Ohio’s Board of Tax Appeals Unable To Address Constitutionality of Bright-Line Nexus Standard
March 13, 2014 Tax Advisor


Allows L.L. Bean to Move On in Fight Against Taxation

The Ohio Board of Tax Appeals (BTA) upheld an assessment for Ohio’s Commercial Activity Tax (CAT) against L.L. Bean, Inc., an out-of-state taxpayer with no physical connection to Ohio but who has significant sales activity within the state.  The BTA found that L.L. Bean met the “bright-line” nexus standards of the CAT by generating more than $500,000 in Ohio taxable gross receipts.  The BTA did not address L.L. Bean’s assertion that the nexus standards of the CAT violate constitutional protections provided to out-of-state taxpayers.  The BTA’s decision provides L.L. Bean the opportunity to appeal to the Ohio state courts to address the constitutional issues presented.

Nexus is the connection a taxpayer must have with a state to subject itself to taxation within the state.  Different taxes, such as income, sales and franchise taxes, require different levels of nexus to allow taxation under the protections offered to out-of-state taxpayers under the U.S. Constitution and federal law.  Generally, most state taxes require some physical presences within a state to permit taxation under these protections; however, many states have become increasingly aggressive with nexus standards that do not require physical presence.

Ohio is a leading example of this trend.  For purposes of the CAT, a taxpayer has nexus in Ohio if they have:

  • More than $500,000 in Ohio taxable gross receipts;
  • More than $50,000 in Ohio property or payroll; or
  • More than 50% of their overall amount of any one category within Ohio.

L.L. Bean is a worldwide provider of clothes and other products located in Maine with no physical connection in Ohio.  L.L. Bean generates its sales primarily through catalog and online sales.  L.L. Bean’s sales to Ohio customers exceeded the $500,000 threshold in every year since the CAT came into effect in 2005.

The Ohio Department of Taxation disagreed and assessed L.L. Bean delinquent CAT liabilities, including penalties and interest.  L.L. Bean claimed that Ohio’s nexus standard violated the U.S. Constitutional restraints on state taxation of out-of-state taxpayers.  The BTA is the first level of appeal for Ohio taxes; the BTA has historically refused to address state or federal constitutional issues.  As a result, the BTA’s ruling does not come as a surprise and serves as an opportunity for L.L. Bean to take its case to an Ohio state court that can address its constitutional arguments.

For questions on the effects of CAT nexus standards to your business or the potential impact of the L.L. Bean case, please contact us.

About the Authors

Robert M. Burak
Robert M. Burak
Partner Emeritus, Taxation Services


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