Ohio Tax - Manufacturers' Education Council
Ohio Tax - Manufacturers' Education Council
Ohio Tax - Manufacturers' Education Council
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<strong>Ohio</strong> <strong>Tax</strong><br />
Workshop S<br />
<strong>Ohio</strong> CAT, Nexus,<br />
Reporting/Filing &<br />
Sourcing Issues<br />
Thursday, January 27, 2011<br />
4:15 p.m. to 5:15 p.m.
Biographical Information<br />
John R. Trippier, CPA, Administrator, Audit Division, <strong>Ohio</strong> Department of <strong>Tax</strong>ation<br />
30 E. Broad Street, 20 th Floor, PO Box 530, Columbus, <strong>Ohio</strong> 43216<br />
john_trippier@tax.state.oh.us 614.995.0724<br />
John rejoined the <strong>Ohio</strong> Department of <strong>Tax</strong>ation in October 2003 as an Administrator in the Audit Division.<br />
John is involved with Sales and Use <strong>Tax</strong>, Personal Property <strong>Tax</strong> and Commercial Activity <strong>Tax</strong>. John<br />
worked with the Department for 2½ years as a sales and use tax agent and a corporate franchise tax<br />
agent in the Chicago office starting in 1989.<br />
John has worked over 11 years in public accounting as a state and local tax consultant for Coopers &<br />
Lybrand, KPMG Peat Marwick and most recently at RSM McGladrey, Inc. As a consultant, John assisted<br />
clients with sales/use, income/franchise, personal/real property, intangible and unclaimed property tax<br />
audits and appeals. John also assisted clients with refund reviews, corporate restructuring, compliance<br />
studies, nexus studies, voluntary disclosure and sales tax software implementation.<br />
John also worked 2 years with a long distance telecommunications provider in Dublin, <strong>Ohio</strong> as a state<br />
and local tax manager responsible for audits, appeals and state and local sales/use, personal/real<br />
property and income/franchise tax compliance.<br />
B.S., Otterbein College<br />
Paul R. Caja, Vice President <strong>Tax</strong>ation, MTD Products, Inc.<br />
P.O. Box 368022, Cleveland, <strong>Ohio</strong> 44136-9722<br />
paul.caja@mtdproducts.com 330.558.3304<br />
Paul has over twenty years of tax experience, most of which were with the public accounting firms of<br />
Ernst & Young, LLC and PricewaterhouseCoopers, LLC. Paul managed a variety of SEC and privately<br />
held accounts. His experience ranges from running a significant outsource engagement to overseeing<br />
the financial provisions on large SEC clients. Paul has significant experience in compliance, planning and<br />
financial reporting as it relates to state and local, federal and international taxes. Paul has also served as<br />
the Federal <strong>Tax</strong> Manager for American Greetings, Inc. and in his current position at MTD Products, Inc. is<br />
responsible for all tax related duties of the <strong>Ohio</strong>-based corporation. Paul is a certified public accountant<br />
and a member of American Institute of Certified Public Accountants as well as the Cleveland chapter of<br />
the <strong>Tax</strong> Executives Institute. Paul received his Bachelors of Science in Accounting from Indiana<br />
University and he received his Masters of <strong>Tax</strong>ation from Akron University.<br />
David L. Cook, Director – State & Local <strong>Tax</strong>es, PricewaterhouseCoopers, LLP<br />
200 Public Square, 18th Floor, Cleveland, <strong>Ohio</strong> 44114<br />
david.l.cook@us.pwc.com 216.875.3027<br />
David is a Director in PwC’s Cleveland tax practice and is responsible for SALT consulting activities in<br />
Cleveland and northern <strong>Ohio</strong>, as well as the Pittsburgh, Buffalo and Rochester markets. He has 18<br />
years of experience serving publicly traded and privately held companies in the manufacturing, service,<br />
retail and distribution industries. David specializes in multi-state strategic income and franchise tax<br />
planning and restructuring, and also has significant experience with merger and acquisition planning,<br />
audit and appeal resolution, and property tax services. He also has extensive project management<br />
experience on large-scale SALT restructuring projects.<br />
David has a Bachelors of Business Administration degree from the University of Michigan and is a CPA.<br />
He has been a speaker at local tax conferences and seminars sponsored by the <strong>Ohio</strong> Society of Certified<br />
Public Accountants, the <strong>Tax</strong> Executives Institute, and the Manufacturers’ <strong>Education</strong> <strong>Council</strong>. He is a<br />
member of the American Institute of Certified Public Accountants and the <strong>Ohio</strong> Society of Certified Public<br />
Accountants.
Biographical Information<br />
Laura M. Stanley, Mgmt. Analyst Supervisor, CAT Div., <strong>Ohio</strong> Department of <strong>Tax</strong>ation<br />
P.O. Box 530, Columbus, OH 43216<br />
Laura_Stanley@tax.state.oh.us 614.644.5764<br />
Laura Stanley is a Management Analyst Supervisor in the Commercial Activity <strong>Tax</strong> (CAT) Division, and<br />
assists Sarah O’Leary in her capacity as Legal Counsel of the CAT, Motor Fuel, and Excise <strong>Tax</strong> Divisions<br />
for the <strong>Ohio</strong> Department of <strong>Tax</strong>ation. Laura’s career with the <strong>Ohio</strong> Department of <strong>Tax</strong>ation began just<br />
four years ago which is why this biography is very short. As a Management Analyst Supervisor, Laura is<br />
instrumental in several projects in the CAT Division. Laura graduated from The University of Akron in<br />
Akron, <strong>Ohio</strong> with a Bachelors of Science in Political Science & Criminal Justice and an Associate of<br />
Applied Science in Criminal Justice Technology. In May of 2009, Laura earned her J.D. from Capital<br />
University School of Law in Columbus, <strong>Ohio</strong>.<br />
Michael R. Baker, SALT Director, RSM McGladrey Inc.<br />
1001 Lakeside Ave. E. Ste. 1400, Cleveland, <strong>Ohio</strong> 44114<br />
michael.baker@mcgladrey.com 216.798.3265<br />
Mike has eighteen years of focused experience in state and local tax issues. Prior to joining RSM<br />
McGladrey Inc., Mike was with Plante & Moran serving as their <strong>Ohio</strong> State & Local <strong>Tax</strong> Leader. Previous<br />
to that Mike spent six years as an attorney with the <strong>Ohio</strong> Department of <strong>Tax</strong>ation. While there, he<br />
specialized in sales, use, and corporation franchise tax issues. Mike currently serves a variety RSM<br />
McGladrey Inc. clients focusing on manufacturing, consumer products and the financial services<br />
industries. His experience has given him a thorough knowledge of <strong>Ohio</strong> taxation and multi-state<br />
corporate income taxation and planning. Mike has authored numerous articles and is a frequent speaker<br />
on state and local taxation topics.<br />
Mike is admitted to the <strong>Ohio</strong> Bar and is a member of the American and <strong>Ohio</strong> Bar Association <strong>Tax</strong>ation<br />
Committees. As well, Mike is a member of the taxation committee of the <strong>Ohio</strong> Chamber of Commerce.<br />
Mike received his Bachelors of Science from Bowling Green University and he received his J.D. from<br />
Capital University Law School.
<strong>Ohio</strong> CAT<br />
Nexus, Reporting/Filing, & Sourcing Issues<br />
<strong>Ohio</strong> <strong>Tax</strong> Conference<br />
Session S<br />
January 27, 2011<br />
1
Presenters<br />
Michael Baker<br />
• State & Local <strong>Tax</strong> Director - RSM McGladrey, Inc.<br />
Paul Caja<br />
• Vice President – <strong>Tax</strong>ation - MTD Products, Inc.<br />
David Cook<br />
• State & Local <strong>Tax</strong> Director - PricewaterhouseCoopers LLP<br />
Laura Stanley<br />
• Legal Counsel – Commercial Activity, Motor Fuel, & Excise <strong>Tax</strong> Divisions - <strong>Ohio</strong><br />
Department of <strong>Tax</strong>ation<br />
John Trippier<br />
• Administrator, Audit Division - <strong>Ohio</strong> Department of <strong>Tax</strong>ation<br />
2
Agenda<br />
• LL Bean Case<br />
– Constitutional Nexus<br />
Challenges<br />
• Filing Group Issues<br />
• Receipts Issues<br />
• Sourcing Issues<br />
• Miscellaneous<br />
• Voluntary Disclosure Program<br />
• Penalty Provisions<br />
3
LL Bean Case / Constitutional<br />
Nexus Challenges<br />
4
LL Bean Case / Constitutional<br />
Nexus Challenges<br />
• Bright Line Nexus – ORC Section 5751.01(I)<br />
• Property with an aggregate value of $50,000 during the year;<br />
• Payroll during the year of at least $50,000;<br />
• <strong>Tax</strong>able gross receipts of at least $500,000 000 during the year;<br />
• At least 25% of the person's total property, total payroll, or<br />
total sales in the state during the year; or<br />
• Is domiciled in this state as an individual or for corporate,<br />
commercial, or other business purposes.<br />
5
LL Bean Case / Constitutional<br />
Nexus Challenges<br />
• Bright Line Nexus – ORC Section 5751.01(I) ()<br />
• Note: Owned property is valued at original cost and rented property<br />
is valued at eight times the net annual rental charge<br />
• Note: Payroll includes:<br />
• (a) Any amount subject to withholding by the person under<br />
section 5747.06 of the Revised Code;<br />
• (b) Any other amount the person pays as compensation to an<br />
individual under the supervision or control of the person for<br />
work kdone in this state; t and<br />
• (c) Any amount the person pays for services performed in this<br />
state on its behalf by another<br />
6
LL Bean Case / Constitutional<br />
Nexus Challenges<br />
• L.L. Bean, Inc. – Certificate of Final Determination<br />
• Issued August 10, 2010<br />
• L.L. Bean acknowledged receipts in excess of $500,000 annually to<br />
customers located in <strong>Ohio</strong><br />
• L.L. L Bean argued that it did not have a physical presence and the imposition<br />
of the CAT violated the Commerce Clause<br />
• Commissioner determined that substantial nexus existed as a result of the<br />
“continuous, systematic, and significant exploitation of the economic<br />
marketplace in <strong>Ohio</strong>”<br />
• Commissioner reserved ruling on the assertion that the company lacked<br />
physical presence, and will render findings on this issue if an adverse ruling<br />
is issued by the BTA and the case is remanded<br />
• L.L. Bean has appealed to Board of <strong>Tax</strong> Appeals<br />
• First case challenging the constitutionality of the CAT nexus standard<br />
• Anticipated 4-5 year time frame for BTA decision<br />
7
LL Bean Case / Constitutional<br />
Nexus Challenges<br />
• What are the implications of the L.L. Bean case to person’s in similar<br />
situations that meet the $500,000 receipts Bright Line nexus threshold<br />
but don’t have physical presence<br />
• Persons identified by the state – audit & assessment process<br />
• No abeyance procedures<br />
• Audits and assessments are not being held in abeyance<br />
• Petitions for Reassessment required to protest<br />
• Certificates of Final Determination are not being held in abeyance<br />
• Appeal to the BTA may be required<br />
• Likely held in abeyance at BTA level<br />
• <strong>Tax</strong>payer Options<br />
• Registration and payment – may be followed by protective refund claims<br />
• Registration and filing (with actual receipts) but no payment (protest) –<br />
immediate assessments issued with 20% penalties for failure to file and<br />
failure to pay<br />
• No registration (full protest) – additional 35% failure to register penalties<br />
imposed<br />
8
LL Bean Case / Constitutional<br />
Nexus Challenges<br />
• What are the implications of the L.L. Bean case to person’s in similar<br />
situations that meet the $500,000 receipts Bright Line nexus threshold<br />
but don’t have physical presence<br />
• Persons not identified by the state<br />
• <strong>Tax</strong>payer Options<br />
• Voluntary Disclosure Agreement process<br />
• Registration, payment, and protective refund claims<br />
• Wait and see<br />
• Be aware of Nexus Unit and Audit Division!<br />
• Completed 31 nexus audits in 2010<br />
• 2010 CAT revenues generated of approximately $2.1 million<br />
• 12 additional nexus audits currently in progress<br />
9
LL Bean Case / Constitutional<br />
Nexus Challenges<br />
• What are the implications of the L.L. Bean case to person’s in similar<br />
situations that meet the $500,000 receipts Bright Line nexus threshold<br />
but don’t have physical presence<br />
• Protective Refund Claim Process<br />
• Procedures will be established similar to Grocer’s case claims<br />
• File claims and identify as L.L. Bean / constitutional nexus issues<br />
• Request holding in abeyance pending L.L. Bean decision<br />
• Department will hold at CAT Division pending L.L. L Bean ruling<br />
• Query: What about physical presence factual determinations<br />
• Other Issues<br />
• Caution – In general, Department’s position is that statute is not running for<br />
any person not registered even though the person would be a member of a<br />
group that is registered and filing<br />
• Why was L.L. L Bean sent to the BTA rather than the <strong>Ohio</strong> Supreme Court<br />
10
Administrative Update – CAT Division’s<br />
New Nexus Unit<br />
• Hired employees to focus on CAT bright-line nexus to discover<br />
persons not registered<br />
• 1 supervisor and 8 agents<br />
• Began November 2009<br />
• Letters Sent: 8,600<br />
• Registered <strong>Tax</strong>payers: 3,308<br />
• Nexus Assessments Issued: 6,394<br />
• Collected $13M<br />
• Will issue estimated assessments<br />
• Includes 60% penalty<br />
• $1,000 penalty for failure to register<br />
* Statistics as of October 31, 2010<br />
11
Filing Group Issues<br />
12
Filing Group Issues<br />
• Retroactive Consolidations<br />
• Consolidated filing elections are always available<br />
when made prior to the filing of the current<br />
quarterly return<br />
• Department will consider retroactive consolidation<br />
elections on a case by case basis<br />
• Generally, if request is made when discovered by the Nexus<br />
Unit or when under audit, the request has been denied<br />
• If taxpayer comes forward voluntarily, Department has typically<br />
allowed retroactive consolidation<br />
13
Filing Group Issues<br />
• Changes in <strong>Tax</strong>payer Group<br />
• Must report changes due to acquisitions /<br />
divestitures of entities and adjust registered group<br />
by the filing date of the current quarterly return<br />
• Successor Liability Issues<br />
• ORC Section 5751.10 contains special rules related to a taxpayer that<br />
sells a business, sells 75% or more of the business assets, or quits the<br />
business<br />
• CAT liability becomes due and payable immediately, and a return must<br />
be filed within 15 days<br />
• Successor of the business must withhold a sufficient amount of the<br />
purchase money to cover the amount due, until seller produces proof of<br />
payment and/or no outstanding liability<br />
• If purchaser fails to withhold, successor liability applies and purchaser<br />
is personally liable for up to amount of purchase price<br />
14
Filing Group Issues<br />
• Common Ownership<br />
• Vertical ownership and control test<br />
• A person is a member of a group if:<br />
• A specified portion (i.e., 50% or 80%) of the value of<br />
person’s ownership interest is owned and controlled<br />
by common o owners; and<br />
• The higher-tiered entity has the ability through its<br />
voting rights to control the operations of the lower-<br />
tiered entities at each level of the vertical chain<br />
15
Filing Group Issues<br />
Comparison of Consolidated v. Combined Filing<br />
• Consolidated Elected • Combined <strong>Tax</strong>payer<br />
• At least 50% or 80%<br />
• More than 50% common<br />
common ownership<br />
ownership<br />
• Must include all entities • Combined only required to<br />
regardless of nexus with include entities with <strong>Ohio</strong><br />
<strong>Ohio</strong><br />
nexus<br />
• Option to include or exclude • Non-US entities included if<br />
non-US entities<br />
<strong>Ohio</strong> nexus<br />
• Gross receipts between<br />
• Gross receipts resulting from<br />
members are excluded payments between members<br />
are subject to the CAT<br />
16
Filing Group Issues<br />
• Complex Filing Groups<br />
• Audit Process – Identifying the “<strong>Tax</strong>payer”<br />
17
Filing Group Issues<br />
• Complex Filing Groups (continued)<br />
• Private Equity / Venture Capital Structures<br />
• <strong>Tax</strong>payer group can be very large and tied together by<br />
“controlling” interests (funds that are the GP in<br />
complex structures) that have only minimal financial<br />
interests in investee companies<br />
• “Supergroup” concept<br />
• Critical Issues<br />
• Practicality of filing a single return for the Supergroup<br />
• $1 million tax bracket<br />
• Consolidated filing election availability<br />
• Request to File Separately approach – practical<br />
solution<br />
18
Filing Group Issues<br />
• Complex Filing Groups (continued)<br />
• Separate Filing Election for Combined Group<br />
Member (CAT Form RTFS)<br />
• Member of combined group can request permission to<br />
file separately<br />
• Requires <strong>Tax</strong> Commissioner approval<br />
• Does not relieve tax liability of member or group<br />
• Commissioner may allow breakout of separate entities<br />
and/or sub-groups (on a combined basis only)<br />
• See ORC Section 5751.012 and OAC 5703-29-08<br />
• Query – Why not allow consolidated sub-groups<br />
19
Filing Group Issues<br />
• Complex Filing Groups – Examples<br />
(See Appendix A for more details)<br />
• Example O-1<br />
• Example MG-1<br />
20
Example O-1<br />
<strong>Tax</strong>payer initially filed four<br />
separate combined groups<br />
and one separate filer:<br />
• Group 1: ABC group<br />
• Group 2: DEF group<br />
• Group 3: GHI group<br />
• Group 4: MNO group<br />
• Separate Filer: JKL LLC<br />
Department upon audit<br />
adjusted to one filing<br />
group:<br />
• Group 1: ABC, DEF, GHI,<br />
JKL LLC, MNO<br />
• Four $1 million exclusions<br />
were eliminated<br />
XYZ<br />
(Non-Nexus<br />
Common Owner)<br />
ABC DEF GHI<br />
JKL LLC<br />
MNO<br />
ABC's Subs DEFs Subs GHI's Subs MNO's Subs<br />
(26) (8) (14) (3)<br />
21
Example MG-1<br />
K<br />
J<br />
<strong>Tax</strong>payer initially filed three<br />
separate consolidated<br />
groups at 80%<br />
• Group 1: J, E, M, T<br />
• Group 2: S, O<br />
• Group 3: Y, Z, A<br />
Department upon audit<br />
adjusted d to two filing<br />
groups:<br />
25%<br />
Y<br />
Z<br />
100%<br />
75%<br />
100%<br />
E<br />
100% 100%<br />
75%<br />
T<br />
M<br />
• Consolidated Group 1: J, E,<br />
M, T, S, O<br />
• Combined Group 2: J, Y, Z, A<br />
• Inter-member receipts<br />
exclusion among Y, Z, A was<br />
eliminated<br />
A<br />
100%<br />
S<br />
100%<br />
25%<br />
O<br />
22
Receipts Issues<br />
23
Types of Gross Receipts<br />
(See Appendix A for further discussion)<br />
• Sales<br />
• Construction allowance<br />
• Rents<br />
• Royalties<br />
• Sublease income<br />
• Sales to federal government<br />
• Advertising co-op income<br />
• Management fees/intercompany<br />
charges<br />
• Sale of inventory as part of<br />
asset sale<br />
• Sale and leaseback of inventory<br />
• Trade-ins<br />
• Recycling receipts / credits<br />
• Freight Damage Claims<br />
• Freight Charges / Pass-through<br />
• Payroll reimbursement for<br />
managed property<br />
• Advertising bartering<br />
• Profit split<br />
• Client reimbursements<br />
• Warranty reimbursement<br />
• Gift card income<br />
24
Troublesome Receipts Issues<br />
(See Appendix A for further discussion)<br />
• Miscellaneous Receipts – not in “normal” receipts<br />
accounts, contra revenue or contra asset accounts,<br />
negative expense accounts<br />
• Examples:<br />
• Cooperative advertising revenues (#2)<br />
• Freight pass-through revenue (#4)<br />
• Client reimbursable expenses (#31)<br />
• Intercompany reimbursements (#29)<br />
• “Allowances” - warranties, advertising,<br />
construction, etc. (#1, #12) – contrast with<br />
exclusion for “returns and allowances”<br />
25
Sourcing Issues<br />
26
Sourcing Issues<br />
• Intangibles<br />
• Services<br />
• Tangible Personal Property<br />
27
Sourcing Issues<br />
• Intangibles – ORC 5751.033(F)<br />
• Trademark/Tradename<br />
• Patent<br />
• Copyright<br />
• “Similar Intellectual Property”<br />
• “Right to use” or “use of”<br />
• No mention of a benefits test<br />
28
Sourcing Issues<br />
• Intangibles<br />
• Actual information identifying right to use or<br />
use of<br />
• Is it available<br />
• How hard is it to get<br />
• Other means to apportion/situs<br />
• Varies by type of intangible<br />
• Nielson ratings<br />
• Population<br />
29
Sourcing Issues<br />
• Services – ORC 5751.033(I)<br />
• …gross receipts from services are sitused to<br />
<strong>Ohio</strong> in the proportion that the purchaser’s<br />
benefit in <strong>Ohio</strong> with respect to what was<br />
purchased bears to the purchaser’s benefit<br />
everywhere with respect to what was<br />
purchased<br />
30
Sourcing Issues<br />
• Three things you need to know about<br />
services:<br />
• Who is the purchaser<br />
• What is the purchaser’s benefit<br />
• Where is the benefit received (to determine<br />
situs)<br />
• Reasonable, consistent and uniform<br />
• OAC 5703-29-17<br />
31
Sourcing Issues<br />
• Tangible Personal Property – ORC<br />
5751.033(E)<br />
• Sitused to <strong>Ohio</strong> if the purchaser ultimately<br />
receives the tangible personal property in <strong>Ohio</strong><br />
after all transportation has been completed<br />
• Title transfer has no impact<br />
• Transportation by the purchaser (or designee) is<br />
considered ed for ultimate destination<br />
• Ultimate destination must be known at the time of<br />
sale (Information Release 2005-17)<br />
32
Sourcing Issues<br />
• Tangible Personal Property –<br />
Sale<br />
Indiana<br />
Mfg<br />
Company<br />
A<br />
$100<br />
Kentucky<br />
Retail<br />
Company<br />
B<br />
Shipment<br />
directly to<br />
Company C<br />
<strong>Ohio</strong><br />
Company<br />
C<br />
Sale<br />
$150<br />
33
Sourcing Issues<br />
• Tangible Personal Property –<br />
Sale<br />
Yes<br />
Indiana<br />
Mfg<br />
Company<br />
A<br />
$100<br />
Kentucky<br />
Retail<br />
Company<br />
B<br />
Shipment<br />
directly to<br />
Company C<br />
<strong>Ohio</strong><br />
Company<br />
C<br />
Sale<br />
$150<br />
Yes<br />
34
Sourcing Issues<br />
• Can the Qualified Distribution Center (QDC)<br />
look-through concept be used in non-QDC<br />
situations<br />
35
Miscellaneous Issues<br />
36
Miscellaneous Issues<br />
• Voluntary Disclosure Program<br />
• Penalty Provisions<br />
37
Administrative Update – Voluntary<br />
Disclosure Agreements (VDAs)<br />
• Information Release CAT 2008-01 – Revised<br />
September 2010<br />
• Allows VDA for CAT<br />
• Interest only – no penalties (as long as taxpayer never<br />
contacted via audit/compliance)<br />
• Beginning g January 1, 2011, a look back period of 3<br />
years plus current year will go in effect<br />
• Steps for VDA:<br />
• Send request for VDA in writing to CAT Divisioni i<br />
• ODT sends letter, contract, and registration/returns<br />
• Register, file returns, pay tax<br />
• ODT bills for interest<br />
38
Administrative Update –VDAs (cont.)<br />
VDA Stats:<br />
• Total Requests Received: 246<br />
• Total Requests Cancelled: 38<br />
• Total Requests Completed: 118<br />
• Total Amount Collected: $3,361,364361 364<br />
* Statistics as of October 31, 2010<br />
Contact Information:<br />
Jack Durham<br />
614.387.1298<br />
Jack_Durham@tax.state.oh.us<br />
39
Administrative Update<br />
– Penalties<br />
• Leniency Policy<br />
• Nexus Unit discovery<br />
• Audits<br />
• Assessments<br />
40
Questions<br />
41
Contact Information<br />
Michael Baker, State & Local <strong>Tax</strong> Director - RSM McGladrey, Inc.<br />
1001 Lakeside Ave, E., Ste. 1400, Cleveland, OH 44114<br />
Phone 216-522-1365 Fax 216-875-1620 Mobile 216-798-3265<br />
Michael.Baker@mcgladrey.com<br />
com<br />
Paul Caja, Vice President - MTD Products, Inc.<br />
5903 Grafton Road, Valley City, <strong>Ohio</strong> 44280<br />
Phone 330-558-3304 Fax 330-558-3300 Mobile 330-635-6300<br />
Paul.Caja@mtdproducts.com<br />
David Cook, Director - PricewaterhouseCoopers LLP<br />
200 Public Square, Suite 1800, Cleveland, <strong>Ohio</strong> 44114<br />
Phone 216-875-3027 Fax 813-329-8922 Mobile 440-725-8796<br />
david.l.cook@us.pwc.com<br />
42
Contact Information (continued)<br />
Laura Stanley, Legal Counsel<br />
Commercial Activity, Motor Fuel, & Excise <strong>Tax</strong> Divisions,<br />
<strong>Ohio</strong> Department of <strong>Tax</strong>ation<br />
Phone 614-644-5764<br />
Laura_Stanley@tax.state.oh.us<br />
John Trippier, Administrator<br />
Audit Division, <strong>Ohio</strong> Department of <strong>Tax</strong>ation<br />
Phone 614-995-0724<br />
John_Trippier@tax.state.oh.us<br />
43
2011 <strong>Ohio</strong> <strong>Tax</strong> Conference<br />
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OWNERSHIP<br />
Combined<br />
Adding the Common Owner: the Department has instructed the auditors to determine who the<br />
common owner is for each taxpayer group. This approach requires the auditor to research for<br />
owners even if they are not part of the registration.<br />
Example O-1. Initially, ABC, DEF, GHI and MNO all registered as different combined groups.<br />
JKL, LLC registered as a separate taxpayer. The Department (as part of its selection process)<br />
selected DEF for audit. When completing its research, the Department identified that the common<br />
owner was not part of the registration for any of the combined groups. Further, the Department<br />
determined that ABC, DEF, GHI, MNO and JKL, LLC (and all of their subsidiaries) should be<br />
part of one combined group. Because XYZ is a non-nexus common owner, it is not required to<br />
register per OAC 5703-29-02(F). By creating one combined taxpayer, the Department eliminated<br />
the $1,000,000 exclusion for ABC, GHI, MNO and JKL, LLC.<br />
Diagram O-1.<br />
XYZ<br />
(Non-nexus<br />
Common Owner)<br />
100%<br />
ABC DEF GHI JKL, LLC MNO<br />
100% 100% 100% 100%<br />
ABC’s Subs<br />
(26)<br />
DEF’s Subs<br />
(8)<br />
GHI’s Subs<br />
(14)<br />
MNO’s Subs<br />
(3)<br />
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Example O-2. Initially the taxpayer only registered MCT Sales as a separate taxpayer. Upon<br />
audit, the Department identified that MCT, EVT and MCT Sales should have filed as a combined<br />
group. JAT and JST did not meet the nexus requirements, so they do not need to be part of the<br />
combined group. The taxpayer has requested that we allow a retroactive consolidated elected<br />
group. The Department has denied the request for a retroactive consolidation, but the taxpayer is<br />
free to change its filing at any time for future reporting purposes.<br />
Diagram O-2.<br />
MCT<br />
100%<br />
EVT JAT JST MCT Sales<br />
Consolidated<br />
Adding the Common Owner—Individual: the Department has instructed the auditors to<br />
determine who the common owner is for each taxpayer group. This approach requires the auditor<br />
to research for owners even if they are not part of the registration.<br />
There have been numerous examples of audits where a consolidated elected group (50% or 80%)<br />
has registered without including its individual common owner. Under audit, we determine<br />
whether the individual meets the de minimis test ($4,500 in taxable gross receipts) and include the<br />
individual if the individual has more than $4,500 in taxable gross receipts.<br />
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Joint Venture<br />
Example JV-1. Initially taxpayer filed a consolidated elected group at 50% including ABC, DEF,<br />
GHI and JKL. Upon review, the Department determined that although it is permissible to show<br />
ABC as the primary filer on the CAT registration, it is improper to classify it as the “common<br />
owner” for the 50% consolidated elected group. ABC does not have a 50% controlling interest<br />
in the other members of the 50% consolidated elected group. However, Mr. X and Mr. Y, the two<br />
individual shareholders, who have a 50% ownership interest in each of the entities listed as<br />
members of the 50% consolidated elected group meet the common ownership test. Therefore,<br />
either of them could elect to be the common owner of the 50% consolidated elected group. Under<br />
review, the taxpayer agreed that Mr. X would be the “common owner” for all the entities listed as<br />
members of the ABC 50% consolidated elected group. Mr. X will be jointly and severally liable<br />
for 100% of the consolidated elected group’s tax liability.<br />
It should be noted that under review, the Department also determined that Mr. X and Mr. Y, in<br />
spite of their common owner status, were not required to file as a part of the consolidated elected<br />
group since neither shareholder has $4,500 in taxable gross receipts and therefore met the de<br />
minimis test for exclusion from the consolidated group.<br />
Diagram JV-1.<br />
Mr. X<br />
Mr. Y<br />
25%<br />
Mr. Z<br />
25%<br />
50%<br />
50%<br />
50%<br />
ABC, Inc. DEF Inc.<br />
GHI, Inc.<br />
JKL, LLC MNO, LLC<br />
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Example JV-2. The Department was conducting an audit of RS who had filed as a consolidated<br />
elected group at 50%. Neither 50% owner (Mr. R or Mr. S) was included in the group nor chose<br />
to have a consolidated elected group at 50%.<br />
Upon audit, the Department determined that neither Mr. R nor Mr. S had more than $4,500 in<br />
taxable gross receipts. The question arose — could RS choose a 50% consolidated group when<br />
neither of its common owners elected 50% consolidation The Department determined that RS<br />
could make the election.<br />
Diagram JV-2.<br />
Mr. R<br />
Mr. S<br />
50%<br />
RS<br />
50%<br />
TUV<br />
100%<br />
IJK<br />
WXY<br />
LMN<br />
ZAB<br />
OPQ<br />
CDE<br />
RST<br />
FGH<br />
SJW<br />
95%<br />
5%<br />
82%
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Example JV-3. The Department was conducting an audit of DEF and identified the joint venture<br />
(LLC) between DEF and XYZ. DEF filed as part of a combined taxpayer group and XYZ filed as<br />
part of a 50% consolidated elected group. Upon audit, the Department determined that XYZ<br />
would be required to pick up 100% of LLC’s taxable gross receipts because it constructively<br />
owns 50% of LLC.<br />
Diagram JV-3.<br />
DEF<br />
XYZ<br />
100% 100%<br />
50%<br />
A<br />
B<br />
49%<br />
1%<br />
LLC<br />
Multiple Groups<br />
Example MG-1. <strong>Tax</strong>payer initially filed three separate consolidated elected groups at 80%:<br />
Group 1: J, E, M and T (black shaded)<br />
Group 2: S and O (diagonal lines)<br />
Group 3: Y, Z and A (grey shaded)<br />
Under review, the Department determined that E constructively owned 100% of S and O and as a<br />
result the Department included S and O in the consolidated elected group of J, E, M and T.<br />
Further, the Department determined that a taxpayer cannot have more than one consolidated<br />
elected group within the same corporate structure. As a result, we eliminated the consolidated<br />
group of Y, Z and A. Y, Z and A was forced into a combined return with J, their common owner.<br />
(Note: J’s gross receipts would be reported with the consolidated elected group and not the<br />
combined group.) Based on the changes, S and O’s $1,000,000 exclusion was eliminated and the<br />
inter-member exclusion between Y, Z and A was eliminated.<br />
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Diagram MG-1.<br />
K<br />
J<br />
25%<br />
75%<br />
100%<br />
100%<br />
Y<br />
E<br />
M<br />
100%<br />
100%<br />
Z<br />
75%<br />
T<br />
100%<br />
25%<br />
A<br />
S<br />
100%<br />
O<br />
Voting Rights<br />
A taxpayer owned 20% of the Common B stock of XYZ Company. The Common B stock<br />
provided 10 votes for each share owned. The Common A stock only provided for 1 vote for each<br />
share owned. As a result of its 20% ownership of the Common B stock, the taxpayer actually<br />
controlled 54% of the voting rights. The Department determined that the taxpayer was the<br />
common owner of XYZ Company.<br />
Member Managed LLC<br />
A managing member of a member managed LLC had all the rights to control the LLC per the<br />
LLC agreement. The Department determined that the managing member was the common owner<br />
as it controlled the LLC (and the LLC’s subsidiaries) the same as a general partner controls a<br />
limited partnership. See <strong>Ohio</strong> Administrative Code 5703-29-02(D)(3) for general partner<br />
guidance.<br />
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GROSS RECEIPTS<br />
1. Warranty allowance<br />
<strong>Tax</strong>payer received an allowance for handling warranty repairs for the manufacturer. The taxpayer<br />
accounted for the receipts in its warranty expense account. The Department determined that the<br />
receipts were taxable and picked up 100% of the allowance (no deduction for expenses).<br />
2. Co/op advertising<br />
<strong>Tax</strong>payer received cash from manufacturers for placing the manufacturer’s products in the<br />
taxpayer’s weekly advertisements. The taxpayer accounted for the receipts as offsets in its<br />
advertising expense account. The Department determined that the receipts were taxable and<br />
picked up all amounts received from the manufacturers (no deduction for expense).<br />
3. Recycling receipts<br />
<strong>Tax</strong>payer recycled the cardboard boxes that it received when purchasing products from its<br />
manufacturers/suppliers. The taxpayer accounted for the receipts received from the recycler as<br />
other income. The Department picked up the entire amount of recycling receipts.<br />
4. Pass-through of Freight<br />
The taxpayer sold and delivered stone to its customers charging separately for the stone and the<br />
delivery. The taxpayer hired third parties to deliver the stone. The taxpayer used the following<br />
accounting entries:<br />
Account Debit Credit<br />
Time of sale:<br />
A/R 105<br />
Sales 100<br />
A/P (Delivery) 5<br />
Payment from customer:<br />
Cash 105<br />
A/R 105<br />
Payment to delivery vendor:<br />
A/P (Deliver) 5<br />
Cash 5<br />
The taxpayer argued that the amount for freight was just a pass-through to the delivery vendor.<br />
The Department determined that the taxpayer did not have an agency relationship with either the<br />
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customer or the delivery vendor. As a result, the freight was a gross receipt even if the amounts<br />
were not reflected in sales. The Department also did not allow for a deduction related to the<br />
amount paid to the delivery vendor.<br />
5. Internet advertising receipts<br />
The taxpayer (a retailer) charged customers for advertising on the taxpayer’s website. The<br />
taxpayer accounted for the receipts in other income. The Department picked up the receipts as<br />
taxable gross receipts.<br />
6. Mandatory product recall<br />
The taxpayer (a retailer) charged vendors a mandatory product recall fee for the costs of removing<br />
the recalled inventory from the shelves and warehouse. The taxpayer accounted for the receipts in<br />
other income. The Department picked up the receipts as taxable gross receipts.<br />
7. Sale of inventory from asset sale<br />
The taxpayer sold a division as part of an asset sale. The sale included inventory and fixed assets.<br />
The taxpayer accounted for the receipts in other income. The Department picked up the sale of<br />
the inventory as a taxable gross receipt. Note: the sale of the fixed assets was excluded under R.C.<br />
5751.01(F)(2)(c).<br />
8. Sale and leaseback of inventory<br />
The taxpayer sold railroad freight cars as well as leased railroad freight cars. The taxpayer would<br />
sometimes take a railroad freight car from inventory and sell it to a bank and lease it back to use<br />
in its leasing business. The Department determined that the sale to the bank was a taxable gross<br />
receipt.<br />
9. Business Interruption insurance<br />
The taxpayer had a fire destroy a part of its manufacturing facility. The taxpayer had purchased<br />
business interruption insurance for just such an occurrence. The Department determined that the<br />
insurance proceeds were taxable gross receipts.<br />
10. Trade-ins<br />
The taxpayer accepts trade-ins when selling its product. The taxpayer deducted the trade-ins from<br />
its taxable gross receipts. The Department denied the deduction as trade-ins are not allowable as<br />
deductions.<br />
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11. Government contracts<br />
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The taxpayer sold its services to the federal government and excluded those gross receipts from<br />
its CAT return. The Department denied the exclusion of these gross receipts as there is no<br />
deduction for gross receipts received from the federal government (or any state or local<br />
governmental jurisdiction).<br />
12. Construction allowance<br />
The taxpayer (a retailer) leased several of its retail locations. In some situations, the taxpayer will<br />
want to make improvements to the leased property. When the lessor agrees with the<br />
improvements, the lessor will pay (or credit future rents) the taxpayer for making the necessary<br />
leasehold improvements. The Department determined that the amounts received were taxable<br />
gross receipts for the taxpayer.<br />
13. Freight claims<br />
The taxpayer hired XYZ to handle all of its shipping needs. XYZ owns the tractors and provides<br />
the driver while the taxpayer owns the trailers and lets XYZ use them. During the shipment,<br />
inventory that XYZ has picked up for the taxpayer may be damaged (as a result of XYZ’s<br />
services). If damaged, the taxpayer will file a freight claim with XYZ to recoup the amount of the<br />
damage. The Department determined that the amounts received by the taxpayer from XYZ are<br />
taxable gross receipts.<br />
14. Back-haul credits<br />
The facts are the same as stated in the Freight claims example above. XYZ may arrange to<br />
provide shipping services for unrelated companies on the return trip instead of returning with an<br />
empty trailer (i.e., backhauling). The taxpayer will receive a portion of the revenue that XYZ has<br />
earned because XYZ has used the taxpayer’s trailers. The taxpayer accounted for the amount in<br />
its Other Income account. The Department determined that the amount received by the taxpayer<br />
was a taxable gross receipt.<br />
15. Uniform reimbursement<br />
The taxpayer purchased uniforms for sale to its employees. The employees pay for the uniforms<br />
through payroll reimbursement. The Department determined that the amounts received from the<br />
taxpayer’s employees were taxable gross receipts. [EXCLUDED AS OF 7/1/2009]<br />
16. Rewards Points Program<br />
The taxpayer (a hotel) has a rewards program, which is operated by a subsidiary of the hotel,<br />
DEF. The hotel filed as a combined group for CAT purposes. Rewards points are earned by the<br />
hotel’s customers when staying at its hotel or at a franchised hotel. The hotel or the franchisee<br />
pays DEF for the points earned. When the hotel’s customer redeems the points on another hotel<br />
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stay, DEF pays the hotel or the franchisee. The amounts received by DEF were determined to be<br />
taxable gross receipts (without reduction for the amounts paid out by DEF).<br />
17. Payroll cost reimbursement for managed property<br />
The taxpayer (a hotel franchisor) franchises hotels to third parties. As part of the franchise<br />
agreement the taxpayer can provide hotel management services (including providing employees<br />
to manage the hotel) to the franchisee. The taxpayer bills for the management services and<br />
separately states the employees’ payroll costs as part of the charge. The Department determined<br />
that the amounts received by the taxpayer for the payroll costs were taxable gross receipts.<br />
18. Warranty repair<br />
The taxpayer purchases trucks that it uses in its business. The taxpayer needs to have the trucks<br />
on the road as much as possible and purchases spare parts that it anticipates will break. The<br />
taxpayer has worked out a deal with the truck manufacturer to repair the trucks when the trucks<br />
are under warranty. The taxpayer bills the manufacturer for the labor it incurred to make the<br />
repair and for the part it uses to repair the truck. The manufacturer sends cash back to the<br />
taxpayer for the labor charge and a replacement part for the spare part used in the repair. The<br />
Department determined that the amounts received for the labor are taxable gross receipts.<br />
Because the part was under warranty, the value of the part was not determined to be a taxable<br />
gross receipt.<br />
19. Chargeback<br />
There is a process in the pharmaceutical industry called the chargeback. The parties involved in<br />
this are the manufacturer, the wholesaler, a group purchasing organization (also known as a<br />
buying group), and the buyer. The buyer, such as a hospital or a drugstore, may join a group<br />
purchasing organization (GPO) to negotiate a better price for purchasing large volumes of drug<br />
products. The GPO negotiates with manufacturers to obtain the best contract prices for its<br />
members. A typical drug manufacturer may have to negotiate thousands of contracts per year<br />
with hundreds of different GPOs. These GPOs may contain over 100,000 individual members.<br />
To simplify the distribution of their drug products, manufacturers also negotiate selling drug<br />
products in large quantities to wholesalers at specified catalog prices. The wholesalers then stock<br />
their multiple distribution centers with the drug products.<br />
Buyers purchase the drug products from wholesalers at the agreed GPO contract prices. The<br />
chargebacks occur when the wholesaler sells the drug products at a contract price lower than what<br />
it paid. The chargeback is the difference between the manufacturer's price to the wholesaler and<br />
the contract price to the customer. The wholesaler will submit a chargeback request to the<br />
manufacturer on a regular basis (daily or weekly). Each chargeback request may contain<br />
thousands of line items for review.<br />
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Under audit, a manufacturer has deducted the amounts paid as chargebacks from its gross<br />
receipts. The Department has determined that the chargebacks are allowable deductions for the<br />
manufacturer.<br />
20. Sale of rental car inventory<br />
The taxpayer (a rental car company) sold its rental cars to wholesalers. The taxpayer did not<br />
include the proceeds of the car sales in its gross receipts for CAT purposes. The Department<br />
agreed that the sales were excluded under R.C. 5751.01(F)(2)(c) — sale of IRC 1221 or 1231<br />
property.<br />
21. Advertising bartering<br />
The taxpayer obtains a discount on future purchases from its vendors for advertising they provide<br />
on behalf of their vendors. The taxpayer solicits the arrangement; it is not sought by their<br />
customers. The taxpayer accounts for the discount as a contra-expense. The Department<br />
determined that the amount of the discount received by the taxpayer was a taxable gross receipt.<br />
22. Profit split - food management<br />
The taxpayer hires GHI (an unrelated 3rd party) to manage its food service operations. The<br />
taxpayer gets a % of the sales made by GHI. Additionally, the taxpayer shares in the profits/losses<br />
made by GHI. The Department determined that the amounts received (% of sales and profits)<br />
would be taxable gross receipts.<br />
23. Non-taxable food<br />
The taxpayer used its sales tax returns to complete its CAT return. The taxpayer used net taxable<br />
sales and did not include non-taxable food in the CAT return.<br />
24. Homeowner construction allowance<br />
The taxpayer, a home builder, deducted the construction allowance that it provided to its<br />
customers for work that will be performed by the customer instead of the homebuilder (e.g.,<br />
septic system, drive way, fire place, etc.). The taxpayer receives the entire amount of the home<br />
loan ($200,000) from the bank and accounts for it as income. The amounts that it pays to its<br />
customers for work the customer will complete (construction allowance) are deducted from<br />
income as a contra-revenue. The Department determined that the deduction was not allowable for<br />
CAT purposes.<br />
25. Land - developer to homeowner<br />
The taxpayer, a home builder, purchases land from a developer and immediately sells it to the<br />
home owner (its customer). The taxpayer did not include the proceeds from the sale of the land as<br />
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a gross receipt. The Department determined that the proceeds from the sale of the land would be a<br />
taxable gross receipt.<br />
26. Rent receipts offset in expense<br />
The taxpayer sublet real property and offset the rental expense with the amounts received by<br />
subletting. The Department picked up the full amount of the sublet income.<br />
27. Concessionaire Expense<br />
The taxpayer hires concessionaires to operate its concessions. The contract provides that the<br />
taxpayer receives 65% of the sales and the concessionaire gets 35%. The contract also provides<br />
that the taxpayer will collect all monies and pay the 35% to the concessionaire. The taxpayer<br />
accounts for 100% of the sales as income and offset the 35% as a deduction to the income<br />
account. The Department determined that the taxpayer will need to include 100% of the sales as<br />
taxable gross receipts.<br />
28. Tooling reimbursements<br />
The taxpayer is a manufacturer of sun roofs for motor vehicles. The taxpayer has a part of the sun<br />
roof manufactured by another manufacturer (contract manufacturer). The taxpayer develops<br />
tooling that will be reimbursed by its customer (auto manufacturer) that it sends to the contract<br />
manufacturer. The Department determined that the amounts received for the tooling are taxable<br />
gross receipts.<br />
29. Inter-company reimbursements<br />
A taxpayer that filed as a combined group did not include inter-company reimbursements<br />
received from other members in the group. The Department determined that the reimbursements<br />
were taxable gross receipts as there is no deduction or exclusion for inter-member receipts for<br />
combined filers.<br />
30. Recovery of bad debts<br />
The taxpayer did not include recoveries of bad debts as taxable gross receipts. The taxpayer<br />
netted the recoveries in the bad debt expense account. The Department determined that the<br />
recoveries were taxable gross receipts and picked up all recoveries.<br />
31. Client reimbursable expenses<br />
The taxpayer (a consulting firm) bills for its services and separately states reimbursable expenses.<br />
The taxpayer did not include reimbursable expenses in its CAT filing. The Department<br />
determined that the amounts received for reimbursable expenses are taxable gross receipts.<br />
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32. Oil Exchanges<br />
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The taxpayer (an oil company) exchanges oil/gas it owns in Columbus, <strong>Ohio</strong> for oil/gas another<br />
oil company owns in Van Wert, <strong>Ohio</strong>. The taxpayer then sells the oil/gas it now owns in Van<br />
Wert, <strong>Ohio</strong> to a customer located in Van Wert. The taxpayer included the gross receipts from its<br />
sale of the oil/gas to its customer in Van Wert.. The Department determined that the taxpayer also<br />
should have included as taxable gross receipts the amount it exchanged with the other oil<br />
company. Further, the other oil company would also need to include as taxable gross receipts the<br />
amount it exchanged with the taxpayer.<br />
33. Agency<br />
The taxpayer argued that the relationship it had with independent contractors the taxpayer<br />
contracted with to distribute tangible personal property was an agency relationship. The taxpayer<br />
marked up the tangible personal property it purchased by 8% when selling the product to the<br />
independent contractors. As a result, the taxpayer argued that only the 8% mark up was subject to<br />
CAT. The Department determined that an agency relationship was not created by the taxpayer<br />
and the independent contractors and the entire amount the taxpayer received from the independent<br />
contractors was subject to CAT.<br />
34. R.C. 5751.013 gross receipts<br />
The taxpayer admitted to having the vendor ship widgets to an unoccupied address in Indiana so<br />
the vendor could avoid CAT on the gross receipts. The widgets actually never came to rest in<br />
Indiana, but instead were transported to <strong>Ohio</strong>. R.C. 5751.013 provides that the Department may<br />
assess CAT against any taxpayer who transfers tangible personal property into this state for the<br />
person's own use within one year after the person receives the property outside this state. The<br />
Department must prove that the person received the property outside the state to avoid in whole<br />
or in part the CAT.<br />
SITUSING<br />
35. Management fees for managing leases<br />
<strong>Tax</strong>payer provides lease management services for banks who lease property to bank customers.<br />
The taxpayer manages the billing, mailing, cash receipt, etc for the bank. The Department<br />
determined that the services could be sitused based on where the leased property is located/used,<br />
the banks’ headquarters or some other reasonable, consistent and uniform method.<br />
36. Airplane lease<br />
The taxpayer owns two single member LLCs that own one airplane each. The two planes are<br />
leased/rented to a third party (who has the pilots), who in turn, provides flights for the taxpayer.<br />
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The third party can also provide flights to unrelated parties as well using the taxpayer’s airplanes.<br />
The airplanes are hangered in <strong>Ohio</strong>, but are flown throughout the country. The Department<br />
determined that 100% of the gross receipts are sitused to <strong>Ohio</strong> as the airplanes are hangered in<br />
<strong>Ohio</strong>.<br />
37. Trademarks/Royalties<br />
<strong>Tax</strong>payers have attempted to situs trademarks/royalties using a corporate headquarters test. The<br />
Department has not been receptive to this type of situsing and has requested that the taxpayers<br />
provide information that indicates where the trademarks/royalties are being used [see R.C.<br />
5751.033(F)].<br />
38. Situsing of contract manufacturing<br />
The taxpayer, which has a division that does contract manufacturing, did not include the contract<br />
manufacturing receipts in its CAT filing. The Department attempted to situs the receipts based on<br />
the taxpayer’s manufacturing facilities (SC and OH) since the taxpayer indicated it did not know<br />
where they were shipping the product. After the taxpayer calculated the amount of tax due based<br />
on that situsing approach, the taxpayer found the information as to where the product was<br />
shipped. The taxpayer needed to include as taxable gross receipts all products shipped into <strong>Ohio</strong><br />
from both its <strong>Ohio</strong> and South Carolina locations.<br />
39. “Shipped from” v. “shipped to”<br />
The taxpayer utilized its “shipped from” location when situsing sales of tangible personal<br />
property for its CAT filings. Under audit, the Department determined that the “shipped to”<br />
location was the proper way to situs the taxpayer’s gross receipts relating to sales of tangible<br />
personal property.<br />
40. Sales office v. job site<br />
The taxpayer, an employer service provider, utilized its sales office as the means to situs its gross<br />
receipts from the sale of employment services. The Department determined that the job site (or<br />
post of duty) was the proper method to situs gross receipts from the sale of employment services.<br />
41. Repair receipts<br />
The taxpayer installed its product in <strong>Ohio</strong> for its customer. The product subsequently needed<br />
repaired and the taxpayer’s customer sent the product back to the taxpayer to be repaired in<br />
Pennsylvania. The taxpayer sent the repaired product back to the customer in <strong>Ohio</strong>. The taxpayer<br />
sitused the repair receipts to Pennsylvania. The Department determined that the benefit of the<br />
repair service was received by the customer in <strong>Ohio</strong>. As a result, the Department picked up the<br />
repair services as a taxable gross receipt. [See OAC 5703-29-17(44)]<br />
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42. Rewards points program<br />
2011 <strong>Ohio</strong> <strong>Tax</strong> Conference<br />
<strong>Ohio</strong> Commercial Activity <strong>Tax</strong> (CAT) Audit Experiences<br />
Appendix A<br />
The facts are the same as in 16 above. The Department determined that the receipts received by<br />
the rewards entity should be sitused based upon where the purchaser (hotel/franchisee) is<br />
receiving the benefit of the service. The Department determined the location of the rewards<br />
program participant (billing address/mailing address) should be how the receipts are sitused.<br />
43. Management fee<br />
The taxpayer was filing as a consolidated elected group at 50% and was providing management<br />
services to related members as well as to unrelated entities. The management fees were for<br />
services primarily performed in <strong>Ohio</strong>. The related member gross receipts were excluded from the<br />
CAT return. The receipts received from the unrelated entities would be taxable if the purchaser<br />
received the benefit in <strong>Ohio</strong>. The unrelated entities did not have any locations in <strong>Ohio</strong>. As a result<br />
the management fees were sitused outside of <strong>Ohio</strong>.<br />
44. Job postings<br />
The taxpayer receives gross receipts from customers (potential employers) who post a job on the<br />
taxpayer’s website. How should the gross receipts be sitused The Department determined that<br />
the situsing should be based on the post of duty for the job being posted. The Department felt that<br />
the taxpayer would have this information as it is part of the job search data. The Department also<br />
felt that the corporate headquarters of the customer would not be as accurate of a reflection of<br />
where the customer receives the benefit as the post of duty.<br />
45. Invoicing didn't match “ship to”<br />
The taxpayer sold tangible personal property and delivered the property to its customer. When<br />
filing its CAT returns, the taxpayer used a “ship to” report from it systems. The Department<br />
tested the accuracy of the report with a probe sample of approximately 75 receipts. Upon review,<br />
the Department determined that the report indicated that for one customer the taxpayer was using<br />
the wrong address (bill to) and the Department picked up the additional taxable gross receipts.<br />
46. Document storage<br />
The taxpayer provides storage services of tangible personal property (e.g., documents). The<br />
taxpayer will pick up the tangible personal property to be stored and take it to one of their storage<br />
facilities. When a customer needs to retrieve its tangible personal property, the customer calls the<br />
taxpayer and the taxpayer delivers the tangible personal property to its customer. The taxpayer<br />
typically tries to store the tangible personal property at one of its storage facilities closest to its<br />
customer. The situation could arise where the taxpayer actually stores its <strong>Ohio</strong> customer's tangible<br />
personal property in Pennsylvania, Kentucky, Indiana or Michigan. The Department determined<br />
that the receipts should be sitused based on the location of where the records were located in the<br />
hands of the customer prior to storage with the taxpayer.<br />
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2011 <strong>Ohio</strong> <strong>Tax</strong> Conference<br />
<strong>Ohio</strong> Commercial Activity <strong>Tax</strong> (CAT) Audit Experiences<br />
47. Consulting - benefit of purchaser<br />
Appendix A<br />
The taxpayer was a consulting firm related to human resource issues. The taxpayer sitused a<br />
portion of the services to <strong>Ohio</strong> based on a sales office approach. The Department is in the process<br />
of identifying the services and the benefits of the services to determine if the taxpayer’s method is<br />
reasonable, uniform and consistent.<br />
48. Advertising - OH v. US or OH v. World<br />
The taxpayer provides advertising services on it website. The taxpayer sitused the services based<br />
on <strong>Ohio</strong> population to worldwide population. The Department determined that approach was not<br />
reasonable and determined that <strong>Ohio</strong> population to US population was a reasonable method to<br />
situs the advertising receipts.<br />
49. Agency<br />
The taxpayer argued that the relationship it had with independent contractors the taxpayer<br />
contracted with to distribute tangible personal property was an agency relationship. The taxpayer<br />
marked up the tangible personal property it purchased by 8% when selling the product to the<br />
independent contractors. As a result, the taxpayer argued that only the 8% mark up was subject to<br />
CAT. The Department determined that an agency relationship was not created by the taxpayer<br />
and the independent contractors and the entire amount the taxpayer received from the independent<br />
contractors was subject to CAT.<br />
50. Cigarette Buy-downs<br />
<strong>Tax</strong>payer, a convenience store retailer, attempted to deduct amounts received from cigarette<br />
manufacturers known as cigarette buy-downs from gross receipts. The Department determined<br />
that these specific buy-downs are similar to manufacturer coupons and are subject to CAT for the<br />
taxpayer. NOTE: cigarette manufacturer buy-downs received by a cigarette wholesaler may not<br />
be subject to CAT for the wholesaler.<br />
REGISTRATION<br />
51. Foreign election - no<br />
A taxpayer registered as consolidated elected at 50%, but elected not to include any foreign<br />
entities. However, as part of the registration, the taxpayer registered a foreign entity. What is the<br />
appropriate method for the taxpayer to file The Department determined that the taxpayer needs<br />
to either include none of its foreign entities or all of its foreign entities.<br />
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52. Foreign common owner<br />
2011 <strong>Ohio</strong> <strong>Tax</strong> Conference<br />
<strong>Ohio</strong> Commercial Activity <strong>Tax</strong> (CAT) Audit Experiences<br />
Appendix A<br />
A taxpayer registered as a consolidated elected at 50%, but elected not to include any foreign<br />
entities. The common owner of the group was a foreign entity. The Department determined that<br />
the common owner must be part of the group even if the election not to include foreign entities<br />
has been chosen.<br />
OTHER<br />
53. Basis for filing<br />
During our reviews and audits, the Department has seen various methods used by taxpayers when<br />
filing the CAT return including, but not limited to:<br />
• Sales tax returns<br />
• Book balances<br />
• Federal income tax<br />
• Self generated CAT reports<br />
• Vertex (sales tax) reports<br />
The Department has stated that a taxpayer may start with any type of method, but the taxpayer<br />
needs to make sure that all receipts required under R.C. 5751 are reported in the CAT return.<br />
54. Probe sample<br />
The Department has the ability to use statistical sampling in its CAT audits [See R.C. 5751.09],<br />
but to date the only sampling that has been used relates to a probe sample to verify situsing.<br />
55. Manufacturing rebates are not receipts<br />
The Department has determined that manufacturing rebates received by the manufacturer’s<br />
customer for volume purchase discounts are not gross receipts to the purchaser. Further, the<br />
manufacturer does get a deduction (cash discount) for such payments. It should be noted that, not<br />
all reductions provided by the manufacturer are allowable deductions from gross receipts [See 19<br />
and 57].<br />
56. Little cooperation<br />
We have several audits/reviews that we received little cooperation from the taxpayer including,<br />
but not limited to:<br />
• Not providing organizational charts prior to the field visit<br />
• Not providing the chart-of-accounts or trial balance information prior to the field<br />
visit<br />
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2011 <strong>Ohio</strong> <strong>Tax</strong> Conference<br />
<strong>Ohio</strong> Commercial Activity <strong>Tax</strong> (CAT) Audit Experiences<br />
Appendix A<br />
• Not providing federal returns for the company or the individual owner<br />
• Not providing requested information during field visit<br />
• Not providing the $500,000 vendor list<br />
57. Inter-member refund<br />
We have had several consolidated elected audits where the taxpayer has forgotten to exclude<br />
inter-member gross receipts and the audits have resulted in a minimal assessment or a minimal<br />
refund.<br />
58. Estimate too high<br />
Some taxpayers have been estimating the amount of CAT and have been very conservative in the<br />
estimate creating an obvious refund position for the taxpayer.<br />
59. Factoring company interest receipts<br />
The taxpayer had created a factoring company (located in Barbados), which purchased the<br />
taxpayer’s accounts receivable at a discount. The taxpayer has a deduction when selling a<br />
receivable that has been previously subject to CAT. The Department looked at whether the<br />
interest earned on accounts receivables while in the hands of the factoring company would be<br />
gross receipts. The Department has made the decision not to pursue this issue at this time.<br />
60. Estimated - true up when 1120 filed<br />
Several taxpayers used an estimation method (that was not approved by the CAT Division) when<br />
preparing the CAT return. The Department reminds taxpayers that the Department can approve an<br />
estimation method (not currently provided by the statute or rule), only if the taxpayer requests<br />
such method in writing.<br />
61. Denied rebates not related to OH<br />
The taxpayer deducted all rebates related to volume purchasing when filing the CAT return<br />
regardless of whether the customers were in <strong>Ohio</strong> or not. The Department denied the deduction<br />
except for those volume purchasing rebates earned in <strong>Ohio</strong>.<br />
62. Denied negative sale of equipment<br />
The taxpayer deducted losses from the sale of equipment used in its business (IRC 1221 or 1231).<br />
The Department denied the deduction for losses and also did not pick up any gains relating to the<br />
sale of equipment used in business because of the exclusion found in 5751.01(F)(2)(c). [See 20]<br />
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2011 <strong>Ohio</strong> <strong>Tax</strong> Conference<br />
<strong>Ohio</strong> Commercial Activity <strong>Tax</strong> (CAT) Audit Experiences<br />
63. Denied manufacturer's coupon deduction<br />
Appendix A<br />
The taxpayer deducted all manufacturer coupons provided to end consumers and not the<br />
manufacturer’s customer (wholesaler/retailer). The Department denied the deduction for<br />
manufacturer coupons in accordance with OAC 5703-29-14(B)(3)(a).<br />
64. Denied fraud deduction<br />
The taxpayer is a retailer of tangible personal property and ships its product via United States<br />
mail. The taxpayer has identified that in some situations postal employees will open the box and<br />
remove the product. Next the postal employees will rewrap the box and forward it empty to the<br />
taxpayer’s customer. The taxpayer deducted the costs of fraud from its gross receipts. The<br />
Department determined that there is no deduction for fraud and as a result denied the taxpayer’s<br />
deduction.<br />
65. Credit card fee<br />
The taxpayer deducted the fees it paid to credit card companies for processing its sales<br />
transactions. The Department determined that the credit card processing fees are not deductible.<br />
66. Denied cash over/under deduction<br />
Department policy is to deny any deduction taken by a taxpayer for cash under. Department<br />
policy also includes not including cash over as a gross receipt.<br />
67. Denied 1st period (semi-annual – 7/1/05 to 12/31/05) bad debt deduction<br />
Most taxpayers have taken a bad debt deduction for the 1 st period (semi-annual period - 7/1/05<br />
through 12/31/05). The Department is denying this deduction as none of the bad debts relate to<br />
gross receipts that have been subject to CAT. Additionally, the bad debts have typically not been<br />
uncollectible for more than 6 months as required by R.C. 5751.01(F)(4)(c).<br />
68. $500K list not provided<br />
Some taxpayers have been resistant to providing a list of vendors selling more than $500,000 of<br />
products or services in <strong>Ohio</strong>. The Department has issued two subpoenas to obtain this information<br />
and will continue to issue subpoenas if necessary.<br />
69. Retroactive Consolidation Election<br />
When we audit a taxpayer which has not registered, who has registered as a separate taxpayer (but<br />
did not register all persons within its group) or a combined taxpayer, the Audit Division has been<br />
instructed to audit the taxpayer as if it were a combined taxpayer. The types of taxpayers<br />
mentioned above do not have the choice of registering as a consolidated elected taxpayer for the<br />
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2011 <strong>Ohio</strong> <strong>Tax</strong> Conference<br />
<strong>Ohio</strong> Commercial Activity <strong>Tax</strong> (CAT) Audit Experiences<br />
Appendix A<br />
audit period. However, the taxpayer can register as a consolidated elected taxpayer for future<br />
periods if it so chooses.<br />
Several taxpayers who are under audit have requested a retroactive consolidation election and the<br />
Department has reviewed each request on a case by case basis when making its determination. In<br />
general, the requests will be denied at the Audit Division level. In contrast, taxpayers who<br />
voluntarily come forward (not under audit) and request retroactive treatment from the CAT<br />
Division typically get retroactive treatment.<br />
70. Non-registered person with nexus that is part of a registered group<br />
The Department is taking the position that there is no statute of limitations for assessing an<br />
unregistered person that the Department determines has nexus with <strong>Ohio</strong> even though the person<br />
is part of a group (combined/consolidated elected) that is currently registered and filing returns.<br />
This position also applies if the person would be part of a combined/consolidated elected group<br />
with a person who has registered and is filing returns as a separate taxpayer.<br />
71. Successor Liability<br />
The Department contacted a taxpayer for audit and was told that the taxpayer’s assets had been<br />
sold to another unrelated company. The Department then contacted the purchaser and inquired if<br />
any of the purchase price was set aside to cover the amount of CAT due by the seller. No money<br />
was set aside. As a result, the purchaser was assessed the CAT liability as a successor in<br />
accordance with R. C. 5751.10.<br />
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