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Ohio Tax
Workshop DD
Sourcing of Receipts Multistate and Ohio
Wednesday, January 29, 2014
11:00 a.m. to 12:30 p.m.
Biographical Information
Alvin “Bo” Moore, Administrator, Audit Division, Ohio Dept. of Taxation
4485 Northland Ridge Blvd.. Columbus, OH 43229
[email protected]
614.466.8581
Fax 614.466.1081
Bo Moore is an Administrator in the Audit Division of the Ohio Department of Taxation. He serves as a
technical resource person for the Department and recommends procedural and policy revisions as
needed. He supervises a group of senior level auditors that review completed audits of each business tax
type being audited by the Audit Division.
He began his career with the Ohio Department of Taxation in October of 1988 as an auditing agent
specializing in income and corporation franchise tax. In November 2003 he was promoted to Audit
Manager and was responsible for a group of field auditors that performed audits of each business tax
type administered by the Audit Division. He was transferred to Audit Administration as an Audit Manager
over the Audit Review group in November 2004 and promoted to his current position in September 2006.
He was a group leader for the team that developed the audit model for the Commercial Activity Tax. Bo is
a Certified Public Accountant (inactive).
Debora (Dardinger)McGraw JD, LLM,CPA, Member, Zaino Hall & Farrin LLC
41 South High Street, Suite 3600, Columbus, OH 43215
614-349-4813
Fax: 614-754-6368 [email protected]
Deb is a member of the firm's Federal and Multistate Tax Practice Group.
Deb has significant
experience representing clients in various state and local tax controversies, including settlement
negotiations. She also assists clients with a variety of federal income tax issues. Deb has significant
experience in conducting refund reviews and in assisting clients with tax planning including
implementation by working with various client operational groups. Deb has worked with clients in various
industry groups and has developed particular experience in the financial services and utility industries.
Prior to joining the firm, Deb was a Director at PricewaterhouseCoopers where she worked for 16 years.
Prior to leaving PwC, Deb led the Columbus large company tax practice and served as the lead contact
for many Columbus based companies. She assisted clients with a variety of federal and state tax
considerations including tax planning, corporate restructurings, federal and state controversy, corporate
compliance, financial statement audits, etc.
In particular, Deb excels at conducting federal and multi-state refund reviews for clients looking to
improve cash flow or review their current tax positions. Deb led PwC's Ohio tax efforts nationally
including negotiation of multiple Fortune 100 and 400 company audit settlements. She frequently used
her refund review experience as offsets in Ohio and other state audits or to argue alternative positions.
Deb handled the legislative analysis for the firm and acted as a national resource for other offices. She
drafted updates that were circulated internally and to clients. Deb spoke regularly on client webcasts
introducing new Ohio legislation, as well as, on federal and multistate tax considerations for internal PwC
trainings.
Deb served as the chair of PwC's local Women's Networking Circle for two years and the board for two
additional years. The group was aimed at mentoring women in public accounting and providing them
networking and support opportunities. She was voted coach of the year for the Ohio-Kentucky-Indiana
cluster of PwC in 2009, the first year the award was offered.
Deb is a frequent speaker and served as an adjunct professor at Capital University Law School.
Biographical Information
Sarah O’Leary, Executive Administrator, Ohio Department of Taxation
Commercial Activity, Energy, and Excise Tax Divisions
P.O. Box 530, Columbus, OH 43216-0530
614.387.0124 Fax: 614.644.9641
Sarah_O’[email protected]
Sarah O’Leary was recently named executive administrator of the Commercial Activity, Energy, and
Excise Tax Divisions of the Ohio Department of Taxation. As executive administrator, Sarah oversees the
operations of several Ohio taxes, including the CAT, casino, motor fuel, tobacco, and severance taxes.
Prior to this position, Sarah was the administrator of the CAT Division, where she was responsible for
overseeing CAT compliance, billings and assessments, and an office audit program. She also served as
legal counsel of the CAT, Excise, and Motor Fuel Tax Divisions for the Department, where she was
responsible for drafting administrative rules and information releases and advising the Commissioner’s
Office on legal matters. She is a frequent presenter at national conferences, including Ohio’s annual Tax
Conference, on legal and administrative issues. Sarah started with the Department as a hearing
officer/staff attorney for the Tax Appeals Division of the Office of Chief Counsel where she handled
corporation franchise tax cases. Sarah graduated from John Carroll University in Cleveland, Ohio with a
B.A. in English and earned her J.D. from the University of Toledo College of Law.
John S. Petzinger, Attorney, Vorys, Sater, Seymour and Pease LLP
52 East Gay Street, P.O. Box 1008, Columbus, OH 43216-1008
[email protected]
614.464.5696
Fax: 614.719.4996
Mr. Petzinger is an associate in the Columbus office and a member of the tax group. His practice focuses
on state and local tax matters involving multi-state corporation income/franchise taxes, the Ohio
commercial activity tax, local net profits tax, pass-through entity tax, personal income tax, trust tax,
employer withholding tax, sales/use tax, and unclaimed property. Mr. Petzinger also counsels clients on
transactional tax matters as well as tax planning involving internal reorganizations, mergers, acquisitions,
and divestitures. In addition, he represents clients before the Ohio Board of Tax Appeals, the Ohio
Department of Taxation, and other state and local taxing authorities.
Prior to joining Vorys, Mr. Petzinger worked for eight years in the Tax Appeals Division of the Ohio
Department of Taxation. There Mr. Petzinger was responsible for drafting Final Determinations of the Tax
Commissioner involving complex administrative appeals related to the corporation franchise tax, passthrough entity tax, personal income tax, employer withholding tax, and commercial activity tax. Mr.
Petzinger also regularly negotiated multi-year, multi-issue settlement agreements to resolve such
appeals.
Mr. Petzinger has lectured for the Ohio Manufacturers Education Council and the Institute for
Professionals in Taxation on topics such as: Ohio’s financial institutions tax, combined reporting issues
facing multi-state businesses; Ohio’s taxation of nonresident individual owners of pass-through entities;
and bright-line nexus standards for Ohio’s commercial activity tax.
Mr. Petzinger received his J.D., with honors, from The Ohio State University Michael E. Moritz College of
Law. He received his B.S., cum laude, from Hillsdale College.
2014 Ohio Tax Conference: Workshop DD
Sourcing of Receipts – Multistate and Ohio
January 29, 2014
Debora D. McGraw Alvin “Bo” Moore John Petzinger Sarah O’Leary
Agenda
• Sale of Tangible Personal Property
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MTC UDITPA Background
Ohio Franchise Tax
Ohio CAT
Municipal Income Tax
• Sale of Intangible Property
• Sale of Services • Questions
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Sales of Tangible Personal Property: Background
• Most of the published cases interpreting the sale of tangible personal property situsing
involve the MTC UDITPA model language. – Language is slightly different than Ohio and does not include the sentence referring to the location where property is “ultimately received” found in Ohio’s law, i.e., the “ultimate destination” rule. 3
Sales of Tangible Personal Property: Background
MTC UDITPA Sample Language: Sales of tangible personal property are in this state if: •
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(a) the property is delivered or shipped to a purchaser, other than the United States government, within this state regardless of the f.o.b. point or other conditions of the sale; or . . .
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(The model rule later includes sales to the US Government and sales where the taxpayer is not subject to tax (throwback sales)).
Sales of Tangible Personal Property: Background
• The cases usually consider “pick up” sales where the customer enters the seller’s state to pick up the goods and return them to the customer’s home state. • In such instances, the question is whether the property was, “. . . delivered or shipped to a purchaser . . . within this state.”
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Sales of Tangible Personal Property: Background
Two interpretations: •
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a.) A sale occurs in the seller’s state for sales factor purposes only if the goods are initially delivered to the purchaser or its agent in the state (“place of delivery” rule); or –
b.) A sale is in a seller’s state for sales factor purposes if the ultimate destination of the property is in that state, regardless of where the seller delivers the goods or title passes (“ultimate destination” rule).
Sales of Tangible Personal Property: Background
Majority of states that have considered the issue followed the ultimate destination rule, for typically the following reasons:
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Statutory construction
Drafter’s policy to recognize consumer states
Administrative ease not a legitimate concern
The minority of states hold that the statutory language provides the place of delivery rule, and that the purchaser received the property if it picked the goods up in the state.
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Sales of Tangible Personal Property: Ohio Franchise Tax
Receipts from the sale of tangible personal property shall be sitused to this state if such property is received in this state by the purchaser. In the case of delivery of tangible personal property by common carrier or by other means of transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered as the place at which such property is received by the purchaser. Direct delivery in this state, other than for purposes of transportation, to a person or firm designated by a purchaser constitutes delivery to the purchaser in this state, and direct delivery outside this state to a person or firm designated by a purchaser does not constitute delivery to the purchaser in this state, regardless of where title passes or other conditions of sale. (Emphasis added).
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Sales of Tangible Personal Property: Ohio Franchise Tax
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Dupps Co. v. Lindley, 62 Ohio St. 2d 305 (1980), the Ohio Supreme Court held that “customer picks‐ups” of goods in Ohio were not Ohio sourced sales. The court cited the statutory language that sources sales where the goods were,“. . . ultimately received after all transportation has been completed.”
Sales of Tangible Personal Property: Ohio Franchise Tax
Loral Corp. v. Limbach, Ohio BTA 85‐C‐914 (1988), the BTA held that where property was received in Ohio by the customer for transportation outside of Ohio again by the customer, such property was not sitused to Ohio because it was not “received” in Ohio. •
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Sales of Tangible Personal Property: Ohio Franchise Tax
• “Products which merely pass through Ohio or never enter Ohio cannot be said to be sold in Ohio for purposes of Ohio franchise taxation. Here, we expressly find that the record before this Board includes uncontroverted testimony that the assessed property merely entered Ohio in route to non‐Ohio destinations… Appellee did not produce any evidence which would cause this Board to conclude that the later shipment of the goods from Wright‐Patterson was not a continuation of the transportation beginning at the appellant’s New York facility.”
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Sales of Tangible Personal Property: Ohio CAT
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R.C. 5751.033(E) . . . For purposes of this section, the phrase "delivery of tangible personal property by motor carrier or by other means of transportation" includes the situation in which a purchaser accepts the property in this state and then transports the property directly or by other means to a location outside this state.
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“Ultimate Destination” ‐ Income tax concept, not sales tax concept.
Sales of Tangible Personal Property: Ohio CAT
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Governor Taft vetoed language in House Bill 66 that would have required the Tax Commissioner to interpret and apply the CAT situsing statutes consistent with the Tax Commissioner’s prior treatment of taxpayers under the CFT and Ohio case law addressing the CFT sales factor statute. Sales of Tangible Personal Property: Ohio CAT
Information Release 2005‐17 “Taxable gross receipt” •
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Reiterates the language in the statute that property is sourced based on where it is ultimately received after all transportation.
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“This location must be known by the seller at the time of sale.” –
Example: Where a Wisconsin company sells to an Ohio wholesaler but knows at the time of sale that they are going to be shipped to Pennsylvania, the receipts can be excluded as Pennsylvania receipts.
Sales of Tangible Personal Property: Ohio CAT
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Qualified Distribution Center Exemption
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Allows a person selling and shipping to a QDC to exclude a percentage of their gross receipts. This percentage is based on historical data of the amount of property that was subsequently sold to a location outside of Ohio.
Sales of Tangible Personal Property: Ohio CAT
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Audit Experience: Ultimate destination sourcing –
Taxpayer utilized “shipped from” location when situsing sales of tangible personal property for CAT filings, but should have used “shipped to” reports.
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Taxpayer sold TPP and delivered the TPP to the customer. Taxpayer used “shipped to” reports, but an invoice sampling indicated that the report had the wrong address for one customer.
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Taxpayer had an out‐of‐state manufacturing location and did not pick up sales ultimately to customers in Ohio.
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Taxpayer shipped to an Ohio warehouse but knew the goods were going elsewhere. Taxpayer did not have information at the time of sale, but later obtained ultimate shipping reports. Tax Appeals/BTA ‐ CAT
• Recent FD issued on March 26, 2013 for Priceless Resource, Inc. (BTA 2013‐1007)
– TPP is delivered to a warehouse in Ohio. “Because the purchaser received the goods in Ohio, the petitioner’s associated receipts must be sitused to Ohio. The result is not altered by the purchaser’s subsequent decision to ship a percentage of the goods to retail locations outside of Ohio.”
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Why do sourcing rules matter? Nexus
• The CAT’s “bright‐line presence” test presumes nexus if taxable gross receipts are at least $500,000. – “Taxable” gross receipts are gross receipts that are sitused to Ohio under R.C. 5751.033. • Other states have adopted similar “factor presence” nexus standards for corporate income tax. 18
Why do sourcing rules matter? CAT: To consolidate or not to consolidate? Combined Groups: Intercompany gross receipts are not eliminated. Sourcing of intercompany gross receipts must be considered. Consolidated Elected Groups: Intercompany gross receipts are eliminated. Sourcing of eliminated gross receipts is irrelevant. 19
Municipal Sourcing – R.C. 718.02(B)
• (1) All sales of tangible personal property delivered within such municipal corporation regardless of where title passes if shipped or delivered from a stock of goods within such municipal corporation; 20
Municipal Sourcing – R.C. 718.02(B)
• (2) All sales of tangible personal property delivered within such municipal corporation regardless of where title passes even though transported from a point outside such municipal corporation if the taxpayer is regularly engaged through its own employees in the solicitation or promotion of sales within such municipal corporation and the sales result from such solicitation or promotion;
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Municipal Sourcing – R.C. 718.02(B)
• (3) All sales of tangible personal property shipped from a place within such municipal corporation to purchasers outside such municipal corporation regardless of where title passes if the taxpayer is not, through its own employees, regularly engaged in the solicitation or promotion of sales at the place where delivery is made. 22
Municipal Sourcing
• Sales sourced based on delivery, regardless of where title passes. • Subsection (1) Sale of goods within the same municipality
• Subsection (2) Sales of goods into a different municipality but the taxpayer’s employees actively solicited the sale in the municipality
• Subsection (3) Sale of goods to another municipality but taxpayer’s employees do not actively solicit – throwback to “home” municipality of goods
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Sales of Intangible Property ‐ CAT
• Intangible Property – R.C. 5751.033(F)
– Trademarks, trade names, patents, copyrights and similar intellectual property.
– Sitused based on the “Right to Use” or “Use of” the intangible property.
• Audit experience
– Taxpayers have attempted to situs trademarks and/or royalties using a corporate headquarters test, but the Department has not been receptive to this methodology. Instead, the Department obtained reports on actual use of the intellectual property.
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Sale of Services
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MTC UDITPA adopted greater “cost of performance” language.
Often consider compensation of service provider and/or time spent. Does not consider the cost of non‐employees (although some states have considered).
All or nothing to extent utilize “greater” COP.
Evidence that the drafters did not spend as much time on sourcing of services due to largely industrial base at that time.
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Ohio Sale of Services ‐ CFT
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Prior to tax years ending after 12/11/2003, followed greater cost of performance for services similar to the MTC language.
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Tax years ending after that date followed a “market approach” based on the purchaser’s benefit. •
Little to no published authority on sourcing under the market approach for corporate franchise tax. 26
Ohio Sale of Services ‐ CFT
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“Receipts from the sale of services…shall be sitused to this state in the proportion to the purchaser's benefit, with respect to the sale, in this state to the purchaser's benefit, with respect to the sale, everywhere. The physical location where the purchaser ultimately uses or receives the benefit of what was purchased shall be paramount in determining the proportion of the benefit in this state to the benefit everywhere.” R.C. 5733.05(B)(2)(c).
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Ohio Sale of Service
• CAT, and recent financial institution tax, adopted the “market approach.” • Other states have adopted a “market approach” including: AL, AZ, CA, GA, IL, IA, ME, MD, MI, MN, NE, OK, UT, and WI. 28
Ohio Sale of Services ‐ CAT
• Ohio Adm. Code 5703‐29‐17
– Worked closely with industries to develop various provisions.
– There were at least six public draft versions before the current version became final with JCARR.
– Current version is 30 pages long and addresses 54 different types of services.
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Ohio Sale of Services ‐ CAT
• Ohio Adm. Code 5703‐29‐15
– Includes presumption of more than 13 days in Ohio.
– Specific rule for situsing transportation services.
• Ohio miles compared to miles everywhere.
• Ohio Adm. Code 5703‐29‐20
– Specific rule for situsing receipts from periodic payments for mobile property.
• Vehicles used for transporting persons or goods are sitused based on transportation rule.
• All other motor vehicles are sitused based on the primary location of the vehicle.
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Ohio Sale of Services ‐ CAT
R.C. 5751.033(I)
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…Alternative method to situs gross receipts under this division if the alternative method is reasonable, is consistently and uniformly applied, and is supported by the taxpayer’s records as the records exist when the service is provided or within a reasonable period of time thereafter.
Ohio Sale of Services ‐ CAT
• Audit Experience
– Sourcing to Purchaser’s Customer • Taxpayer provided management services (billing, mailing, cash receipt, etc.) for banks who lease property to their customers. Services should be sourced where the leased property is located/used, the banks’ headquarters, or some other reasonable, consistent, and uniform method.
• Taxpayer managed rewards points programs for hotel franchisees. The Department determined that the receipts should be sitused based on the location of the rewards program participant (billing address/mailing address).
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Ohio Sale of Services ‐ CAT
• Audit Experience
– Sourcing based on Purchaser’s Benefit
• The Department determined that the job site (or post of duty) was the proper method of situsing gross receipts from the sale of employment services.
• Taxpayer provided repairs to its product at its Pennsylvania location. It then sent the repaired product back to the customer in Ohio. The Department determined that the benefit of the repair was received by the customer in Ohio and the repair was an Ohio gross receipt.
• Taxpayer provided management fees to unrelated members. The management services were primarily performed in Ohio. The receipts from unrelated members were taxable if the purchaser received the benefit in Ohio. The unrelated entities did not have any locations in Ohio. Thus, the management fees were sitused outside of Ohio.
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Ohio Sale of Services ‐ CAT
• Audit Experience
– Sourcing based on Purchaser’s Benefit
• Taxpayer provided document storage. Taxpayer picked the goods up from the customer and stored the files in its warehouse. When needed, the customer called and requested delivery and the taxpayer delivered them. The Department determined that the receipts should be sourced based on the customer’s location, not the document warehouse. • Gross receipts from posting a job on the taxpayer’s website were sourced based on location identified in the job posting, not on the employer’s headquarter location. 34
Ohio Sale of Services ‐ CAT
• Audit Experience
– Sourcing based on Purchaser’s Benefit
• Taxpayer provides advertising services on its website. The taxpayer sitused the services based on Ohio population to world population. The Department determined that Ohio population to U.S. population was more reasonable. • Entertainment revenue was sourced as follows:
– Event revenue, such as ticket sales, sitused if live event in Ohio.
– Pay‐Per‐View revenue sitused based on Ohio viewership (from cable/satellite provider sale to their customer).
– Concession revenue during live events are sitused based on the location of the event.
– Sale of DVDs are sitused based on the destination of the DVD. 35
Tax Appeals/BTA ‐ CAT
• FD issued in 2011 and Voluntarily Dismissed at the BTA – DIRECTV Inc., Issued January 7, 2011 (BTA 2011‐522)
– Challenged that its gross receipts are not “fairly apportioned” under the “fair apportionment” prong of the dormant Commerce Clause test.
– Department contended that the CAT possesses a situsing formula in R.C. 5751.033(I) that meets the “fair apportionment” prong. Based on purchaser’s benefit in Ohio with respect of the purchaser’s benefit everywhere.
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Municipal Sourcing of Services
• Typically follow cost of performance.
• R.C. 718.02(A)(3) guidance, “Gross receipts of the business or profession from sales made and services performed during the taxable period in such municipal corporation to gross receipts of the business or profession during the same period from sales and services, wherever made or performed.” (Emphasis Added).
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Questions & Answers
Contact Information
Debora D. McGraw
Zaino Hall & Farrin LLC
(614) 349‐4813
[email protected]
Sarah O’Leary
Ohio Department of Taxation
(614) 387‐0124
Sarah.O’[email protected]
John Petzinger
Vorys, Sater, Seymour and Pease LLP
(614) 464‐5696
[email protected]
Alvin “Bo” Moore
Ohio Department of Taxation
(614) 466‐8581
[email protected]
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