Ohio Supreme Court Upholds Commercial Activity Tax: Physical Presence Not Required

The Ohio Supreme Court has ruled that Ohio has the authority to impose the Commercial Activity Tax (CAT) on taxpayers that do not have a physical presence in Ohio. 

Under Ohio law, taxpayers without a physical presence in Ohio are subject to the CAT if such taxpayer has more than $500,000 in gross receipts from sales in Ohio. Three online retailers who did not have a physical presence in Ohio, but had more than $500,000 of sales in the state, brought suit challenging the tax law, stating that it violated the U.S. Constitution’s commerce clause.  

The CAT is not a sales tax; it is an annual tax imposed on the privilege of doing business in Ohio, measured by taxable gross receipts from most business activities. The CAT only applies to those gross receipts that are sourced to Ohio. Under the CAT, once you meet the nexus threshold requirements ($500,000 of sales into Ohio), you are subject to the minimum tax, as shown in the chart below.  However, you are not taxed on the first $1,000,000 of Ohio sales/receipts.  

Taxable Gross Receipts Annual Minimum Tax CAT
$1 million or less $150 No additional tax
More than $1 million but less than or equal to $2 million $800 0.26% x (taxable gross receipts minus $1 million)
More than $2 million but less than or equal to $4 million $2,100 0.26% x (taxable gross receipts minus $1 million)
More than $4 million $2,600 0.26% x (taxable gross receipts minus $1 million)

 

The Ohio Supreme Court disagreed with the taxpayers in this case and ruled in favor of Ohio. If you do not have a physical presence in Ohio but have more than $500,000 of sales sourced to Ohio (goods shipped to Ohio or customers receiving benefits in Ohio from services you perform), then you are subject to the CAT and must file a tax return with the Ohio Department of Revenue.  

For questions about this regulation or other state and local tax matters, please contact us.