Ohio OK’s retroactive consolidated CAT election

Ying Lee
T +1 513 345 4578

Doug Kleiner
T +1 513 345 4631

Christopher J. Garman
T +1 216 858 3696

Jason Gajramsingh
T +1 513 345 4529

Sam Barnett
T +1 513 345 4573

Jamie C. Yesnowitz
Washington, DC
T +1 202 521 1504

Chuck Jones
T +1 312 602 8517

Lori Stolly
T +1 513 345 4540

Patrick Skeehan
T +1 215 814 1743

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

Background 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.

Decision 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.

Commentary 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.

1 Nissan North America, Inc. v. McClain, No. 2016-1076, Ohio Board of Tax Appeals (Oct. 9, 2019).
2 Am. Sub. H.B. 66, Laws 2005.
3 OHIO REV. CODE ANN. § 5751.001(F).
4 OHIO REV. CODE ANN. § 5751.012. Ohio generally employs a bright-line nexus requirement on entities with at least $500,000 in annual Ohio gross receipts. OHIO REV. CODE ANN. § 5751.01(H)(3),(I)(3).
5 OHIO REV. CODE ANN. § 5751.012(C).
6 OHIO REV. CODE ANN. § 5751.011. Taxpayers who are members of a commonly controlled group and do not elect to file consolidated are required to file a combined CAT return, in which intercompany transactions remain subject to the CAT, but only entities with Ohio nexus are included.
7 OHIO REV. CODE ANN. § 5751.011(C)(1)(a).
8 OHIO REV. CODE ANN. § 5751.011(D).
9 OHIO ADMIN. CODE § 5703-29-04(B)(4)(b).
10 Id.
11 The entities included: (i) Nissan Infiniti Lease Trust, with which Nissan engaged in leasing transactions; and (ii) Nissan Motor Acceptance Corporation, which serviced the leases.
12 Citing Procter & Gamble Co. v. Evatt, 142 Ohio St. 373 (1943).

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.