Earlier this week, the Ohio Supreme Court released its opinion Crutchfield Corp v. Testa. The Court’s 5-2 opinion held that United States Constitution’s Commerce Clause does not prohibit the State of Ohio from levying its commercial activity tax on out-of-state companies that sell products to Ohioans but have no physical presence in the state. This is bad news for taxpayers and could have major implications across the country.
In 2005, Ohio instituted a commercial activities tax based on the gross receipts of every person or corporation for the privilege of doing business in the state. Between 2005 -2010, Ohio’s Tax Commissioner levied a commercial activity tax on Crutchfield, a Virginia-based electronics retailer, for its sales to Buckeye State residents. Crutchfield refused to pay the levy, citing the United States Supreme Court’s decision in Quill Corp. v. North Dakota. Decided in 1992, Quill held that for a state to levy taxes on sellers, such sellers must have a “substantial nexus” with that particular state. If remote, out-of-state sellers lacked nexus, a state’s powers to tax such sellers are non-existent.
Crutchfield argued that the Quill decision required a physical presence in the state and as a Virginia-based company, Ohio had no authority to require them to pay the commercial activities tax. The State of Ohio disagreed – arguing that a threshold of $500,000 or more in gross sales met the “substantial nexus” standard established by Quill. Regrettably, the Ohio Supreme Court sided with the Tax Commissioner by holding that $500,000 establishes a “bright-line presence.” If upheld, this ruling would completely alter the definition of nexus.
The Ohio Supreme Court’s decision in Crutchfield is sure to be appealed. There are enormous problems with empowering state tax commissioners and departments of revenue to begin taxing out-of-state companies and individuals. It raises profound questions about the limits of government and it is misguided economics. National Taxpayers Union will monitor the case’s developments and its implications for taxpayers.