“If you ain’t first, you’re last.” That all-or-nothing motto catalyzes number one NASCAR driver and titular hero in the 2006 spoof, Talladega Nights: The Ballad of Ricky Bobby.
Funny coincidence: My kids and I watched the movie on television right after I read about NASCAR’s (National Association for Stock Car Auto Racing Holdings, Inc.) court challenge to Ohio’s commercial activity tax (CAT). At issue: What does it really mean to do business in the state? Or, as the lawyers say, to establish “nexus” and therefore owe state tax?
Nexus used to mean “physical presence.” If you owned and operated a store in a state, you paid tax there. But in 2018 the US Supreme Court ruled in South Dakota v. Wayfair that given a certain amount of economic activity (like online sales), a business doesn’t have to be physically present in a state to collect that state’s sales tax. Although it took a while, all those states with a general sales tax now require remote sellers to collect those levies from their residents.
But the High Court didn’t address what nexus means for other state taxes. That brings us to Ohio’s CAT.
When is a company supposed to pay the Ohio CAT?
Since 2005, Ohio has imposed an annual commercial activity tax (CAT) on gross receipts for the “privilege of doing business in Ohio.” It says any person or entity with at least $150,000 in gross receipts in the state has substantial nexus and must pay the CAT. In fiscal year 2020, Ohio collected about $2 billion from the tax, about 6.3 percent of its own-source tax revenue.
NASCAR holds events at racetracks in Ohio pays tax for sales at those events, such as admission tickets. But the state Tax Commissioner says NASCAR owes far more tax because Ohioans can watch NASCAR races on televisions.
The commissioner asserts that according to the Ohio Revenue Code, television viewership is enough to meet its nexus test. He audited NASCAR from 2005 through 2010 and calculated the share of revenues earned from broadcast and other licenses based on Ohio’s population and audience. He then sent the racing association a bill for $549,520 in taxes, interest, and penalties.
NASCAR did not interpret the law that way. Based in Daytona Beach, Florida, NASCAR sanctions auto races domestically and internationally. But it earns most of its money (about $660 million annually) from the sale of broadcast rights. Add media sales, trademark licenses, and sponsor fees and NASCAR revenues total about $711 million a year. NASCAR allocates those one-time, flat-fee sales to Florida. But because NASCAR is an LLC with no corporate partner in Florida, it is exempt from the state’s corporate income tax. NASCAR insists it is the businesses that purchase rights, such as TV networks or merchandise retailers, that decide where to use them. The racing association says the networks, not NASCAR, broadcast races on television in Ohio.
NASCAR claims the tax commissioner has taken an excessively broad interpretation of the base for the CAT. The commissioner says he’s simply following the Ohio Revenue Code. Who will come out ahead?
The Ohio Supreme Court will decide.
Not surprisingly, NASCAR appealed the tax bill. But Ohio’s Board of Tax Appeals agreed with the Tax Commissioner. NASCAR appealed again, this time to the Ohio Supreme Court. In its court filings, NASCAR contends the commissioner has taken a “remarkable position… [it] would automatically apply the CAT to revenue ranging from baseball teams in California, to makers of YouTube cat videos, and everything in between, no matter how that content makes it to Ohio.”
If the Ohio Supreme Court sides with the Commissioner, the state’s tax nexus would be greatly expanded. How many steps removed from an Ohio consumer would a business have to be to owe no CAT? According to the Tax Commissioner’s attorneys, “NASCAR can avoid any further conflict with the Commissioner by specifically excluding Ohio from all of its licensing contracts.”
That certainly seems like an all-or-nothing approach to tax nexus.
Would that be good tax policy?
What if other states took Ohio’s approach to defining tax nexus? My TPC colleague Howard Gleckman wrote earlier this year about Maryland’s tax on digital advertising—a distant cousin of television broadcast rights. He warned that chaos and multiple taxation could result from a system where each state levies its own tax, using its own rules, on businesses that cross state lines over the Internet.
There needs to be some level of uniformity in business taxation in a digital world. Maybe something like, as Howard suggested, a national and broad-based value-added-tax with revenue rebated to states.
Otherwise, states and companies will continue to battle over tax bills and courts will have to decide who wins.
The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.