A Georgia based wholesaler of lawn and garden products had nexus with Ohio and had to pay the commercial activity tax (CAT).
What was the Taxpayer’s Business?
The taxpayer received revenue from the sale of lawn and garden products that were shipped into Ohio. The taxpayer did not have any locations in Ohio and it did not employ any agents, representatives, or employees in Ohio. The taxpayer’s customers were “big-box” retailers. The taxpayer did not ship items to Ohio.
Ohio conducted an audit and claimed the taxpayer had nexus for purposes of the CAT. The taxpayer appealed. The Board of Tax Appeals (BTA) determined that the taxpayer had to pay the CAT because it could not show that its goods were received at a location other than Ohio.
The taxpayer questioned if the application of the CAT violated the:
- Commerce Clause of the U.S. Constitution due to the lack of a “substantial nexus;” and
- Due Process Clause of the U.S. Constitution due to the lack of “minimum contacts” with Ohio.
Did the Taxpayer Have Substantial Nexus With Ohio?
The taxpayer argued its transactions did not create substantial nexus under the Commerce Clause of the U.S. Constitution. However, the taxpayer knew that its products were destined for Ohio.
Ohio law states that the situs of the gross receipts from the sale of tangible personal property is the place where the property is received. In this case, the evidence established that place was Ohio. Further, the taxpayer had $500,000 in Ohio sales for the tax period. So, the taxpayer had substantial nexus with Ohio. The application of the CAT did not violate the dormant Commerce Clause.
Did the Taxpayer Have Minimum Contacts With Ohio?
The taxpayer also argued that it did not have the minimum contacts with Ohio. The taxpayer claimed it did nothing to purposefully avail itself or further its business in Ohio.
The tax commissioner argued that the taxpayer knowingly and consciously sold its products to retailers with a national presence. The income from the sales was made possible because there was a market for its goods in Ohio. This created a link between Ohio and the taxpayer.
The taxpayer purposefully took advantage of the distribution ability of national retailers and knew that its products were shipped to Ohio. Thus, the application of the CAT to the taxpayer did not violate the Due Process Clause of the Fourteenth Amendment.
Greenscapes Home and Garden Products, Inc. v. Testa, Court of Appeals of Ohio, Tenth District, No. 17AP-593, February 7, 2019, ¶404-770