September 29, 2023
Ohio Board of Tax Appeals addresses construction of CAT situsing rule for sales of tangible personal property
The Ohio Board of Tax Appeals (BTA) recently issued decisions in two cases — VVF Intervest, LLC1 and Jones Apparel Group/Nine West Holdings 2 — that involved refund claims focused on the application of ORC 5751.033(E), the Commercial Activity Tax (CAT) rule governing situsing sales of tangible personal property. The BTA's decisions provide important guidance on the application of the situsing rule and the burden of proof taxpayers must meet to establish the situsing location. Most importantly, the BTA's decisions reject an extra-statutory requirement that the taxpayer know the final destination of goods at the time of sale.
ORC 5751.033(E) — situsing sales of tangible personal property
ORC 5751.033(E) requires gross receipts from the sale of tangible personal property to be sitused to Ohio if the property is received in Ohio by the purchaser. The statute further provides, in relevant part, that in "the case of delivery of tangible personal property by motor carrier or by other means of transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered the place where the purchaser receives the property." In applying the situsing statute, the Ohio Department of Taxation (Department) relied on guidance it issued in 2005 imposing an additional requirement that the location of shipment must be "known by the seller at the time of the sale".3
The BTA noted that, because the CAT situsing rule was similar to that employed by the defunct Corporation Franchise Tax, the BTA, Ohio courts and the Department have been guided by court decisions that focused on where tangible personal property was ultimately received. Those decisions concluded that goods should not be sourced to Ohio "simply because Ohio was one stop in a singular delivery process to a purchaser" or when there is a dock sale where the customer picks up goods in Ohio, either via its own trucks or common carrier, for transport outside Ohio.4 The BTA also observed that it has directly interpreted ORC 5751.033(E) and, in all of those cases, it concluded that the taxpayer did not meet its evidentiary burden to show that Ohio was "merely a pit stop" and not the place where property was delivered to the purchaser after all transportation was completed.5
VVF Intervest (VVF) is a contract manufacturer of personal care products located in Kansas. VVF's largest customer (Company X) placed monthly orders with VVF based on demand forecasts. Company X contracted with third parties to transport goods from VVF's Kansas facility to one of three distribution centers, one of which was in Ohio. These distribution centers were owned and operated by unrelated third parties. Company X held about two months of inventory at the Ohio distribution center, and when one of its retail customers, placed an order, it would use its third-party transportation provider to transport the product to the retail customer's distribution center. Goods from the Ohio distribution center were usually sent to retailer facilities in the Eastern United States.
VVF filed a refund claim for CAT paid on receipts from sales of bar soap. The Department denied the refund claim and VVF appealed to the BTA. At the BTA hearing, VVF presented testimony from its Chief Operating Officer who authenticated reports created for Company X's management showing the ultimate destination of the units of soap. VVF also presented testimony from Company X indicating that the product was not ultimately delivered in Ohio. VVF argued that because the goods were shipped to the Ohio distribution center for future shipment, it was an interim stop within the distribution chain. Accordingly, the Ohio distribution center was not the location where Company X ultimately received the goods after all transportation was completed. The Department argued that the shipment from Company X's Kansas facility to the Ohio distribution center should be treated as its own taxable event. The second shipment from the Ohio distribution center to the retailer's facilities outside Ohio should be treated as a separate taxable event. The Department emphasized VVF's records and subjective knowledge at the time the soap left its Kansas facility showing that the soap was initially shipped into Ohio.
In evaluating the parties' arguments, the BTA initially observed that neither ORC 5751.033(E), nor case law, supports the imposition of a requirement of contemporaneous knowledge of the ultimate destination at the time of sale. The BTA indicated that the case law, such as the Greenscapes case, stands for the proposition that if the only evidence available shows the products were shipped to Ohio, then they may be properly sitused to Ohio, while leaving open the possibility for a party to produce evidence proving that the goods at issue were ultimately received outside of Ohio. The BTA concluded that VVF met its burden of proof,6 by virtue of its customer's testimony and corroborating management reports, in demonstrating its sales to Company X were not ultimately delivered to the customer in Ohio. The BTA rejected the Department's argument that the transportation between VVF and Company X ended at the Ohio distribution center because there was a second transaction, i.e., the sale by Company X to its retail customer. Instead, the BTA reasoned that ultimate delivery to Company X was not at the Ohio distribution center, but just one leg of Company X's transportation and continuous delivery process. The BTA concluded that "Ohio does not become the ultimate delivery point simply because the bars are temporarily held there in a distribution center owned by an entirely unrelated third party."
A partial dissenting opinion, while agreeing with the majority opinion's rejection of a rule requiring a seller's subjective knowledge of ultimate delivery at the time of sale, would have affirmed the Department on the ground that VVF's receipts be sitused to the location where delivery was made to Company X. The application of the statute should not be expanded to "purchasers further down the supply chain."
Jones Apparel Group/Nine West (Nine West)
Nine West is a designer, marketeer and wholesaler of apparel, footwear, jewelry and other accessories, such as handbags. Nine West sells products through its retail locations, online and other major retailers. Nine West ships products to Ohio-based distribution centers of major retailers. Nine West paid CAT on receipts for all goods shipped to Ohio distribution centers, including those ultimately received by customers in locations outside of Ohio.
Like VVF, Nine West filed a refund claim, which was audited by the Department. Nine West provided shipping labels for each of the Ohio distribution centers. Some of the shipping labels had "mark-for" addresses, which tied to specific store numbers or locations as the ultimate shipping addresses. The Department allowed refunds for these sales because the "mark-for" addresses at the time of shipping were sufficient7 to prove that Nine West knew where the goods were going to be shipped at the time of the sale. Refunds were denied for sales to other retailers that did not have "mark-for" addresses or any other evidence showing Nine West knew the ultimate destination at the time of sale.
Nine West appealed the denied refund claim to the BTA and presented testimony from its Vice President and Assistant Treasurer who indicated that the company would hold meetings to discuss marketing campaigns, distribution methods and other information that tracked performance and sales trends and to see if customers' retail stores were doing better than expected. This information helped with reorders. Nine West also presented testimony describing its use of business intelligence applications that determined cities (1) in which its retail customer was located, (2) which stores were in those cities, and (3) which products were available at each store. This information was intended to corroborate Nine West's contention that it had knowledge of the ultimate destination of goods without a "mark-for" designation, but not necessarily from the time of sale.
The BTA first noted that subjective knowledge of the ultimate destination at the time of shipping was not required by ORC 5751.033(E). The BTA indicated that it could consider evidence provided by a taxpayer that shows the goods were ultimately received outside of Ohio. The BTA, however, concluded that Nine West did not meet its burden of proof in this case. The evidence presented by Nine West was based on data collected for periods outside of the period covered by the refund claim. The BTA said that "the data submitted … was too far removed and reflected too narrow a time frame to establish the goods … were ultimately received outside Ohio."
The most significant aspect of these BTA decisions is its rejection of the extra-statutory requirement that a seller know the ultimate destination of goods at the time of sale. Also significant is the BTA's holding, in VVF, that an intervening sale between the sellers' customer and a third-party ultimate customer may not break the chain of transportation between the seller and its customer. The decisions also provide important guidance on the facts and circumstances, as well as evidence, that could support refund claims based on ultimate destination. Taxpayers considering filing protective refund claims should bear in mind that there is a four-year statute of limitations that runs from the date the CAT was paid, not the return filing date.
It is unknown at this time whether the parties will appeal either of these decisions.
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor
1 VVF Intervest, LLC v. Harris, Case No. 2019–1233 (Ohio Bd. Tax App. Sept. 13, 2023).
2 Jones Apparel Group/Nine West Holdings v. McClain, Case Nos. 2020-53, 2020-54 (Ohio Bd. Tax App. Sept. 15, 2023).
3 See Ohio Dept. of Taxn., Information Release CAT 2005-17 — Commercial Activity Tax — "Taxable Gross Receipt" (revised April 2006).
4 See House of Seagram v. Porterfield, 271 N.E.2nd 827 (1971), Dupps Co. v. Lindley, 405 N.E.2nd 716 (1980), Loral Corp. v. Limbach, BTA Case Nos. 85-C-914, et al. (February 23, 1988).
5 See Greenscapes Home & Garden Prods. v. Testa, 2019-Ohio-384, 129 N.E.3d 1060 (10th Dist.), Mia Shoes, Inc. v. McClain, BTA No. 2016-282 (August 8, 2019), Henry RAC Holding Corp. v. McClain, BTA No. 2019-787 (November 10, 2020).
6 The BTA upheld the denial of refunds to VVF on sales involving other retail customers of Company X on the ground that VVF did not present enough evidence to support its claims with respect to those sales.
7 The Department adjusted the refund claims for sales initially shipped to distribution centers outside of Ohio but that had "mark-for" addresses in Ohio.