The Court will consider if the Commercial Activity Tax can be imposed on out-of-state online businesses with no physical presence in Ohio.

The Court will consider if the Commercial Activity Tax can be imposed on out-of-state online businesses with no physical presence in Ohio.

Three online sellers are challenging Ohio’s right to impose the state’s commercial activity tax (CAT) on them strictly because they earn sales in Ohio, but don’t have any stores, facilities, employees, or any other “physicial presence.”

The companies maintain the tax violates the U.S. Constitution’s commerce clause and only Congress can establish these types of business taxes. The Ohio Supreme Court will hear oral arguments next week from the companies and the Ohio tax commissioner, who maintains physical presence is no longer required in a modern economy that relies heavily on e-commerce.

As part of a sweeping overhaul of Ohio’s state tax system in 2005, the General Assembly adopted the CAT to address the issue raised by “brick and mortar” Ohio companies about the surge of e-commerce. Ohio turned to model legislation developed in 2002 by the Multistate Tax Commission, which proposed that companies without a physical presence in the state could be required to pay the CAT if the company had at least $500,000 in gross receipts from sales in Ohio. This was labeled the “bright-line presence” rule.

The Ohio tax commissioner began to audit companies believed to have large amounts of Internet sales in Ohio that weren’t paying the CAT. California-based Newegg Inc., which the commissioner noted is the second largest online retailer after Amazon Inc., Virginia-based Crutchfield Corp., and Wisconsin-based Mason Companies, were among the companies refusing to pay the bills from 2005 through 2012. They challenged the tax claiming it is a violation of the commerce clause.

In 2015, the Board of Tax Appeals (BTA) upheld the tax commissioner’s determinations for Newegg, Crutchfield, and Mason. On appeal, the Supreme Court consolidated the three cases, Crutchfield Corp. v. Testa, Newegg Inc. v. Testa, and Mason Cos. Inc. v. Testa, which are represented by the same Maine-based law firm and have filed nearly identical challenges.

The case has drawn the attention of national organizations representing both state and local governments and online retailers. An amicus curiae brief from the Council on State Taxation (COST), which represents nearly 600 major corporations engaging in interstate business, indicates that Ohio was the first to adopt the Multistate Tax Commission’s bright-line presence rule, and several other states have followed. COST believes the case is of national importance because it represents the first time a challenge to the new rule has reached a state’s highest court.

In addition to the CAT case, the Court will hear two other cases on Tuesday, May 3 and three cases on Wednesday, May 4 at the Thomas J. Moyer Ohio Judicial Center in Columbus. The Court’s sessions begin at 9 a.m., and the arguments will be streamed live online at sc.ohio.gov and broadcast live on The Ohio Channel.

Previews Available
Along with the brief descriptions below, the Office of Public Information today released previews of the cases.

Cases for Tuesday, May 3
In State v. Williams, a Summit County man challenges his 69-years-to-life prison sentence for multiple offenses, including murder. He contends his sentence is void because the trial court erroneously imposed multiple, concurrent sentences for allied offenses. He argues he should be resentenced by the trial court.

The attorney conduct board has recommended an indefinite suspension for a Milford attorney in Cincinnati Bar Association v. Hauck. The attorney helped a client, who he says was only a friend, to contact family members in violation of a civil protection order. The attorney maintains the evidence doesn’t support the proposed sanction and the civil protection statute is unconstitutional.

Cases for Wednesday, May 4
A Kentucky attorney faces a six-month actual suspension in Cincinnati Bar Association v. Weist for using a client’s confidential information to make financially rewarding stock trades and for revealing the private details to federal investigators. The attorney told disciplinary authorities he made the purchases based on the stock’s volatility and removal from Nasdaq.

Following a fall at a Cleveland hospital, a woman sued for her injuries. During discovery, she asked for the incident report, but the hospital refused, stating it was a privileged document. However, the trial court disagreed and ordered the report’s release. The hospital filed an immediate appeal in Burnham v. Cleveland Clinic, arguing its legal challenge is allowed, and essential, because the confidentiality of the report can’t be restored once it’s disclosed.