Ohio Supreme Court Rules Against Online Sales Taxes But for a Different Online Tax

by | November 18, 2016

By Randy Ludlow

Ohio can impose its commercial activity tax on out-of-state businesses lacking a bricks-and-mortar presence in the state, the Ohio Supreme Court ruled today.

In a 5-2 decision, the justices found that three online retailers were subject to the tax.

Justice William M. O'Neill wrote that while an in-state physical presence may be necessary to collect sales taxes from a retailer, the U.S. Constitution commerce clause does not forbid the collection of a "privilege to do business" tax such as the commercial activity tax.

The state's $500,000 annual sales threshold before the tax is imposed complies with the commerce clause, O'Neill wrote.

The tax has been collected since 2005 and brings in about $1.7 billion a year for the state.

The ruling came in cases in which Crutchfield Corp., Newegg Inc. and Mason Companies had appealed Board of Tax Appeals rulings that they owed commercial activity taxes which they had refused to pay based on their Ohio sales.

Crutchfield, based in Charlottesville, Virginia, sells electronics online while Newegg, of Whittier, California, also sells electronics and other items. Mason Companies, of Chippewa Falls, Wisconsin, sells a variety of items online.

In a dissenting opinion joined by Justice Judith Ann Lanzinger, Justice Sharon L. Kennedy wrote that a 1992 U.S. Supreme Court ruling a physical presence was required to tax out-of-state companies and that only the court or Congress can change law on taxing interstate commerce.

Ohio Department of Taxation spokesman Gary Gudmundson said there is no estimate on the number of out-of-state businesses that have refused to pay the commercial activity tax and what they owe.

A number of online retailers have been paying the tax since its inception while others have declined while awaiting a legal decision, he said.

In Crutchfield's case, the company was billed about $207,000 in taxes and non-payment penalties from mid-2005 through mid-2012. Newegg owed $447,580 for 2005 through 2009.

In a statement, Tax Commissioner Joseph Testa said: "The Court's decision recognizes Ohio's legitimate interest in applying its singular general business tax evenhandedly on both in-state and out-of-state businesses.  It is reasonable that out-of-state businesses, who enjoy over $500,000 annually in gross receipts from Ohioans, should pay the CAT just as their Ohio peers do."

(c)2016 The Columbus Dispatch (Columbus, Ohio)