Ohio Tax - Manufacturers' Education Council

Ohio Tax 

Workshop S 

Ohio CAT, Nexus, 

Reporting/Filing & 

Sourcing Issues 

Thursday, January 27, 2011 

4:15 p.m. to 5:15 p.m.

Biographical Information 

John R. Trippier, CPA, Administrator, Audit Division, Ohio Department of Taxation 

30 E. Broad Street, 20 th Floor, PO Box 530, Columbus, Ohio 43216 

john_trippier@tax.state.oh.us 614.995.0724 

John rejoined the Ohio Department of Taxation in October 2003 as an Administrator in the Audit Division. 

John is involved with Sales and Use Tax, Personal Property Tax and Commercial Activity Tax. John 

worked with the Department for 2½ years as a sales and use tax agent and a corporate franchise tax 

agent in the Chicago office starting in 1989. 

John has worked over 11 years in public accounting as a state and local tax consultant for Coopers & 

Lybrand, KPMG Peat Marwick and most recently at RSM McGladrey, Inc. As a consultant, John assisted 

clients with sales/use, income/franchise, personal/real property, intangible and unclaimed property tax 

audits and appeals. John also assisted clients with refund reviews, corporate restructuring, compliance 

studies, nexus studies, voluntary disclosure and sales tax software implementation. 

John also worked 2 years with a long distance telecommunications provider in Dublin, Ohio as a state 

and local tax manager responsible for audits, appeals and state and local sales/use, personal/real 

property and income/franchise tax compliance. 

B.S., Otterbein College 

Paul R. Caja, Vice President Taxation, MTD Products, Inc. 

P.O. Box 368022, Cleveland, Ohio 44136-9722 

paul.caja@mtdproducts.com 330.558.3304 

Paul has over twenty years of tax experience, most of which were with the public accounting firms of 

Ernst & Young, LLC and PricewaterhouseCoopers, LLC. Paul managed a variety of SEC and privately 

held accounts. His experience ranges from running a significant outsource engagement to overseeing 

the financial provisions on large SEC clients. Paul has significant experience in compliance, planning and 

financial reporting as it relates to state and local, federal and international taxes. Paul has also served as 

the Federal Tax Manager for American Greetings, Inc. and in his current position at MTD Products, Inc. is 

responsible for all tax related duties of the Ohio-based corporation. Paul is a certified public accountant 

and a member of American Institute of Certified Public Accountants as well as the Cleveland chapter of 

the Tax Executives Institute. Paul received his Bachelors of Science in Accounting from Indiana 

University and he received his Masters of Taxation from Akron University. 

David L. Cook, Director – State & Local Taxes, PricewaterhouseCoopers, LLP 

200 Public Square, 18th Floor, Cleveland, Ohio 44114 

david.l.cook@us.pwc.com 216.875.3027 

David is a Director in PwC’s Cleveland tax practice and is responsible for SALT consulting activities in 

Cleveland and northern Ohio, as well as the Pittsburgh, Buffalo and Rochester markets. He has 18 

years of experience serving publicly traded and privately held companies in the manufacturing, service, 

retail and distribution industries. David specializes in multi-state strategic income and franchise tax 

planning and restructuring, and also has significant experience with merger and acquisition planning, 

audit and appeal resolution, and property tax services. He also has extensive project management 

experience on large-scale SALT restructuring projects. 

David has a Bachelors of Business Administration degree from the University of Michigan and is a CPA. 

He has been a speaker at local tax conferences and seminars sponsored by the Ohio Society of Certified 

Public Accountants, the Tax Executives Institute, and the Manufacturers’ Education Council. He is a 

member of the American Institute of Certified Public Accountants and the Ohio Society of Certified Public 

Accountants.

Biographical Information 

Laura M. Stanley, Mgmt. Analyst Supervisor, CAT Div., Ohio Department of Taxation 

P.O. Box 530, Columbus, OH 43216 

Laura_Stanley@tax.state.oh.us 614.644.5764 

Laura Stanley is a Management Analyst Supervisor in the Commercial Activity Tax (CAT) Division, and 

assists Sarah O’Leary in her capacity as Legal Counsel of the CAT, Motor Fuel, and Excise Tax Divisions 

for the Ohio Department of Taxation. Laura’s career with the Ohio Department of Taxation began just 

four years ago which is why this biography is very short. As a Management Analyst Supervisor, Laura is 

instrumental in several projects in the CAT Division. Laura graduated from The University of Akron in 

Akron, Ohio with a Bachelors of Science in Political Science & Criminal Justice and an Associate of 

Applied Science in Criminal Justice Technology. In May of 2009, Laura earned her J.D. from Capital 

University School of Law in Columbus, Ohio. 

Michael R. Baker, SALT Director, RSM McGladrey Inc. 

1001 Lakeside Ave. E. Ste. 1400, Cleveland, Ohio 44114 

michael.baker@mcgladrey.com 216.798.3265 

Mike has eighteen years of focused experience in state and local tax issues. Prior to joining RSM 

McGladrey Inc., Mike was with Plante & Moran serving as their Ohio State & Local Tax Leader. Previous 

to that Mike spent six years as an attorney with the Ohio Department of Taxation. While there, he 

specialized in sales, use, and corporation franchise tax issues. Mike currently serves a variety RSM 

McGladrey Inc. clients focusing on manufacturing, consumer products and the financial services 

industries. His experience has given him a thorough knowledge of Ohio taxation and multi-state 

corporate income taxation and planning. Mike has authored numerous articles and is a frequent speaker 

on state and local taxation topics. 

Mike is admitted to the Ohio Bar and is a member of the American and Ohio Bar Association Taxation 

Committees. As well, Mike is a member of the taxation committee of the Ohio Chamber of Commerce. 

Mike received his Bachelors of Science from Bowling Green University and he received his J.D. from 

Capital University Law School.

Ohio CAT 

Nexus, Reporting/Filing, & Sourcing Issues 

Ohio Tax Conference 

Session S 

January 27, 2011 

1

Presenters 

Michael Baker 

• State & Local Tax Director - RSM McGladrey, Inc. 

Paul Caja 

• Vice President – Taxation - MTD Products, Inc. 

David Cook 

• State & Local Tax Director - PricewaterhouseCoopers LLP 

Laura Stanley 

• Legal Counsel – Commercial Activity, Motor Fuel, & Excise Tax Divisions - Ohio 

Department of Taxation 

John Trippier 

• Administrator, Audit Division - Ohio Department of Taxation 

2

Agenda 

• LL Bean Case 

– Constitutional Nexus 

Challenges 

• Filing Group Issues 

• Receipts Issues 

• Sourcing Issues 

• Miscellaneous 

• Voluntary Disclosure Program 

• Penalty Provisions 

3

LL Bean Case / Constitutional 

Nexus Challenges 

4



• Bright Line Nexus – ORC Section 5751.01(I) 

• Property with an aggregate value of $50,000 during the year; 

• Payroll during the year of at least $50,000; 

• Taxable gross receipts of at least $500,000 000 during the year; 

• At least 25% of the person's total property, total payroll, or 

total sales in the state during the year; or 

• Is domiciled in this state as an individual or for corporate, 

commercial, or other business purposes. 

5



• Bright Line Nexus – ORC Section 5751.01(I) () 

• Note: Owned property is valued at original cost and rented property 

is valued at eight times the net annual rental charge 

• Note: Payroll includes: 

• (a) Any amount subject to withholding by the person under 

section 5747.06 of the Revised Code; 

• (b) Any other amount the person pays as compensation to an 

individual under the supervision or control of the person for 

work kdone in this state; t and 

• (c) Any amount the person pays for services performed in this 

state on its behalf by another 

6



• L.L. Bean, Inc. – Certificate of Final Determination 

• Issued August 10, 2010 

• L.L. Bean acknowledged receipts in excess of $500,000 annually to 

customers located in Ohio 

• L.L. L Bean argued that it did not have a physical presence and the imposition 

of the CAT violated the Commerce Clause 

• Commissioner determined that substantial nexus existed as a result of the 

“continuous, systematic, and significant exploitation of the economic 

marketplace in Ohio” 

• Commissioner reserved ruling on the assertion that the company lacked 

physical presence, and will render findings on this issue if an adverse ruling 

is issued by the BTA and the case is remanded 

• L.L. Bean has appealed to Board of Tax Appeals 

• First case challenging the constitutionality of the CAT nexus standard 

• Anticipated 4-5 year time frame for BTA decision 

7



• What are the implications of the L.L. Bean case to person’s in similar 

situations that meet the $500,000 receipts Bright Line nexus threshold 

but don’t have physical presence 

• Persons identified by the state – audit & assessment process 

• No abeyance procedures 

• Audits and assessments are not being held in abeyance 

• Petitions for Reassessment required to protest 

• Certificates of Final Determination are not being held in abeyance 

• Appeal to the BTA may be required 

• Likely held in abeyance at BTA level 

• Taxpayer Options 

• Registration and payment – may be followed by protective refund claims 

• Registration and filing (with actual receipts) but no payment (protest) – 

immediate assessments issued with 20% penalties for failure to file and 

failure to pay 

• No registration (full protest) – additional 35% failure to register penalties 

imposed 

8






• Persons not identified by the state 

• Taxpayer Options 

• Voluntary Disclosure Agreement process 

• Registration, payment, and protective refund claims 

• Wait and see 

• Be aware of Nexus Unit and Audit Division! 

• Completed 31 nexus audits in 2010 

• 2010 CAT revenues generated of approximately $2.1 million 

• 12 additional nexus audits currently in progress 

9






• Protective Refund Claim Process 

• Procedures will be established similar to Grocer’s case claims 

• File claims and identify as L.L. Bean / constitutional nexus issues 

• Request holding in abeyance pending L.L. Bean decision 

• Department will hold at CAT Division pending L.L. L Bean ruling 

• Query: What about physical presence factual determinations 

• Other Issues 

• Caution – In general, Department’s position is that statute is not running for 

any person not registered even though the person would be a member of a 

group that is registered and filing 

• Why was L.L. L Bean sent to the BTA rather than the Ohio Supreme Court 

10

Administrative Update – CAT Division’s 

New Nexus Unit 

• Hired employees to focus on CAT bright-line nexus to discover 

persons not registered 

• 1 supervisor and 8 agents 

• Began November 2009 

• Letters Sent: 8,600 

• Registered Taxpayers: 3,308 

• Nexus Assessments Issued: 6,394 

• Collected $13M 

• Will issue estimated assessments 

• Includes 60% penalty 

• $1,000 penalty for failure to register 

* Statistics as of October 31, 2010 

11

Filing Group Issues 

12


• Retroactive Consolidations 

• Consolidated filing elections are always available 

when made prior to the filing of the current 

quarterly return 

• Department will consider retroactive consolidation 

elections on a case by case basis 

• Generally, if request is made when discovered by the Nexus 

Unit or when under audit, the request has been denied 

• If taxpayer comes forward voluntarily, Department has typically 

allowed retroactive consolidation 

13


• Changes in Taxpayer Group 

• Must report changes due to acquisitions / 

divestitures of entities and adjust registered group 

by the filing date of the current quarterly return 

• Successor Liability Issues 

• ORC Section 5751.10 contains special rules related to a taxpayer that 

sells a business, sells 75% or more of the business assets, or quits the 

business 

• CAT liability becomes due and payable immediately, and a return must 

be filed within 15 days 

• Successor of the business must withhold a sufficient amount of the 

purchase money to cover the amount due, until seller produces proof of 

payment and/or no outstanding liability 

• If purchaser fails to withhold, successor liability applies and purchaser 

is personally liable for up to amount of purchase price 

14


• Common Ownership 

• Vertical ownership and control test 

• A person is a member of a group if: 

• A specified portion (i.e., 50% or 80%) of the value of 

person’s ownership interest is owned and controlled 

by common o owners; and 

• The higher-tiered entity has the ability through its 

voting rights to control the operations of the lower- 

tiered entities at each level of the vertical chain 

15


Comparison of Consolidated v. Combined Filing 

• Consolidated Elected • Combined Taxpayer 

• At least 50% or 80% 

• More than 50% common 

common ownership 

ownership 

• Must include all entities • Combined only required to 

regardless of nexus with include entities with Ohio 

Ohio 

nexus 

• Option to include or exclude • Non-US entities included if 

non-US entities 

Ohio nexus 

• Gross receipts between 

• Gross receipts resulting from 

members are excluded payments between members 

are subject to the CAT 

16


• Complex Filing Groups 

• Audit Process – Identifying the “Taxpayer” 

17


• Complex Filing Groups (continued) 

• Private Equity / Venture Capital Structures 

• Taxpayer group can be very large and tied together by 

“controlling” interests (funds that are the GP in 

complex structures) that have only minimal financial 

interests in investee companies 

• “Supergroup” concept 

• Critical Issues 

• Practicality of filing a single return for the Supergroup 

• $1 million tax bracket 

• Consolidated filing election availability 

• Request to File Separately approach – practical 

solution 

18


• Complex Filing Groups (continued) 

• Separate Filing Election for Combined Group 

Member (CAT Form RTFS) 

• Member of combined group can request permission to 

file separately 

• Requires Tax Commissioner approval 

• Does not relieve tax liability of member or group 

• Commissioner may allow breakout of separate entities 

and/or sub-groups (on a combined basis only) 

• See ORC Section 5751.012 and OAC 5703-29-08 

• Query – Why not allow consolidated sub-groups 

19


• Complex Filing Groups – Examples 

(See Appendix A for more details) 

• Example O-1 

• Example MG-1 

20

Example O-1 

Taxpayer initially filed four 

separate combined groups 

and one separate filer: 

• Group 1: ABC group 

• Group 2: DEF group 

• Group 3: GHI group 

• Group 4: MNO group 

• Separate Filer: JKL LLC 

Department upon audit 

adjusted to one filing 

group: 

• Group 1: ABC, DEF, GHI, 

JKL LLC, MNO 

• Four $1 million exclusions 

were eliminated 

XYZ 

(Non-Nexus 

Common Owner) 

ABC DEF GHI 

JKL LLC 

MNO 

ABC's Subs DEFs Subs GHI's Subs MNO's Subs 

(26) (8) (14) (3) 

21

Example MG-1 

K 

J 

Taxpayer initially filed three 

separate consolidated 

groups at 80% 

• Group 1: J, E, M, T 

• Group 2: S, O 

• Group 3: Y, Z, A 

Department upon audit 

adjusted d to two filing 

groups: 

25% 

Y 

Z 

100% 

75% 

100% 

E 

100% 100% 

75% 

T 

M 

• Consolidated Group 1: J, E, 

M, T, S, O 

• Combined Group 2: J, Y, Z, A 

• Inter-member receipts 

exclusion among Y, Z, A was 

eliminated 

A 

100% 

S 

100% 

25% 

O 

22

Receipts Issues 

23

Types of Gross Receipts 

(See Appendix A for further discussion) 

• Sales 

• Construction allowance 

• Rents 

• Royalties 

• Sublease income 

• Sales to federal government 

• Advertising co-op income 

• Management fees/intercompany 

charges 

• Sale of inventory as part of 

asset sale 

• Sale and leaseback of inventory 

• Trade-ins 

• Recycling receipts / credits 

• Freight Damage Claims 

• Freight Charges / Pass-through 

• Payroll reimbursement for 

managed property 

• Advertising bartering 

• Profit split 

• Client reimbursements 

• Warranty reimbursement 

• Gift card income 

24

Troublesome Receipts Issues 

(See Appendix A for further discussion) 

• Miscellaneous Receipts – not in “normal” receipts 

accounts, contra revenue or contra asset accounts, 

negative expense accounts 

• Examples: 

• Cooperative advertising revenues (#2) 

• Freight pass-through revenue (#4) 

• Client reimbursable expenses (#31) 

• Intercompany reimbursements (#29) 

• “Allowances” - warranties, advertising, 

construction, etc. (#1, #12) – contrast with 

exclusion for “returns and allowances” 

25


26


• Intangibles 

• Services 

• Tangible Personal Property 

27


• Intangibles – ORC 5751.033(F) 

• Trademark/Tradename 

• Patent 

• Copyright 

• “Similar Intellectual Property” 

• “Right to use” or “use of” 

• No mention of a benefits test 

28


• Intangibles 

• Actual information identifying right to use or 

use of 

• Is it available 

• How hard is it to get 

• Other means to apportion/situs 

• Varies by type of intangible 

• Nielson ratings 

• Population 

29


• Services – ORC 5751.033(I) 

• …gross receipts from services are sitused to 

Ohio in the proportion that the purchaser’s 

benefit in Ohio with respect to what was 

purchased bears to the purchaser’s benefit 

everywhere with respect to what was 

purchased 

30


• Three things you need to know about 

services: 

• Who is the purchaser 

• What is the purchaser’s benefit 

• Where is the benefit received (to determine 

situs) 

• Reasonable, consistent and uniform 

• OAC 5703-29-17 

31


• Tangible Personal Property – ORC 

5751.033(E) 

• Sitused to Ohio if the purchaser ultimately 

receives the tangible personal property in Ohio 

after all transportation has been completed 

• Title transfer has no impact 

• Transportation by the purchaser (or designee) is 

considered ed for ultimate destination 

• Ultimate destination must be known at the time of 

sale (Information Release 2005-17) 

32


• Tangible Personal Property – 

Sale 

Indiana 

Mfg 

Company 

A 

$100 

Kentucky 

Retail 

Company 

B 

Shipment 

directly to 

Company C 


Company 

C 

Sale 

$150 

33


• Tangible Personal Property – 

Sale 

Yes 

Indiana 

Mfg 

Company 

A 

$100 

Kentucky 

Retail 

Company 

B 

Shipment 

directly to 

Company C 


Company 

C 

Sale 

$150 

Yes 

34


• Can the Qualified Distribution Center (QDC) 

look-through concept be used in non-QDC 

situations 

35

Miscellaneous Issues 

36

Miscellaneous Issues 

• Voluntary Disclosure Program 

• Penalty Provisions 

37

Administrative Update – Voluntary 

Disclosure Agreements (VDAs) 

• Information Release CAT 2008-01 – Revised 

September 2010 

• Allows VDA for CAT 

• Interest only – no penalties (as long as taxpayer never 

contacted via audit/compliance) 

• Beginning g January 1, 2011, a look back period of 3 

years plus current year will go in effect 

• Steps for VDA: 

• Send request for VDA in writing to CAT Divisioni i 

• ODT sends letter, contract, and registration/returns 

• Register, file returns, pay tax 

• ODT bills for interest 

38

Administrative Update –VDAs (cont.) 

VDA Stats: 

• Total Requests Received: 246 

• Total Requests Cancelled: 38 

• Total Requests Completed: 118 

• Total Amount Collected: $3,361,364361 364 

* Statistics as of October 31, 2010 

Contact Information: 

Jack Durham 

614.387.1298 

Jack_Durham@tax.state.oh.us 

39

Administrative Update 

– Penalties 

• Leniency Policy 

• Nexus Unit discovery 

• Audits 

• Assessments 

40

Questions 

41

Contact Information 

Michael Baker, State & Local Tax Director - RSM McGladrey, Inc. 

1001 Lakeside Ave, E., Ste. 1400, Cleveland, OH 44114 

Phone 216-522-1365 Fax 216-875-1620 Mobile 216-798-3265 

Michael.Baker@mcgladrey.com 

com 

Paul Caja, Vice President - MTD Products, Inc. 

5903 Grafton Road, Valley City, Ohio 44280 


Paul.Caja@mtdproducts.com 

David Cook, Director - PricewaterhouseCoopers LLP 

200 Public Square, Suite 1800, Cleveland, Ohio 44114 


david.l.cook@us.pwc.com 

42

Contact Information (continued) 

Laura Stanley, Legal Counsel 

Commercial Activity, Motor Fuel, & Excise Tax Divisions, 

Ohio Department of Taxation 

Phone 614-644-5764 

Laura_Stanley@tax.state.oh.us 

John Trippier, Administrator 

Audit Division, Ohio Department of Taxation 

Phone 614-995-0724 

John_Trippier@tax.state.oh.us 

43

2011 Ohio Tax Conference 

Ohio Commercial Activity Tax (CAT) Audit Experiences 

Appendix A 

OWNERSHIP 

Combined 

Adding the Common Owner: the Department has instructed the auditors to determine who the 

common owner is for each taxpayer group. This approach requires the auditor to research for 

owners even if they are not part of the registration. 

Example O-1. Initially, ABC, DEF, GHI and MNO all registered as different combined groups. 

JKL, LLC registered as a separate taxpayer. The Department (as part of its selection process) 

selected DEF for audit. When completing its research, the Department identified that the common 

owner was not part of the registration for any of the combined groups. Further, the Department 

determined that ABC, DEF, GHI, MNO and JKL, LLC (and all of their subsidiaries) should be 

part of one combined group. Because XYZ is a non-nexus common owner, it is not required to 

register per OAC 5703-29-02(F). By creating one combined taxpayer, the Department eliminated 

the $1,000,000 exclusion for ABC, GHI, MNO and JKL, LLC. 

Diagram O-1. 

XYZ 

(Non-nexus 

Common Owner) 

100% 

ABC DEF GHI JKL, LLC MNO 

100% 100% 100% 100% 

ABC’s Subs 

(26) 

DEF’s Subs 

(8) 

GHI’s Subs 

(14) 

MNO’s Subs 

(3) 

1



Appendix A 

Example O-2. Initially the taxpayer only registered MCT Sales as a separate taxpayer. Upon 

audit, the Department identified that MCT, EVT and MCT Sales should have filed as a combined 

group. JAT and JST did not meet the nexus requirements, so they do not need to be part of the 

combined group. The taxpayer has requested that we allow a retroactive consolidated elected 

group. The Department has denied the request for a retroactive consolidation, but the taxpayer is 

free to change its filing at any time for future reporting purposes. 

Diagram O-2. 

MCT 

100% 

EVT JAT JST MCT Sales 

Consolidated 

Adding the Common Owner—Individual: the Department has instructed the auditors to 

determine who the common owner is for each taxpayer group. This approach requires the auditor 

to research for owners even if they are not part of the registration. 

There have been numerous examples of audits where a consolidated elected group (50% or 80%) 

has registered without including its individual common owner. Under audit, we determine 

whether the individual meets the de minimis test ($4,500 in taxable gross receipts) and include the 

individual if the individual has more than $4,500 in taxable gross receipts. 

2



Appendix A 

Joint Venture 

Example JV-1. Initially taxpayer filed a consolidated elected group at 50% including ABC, DEF, 

GHI and JKL. Upon review, the Department determined that although it is permissible to show 

ABC as the primary filer on the CAT registration, it is improper to classify it as the “common 

owner” for the 50% consolidated elected group. ABC does not have a 50% controlling interest 

in the other members of the 50% consolidated elected group. However, Mr. X and Mr. Y, the two 

individual shareholders, who have a 50% ownership interest in each of the entities listed as 

members of the 50% consolidated elected group meet the common ownership test. Therefore, 

either of them could elect to be the common owner of the 50% consolidated elected group. Under 

review, the taxpayer agreed that Mr. X would be the “common owner” for all the entities listed as 

members of the ABC 50% consolidated elected group. Mr. X will be jointly and severally liable 

for 100% of the consolidated elected group’s tax liability. 

It should be noted that under review, the Department also determined that Mr. X and Mr. Y, in 

spite of their common owner status, were not required to file as a part of the consolidated elected 

group since neither shareholder has $4,500 in taxable gross receipts and therefore met the de 

minimis test for exclusion from the consolidated group. 

Diagram JV-1. 

Mr. X 

Mr. Y 

25% 

Mr. Z 

25% 

50% 

50% 

50% 

ABC, Inc. DEF Inc. 

GHI, Inc. 

JKL, LLC MNO, LLC 

3



Appendix A 

Example JV-2. The Department was conducting an audit of RS who had filed as a consolidated 

elected group at 50%. Neither 50% owner (Mr. R or Mr. S) was included in the group nor chose 

to have a consolidated elected group at 50%. 

Upon audit, the Department determined that neither Mr. R nor Mr. S had more than $4,500 in 

taxable gross receipts. The question arose — could RS choose a 50% consolidated group when 

neither of its common owners elected 50% consolidation The Department determined that RS 

could make the election. 

Diagram JV-2. 

Mr. R 

Mr. S 

50% 

RS 

50% 

TUV 

100% 

IJK 

WXY 

LMN 

ZAB 

OPQ 

CDE 

RST 

FGH 

SJW 

95% 

5% 

82%



Appendix A 

Example JV-3. The Department was conducting an audit of DEF and identified the joint venture 

(LLC) between DEF and XYZ. DEF filed as part of a combined taxpayer group and XYZ filed as 

part of a 50% consolidated elected group. Upon audit, the Department determined that XYZ 

would be required to pick up 100% of LLC’s taxable gross receipts because it constructively 

owns 50% of LLC. 

Diagram JV-3. 

DEF 

XYZ 

100% 100% 

50% 

A 

B 

49% 

1% 

LLC 

Multiple Groups 

Example MG-1. Taxpayer initially filed three separate consolidated elected groups at 80%: 

Group 1: J, E, M and T (black shaded) 

Group 2: S and O (diagonal lines) 

Group 3: Y, Z and A (grey shaded) 

Under review, the Department determined that E constructively owned 100% of S and O and as a 

result the Department included S and O in the consolidated elected group of J, E, M and T. 

Further, the Department determined that a taxpayer cannot have more than one consolidated 

elected group within the same corporate structure. As a result, we eliminated the consolidated 

group of Y, Z and A. Y, Z and A was forced into a combined return with J, their common owner. 

(Note: J’s gross receipts would be reported with the consolidated elected group and not the 

combined group.) Based on the changes, S and O’s $1,000,000 exclusion was eliminated and the 

inter-member exclusion between Y, Z and A was eliminated. 

5



Appendix A 

Diagram MG-1. 

K 

J 

25% 

75% 

100% 

100% 

Y 

E 

M 

100% 

100% 

Z 

75% 

T 

100% 

25% 

A 

S 

100% 

O 

Voting Rights 

A taxpayer owned 20% of the Common B stock of XYZ Company. The Common B stock 

provided 10 votes for each share owned. The Common A stock only provided for 1 vote for each 

share owned. As a result of its 20% ownership of the Common B stock, the taxpayer actually 

controlled 54% of the voting rights. The Department determined that the taxpayer was the 

common owner of XYZ Company. 

Member Managed LLC 

A managing member of a member managed LLC had all the rights to control the LLC per the 

LLC agreement. The Department determined that the managing member was the common owner 

as it controlled the LLC (and the LLC’s subsidiaries) the same as a general partner controls a 

limited partnership. See Ohio Administrative Code 5703-29-02(D)(3) for general partner 

guidance. 

6



Appendix A 

GROSS RECEIPTS 

1. Warranty allowance 

Taxpayer received an allowance for handling warranty repairs for the manufacturer. The taxpayer 

accounted for the receipts in its warranty expense account. The Department determined that the 

receipts were taxable and picked up 100% of the allowance (no deduction for expenses). 

2. Co/op advertising 

Taxpayer received cash from manufacturers for placing the manufacturer’s products in the 

taxpayer’s weekly advertisements. The taxpayer accounted for the receipts as offsets in its 

advertising expense account. The Department determined that the receipts were taxable and 

picked up all amounts received from the manufacturers (no deduction for expense). 

3. Recycling receipts 

Taxpayer recycled the cardboard boxes that it received when purchasing products from its 

manufacturers/suppliers. The taxpayer accounted for the receipts received from the recycler as 

other income. The Department picked up the entire amount of recycling receipts. 

4. Pass-through of Freight 

The taxpayer sold and delivered stone to its customers charging separately for the stone and the 

delivery. The taxpayer hired third parties to deliver the stone. The taxpayer used the following 

accounting entries: 

Account Debit Credit 

Time of sale: 

A/R 105 

Sales 100 

A/P (Delivery) 5 

Payment from customer: 

Cash 105 

A/R 105 

Payment to delivery vendor: 

A/P (Deliver) 5 

Cash 5 

The taxpayer argued that the amount for freight was just a pass-through to the delivery vendor. 

The Department determined that the taxpayer did not have an agency relationship with either the 

7



Appendix A 

customer or the delivery vendor. As a result, the freight was a gross receipt even if the amounts 

were not reflected in sales. The Department also did not allow for a deduction related to the 

amount paid to the delivery vendor. 

5. Internet advertising receipts 

The taxpayer (a retailer) charged customers for advertising on the taxpayer’s website. The 

taxpayer accounted for the receipts in other income. The Department picked up the receipts as 

taxable gross receipts. 

6. Mandatory product recall 

The taxpayer (a retailer) charged vendors a mandatory product recall fee for the costs of removing 

the recalled inventory from the shelves and warehouse. The taxpayer accounted for the receipts in 

other income. The Department picked up the receipts as taxable gross receipts. 

7. Sale of inventory from asset sale 

The taxpayer sold a division as part of an asset sale. The sale included inventory and fixed assets. 

The taxpayer accounted for the receipts in other income. The Department picked up the sale of 

the inventory as a taxable gross receipt. Note: the sale of the fixed assets was excluded under R.C. 

5751.01(F)(2)(c). 

8. Sale and leaseback of inventory 

The taxpayer sold railroad freight cars as well as leased railroad freight cars. The taxpayer would 

sometimes take a railroad freight car from inventory and sell it to a bank and lease it back to use 

in its leasing business. The Department determined that the sale to the bank was a taxable gross 

receipt. 

9. Business Interruption insurance 

The taxpayer had a fire destroy a part of its manufacturing facility. The taxpayer had purchased 

business interruption insurance for just such an occurrence. The Department determined that the 

insurance proceeds were taxable gross receipts. 

10. Trade-ins 

The taxpayer accepts trade-ins when selling its product. The taxpayer deducted the trade-ins from 

its taxable gross receipts. The Department denied the deduction as trade-ins are not allowable as 

deductions. 

8

11. Government contracts 



Appendix A 

The taxpayer sold its services to the federal government and excluded those gross receipts from 

its CAT return. The Department denied the exclusion of these gross receipts as there is no 

deduction for gross receipts received from the federal government (or any state or local 

governmental jurisdiction). 

12. Construction allowance 

The taxpayer (a retailer) leased several of its retail locations. In some situations, the taxpayer will 

want to make improvements to the leased property. When the lessor agrees with the 

improvements, the lessor will pay (or credit future rents) the taxpayer for making the necessary 

leasehold improvements. The Department determined that the amounts received were taxable 

gross receipts for the taxpayer. 

13. Freight claims 

The taxpayer hired XYZ to handle all of its shipping needs. XYZ owns the tractors and provides 

the driver while the taxpayer owns the trailers and lets XYZ use them. During the shipment, 

inventory that XYZ has picked up for the taxpayer may be damaged (as a result of XYZ’s 

services). If damaged, the taxpayer will file a freight claim with XYZ to recoup the amount of the 

damage. The Department determined that the amounts received by the taxpayer from XYZ are 


14. Back-haul credits 

The facts are the same as stated in the Freight claims example above. XYZ may arrange to 

provide shipping services for unrelated companies on the return trip instead of returning with an 

empty trailer (i.e., backhauling). The taxpayer will receive a portion of the revenue that XYZ has 

earned because XYZ has used the taxpayer’s trailers. The taxpayer accounted for the amount in 

its Other Income account. The Department determined that the amount received by the taxpayer 

was a taxable gross receipt. 

15. Uniform reimbursement 

The taxpayer purchased uniforms for sale to its employees. The employees pay for the uniforms 

through payroll reimbursement. The Department determined that the amounts received from the 

taxpayer’s employees were taxable gross receipts. [EXCLUDED AS OF 7/1/2009] 

16. Rewards Points Program 

The taxpayer (a hotel) has a rewards program, which is operated by a subsidiary of the hotel, 

DEF. The hotel filed as a combined group for CAT purposes. Rewards points are earned by the 

hotel’s customers when staying at its hotel or at a franchised hotel. The hotel or the franchisee 

pays DEF for the points earned. When the hotel’s customer redeems the points on another hotel 

9



Appendix A 

stay, DEF pays the hotel or the franchisee. The amounts received by DEF were determined to be 

taxable gross receipts (without reduction for the amounts paid out by DEF). 

17. Payroll cost reimbursement for managed property 

The taxpayer (a hotel franchisor) franchises hotels to third parties. As part of the franchise 

agreement the taxpayer can provide hotel management services (including providing employees 

to manage the hotel) to the franchisee. The taxpayer bills for the management services and 

separately states the employees’ payroll costs as part of the charge. The Department determined 

that the amounts received by the taxpayer for the payroll costs were taxable gross receipts. 

18. Warranty repair 

The taxpayer purchases trucks that it uses in its business. The taxpayer needs to have the trucks 

on the road as much as possible and purchases spare parts that it anticipates will break. The 

taxpayer has worked out a deal with the truck manufacturer to repair the trucks when the trucks 

are under warranty. The taxpayer bills the manufacturer for the labor it incurred to make the 

repair and for the part it uses to repair the truck. The manufacturer sends cash back to the 

taxpayer for the labor charge and a replacement part for the spare part used in the repair. The 

Department determined that the amounts received for the labor are taxable gross receipts. 

Because the part was under warranty, the value of the part was not determined to be a taxable 

gross receipt. 

19. Chargeback 

There is a process in the pharmaceutical industry called the chargeback. The parties involved in 

this are the manufacturer, the wholesaler, a group purchasing organization (also known as a 

buying group), and the buyer. The buyer, such as a hospital or a drugstore, may join a group 

purchasing organization (GPO) to negotiate a better price for purchasing large volumes of drug 

products. The GPO negotiates with manufacturers to obtain the best contract prices for its 

members. A typical drug manufacturer may have to negotiate thousands of contracts per year 

with hundreds of different GPOs. These GPOs may contain over 100,000 individual members. 

To simplify the distribution of their drug products, manufacturers also negotiate selling drug 

products in large quantities to wholesalers at specified catalog prices. The wholesalers then stock 

their multiple distribution centers with the drug products. 

Buyers purchase the drug products from wholesalers at the agreed GPO contract prices. The 

chargebacks occur when the wholesaler sells the drug products at a contract price lower than what 

it paid. The chargeback is the difference between the manufacturer's price to the wholesaler and 

the contract price to the customer. The wholesaler will submit a chargeback request to the 

manufacturer on a regular basis (daily or weekly). Each chargeback request may contain 

thousands of line items for review. 

10



Appendix A 

Under audit, a manufacturer has deducted the amounts paid as chargebacks from its gross 

receipts. The Department has determined that the chargebacks are allowable deductions for the 

manufacturer. 

20. Sale of rental car inventory 

The taxpayer (a rental car company) sold its rental cars to wholesalers. The taxpayer did not 

include the proceeds of the car sales in its gross receipts for CAT purposes. The Department 

agreed that the sales were excluded under R.C. 5751.01(F)(2)(c) — sale of IRC 1221 or 1231 

property. 

21. Advertising bartering 

The taxpayer obtains a discount on future purchases from its vendors for advertising they provide 

on behalf of their vendors. The taxpayer solicits the arrangement; it is not sought by their 

customers. The taxpayer accounts for the discount as a contra-expense. The Department 

determined that the amount of the discount received by the taxpayer was a taxable gross receipt. 

22. Profit split - food management 

The taxpayer hires GHI (an unrelated 3rd party) to manage its food service operations. The 

taxpayer gets a % of the sales made by GHI. Additionally, the taxpayer shares in the profits/losses 

made by GHI. The Department determined that the amounts received (% of sales and profits) 

would be taxable gross receipts. 

23. Non-taxable food 

The taxpayer used its sales tax returns to complete its CAT return. The taxpayer used net taxable 

sales and did not include non-taxable food in the CAT return. 

24. Homeowner construction allowance 

The taxpayer, a home builder, deducted the construction allowance that it provided to its 

customers for work that will be performed by the customer instead of the homebuilder (e.g., 

septic system, drive way, fire place, etc.). The taxpayer receives the entire amount of the home 

loan ($200,000) from the bank and accounts for it as income. The amounts that it pays to its 

customers for work the customer will complete (construction allowance) are deducted from 

income as a contra-revenue. The Department determined that the deduction was not allowable for 

CAT purposes. 

25. Land - developer to homeowner 

The taxpayer, a home builder, purchases land from a developer and immediately sells it to the 

home owner (its customer). The taxpayer did not include the proceeds from the sale of the land as 

11



Appendix A 

a gross receipt. The Department determined that the proceeds from the sale of the land would be a 

taxable gross receipt. 

26. Rent receipts offset in expense 

The taxpayer sublet real property and offset the rental expense with the amounts received by 

subletting. The Department picked up the full amount of the sublet income. 

27. Concessionaire Expense 

The taxpayer hires concessionaires to operate its concessions. The contract provides that the 

taxpayer receives 65% of the sales and the concessionaire gets 35%. The contract also provides 

that the taxpayer will collect all monies and pay the 35% to the concessionaire. The taxpayer 

accounts for 100% of the sales as income and offset the 35% as a deduction to the income 

account. The Department determined that the taxpayer will need to include 100% of the sales as 


28. Tooling reimbursements 

The taxpayer is a manufacturer of sun roofs for motor vehicles. The taxpayer has a part of the sun 

roof manufactured by another manufacturer (contract manufacturer). The taxpayer develops 

tooling that will be reimbursed by its customer (auto manufacturer) that it sends to the contract 

manufacturer. The Department determined that the amounts received for the tooling are taxable 

gross receipts. 

29. Inter-company reimbursements 

A taxpayer that filed as a combined group did not include inter-company reimbursements 

received from other members in the group. The Department determined that the reimbursements 

were taxable gross receipts as there is no deduction or exclusion for inter-member receipts for 

combined filers. 

30. Recovery of bad debts 

The taxpayer did not include recoveries of bad debts as taxable gross receipts. The taxpayer 

netted the recoveries in the bad debt expense account. The Department determined that the 

recoveries were taxable gross receipts and picked up all recoveries. 

31. Client reimbursable expenses 

The taxpayer (a consulting firm) bills for its services and separately states reimbursable expenses. 

The taxpayer did not include reimbursable expenses in its CAT filing. The Department 

determined that the amounts received for reimbursable expenses are taxable gross receipts. 

12

32. Oil Exchanges 



Appendix A 

The taxpayer (an oil company) exchanges oil/gas it owns in Columbus, Ohio for oil/gas another 

oil company owns in Van Wert, Ohio. The taxpayer then sells the oil/gas it now owns in Van 

Wert, Ohio to a customer located in Van Wert. The taxpayer included the gross receipts from its 

sale of the oil/gas to its customer in Van Wert.. The Department determined that the taxpayer also 

should have included as taxable gross receipts the amount it exchanged with the other oil 

company. Further, the other oil company would also need to include as taxable gross receipts the 

amount it exchanged with the taxpayer. 

33. Agency 

The taxpayer argued that the relationship it had with independent contractors the taxpayer 

contracted with to distribute tangible personal property was an agency relationship. The taxpayer 

marked up the tangible personal property it purchased by 8% when selling the product to the 

independent contractors. As a result, the taxpayer argued that only the 8% mark up was subject to 

CAT. The Department determined that an agency relationship was not created by the taxpayer 

and the independent contractors and the entire amount the taxpayer received from the independent 

contractors was subject to CAT. 

34. R.C. 5751.013 gross receipts 

The taxpayer admitted to having the vendor ship widgets to an unoccupied address in Indiana so 

the vendor could avoid CAT on the gross receipts. The widgets actually never came to rest in 

Indiana, but instead were transported to Ohio. R.C. 5751.013 provides that the Department may 

assess CAT against any taxpayer who transfers tangible personal property into this state for the 

person's own use within one year after the person receives the property outside this state. The 

Department must prove that the person received the property outside the state to avoid in whole 

or in part the CAT. 

SITUSING 

35. Management fees for managing leases 

Taxpayer provides lease management services for banks who lease property to bank customers. 

The taxpayer manages the billing, mailing, cash receipt, etc for the bank. The Department 

determined that the services could be sitused based on where the leased property is located/used, 

the banks’ headquarters or some other reasonable, consistent and uniform method. 

36. Airplane lease 

The taxpayer owns two single member LLCs that own one airplane each. The two planes are 

leased/rented to a third party (who has the pilots), who in turn, provides flights for the taxpayer. 

13



Appendix A 

The third party can also provide flights to unrelated parties as well using the taxpayer’s airplanes. 

The airplanes are hangered in Ohio, but are flown throughout the country. The Department 

determined that 100% of the gross receipts are sitused to Ohio as the airplanes are hangered in 

Ohio. 

37. Trademarks/Royalties 

Taxpayers have attempted to situs trademarks/royalties using a corporate headquarters test. The 

Department has not been receptive to this type of situsing and has requested that the taxpayers 

provide information that indicates where the trademarks/royalties are being used [see R.C. 

5751.033(F)]. 

38. Situsing of contract manufacturing 

The taxpayer, which has a division that does contract manufacturing, did not include the contract 

manufacturing receipts in its CAT filing. The Department attempted to situs the receipts based on 

the taxpayer’s manufacturing facilities (SC and OH) since the taxpayer indicated it did not know 

where they were shipping the product. After the taxpayer calculated the amount of tax due based 

on that situsing approach, the taxpayer found the information as to where the product was 

shipped. The taxpayer needed to include as taxable gross receipts all products shipped into Ohio 

from both its Ohio and South Carolina locations. 

39. “Shipped from” v. “shipped to” 

The taxpayer utilized its “shipped from” location when situsing sales of tangible personal 

property for its CAT filings. Under audit, the Department determined that the “shipped to” 

location was the proper way to situs the taxpayer’s gross receipts relating to sales of tangible 

personal property. 

40. Sales office v. job site 

The taxpayer, an employer service provider, utilized its sales office as the means to situs its gross 

receipts from the sale of employment services. The Department determined that the job site (or 

post of duty) was the proper method to situs gross receipts from the sale of employment services. 

41. Repair receipts 

The taxpayer installed its product in Ohio for its customer. The product subsequently needed 

repaired and the taxpayer’s customer sent the product back to the taxpayer to be repaired in 

Pennsylvania. The taxpayer sent the repaired product back to the customer in Ohio. The taxpayer 

sitused the repair receipts to Pennsylvania. The Department determined that the benefit of the 

repair service was received by the customer in Ohio. As a result, the Department picked up the 

repair services as a taxable gross receipt. [See OAC 5703-29-17(44)] 

14

42. Rewards points program 



Appendix A 

The facts are the same as in 16 above. The Department determined that the receipts received by 

the rewards entity should be sitused based upon where the purchaser (hotel/franchisee) is 

receiving the benefit of the service. The Department determined the location of the rewards 

program participant (billing address/mailing address) should be how the receipts are sitused. 

43. Management fee 

The taxpayer was filing as a consolidated elected group at 50% and was providing management 

services to related members as well as to unrelated entities. The management fees were for 

services primarily performed in Ohio. The related member gross receipts were excluded from the 

CAT return. The receipts received from the unrelated entities would be taxable if the purchaser 

received the benefit in Ohio. The unrelated entities did not have any locations in Ohio. As a result 

the management fees were sitused outside of Ohio. 

44. Job postings 

The taxpayer receives gross receipts from customers (potential employers) who post a job on the 

taxpayer’s website. How should the gross receipts be sitused The Department determined that 

the situsing should be based on the post of duty for the job being posted. The Department felt that 

the taxpayer would have this information as it is part of the job search data. The Department also 

felt that the corporate headquarters of the customer would not be as accurate of a reflection of 

where the customer receives the benefit as the post of duty. 

45. Invoicing didn't match “ship to” 

The taxpayer sold tangible personal property and delivered the property to its customer. When 

filing its CAT returns, the taxpayer used a “ship to” report from it systems. The Department 

tested the accuracy of the report with a probe sample of approximately 75 receipts. Upon review, 

the Department determined that the report indicated that for one customer the taxpayer was using 

the wrong address (bill to) and the Department picked up the additional taxable gross receipts. 

46. Document storage 

The taxpayer provides storage services of tangible personal property (e.g., documents). The 

taxpayer will pick up the tangible personal property to be stored and take it to one of their storage 

facilities. When a customer needs to retrieve its tangible personal property, the customer calls the 

taxpayer and the taxpayer delivers the tangible personal property to its customer. The taxpayer 

typically tries to store the tangible personal property at one of its storage facilities closest to its 

customer. The situation could arise where the taxpayer actually stores its Ohio customer's tangible 

personal property in Pennsylvania, Kentucky, Indiana or Michigan. The Department determined 

that the receipts should be sitused based on the location of where the records were located in the 

hands of the customer prior to storage with the taxpayer. 

15



47. Consulting - benefit of purchaser 

Appendix A 

The taxpayer was a consulting firm related to human resource issues. The taxpayer sitused a 

portion of the services to Ohio based on a sales office approach. The Department is in the process 

of identifying the services and the benefits of the services to determine if the taxpayer’s method is 

reasonable, uniform and consistent. 

48. Advertising - OH v. US or OH v. World 

The taxpayer provides advertising services on it website. The taxpayer sitused the services based 

on Ohio population to worldwide population. The Department determined that approach was not 

reasonable and determined that Ohio population to US population was a reasonable method to 

situs the advertising receipts. 

49. Agency 

The taxpayer argued that the relationship it had with independent contractors the taxpayer 

contracted with to distribute tangible personal property was an agency relationship. The taxpayer 

marked up the tangible personal property it purchased by 8% when selling the product to the 

independent contractors. As a result, the taxpayer argued that only the 8% mark up was subject to 

CAT. The Department determined that an agency relationship was not created by the taxpayer 

and the independent contractors and the entire amount the taxpayer received from the independent 

contractors was subject to CAT. 

50. Cigarette Buy-downs 

Taxpayer, a convenience store retailer, attempted to deduct amounts received from cigarette 

manufacturers known as cigarette buy-downs from gross receipts. The Department determined 

that these specific buy-downs are similar to manufacturer coupons and are subject to CAT for the 

taxpayer. NOTE: cigarette manufacturer buy-downs received by a cigarette wholesaler may not 

be subject to CAT for the wholesaler. 

REGISTRATION 

51. Foreign election - no 

A taxpayer registered as consolidated elected at 50%, but elected not to include any foreign 

entities. However, as part of the registration, the taxpayer registered a foreign entity. What is the 

appropriate method for the taxpayer to file The Department determined that the taxpayer needs 

to either include none of its foreign entities or all of its foreign entities. 

16

52. Foreign common owner 



Appendix A 

A taxpayer registered as a consolidated elected at 50%, but elected not to include any foreign 

entities. The common owner of the group was a foreign entity. The Department determined that 

the common owner must be part of the group even if the election not to include foreign entities 

has been chosen. 

OTHER 

53. Basis for filing 

During our reviews and audits, the Department has seen various methods used by taxpayers when 

filing the CAT return including, but not limited to: 

• Sales tax returns 

• Book balances 

• Federal income tax 

• Self generated CAT reports 

• Vertex (sales tax) reports 

The Department has stated that a taxpayer may start with any type of method, but the taxpayer 

needs to make sure that all receipts required under R.C. 5751 are reported in the CAT return. 

54. Probe sample 

The Department has the ability to use statistical sampling in its CAT audits [See R.C. 5751.09], 

but to date the only sampling that has been used relates to a probe sample to verify situsing. 

55. Manufacturing rebates are not receipts 

The Department has determined that manufacturing rebates received by the manufacturer’s 

customer for volume purchase discounts are not gross receipts to the purchaser. Further, the 

manufacturer does get a deduction (cash discount) for such payments. It should be noted that, not 

all reductions provided by the manufacturer are allowable deductions from gross receipts [See 19 

and 57]. 

56. Little cooperation 

We have several audits/reviews that we received little cooperation from the taxpayer including, 

but not limited to: 

• Not providing organizational charts prior to the field visit 

• Not providing the chart-of-accounts or trial balance information prior to the field 

visit 

17



Appendix A 

• Not providing federal returns for the company or the individual owner 

• Not providing requested information during field visit 

• Not providing the $500,000 vendor list 

57. Inter-member refund 

We have had several consolidated elected audits where the taxpayer has forgotten to exclude 

inter-member gross receipts and the audits have resulted in a minimal assessment or a minimal 

refund. 

58. Estimate too high 

Some taxpayers have been estimating the amount of CAT and have been very conservative in the 

estimate creating an obvious refund position for the taxpayer. 

59. Factoring company interest receipts 

The taxpayer had created a factoring company (located in Barbados), which purchased the 

taxpayer’s accounts receivable at a discount. The taxpayer has a deduction when selling a 

receivable that has been previously subject to CAT. The Department looked at whether the 

interest earned on accounts receivables while in the hands of the factoring company would be 

gross receipts. The Department has made the decision not to pursue this issue at this time. 

60. Estimated - true up when 1120 filed 

Several taxpayers used an estimation method (that was not approved by the CAT Division) when 

preparing the CAT return. The Department reminds taxpayers that the Department can approve an 

estimation method (not currently provided by the statute or rule), only if the taxpayer requests 

such method in writing. 

61. Denied rebates not related to OH 

The taxpayer deducted all rebates related to volume purchasing when filing the CAT return 

regardless of whether the customers were in Ohio or not. The Department denied the deduction 

except for those volume purchasing rebates earned in Ohio. 

62. Denied negative sale of equipment 

The taxpayer deducted losses from the sale of equipment used in its business (IRC 1221 or 1231). 

The Department denied the deduction for losses and also did not pick up any gains relating to the 

sale of equipment used in business because of the exclusion found in 5751.01(F)(2)(c). [See 20] 

18



63. Denied manufacturer's coupon deduction 

Appendix A 

The taxpayer deducted all manufacturer coupons provided to end consumers and not the 

manufacturer’s customer (wholesaler/retailer). The Department denied the deduction for 

manufacturer coupons in accordance with OAC 5703-29-14(B)(3)(a). 

64. Denied fraud deduction 

The taxpayer is a retailer of tangible personal property and ships its product via United States 

mail. The taxpayer has identified that in some situations postal employees will open the box and 

remove the product. Next the postal employees will rewrap the box and forward it empty to the 

taxpayer’s customer. The taxpayer deducted the costs of fraud from its gross receipts. The 

Department determined that there is no deduction for fraud and as a result denied the taxpayer’s 

deduction. 

65. Credit card fee 

The taxpayer deducted the fees it paid to credit card companies for processing its sales 

transactions. The Department determined that the credit card processing fees are not deductible. 

66. Denied cash over/under deduction 

Department policy is to deny any deduction taken by a taxpayer for cash under. Department 

policy also includes not including cash over as a gross receipt. 

67. Denied 1st period (semi-annual – 7/1/05 to 12/31/05) bad debt deduction 

Most taxpayers have taken a bad debt deduction for the 1 st period (semi-annual period - 7/1/05 

through 12/31/05). The Department is denying this deduction as none of the bad debts relate to 

gross receipts that have been subject to CAT. Additionally, the bad debts have typically not been 

uncollectible for more than 6 months as required by R.C. 5751.01(F)(4)(c). 

68. $500K list not provided 

Some taxpayers have been resistant to providing a list of vendors selling more than $500,000 of 

products or services in Ohio. The Department has issued two subpoenas to obtain this information 

and will continue to issue subpoenas if necessary. 

69. Retroactive Consolidation Election 

When we audit a taxpayer which has not registered, who has registered as a separate taxpayer (but 

did not register all persons within its group) or a combined taxpayer, the Audit Division has been 

instructed to audit the taxpayer as if it were a combined taxpayer. The types of taxpayers 

mentioned above do not have the choice of registering as a consolidated elected taxpayer for the 

19



Appendix A 

audit period. However, the taxpayer can register as a consolidated elected taxpayer for future 

periods if it so chooses. 

Several taxpayers who are under audit have requested a retroactive consolidation election and the 

Department has reviewed each request on a case by case basis when making its determination. In 

general, the requests will be denied at the Audit Division level. In contrast, taxpayers who 

voluntarily come forward (not under audit) and request retroactive treatment from the CAT 

Division typically get retroactive treatment. 

70. Non-registered person with nexus that is part of a registered group 

The Department is taking the position that there is no statute of limitations for assessing an 

unregistered person that the Department determines has nexus with Ohio even though the person 

is part of a group (combined/consolidated elected) that is currently registered and filing returns. 

This position also applies if the person would be part of a combined/consolidated elected group 

with a person who has registered and is filing returns as a separate taxpayer. 

71. Successor Liability 

The Department contacted a taxpayer for audit and was told that the taxpayer’s assets had been 

sold to another unrelated company. The Department then contacted the purchaser and inquired if 

any of the purchase price was set aside to cover the amount of CAT due by the seller. No money 

was set aside. As a result, the purchaser was assessed the CAT liability as a successor in 

accordance with R. C. 5751.10. 

20

Ohio Tax - Manufacturers' Education Council

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