COLUMBUS, Ohio (AP) — Ohio can impose its primary business tax on out-of-state companies that sell to its residents but have no stores or physical presence in the state, the Ohio Supreme Court ruled Thursday.
Three out-of-state retailers had challenged Ohio’s application of its commercial activities tax. They claimed imposing it across state lines violates the U.S. Constitution’s commerce clause, which gives Congress authority over interstate commerce. The companies argued they had no “substantial nexus” with the state to be subject to the tax because they had no employees, buildings or physical presence in Ohio.
But in a 5-2 decision, Ohio’s high court found that the state can impose the tax on out-of-state companies that sell online to its residents.
Writing for the majority, Justice William O’Neill said while such a physical presence may be needed to levy sales taxes and use taxes on out-of-state sellers, that doesn’t extend to business-privilege taxes such as the commercial activities tax, or CAT.
The tax has been in place since 2005. Ohio applies the CAT if a business earns $500,000 or more in annual gross sales in the state. It’s levied as a “privilege of doing business.” Last budget year, the tax generated about $1.7 billion in state revenue.
The court found the $500,000 sales-receipts threshold in the case didn’t impose an excessive burden and complies with the commerce clause.
“Were the state to tax all receipts without any regard for the volume of Ohio sales, the CAT could become clearly excessive as to a business with a very small amount of such receipts,” O’Neill wrote. He said lawmakers “sensibly attempted to foreclose that possibility by setting a minimum sales-receipts threshold.”
The businesses that challenged the tax were California-based Newegg Inc., an online retailer; Virginia-based Crutchfield Corp., a consumer electronics retailer; and Wisconsin-based Mason Companies Inc., which sells shoes and other products.
Martin Eisenstein, the companies’ attorney, said he was disappointed by the ruling. “We have to review our options,” he said.
Ohio’s tax commissioner said he was pleased with the court’s decision.
“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,” Joe Testa said.
It’s unclear how much additional tax revenue Ohio stands to gain because of the ruling.
Some out-of-state companies have been paying the tax, while others have not, said Gary Gudmundson, a spokesman for Ohio’s tax department. The agency didn’t have an estimate of the revenue that could flow in as companies that have not paid the tax come into compliance.
Justices Sharon Kennedy and Judith Ann Lanzinger dissented in the case.
Kennedy said the power to regulate interstate commerce rests exclusively with Congress.
“While I am sympathetic to all Ohio-based businesses that must pay a business-privilege tax such as the CAT, this court nevertheless should follow the law as it exists today,” she wrote.