Nicolette Crouch, Associate Member, University of Cincinnati Law Review
This is the first article in a two-part discussion about Ohio sales and use tax. Click here to read the follow-up, which more closely analyzes the practical consequences of the ruling in Cincinnati Reds, L.L.C. v. Testa for the Reds.
I. The Reds Cheer Another Victory
All I do is win, win, win no matter what . . . every time I step into the building; Everybody’s hands go up . . . .”
Following a Cincinnati Reds baseball victory, fans throughout Great American Ballpark can be seen raising their hands at the prompting of this song. After Cincinnati Reds, L.L.C. v. Testa, Tax Comm’r, the Reds can join fans and raise their hands in celebration of another victory – this one over the Ohio Commissioner of Taxation. In a disappointing decision for Ohio tax authorities, the Ohio Supreme Court decided that the Reds are exempt from paying “use” tax under Ohio’s “sale for resale” exemption on bobblehead statues that are given away to fans at games. Although taxpayers cheer this victory alongside the Reds, the Reds decision may result in less tax revenue for Ohio, meaning that the Commissioner may look for other ways to make up this revenue such as enacting new taxes, raising tax rates, or broadening the tax base of existing taxes.
This article discusses the real-world implications of the Reds decision. Part II reviews sale and use tax law in Ohio. Part III focuses on the Ohio Supreme Court’s recent ruling in Cincinnati Reds, L.L.C. v. Testa, Tax Comm’r that found that the Reds were exempt from paying use tax on bobbleheads and other promotional items that were given away at select games. Finally, Part IV explains why Ohio Supreme Court should have given more weight to the administrative burden and practical effects created by the Reds ruling.
II. Sales and Use Tax in Ohio
Sales tax is imposed on retail sales to consumers of tangible personal property unless an exemption applies. Many consumers are familiar with sales tax and recognize the tax when it appears as a line item on the bottom of receipts. For example, when Ohio consumers purchase clothing at Marshalls, they see a line item on the receipt for sales tax. Sales tax is a flow-through tax, meaning the seller collects the tax from the buyer at the time of purchase and remits the collected money to the state taxing authority. In the Marshalls example, Marshalls collects the sales tax liability paid and remits the collected money to the Ohio Department of Taxation.
But consumers are less familiar with the use tax. The use tax simply fill in gaps where sales tax leave off. If sales tax is due, but not collected by the seller for whatever reason, a use tax of equal amount is due from the buyer. Use tax is applied to a buyer when a sale takes place out of state, such as when an Ohio resident buys an item in Indiana but “uses” the item in Ohio. If the seller does not collect the use tax at the time of purchase and remit it to the Ohio Department of Taxation, the end user is required to remit the use tax directly to the taxing authority.
Ohio provides many exceptions and exemptions from sales and use tax, one of which provides that items bought exclusively for resale are exempt from sales and use tax. This “sale for resale” exemption (“Resale Exemption”) allows a purchaser to avoid paying sales or use tax on an item that the purchaser buys with the intent to resell the item to a consumer in the same form. The Resale Exemption acts to prevent double taxation as an item moves through the stream of commerce, first, from the manufacturer to a retailer, and second, from the retailer to the end consumer. For example, a retailer who buys clothing from a manufacturer with an intent to resell the clothing does not have to pay sales tax on the clothing at the time of the purchase. Instead, the tax flows through to the end customer; the retailer collects sales tax liability from the customer at the time of sale and remits the collected money to the Ohio Department of Taxation.
III. Cincinnati Reds, L.L.C. v. Testa , Tax Comm’r
In 2018, the Ohio Supreme Court held that the Reds were exempt from paying use tax on bobbleheads and other promotional items that were given away at select home games throughout the team’s season. The case reached the Supreme Court after the Ohio Board of Tax Appeals (“BTA”) upheld the Commissioner’s determination that the Reds owed use tax on promotional items that the team bought from vendors. At the BTA hearing, the Reds CFO explained that the Reds advertised bobbleheads and other promotions items like shirts, towels, bats, and player cards in advance of the game using radio, television, billboards, and fliers. The purpose of the promotional items was to entice fans to attend games that otherwise might have had lower attendance. The Reds purchased these promotional items from third-party vendors and factored that cost into the price of all tickets sold during the season, along with other overheads costs. This allowed the Reds to avoid charging higher ticket prices at games where bobbleheads were given away. When the bobbleheads or other advertised promotional items ran out, the Reds provided fans with alternative items, because, as the CFO explained, fans expected to receive the advertised promotional items upon attending the game.
The BTA found that the Reds owed use tax on the promotional items because the Reds purchased the items with the intent to give them away for free to fans. The Reds challenged this finding and argued that the promotional items were purchased for resale and therefore, the promotional items were exempt from sales and use tax under the Resale Exemption.
Accordingly, the Ohio Supreme Court’s analysis focused on whether the Reds purchased the bobbleheads with the intent to resell them. The court reasoned that in order for these promotional items to fall under the Resale Exemption, the Reds had to prove that the transactions met the definition of a “sale” under Ohio Revised Code (“ORC”) 5739.01(B)(1). The court explained that a “sale” required the transfer of possession or title of the property for “consideration,” which has a specific legal meaning. Thus, the Reds would prevail only if they could show that attendees provided consideration in exchange for the promotional items, instead of merely receiving the items for free.
The BTA found that the attendees provided no consideration for the promotional items because the attendees paid the same price to attend a game regardless of whether a promotional item was offered. In other words, the BTA held that attendees paid only for the right to attend the game and received the promotional item for free. But the Ohio Supreme Court disagreed. The court sided with the Reds and held that attendees indeed provided consideration in exchange for the promotional items. The court concluded that attendees paid one portion of the ticket price for the right to attend the game and paid a separate portion of the ticket price for the right to receive the promotional item.
Accordingly, the court held that the Reds purchase of these bobbleheads and other promotional items met the requirements of the Resale Exemption and therefore, the Reds were not required to pay use tax on the bobbleheads when the Reds purchased them. Instead, because use tax is levied on the end consumer, the fans bear the burden of paying the use tax associated with these promotional items; the Reds bear the burden of collecting and remitting the use tax payments.
Although the Reds decision absolved the Reds themselves from owing use tax on the bobbleheads and other promotional items (collectively, “Giveaways”), Ohio taxing authorities are permitted to seek use tax on the “separate and explicit” resale of bobbleheads and other promotional items to ticket buyers. After all, Ohio’s primary source of revenue is sales and use tax. Therefore, the Reds may be required to collect and remit use tax on the portion of the ticket price allocated to just the Giveaways.Yet, the burden of collecting use tax on the Giveaways is notably absent from the court’s opinion in Reds. Additionally, the Reds decision could open the doors for taxpayers to attempt to extend the Resale Exemption to other promotional items that customers “expect that they will receive. . . .”
A. Challenges of Collecting Sales Tax on Giveaways after Reds
After the Reds decision, Ohio may direct the Reds to collect and remit use tax on the portion of the ticket price allocated to just the Giveaways. Under ORC 5739.025, the amount of tax owed on the Giveaways is determined by the price of the item sold. The price of a Giveaway could include the cost of the item, transportation costs, delivery charges, storage and distribution costs, and any other charges necessary to complete the sale. After the price of a Giveaway is determined, the Reds would generally multiply the price by the statutory tax rate.
However, because the Reds included the price of the Giveaway into the overall ticket price, determining the use tax on just the Giveaways would be complex and burdensome because it is difficult to allocate a portion of the ticket price to the Giveaways. The overall ticket price for a sporting event includes other costs such as overhead costs and is heavily influenced by demand, weather conditions, overhead costs, and other factors. Importantly, admissions to sporting events are generally not subject to sales tax in Ohio (“Admissions Exemption”). Therefore, the Reds would have to mechanically separate the price of Giveaways from the price of attending a game.
This administrative burden and business risks connected with raising overall ticket prices to reflect the use tax would likely lead the Reds to resist collecting and remitting use tax on Giveaways. The Reds would likely argue that the Giveaways are covered by the Admissions Exemption and therefore, the Reds do not have to collect sales or use tax from fans for both the ticket purchase and the Giveaway “purchase.” Accordingly, the Reds decision likely means a win for the Reds and a loss for the Ohio sales and use tax fund: Reds 1 Ohio 0.
B. Potential Impact on Other Promotional Items after Reds
The Reds decision may expand the Resale Exemption to transactions that previously generated sales and use tax revenue for Ohio. The Reds case provides grounds for taxpayers to argue that transactions involving promotional items qualify for the Resale Exemption if the promotional item is an integral part of a customer’s overall purchase and its cost is included in the overall purchase price.
For example, in Burger King, Inc. v. State Tax Comm., a New York appeals court held that purchases of paper products used to hold food to be sold to customers fell within New York’s resale exemption. Although the Burger King case was decided under New York law, after the Reds decision, an Ohio court would likely hold the same given a similar set of facts. Like the fans who purchased bobbleheads in Reds, restaurant patrons purchase paper and plastic products used as containers for food and beverages. Indeed, a customer cannot purchase a cup of coffee without simultaneously purchasing a container to hold the beverage. Therefore, under Reds, an Ohio court would probably conclude that a restaurant’s purchase of paper and plastic products falls within the Resale Exemption. To the extent that taxpayers paid sales and use tax on promotional items before the Reds decision, taxpayers now have a strong argument that more purchases of these promotional items qualify for the Resale Exemption. Ohio may consequently collect less tax revenue: Taxpayers 1 Ohio 0.
The Reds decision is double strikeout for the Ohio Department of Taxation. In addition to likely not getting a cut of the Giveaways under the Admissions Exemption, the Reds decision will likely encourage Ohio taxpayers to test the limits of the decision and seek the Resale Exemption for other promotional items. The real-world impact of both these possibilities is less sales and use tax revenue for Ohio. However, taxpayers should keep in mind that the Reds case dealt with facts that were favorable to the Reds. Had the case dealt with purchases other than ticket purchases, an escape route like the Admissions Exemption may not have been available. Therefore, although taxpayers may cheer the idea of not paying sales and use tax for promotional items, taxpayers should also weigh the administrative burden and business risks connected with shifting the burden of paying the tax to customers. Taxpayers should consider paying the tax themselves and making up the costs in other ways.
In conclusion, the Reds case resulted in a Reds victory and a milestone for Ohio sales and use tax jurisprudence. We can expect to see taxpayers push the limits of this decision in the near future.
DJ Khaled, All I Do Is Win (We The Best Music Group, 2010).
Cincinnati Reds, L.L.C. v. Testa, Tax Comm’r, 155 Ohio St. 3d 512, 2018-Ohio-4669, 122 N.E.3d 1178 (Ohio 2018).
Id. at ¶ 36.
Hellerstein & John A. Swain, State Taxation ¶ 12.01, 3rd ed. 2001; Ohio Dep’t of Taxation, Sales & Use Tax, Ohio.gov, https://www.tax.ohio.gov/sales_and_use.aspx (last visited Sept. 28, 2019).
State Taxation at ¶ 12.01.
See Ohio Dep’t of Taxation, Sales & Use Tax, Ohio.gov, https://www.tax.ohio.gov/sales_and_use.aspx (last visited Sept. 28, 2019); 122 N.E.3d 1178 at ¶ 14.
State Taxation at ¶ 16.01.
What is the difference between sales tax and use tax?, Sales Tax Institute, https://www.salestaxinstitute.com/sales_tax_faqs/the_difference_between_sales_tax_and_use_tax (last visited Sept. 28, 2019).
Ohio Rev. Code Ann.§ 5741.12 (West 2009).
Ohio Rev. Code Ann.§ 5739.01(E) (West 2019); Ohio Rev. Code Ann.§ 5741.02(C)(2) (West 2018).
Dan Trevas, Must Sports Team Pay Tax on Bobbleheads and Other Giveaways?, Oral Argument Previews (June 12, 2018) http://www.courtnewsohio.gov/cases/previews/18/0613/0613.asp#.XY5V2mZ7nsN.
Cincinnati Reds, L.L.C. v. Testa, Tax Comm’r, 155 Ohio St. 3d 512, 2018-Ohio-4669, 122 N.E.3d 1178, at ¶ 36.
See id. at ¶ 4-13.
Id. at ¶ 7.
See id. at ¶ 9.
Id. at ¶ 10.
Id. ¶ 11-12.
See id. at ¶ 13-14.
Id. at ¶ 15.
Id. at ¶ 16-17.
Id. at ¶ 17.
Id. at ¶ 18.
Id. at ¶ 36.
Id. at ¶ 24.
Id. at ¶ 36.
Id. at¶ 32.
Ohio Dep’t of Taxation, Annual Report Fiscal Year 2018, Ohio.gov, https://www.tax.ohio.gov/Portals/0/communications/publications/annual_reports/2018AnnualReport/AR2018.pdf (last visited Sept. 28, 2019).
Ohio Rev. Code Ann.§ 5739.03 (West 2019) (provides that the sales tax “shall be paid by the consumer to the vendor, and each vendor shall collect from the consumer, as a trustee for the state of Ohio, the full and exact amount of the tax payable on each taxable sale . . . .”)
See 122 N.E.3d.
Id. at¶ 36.
Ohio Rev. Code Ann.§ 5739.025(A) (West 2017) (“A vendor shall compute the tax on each sale by multiplying the price by the aggregate rate of taxes . . . .”).
See Ohio Rev. Code Ann. § 5739.01(H)(1) (West 2019).
Ohio Rev. Code Ann.§ 5739.025 (West 2017).
122 N.E.3d at ¶ 9.
See Tim Parker, Why The Prices Of Sports Tickets Vary So Much, Investopedia (Oct. 9, 2012), https://www.investopedia.com/financial-edge/1012/why-the-prices-of-sports-tickets-vary-so-much-.aspx.
See Ohio Rev. Code Ann. §§ 715.013 (West 2003), 5739.01 (West 2019), 5739.02 (West 2019); Ohio Dep’t of Taxation, Admissions Tax, Sales and Use, https://www.tax.ohio.gov/portals/0/communications/publications/brief_summaries/2009_brief_summary/admissions_tax.pdf (last visited Oct. 18, 2019).
Burger King, Inc. v. State Tax Commn., 421 N.Y.S.2d 668 (N.Y. App. Div. 3d Dept. 1979), aff’d as modified, 416 N.E.2d 1024 (N.Y. 1980).