov. 22, 2022).
2 Including US territories and military bases abroad, and Puerto Rico.
3 Accordingly, a licensing agreement that makes payment contingent on sales could be sourced to Ohio based on the "actual use" language of ORC 5751.033(F).