Ohio CAT Sourcing – Lessons From Two Cases

Two recent Ohio Supreme Court decisions provide guidance regarding the sourcing of tangible personal property sales for Ohio CAT purposes. The decisions involve interpreting the location of a property’s ultimate receipt when the buyer directs property to its ultimate location.

Ohio’s sourcing rule

For CAT purposes, gross receipts from the sale of tangible property are sourced to Ohio if the purchaser receives the property in Ohio, which, under Ohio Revenue Code Section 5751.033(E), is the place at which the property “is ultimately received after all transportation has been completed.”

Ultimate receipt determined by purchaser, not ultimate end user

In VVF Intervest LLC v. Harris, VVF manufactured products in Kansas and sold them to High Ridge Brands (HRB), which arranged shipment of the goods to an Ohio distribution center via a third-party carrier. HRB held the goods in Ohio until receiving orders from national retailers, then used third-party carriers to ship the goods to out-of-state distribution centers. At the time of sale, VVF did not know the products’ ultimate destinations beyond Ohio.

VVF argued that Ohio was not the place where products were “ultimately received,” and therefore, the products were not subject to Ohio CAT because Ohio delivery from Kansas to the Ohio distribution center was just one leg of the transportation and continuous delivery process.

The Ohio Supreme Court disagreed, holding that when products left the Ohio distribution center, they did so because of a second sale by HRB to an out-of-state retailer. The sale at issue in this case – the sale from VVF to HRB – was the first sale and that sale concluded in Ohio.

The court found that Ohio law does not speak in terms of an ultimate delivery location in relation to end users. Rather, it concentrates on where the purchaser ultimately received the property from the taxpayer. According to the court, “[t]he statutory analysis does not follow the goods indefinitely; it stops when the seller’s delivery obligation is fulfilled and the purchaser receives the property.” Accordingly, the court found that VVF’s sales of products to HRB that were delivered to an Ohio distribution center were Ohio sales for CAT purposes.

Insufficient documentation to support product movement

In Jones Apparel Group/Nine West Holdings v. Harris, Jones Apparel sold products to DSW that were initially shipped to DSW’s Ohio distribution center. DSW would then “pick and pull” merchandise from the distribution center and send it on to DSW’s individual retail stores. At the time of the sale, Jones Apparel did not know how long products would sit in the Ohio distribution center or to which retail stores DSW would eventually ship the products.

Jones Apparel argued that sales of merchandise that eventually left the Ohio distribution center for placement in DSW’s retail stores outside Ohio should not be sourced to Ohio.

However, rather than providing evidence directly from DSW affirming where products were ultimately delivered, Jones Apparel used statistical sampling and other observational conclusions based on DSW’s operations. It concluded that 80% of the items it sold to DSW should be treated as ultimately received by DSW in locations outside of Ohio. Specifically, Jones Apparel relied on testimony from two of its employees, a review of DSW’s 10-K report, and common knowledge that merchandise shipped to a distribution center eventually gets distributed throughout the United States.

The tax commissioner argued that the CAT sourcing rule creates a contemporaneous knowledge requirement such that a taxpayer’s subjective knowledge at or near the time that transactions occur should be the basis for sourcing determinations.

The Ohio Supreme Court rejected the commissioner's position as not supported by the statute. Instead, the court held that taxpayers can acquire knowledge and documentation after transactions take place to support a claim that sourcing should be outside of the state.

However, the court also held that Jones Apparel did not provide sufficient evidence to support its claim.

The court rejected Jones Apparel’s evidence, stating that a taxpayer must “make a quantitative showing of the amount of the claimed refund with documentary evidence that justifies the issuance of a refund.” The court found that, although an inference can be made that some portion of merchandise ends up outside Ohio, Jones Apparel failed to provide documentary evidence establishing the gross receipts of merchandise that actually was transported out of Ohio.

Crowe observation

Although the taxpayer lost in both cases, these decisions offer a practical road map for Ohio CAT taxpayers to assess sourcing positions. Documentation that a purchaser moves goods from Ohio to out-of-state locations might support treating those sales as sourced outside Ohio.

Looking ahead

Ohio CAT taxpayers should revisit sourcing positions involving distribution centers and multileg shipments to evaluate whether contracts, shipping terms, and customer documentation establish where purchasers ultimately receive goods. Where gaps exist, taxpayers should implement processes to obtain and retain contemporaneous or post-sale evidence to substantiate sourcing positions and support potential claims that certain products delivered to Ohio locations should be sourced outside of Ohio for CAT purposes.