Nicolette Crouch, Associate Member, University of Cincinnati Law Review
This is the second article in a two-part discussion about Ohio sales and use tax. Click here to read an in-depth explanation of Cincinnati Reds, L.L.C. v. Testa.
I. The Reds and Ohio Tax Authorities Might Head to Extra Innings
In 2018, the Ohio Supreme Court in Cincinnati Reds, L.L.C. v. Testa, Tax Comm’r absolved the Cincinnati Reds from owing use tax on the purchase of bobblehead statues and other promotional items that are distributed to fans at select home games. Although the decision was a home run for the Reds, the club should consider the impact of the ruling on sales to purchasers of season tickets compared to purchasers of single game tickets. The court’s conclusion that attendees paid a portion of the ticket price for the right to receive promotional items does not apply as smoothly to season ticket holders who do not “purchase tickets to specific games with the expectation that they will receive a promotional item.”
Accordingly, this article explains practical implications of the Reds decision on the club. Part II reviews the Reds majority opinion that found the Reds exempt from paying use tax on bobbleheads and other promotional items given away at select games. Part III focuses on the dissenting opinion that contended that the Reds owed use tax on the purchase of promotional items from vendors. Finally, Part IV explains why the Reds ruling leaves open the possibility that the Ohio Commissioner of Taxation (the “Commissioner”) will seek use tax on the portion of promotional items which go to season ticket holders.
II. Majority Opinion in Cincinnati Reds, L.L.C. v. Testa , Tax Comm’r
In Reds, the Ohio Supreme Court held that the Reds were exempt from paying use tax on bobbleheads and other promotional items that were distributed at select home games throughout the team’s season. The case reached the Ohio 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 Reds purchased these promotional items to entice fans to attend games 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.
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 to fans for free. 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 Ohio’s “sale for resale” exemption (“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.
Although the BTA found that the attendees provided no consideration for the promotional items because attendees paid the same price to attend a game regardless of whether a promotional item was offered, the court sided with the Reds and held that attendees provided consideration 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.
III. Dissent in Cincinnati Reds, L.L.C. v. Testa , Tax Comm’r
Two of the seven justices dissented from the majority opinion in Reds. The dissent contended that fans paid only for the right to attend games and therefore received the promotional items as free giveaways. In other words, the dissent asserted that the Reds did not “resell” the promotional items to fan; rather, the transfer of promotional items to fans was gratuitous.
In support of this contention, the dissent pointed to the lack of consideration for the promotional items. Because the cost of promotional items was built into all ticket prices for the season, every fan helped pay for promotional items, but not every fan received an item. The dissent noted that more than 10,000 attendees did not receive promotional items at select games. Further, the dissent explained, the Reds advertising for the promotional items stated that the items were available for “free” and that quantities were limited.
The dissent explained that because the Reds offered and distributed promotional items gratuitously, the transfer was not a resale. Therefore, the dissent contended that the promotional items were not exempt under the Resale exemption, and the Reds owed use tax on the purchase of promotional items from vendors.
IV. Season Ticket Purchases Versus Single Game Ticket Purchases
The Reds dissent shines light favorable to Ohio tax authorities on Reds fans who purchase season tickets instead of single game tickets. While the majority’s conclusion that single-game purchasers “purchase tickets to those specific games with the expectation that they will receive a promotional item,” the Commissioner would likely argue that the same is not true for purchasers of season tickets. Distinct from single-game purchasers, season ticket purchasers buy tickets for games without “separate and explicit” consideration of promotional items. Indeed, it is likely that many season ticket holders purchase season ticket packages months before the Reds advertise or even order promotional items. Therefore, season ticket purchasers do not pay a “separate portion” of the ticket price for the right to receive the promotional item.
Within this context, season ticket purchasers who receive promotional items at select games receive them gratuitously, as the dissent claims. Under the Reds majority framework, the portion of promotional items purchased by the Reds which go to season ticket purchasers is not exempt under the Resale Exemption. Consequently, the Commissioner has grounds to argue that the Reds owe use tax on the percentage of promotional items which go to season ticket holders.
The Reds sometimes sell more than 15,000 season tickets a year. Accordingly, the club will likely resist owing use tax on the portion of promotional items purchased by the Reds which go to season ticket purchasers. The Reds should consider adding proper contractual guarantees to season ticket holder agreements to convert the transfer of promotional items into resales. Additionally, the Reds should ensure that each season ticket holder receives a promotional item at applicable games. Otherwise, season ticket purchasers who receive promotional items at select games receive them gratuitously.
But in the meantime, the Commissioner might seek use tax on the portion of promotional items going to season ticket holders. After all, in baseball, “[i]t ain’t over till it’s over.”
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 ¶ 21.
Id. at ¶ 36.
Id. at ¶ 55.
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. ¶ 11-12.
See id. at ¶ 13-14; Ohio Rev. Code Ann.§ 5739.01(E) (West 2019); Ohio Rev. Code Ann.§ 5741.02(C)(2) (West 2018).
Id. at ¶ 15.
Id. at ¶ 16-17.
Id. at ¶ 17.
Id. at ¶ 18, 26.
Id. at ¶ 24.
Id. at ¶ 36.
Id. at ¶ 38.
Id. at ¶ 46.
Id. at ¶ 49.
Id. at ¶ 47.
Id. at ¶ 44.
Id. at ¶ 55.
122 N.E.3d. at ¶ 21.
Id. at¶ 32.
122 N.E.3d. at ¶ 22.
Steve Watkins, All-Star Game lifts Reds season ticket sales to GABP record, Cincinnati Business Courier (Apr. 1, 2015) https://www.bizjournals.com/cincinnati/news/2015/04/01/all-star-game-lifts-reds-season-ticket-sales-to.html.
Nate Scott, The 50 greatest Yogi Berra quotes, For the Win (Mar. 28, 2019) https://ftw.usatoday.com/2019/03/the-50-greatest-yogi-berra-quotes.