CAT tax ruling levels field for online sales

Commercial activities tax is not charged to the consumer during digital sales.

In November, the Ohio Supreme Court ruled 5-2 that Ohio can impose its commercial activities tax — sometimes called “CAT tax” — against online or mail-order businesses that have no physical presence in the state.

It’s too soon to say whether the ruling will help fill government coffers, state taxation officials said. But the fairly complex ruling did cause a bit of confusion, those same officials added.

The Supreme Court determined that, while a physical presence in a state may be required to impose an obligation to collect sales taxes on an out-of-state seller, that requirement does not apply to the CAT, which is considered a tax on the “privilege” of doing business in Ohio.

Ohio collected about $1.75 billion from the commercial activities tax in fiscal year 2015. The number for fiscal 2016 was $1.68 billion, the state said.

Matt Chafin, chief counsel and deputy director of the Ohio Department of Taxation, said there has been some confusion between sales and CAT taxes, referring to an erroneous op-ed piece published last month in another Ohio newspaper.

The writer in that piece wrote that the November ruling meant “the state could impose sales taxes on certain online transactions.”

Not so, Chafin said.

Ohioans don’t have to pay sales taxes on Internet purchases today that didn’t collect sales taxes yesterday, Chafin said.

“It’s got nothing to do with the sales tax,” said Gary Gudmundson, spokesman for the state taxation department. “Those are two different animals, really.”

A 1992 U.S. Supreme Court ruling mandated that Ohio (or any other state) can’t expect businesses that don’t have a physical presence in that state to collect sales taxes from customers who are residents of that state.

That remains law, Chafin said.

CAT taxes are different. Ohio is one of the few states with that kind of tax, joining Texas, Washington and Nevada.

The CAT is imposed on any company that earns gross receipts — sales, services payments, rents, leases and more — in Ohio, Chafin said.

Another difference between the two taxes: The CAT is a tax on businesses. It’s not supposed to be imposed on consumers directly, like the sales tax.

But Greg Saul, director of tax policy for the Ohio Society of CPAs, said the tax likely does get passed on to consumers in some capacity.

If a company sells goods online or via phone or mail order to Ohio customers, reaching at least $500,000 in sales, Chafin said, “You can’t argue to me that you don’t have to pay the CAT because you don’t have any physical presence in Ohio.”

The Ohio Supreme Court ruling came after a trio of out-of-state companies — Virginia-based Crutchfield Corp., California-based Newegg and Wisconsin’s Mason Companies — had appealed state Board of Tax Appeals rulings that they owned CAT taxes they had previously refused to pay on sales to Ohio customers.

The Department of Taxation could not say whether November’s ruling has resulted in greater compliance with CAT tax requirements.

But Chafin thinks reluctant companies will come around.

“I suspect there are some companies that maybe we haven’t identified yet that are going to come out of the woods, probably approach us with we call a … voluntary disclosure agreement,” Chafin said. “I don’t have any anecdotal evidence to tell you that, hey, yeah, we’ve already approved ten of these things here since the decision came out.”

If the case had gone the other way, the base of the commercial activities tax would have been narrowed, Saul said.

“The more you whittle away at the broad base of the tax, the more likely there will be discussions that the rate needs to be increased,” Saul said. “I think it’s good for residents of Ohio.”

Alfred DuPuy, executive director of Cincinnati-based Interbrand, a consultancy that focuses on consumer and retail issues, said that for most consumers, the brand in question is a powerful motivator in making buying decisions.

But some consumers also consider cost of delivery and taxes when choosing between two companies, he added.

“There’s going to be a portion of the buying public that evaluates it so that, by definition, it levels the playing field a little bit,” DuPuy said.

Taxes can affect competition between companies, as well. Well known, established brands may not worry about taxes quite as much as smaller or newer companies, he said.

“Whereas maybe weaker brands have to worry about it a bit more,” he said.


Past five years of Ohio commercial activity tax collections:

Fiscal year 2016: $1.68 billion.

FY 2015: $1.75 billion.

FY 2014: $1.68 billion.

FY 2013: $1.59 billion.

FY 2012: $1.65 billion.

Source: Ohio Department of Taxation.

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