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Ohio BTA holds no CAT on items ultimately delivered outside state

Written on Oct 6, 2023

The Ohio Board of Tax Appeals (BTA) has ruled that a taxpayer who manufactured soap in Kansas that was transported to its customer’s distribution center in Ohio was not subject to Ohio Commercial Activity Tax (CAT) for the soap that ultimately was delivered outside Ohio. 

The taxpayer, VVF Intervest, manufactured bar soap and other personal care items in Kansas and did not have any property or employees in Ohio. At the end of the manufacturing and packaging process, VVF knew the intermediate destination of the soap, but had limited information about where the soap was ultimately destined. VVF’s largest customer, High Ridge Brands (HRB), contracted with third-party trucking companies to transport the soap from VVF’s manufacturing facility to its distribution centers in Ohio, Missouri, and California. HRB held approximately two months of inventory in the Ohio distribution center. From this Ohio facility, HRB contracted to transport the goods to destinations outside Ohio based on its customer needs. HRB did not own the trucks or distribution centers and no changes were made to the soap or its packaging at the distribution centers. VVF filed an application seeking a refund of CAT paid on bar soap receipts from 2010 through 2014. After the Ohio Tax Commissioner denied the refund claim, VVF appealed to the OTA. 

Under the CAT, gross receipts from the sale of tangible personal property occur in Ohio if the property is received in the state by the purchaser. In the case of delivery of tangible personal property by motor carrier, the place at which such property is ultimately received after all transportation has been completed is considered the place where the purchaser receives the property.  

In interpreting this provision, the BTA considered several cases addressing the relevant CAT sourcing statute, and a similar sourcing statute in effect when Ohio previously imposed a corporate franchise tax. In the cases addressing the CAT sourcing statute, the BTA determined that the taxpayers failed to show that Ohio was merely a stop in the transportation process and not the place where the goods were ultimately delivered after all transportation had been completed. However, the BTA noted in these decisions that the taxpayers could have prevailed if they had been able to show that the transportation ended outside Ohio. 

VVF argued that the soap should not be sourced to Ohio because the Ohio distribution center was an interim stop in the distribution chain and not the location where the soap was ultimately received. As a result, VVF argued that 96.84% of its HRB receipts should not be sourced to Ohio, and 52% of its receipts to another customer, Dollar General, should not be sourced to the state. The Commissioner argued that the trip from Kansas to Ohio should be treated as a taxable event separate from the trip from Ohio to another state. The Commissioner placed great emphasis on VVF’s records and subjective knowledge at the time the soap left Kansas. Because those documents indicated the soap bars were destined for Ohio, the Commissioner argued that the receipts should be sourced to Ohio. 

The OTA determined that VVF’s subjective knowledge at the initial shipping point was probative but not dispositive. Neither the statute nor the case law imposes a requirement of contemporaneous knowledge of the ultimate destination at the time of transportation. The OTA held that VVF carried its burden of proof for the HRB receipts for bars that were ultimately delivered outside Ohio. VVF presented sufficient evidence that the soap was not ultimately delivered to its customer in Ohio. The OTA agreed with the Commissioner that the sale of goods to HRB could be viewed as a transaction separate from the subsequent sale of those goods from HRB to its customers. However, the OTA determined that the ultimate delivery to HRB was not to the Ohio distribution center. From the Ohio facility, HRB again contracted to transport the goods outside Ohio based on customer needs. Although VVF met its burden for the HRB receipts, it did not meet its burden regarding the Dollar General receipts because its evidence was speculative. The OTA clarified that its analysis was confined to VVF’s receipts and that it made no findings concerning the receipts of HRB, the trucking companies, or the warehouse. 

One of the members of the three-member OTA panel filed a dissent and disagreed that the soap ultimately delivered outside Ohio should not be sourced to the state. Contrary to the majority’s finding, the dissent interpreted the relevant statute to require taxable gross receipts to be sourced where ultimately received by the purchaser in the sale generating the gross receipts, not where received by the ultimate purchaser. The decision, which may be appealed by the state, should be of interest to manufacturers and other businesses that sell their products to Ohio distributors and source these sales for CAT purposes as Ohio sales, but have proof that such distributors resell those products to a national market. 

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