Court determines Cincinnati Reds do not need to pay tax on giveaways.

Court determines Cincinnati Reds do not need to pay tax on giveaways.

In a dispute between state tax officials and Cincinnati’s professional baseball team, the Ohio Supreme Court today quoted the team’s longtime radio announcer by declaring, “This one belongs to the Reds.”

A divided Supreme Court determined the Cincinnati Reds were exempt from paying “use” tax on bobbleheads and other promotional items given to attendees at selected home games. The Court concluded the team successfully demonstrated that the cost of the items were factored into the cost of game tickets and counted as a tax-exempt “resale” of the items to fans.

Justice Patrick F. Fischer cited Reds announcer Marty Brennaman and several other sports figures as he delved deeply into the rich history of Ohio’s influence on professional baseball in the Court’s lead opinion. Because of the unique and undisputed evidence in the record, Justice Fischer cautioned that the ruling may not be applicable to other professional sports teams and organizations that sponsor promotional item giveaways. The Reds argued that rather than discount the ticket price to less-desirable games, the team factored a portion of ticket price to cover the costs of giveaways as a means to boost attendance.

“While our conclusion may be viewed as exposing a ‘loophole’ by which sports organizations can avoid paying the use tax on promotional items, we emphasize that our interpretation is compelled by the application of R.C. Chapter 5739 to the specifics facts in the record in this case,” he wrote.

Justice Judith L. French joined Justice Fischer’s opinion. Chief Justice Maureen O’Connor and Justices Terrence O’Donnell and Sharon L. Kennedy concurred in judgment only without a written opinion.

In a dissenting opinion, Justice Mary DeGenaro wrote that the Ohio Board of Tax Appeals (BTA) was justified in concluding the Reds were giving away the items for free as a way of “incentivizing paid attendance,” but that does not mean the team was reselling the items. She noted that because ticket sales themselves are not taxed, then the Reds escape paying sales tax or use tax on promotional items that generally apply to similar purchases in Ohio.

Sixth District Court of Appeals Judge Christine Mayle joined Justice DeGenaro’s opinion. Judge Mayle sat on the case for Justice R. Patrick DeWine, who did not participate.

Items Now Part of Game, Team Maintains
Justice Fischer wrote that professional baseball in Ohio has transformed over the years, enticing fans to attend games, turning stadiums into “mini theme parks” and offering the public the opportunity to receive unique merchandise, such as bobbleheads, shirts, bats, and other items, that can only be obtained by attending the game.

The Ohio tax commissioner conducted an audit of the Reds that included team purchases from 2008 through 2010, and found the team determined it was exempt from paying use tax on the promotional items it purchased. The tax commissioner ruled the team had to pay use tax on the items, which businesses pay as a form of sales tax on goods used to conduct their operations. R.C. 5739.01(E) contains a “sale-for-resale” exemption to the use tax for businesses that buy items that they intend to sell. When the item is resold to a consumer, the customer typically pays state sales tax.

The Reds appealed the tax commissioner’s decision to the BTA. Doug Healy, the Red’s chief financial officer, testified before the BTA that the team distributes promotional items to drive ticket revenue at games that would otherwise be attended by fewer fans. The Reds decide before the season which games would likely have low attendance and offer promotional items for them.

The cost of the promotional items are not stated separately from the ticket price and they are advertised as “free.” But the ticket price is set to cover the cost of the items and then those costs are spread out over the costs for all ticket prices throughout the year, Healy stated.

The BTA sided with the tax commissioner, finding the items were given away for free, and that patrons paid the same price for tickets for games with no giveaways, and also paid the same price even if they did not receive a promotional item because the supply ran out. The BTA determined the Reds must pay use tax on the items.

The Reds appealed the decision to the Ohio Supreme Court, which at the time was required to hear the case.

Club Intended to Sell Items
The lead opinion stated the resell exemption can apply only if the Reds intended to sell the items. Referencing the definition of “sale” in R.C. 5739.01(E), Justice Fischer explained that the definition contains the legal concept of “consideration,” which means the receiver of the items has to provide something in exchange for it. The Reds argued the fans provided consideration in the form of the ticket purchase, meaning they paid for the both right to attend the game and to receive an item.

While not all ticket buyers are guaranteed to receive an item, the Reds maintained, without contradiction, that they created a contractual expectation with the fans that attendees would receive the giveaway or a suitable substitute if the club ran out. Healy testified that in some cases, the team refunded money to ticket purchasers who insisted on receiving the giveaway but were unable to attain it.

“Healy’s unrefuted testimony indicates that in the specific circumstances here, fans gave consideration in exchange for promotional items,” the lead opinion stated.

The opinion contrasted the “expected” giveaway with the unexpected free items a fan might receive while attending a game, such as a foul ball hit into the stands or a T-shirt tossed to fans.

“In these instances the fan had no expectation of receiving the item and did not purchase a ticket under the assumption that the item would be provided by the team,” the opinion stated.

The opinion indicated that if the Reds’ argument exposes a “loophole” in the law, the Ohio General Assembly can amend the Revised Code to require the team to pay use tax on promotional items.

The decision reversed the BTA’s ruling and remanded the matter to the BTA for further proceedings.

Dissent Maintains BTA Findings Appropriate
In her dissent, Justice DeGenaro wrote that her principal disagreement with the lead opinion is its conclusion that the BTA’s decision was not “supported by any reliable and probative evidence found in the record.”

At the BTA proceedings, the burden was on the Reds to prove they intended to resell the items. The evidence at the hearing demonstrated that the Reds advertised the items were free and in limited quantity, and the club provided no written guarantee that a ticket buyer would receive a giveaway.

Healy’s testimony indicated the Reds were in the business of selling tickets and not reselling promotional items, and the BTA concluded the Reds built the price of items — like any other business overhead cost — into the price of the ticket. The dissent maintained the BTA was “justified in concluding that the purchase of a game ticket constituted consideration for nothing more than the right to attend the baseball game,” and the Reds were using the free items to drive ticket sales, not reselling the items.

Because all ticket purchasers at every game helped pay for the giveaways whether they received one or not, those “circumstances breaks the link” between buying a ticket and being offered a giveaway, the dissent stated. That indicated the BTA was justified in concluding the items were not being resold, the dissent concluded.

2017-0854. Cincinnati Reds LLC v. Testa, Slip Opinion No. 2018-Ohio-4669.

View oral argument video of this case.

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