Ohio Tax - Manufacturers' Education Council

2011 Ohio Tax Conference
Ohio Commercial Activity Tax (CAT) Audit Experiences
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.
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