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Christopher J. Garman
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Jamie C. Yesnowitz
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The Ohio Board of Tax Appeals (BTA) recently determined that the Ohio Department of Taxation erred in denying a taxpayer’s request to retroactively apply a consolidated election for Commercial Activity Tax (CAT) purposes.1
Ohio’s imposition of the CAT
The CAT is a privilege tax which generally applies to taxable gross receipts in Ohio received on and after July 1, 2005.2
The base of the CAT is gross receipts, defined as the total amount realized, without deduction for the cost of goods sold or other expenses incurred, from activities that contribute to the production of gross income.3
For taxpayer groups meeting at least a 50% common ownership requirement, a combined return including all members with Ohio nexus must be filed.4
Intercompany gross receipts remain subject to tax on combined returns.5
However, Ohio also provides an election to file CAT returns as a consolidated elected taxpayer group is available.6
For consolidated elected taxpayer groups, all members with common ownership must be included, but receipts from transactions between members are not subject to the CAT.7
The statutes specify that the binding election must be made and the related fee paid before the beginning of the first calendar quarter to which the election applies.8
A related rule provides that a combined taxpayer may make the election at any time after it has registered and that the election is binding for at least eight calendar quarters.9
In addition, the election is effective prospectively unless a retroactive application has been requested by the taxpayer and approved by the Ohio Tax Commissioner.10
The taxpayer, Nissan North America, Inc. timely filed Ohio CAT returns for the 2009- 2011 tax periods, and included several affiliated entities engaged in numerous intercompany transactions.11
In the returns, intending to file on a consolidated basis, Nissan excluded intercompany transactions from taxable gross receipts and included all affiliates with substantial nexus. However, Nissan failed to make an election to file as a consolidated elected taxpayer group until Oct. 25, 2011. For the tax periods at issue, there was no difference between the tax liability reported on Nissan’s return and the tax liability that would have been reported on a validly elected consolidated return.
The Department audited Nissan’s CAT returns for the 2009-2011 tax periods and issued an assessment on Nov. 6, 2013. The assessment was based on the determination that certain receipts from the intercompany transactions were subject to tax. If a proper election to file as a consolidated elected taxpayer group had been made in Nissan’s initial CAT registration, the assessment would not have mattered, because such transactions would have been excluded from taxable gross receipts. On Nov. 8, 2013, Nissan requested that its election to file on a consolidated basis be made retroactive to Jan. 1, 2009. The Commissioner denied the request in April 2014, noting that there is “no specific statutory mechanism by which the denial of a request may be appealed” and purporting that such denial was justified and within his discretion. Nissan appealed the determination to the BTA.
The BTA focused its analysis on Nissan’s argument that the Commissioner erred in denying its request for retroactive consolidated filing status, as the election would have allowed Nissan to exclude all of the gross receipts included in the assessment. Nissan presented many exhibits as well as witness testimony from four tax department employees. Specifically, Nissan argued that Commissioner was arbitrary and capricious in denying its request for retroactive application. The Commissioner contended that his denial was consistent with the applicable statute and rule, as well as a Department policy only allowing a change in filing status prior to commencement of an audit.
In its determination, the BTA noted that the statute does not prohibit retroactive application, and the related rule in fact provides a process for obtaining it. Because neither provides any specific requirements, the BTA found that the Commissioner has discretion to grant retroactive application regardless of audit status. Next, the BTA considered whether the Commissioner abused his discretion, resulting in an arbitrary or unreasonable result. Nissan argued that its intent to file as a consolidated taxpayer group was apparent from the substance of its returns, in which intercompany transactions were eliminated. Citing an Ohio Supreme Court decision, the BTA determined that the taxpayer has the right to amend returns to correct mistakes.12
Therefore, it found the Commissioner’s decision to deny Nissan’s request to apply its consolidated elected taxpayer status retroactively was unreasonable. Accordingly, the BTA found the denial to be an abuse of discretion and remanded the matter to the Commissioner for further action.
This taxpayer-friendly BTA decision appears to have been driven largely based on facts, particularly the inequity that would have resulted to a taxpayer that simply missed a filing methods election. In this case, there was plenty of evidence to support the taxpayer’s intention to file its CAT returns on a consolidated basis, despite its lack of a formal election. Given that the failure to make a timely election often dooms a taxpayer and prevents the granting of relief, the taxpayer was fortunate that the BTA took a more forgiving approach in this instance.
Even so, as the BTA decision can be interpreted to limit the Commissioner’s discretionary authority with respect to the CAT consolidated election, and potentially other areas of the Ohio tax law, it will be interesting to see whether the Commissioner appeals the decision to the Ohio Supreme Court. In the meantime, taxpayers subject to the CAT should be aware of their affirmative rights to correct procedural errors on previously filed returns for tax years that are still open under the Ohio statute of limitations, whether or not they are being audited by the Department.
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