The Supreme Court of Ohio (court) recently issued decisions in two cases¹ denying taxpayers refunds of Commercial Activity Tax (CAT) paid on gross receipts from property sold to purchasers that had the property pass through Ohio distribution centers. These cases, while taxpayer losses, provide some guidance on the application of ORC 5751.033(E), the CAT rule governing situsing receipts from tangible personal property.

VVF Intervest

VVF Intervest (VVF) is a contract manufacturer of personal care products located in Kansas. VVF's largest wholesale customer placed monthly orders with VVF based on demand forecasts. The wholesale customer 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. The wholesale customer 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, including some outside Ohio.

In initially allowing the refund claim, the Board of Tax Appeals (BTA) had concluded that the shipment to the Ohio distribution center was merely "one leg" of the transportation of the goods with the final destination being outside of Ohio.² The Department of Taxation (Department) had unsuccessfully argued that the "second sale" (i.e., the sale by the wholesale customer to the retail customer) should not have been considered.

In reversing the BTA's holding, the court agreed with the Department's "second sale" argument because ORC 5751.033(E) provides that property received in Ohio "by the purchaser" is a sale that is subject to CAT. While ORC 5751.033(E) provides that receipt takes place when all transportation is completed, the court concluded that the statute focuses on where the property is received by the purchaser, not where a purchaser may subsequently ship it because of a second sale.

Since it concluded that the taxpayer's gross receipts were sitused to Ohio, the court did not address the Department's argument that "contemporaneous knowledge" of the destination of the goods was required. The court also rejected constitutional arguments raised by the taxpayer.

A lone dissenting opinion asserted that the delivery of the goods occurred in Kansas, not Ohio. The dissent focused on a phrase from the statute that says "direct delivery outside this state to a person or firm designated by a purchaser does not constitute delivery to the purchaser in this state." The dissent concluded that both delivery and receipt were in Kansas, because the purchaser designated the motor carrier that picked up the goods in Kansas and also assumed full control over the property in Kansas.

Jones Apparel/Nine West

Jones Apparel/Nine West (Nine West) is a designer, marketer and wholesaler of apparel, footwear, jewelry and other accessories, such as handbags. Nine West sells products through its own retail locations and online, as well as through 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 partially denied by the Department. 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 to see if customers' retail stores were doing better than expected. He testified that 80% of the taxpayer's sales were outside Ohio. Nine West also presented testimony describing its use of business intelligence applications that determined the cities in which its retail customer was located, which stores were in those cities and 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 the 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 court, in affirming the BTA's decision, agreed with the BTA's conclusion that contemporaneous knowledge of the destination of goods is not required for the "simple reason" that such a requirement is not in the statute. The court also observed that CAT refund claims generally must be submitted within four years after the date of the overpayment. While noting that the refund claim must be accompanied by "documentation to support" it, the court found that the statute does not specify the type of documentation that must be furnished to support the claim.

Turning to the issue of the sufficiency of the taxpayer's documentation, the court observed that one could "reasonably infer" from the testimony of the taxpayer's witnesses that some portion of its sale eventually ended up outside Ohio. However, the court said that the taxpayer did not provide "documentary evidence that establishes the amount of gross receipts for the merchandise that was actually transported out of Ohio." The court concluded that the testimony from the taxpayer's Vice President and Treasurer was an "educated guess" with no quantitative evidence supporting it. The taxpayer's study using business intelligence applications, while "comparatively more rigorous," was also deemed insufficient because it was computed based on a three-month period that postdated a seven-year refund period.

A dissenting opinion would have found the taxpayer's evidence sufficient. The dissent observed that the taxpayer only had one distribution center that serviced the entire United States; yet, only 17-18 of its 500 retail stores were in Ohio. Accordingly, saying that 80% of the taxpayer's goods were sold outside Ohio was "no stretch of the imagination."

Implications

The court's decisions provide some clarity to taxpayers in that it expressly rejected the Department's extra-statutory requirement that contemporaneous knowledge is required to determine sourcing. It also clarifies that the focus of the situsing statute is where the purchaser receives the tangible personal property "after all transportation is completed" and not the purchaser's customer. However, the decisions leave open the question of what evidence or documentation would be sufficient to support the application of the statute. Unfortunately, the net result of the decisions may be that sourcing issues will continue to be contentious, especially in the context of refund claims.