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Ohio wants $210,000 in back taxes under the state’s commercial activity tax law.
In a matter that could affect the course of Internet tax laws in other states, the Ohio Department of Taxation has informed apparel and outdoor sporting goods retailer L.L. Bean Inc. that it owes the state $210,770 in back taxes, interest and penalties that accrued under the state’s commercial activity tax law.
The state’s commercial activity tax, sometimes called a business privilege tax, requires companies to pay a tax on the value of their gross receipts on sales to Ohio customers. As such, it is not a sales tax imposed on individual transactions, a spokesman for the Ohio Department of Taxation says.
Ohio enacted the law in 2005 and has phased it in gradually since then, with the law’s full 0.26% tax rate taking effect in the second quarter of 2009. That rate applies to taxable gross receipts in excess of $1 million for a full year. Businesses with more than $150,000 in taxable annual gross receipts in Ohio must register under the law and pay a $150 annual administration fee.
When the Ohio Department of Taxation initially informed L.L. Bean of what it owed under the CAT, L.L. Bean appealed the finding to the state’s tax commissioner, contending that the tax doesn’t apply to the retailer because it has no physical presence or nexus in Ohio.
L.L. Bean bases its argument on the Commerce Clause of the U.S. Constitution, with the retailer saying that without a physical presence in Ohio, the state cannot hold the retailer liable for sales-related taxes. The argument was upheld in a 1992 U.S. Supreme Court ruling that shields e-retailers from having to collect sales taxes in states where the retailers do not have a physical office, warehouse or store.
But the Ohio tax commissioner ruled that the commercial activity tax applies to all companies with a minimum economic presence in Ohio regardless of their physical presence, denied L.L. Bean’s appeal and issued a final determination on Aug. 10 that the retailer owed the state $210,770.
L.L. Bean has the option of appealing to the Ohio Board of Tax Appeals, but has not yet decided on its course, says George Isaacson, a partner with Brann & Isaacson, a Lewiston, ME, law firm that is representing L.L. Bean in the matter. Another option would be to appeal in state or federal courts.
At issue, Isaacson says, is whether the 1992 U.S. Supreme Court decision regarding physical presence applies to forms of taxes other than sales and use taxes imposed on consumers and usually collected and remitted by retailers. That has yet to be decided at the state court level, putting a lot of attention on what may happen in Ohio with the L.L. Bean case, Isaacson says.
“There’s been a great deal of interest surrounding this commercial activity tax,” he says. “A decision in an Ohio court would not be binding on other states, of course, but what happens in one state is often followed by tax administrators in other states.”
L.L. Bean is No. 24 in the Internet Retailer Top 500 Guide.