Court rules NASCAR does not have to pay state commercial activities tax.

Court rules NASCAR does not have to pay state commercial activities tax.

The money NASCAR makes from selling the rights to broadcast stock car races and merchandise to Ohio fans is not subject to the state’s commercial activities tax (CAT), the Supreme Court of Ohio ruled today.

In a unanimous decision, the Supreme Court rejected the Ohio Tax Commissioner’s order that  NASCAR owes the state nearly $550,000. The Court found NASCAR did not owe taxes for revenues earned through broadcasting races, online marketing, and sponsorship fees. The Court split 4-3 on whether the state could tax “licensing fees” that NASCAR grants to banks, insurance companies, and manufacturers, including the maker of NASCAR-branded mugs and fuzzy dice.

Writing for the Court majority, Justice R. Patrick DeWine explained that the dispute centers on a CAT provision that allows Ohio to tax “the right to use” NASCAR’s intellectual property in the state.” The tax commissioner claimed NASCAR owed taxes for granting the use of those rights to television stations, retailers, corporate sponsors, and others. But NASCAR’s contracts granted the rights to use its trademarks and logos nationwide and in other countries. None of the contracts tied payments to NASCAR to the right to use its property specifically in Ohio. Because those revenue streams were not “based on” “the right to use” NASCAR’s intellectual property in Ohio, the Court held that the CAT does not permit the tax commissioner to tax NASCAR for those revenues.

The decision reduces the amount of NASCAR revenue that may be taxed by Ohio under the CAT over a five-and-a-half-year period from of $186 million to less than a half-million dollars. The Court remanded the case to the Ohio Board of Tax Appeals (BTA) to determine what, if any, tax NASCAR owes for hosting seven races in Ohio in its smaller racing series between 2005 and 2010.

Chief Justice Maureen O’Connor and Justices Sharon L. Kennedy and Patrick F. Fischer joined Justice DeWine’s opinion.

In a concurring opinion, Justice Melody Stewart wrote that NASCAR’s licensing contracts, unlike its broadcasting deals, allow the company to collect additional revenue based on the amount of sales made by those usings its trademarks. The state has a right to estimate the portion of those sales that occurred in Ohio and tax them, she wrote.

Justices Michael P. Donnelly and Jennifer Brunner joined Justice Stewart’s opinion.

Commissioner Audits Race Organizer
NASCAR is the leading sanctioning body of stockcar racing. The parent company, NASCAR Holdings, is based in Florida. NASCAR conducts races at more than 100 racetracks across 39 states and Canada and broadcasts the races in more than 150 countries.

In 2005, Ohio enacted the CAT, which is levied on “taxable gross receipts for the privilege of doing business in the state.” In turn, lawmakers phased out other taxes imposed on businesses. Under R.C. 5751.01, taxable receipts are defined as “gross receipts sitused to this state,” which means the revenue must be connected to business done in Ohio to be subject to the CAT. The CAT refers to such a connection to Ohio as a “substantial nexus.” One way a business can have a substantial nexus is to have more than $500,000 of annual taxable gross receipts attributed to doing business in Ohio.

In 2011, the state tax commissioner audited NASCAR, examining its tax payments from July 2005 to December 2010. The audit reviewed NASCAR’s receipts from seven revenue streams: broadcast revenue, media revenue, licensing fees, sponsorship fees, sanction fees, memberships, and competition.

To conduct the audit, the tax commissioner agreed to review “sample agreements” for each category. Broadcasting agreements generated the most revenue. The tax commissioner examined NASCAR’s contract with Fox Broadcasting Company to broadcast a select number of races over eight years. Fox paid $1.66 billion to air the races in the U.S., Mexico, Canada, and other territories. Fox then entered into agreements with local television stations and others to air the races, and NASCAR was not involved in Fox’s local agreements.

The tax commissioner determined that some of the revenue NASCAR earned from Fox occurred in Ohio for tax purposes by estimating the number of cable TV households in Ohio compared to all U.S. cable TV households. The commissioner estimated that about 4.3% of American cable TV viewers lived in Ohio and thus assessed a tax on 4.3% of NASCAR’s broadcast revenues.

The commissioner used the same formula to determine the amount of media revenue the state could tax. The commissioner examined NASCAR’s six-year, $6 million contract with Turner Broadcasting System to operate NASCAR’s website, which gave Turner the exclusive right to use the NASCAR brand online. The agreement allowed Turner to open an online store and develop NASCAR-branded games. The commissioner estimated the company taxable revenues that NASCAR earned over the audit period in Ohio from broadcast and media rights at $139 million.

The commissioner looked at NASCAR’s sponsorship contract with AFLAC to advertise itself as NASCAR’s supplemental-insurance partner in the United States. AFLAC paid NASCAR $5.5 million over three-and-a-half-years for the sponsorship. The commissioner estimated that based on all of NASCAR’s sponsorships over the audit period, $26 million on taxable receipts were attributable to doing business in Ohio.

For licensing fees, the commissioner reviewed a contract with BSI Products, which had the right to use NASCAR logos on various products including flags, mugs, barbeque sets, keychains, and fuzzy dice. The contract required the company pay a royalty to NASCAR based on total sales in the U.S., Canada, U.S. territories, and U.S. military bases. The commissioner estimated NASCAR earned $10 million in royalties from fees from manufacturers, insurance companies, banks, food makers, and others whose licensed the use of NASCAR trademarks. For sponsorship and licensing fees, the tax commissioner used U.S. census data to find Ohio’s proportion of the national population, and then attributed that proportion of NASCAR’s revenue to Ohio to impose the CAT.

All in all, the tax commissioner found $186 million in taxable revenue and imposed on NASCAR a final tax assessment of $549,520.

Company Objects to Taxation
NASCAR objected to the commissioner’s assessment. The company maintained that it is based in Florida and for tax purposes all its revenues from the sale of its intellectual property are subject to Florida taxes.

NASCAR appealed to the BTA, which affirmed the tax commissioner’s assessment that, based on the $186 million it earned, it owed $328,000 in taxes to Ohio for the five-and-a-half-year period. With interest and penalties, NASCAR’s outstanding tax bill was $550,000. NASCAR did not dispute that it owed taxes for sanctioning seven races in Ohio and the associated membership fees paid by those participating in the events as well as the revenues earned by the events. Those categories represented 0.25% of the overall $186 million in revenues estimated to be earned in Ohio.

NASCAR appealed the BTA’s decision to the Supreme Court.

Supreme Court Examined Tax Law
R.C. 5751.033(F) permits the taxation of revenue generated from granting “the right to use” trademarks, copyrights, and other intellectual property “to the extent the receipts are based on the right to use the property in” Ohio. The same law permits taxation “based on the amount of” actual “use of the property” in Ohio, but the tax commissioner taxed NASCAR for its revenue from granting the right to use its intellectual property, not actual use.

Looking at each sample contract, Justice DeWine explained  that none of the contracts was contingent on the right to use the property in Ohio. Each contract called for a fixed payment in exchange for granting rights to use NASCAR’s intellectual property on a national or international scale. None of the contracts made specific mention of Ohio.

“Intellectual property receipts may be sitused to Ohio only in so much as – or to the extent that – they are ‘based on’ the right to use the property in this state,” the Court stated. “But nothing in the contracts before us shows any causal connection between any of the receipts and the right to use NASCAR’s intellectual property in Ohio.”

For each revenue stream — broadcast, media licensing fees, and sponsorship fees — the Court explained that the tax commissioner’s method of implementing the CAT did not properly reflect “the extent” that NASCAR’s revenues “are based on the right to use the property in [Ohio].”

Under NASCAR’s agreement with BSI Products, licensing fees, “unlike the other categories” of revenue, vary based on actual sales. But, the Court explained, the tax commissioner taxed NASCAR’s revenue from licensing fees the same way as all the other streams of revenue, based on the right to use, not actual use.

“The tax commissioner did not attempt to justify the assessment based on actual use; indeed, he specifically distinguished actual use from the right to use,” the opinion noted.

Because the Court found less than $500,000 of taxable receipts were attributed to Ohio, it directed the BTA to consider whether NASCAR owes any CAT at all. It also directed the tax commissioner to calculate the CAT, if any, based on the three areas related to conducting races in Ohio that NASCAR did not dispute.

License Fees Might Be Taxable, Concurrence Stated
In her concurrence, Justice Stewart wrote that unlike the broadcast fees and other fixed payments, licensing fees NASCAR charged did change based on total sales by the licensed users. She noted that NASCAR granted BSI Products a license to use the trademarks over a broad geographic territory and never asked the company to report where it made its sales.

She wrote the BTA correctly permitted the commissioner to assess the sales of the licensed items and that the CAT rules are similar to Ohio’s corporate franchise tax and personal income tax rules for using licensed intellectual property. The burden is on NASCAR to demonstrate that the tax commissioner’s assessment was incorrect, and the company provided no evidence to contradict the amount, the concurrence concluded.

2021-0578. NASCAR Holdings, Inc. v. McClain, Slip Opinion No. 2022-Ohio-4131.

View oral argument video of this case.

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