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Ohio Supreme Court: No ‘use tax’ for Reds on giveaways

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On Nov. 21, 2018, the Ohio Supreme Court concluded that the Cincinnati Reds baseball team did not have to pay use tax on promotional giveaway items, such as bobbleheads.1 Reversing the decision of the Ohio Board of Tax Appeals (BTA), the Court treated the promotional giveaways as components of sales eligible for the resale exemption from use tax.

Background During the course of a use tax audit, the Ohio Tax Commissioner determined that the Reds did not accrue and remit use tax from Jan. 1, 2008, through Dec. 31, 2010, on the purchase of promotional items. The Reds appealed the assessment to the BTA. During the course of the BTA hearing, the Reds’ Chief Financial Officer testified that the purpose of the promotional items was to drive ticket sales for baseball games that would otherwise have lower turnout. As such, the Reds claimed that their initial purchase of the promotional items qualified under the state’s resale exception.

On May 22, 2017, the BTA ruled against the Reds, basing the majority of its decision on the fact that not everyone who bought a ticket received a promotional item, which were only made available to attendees while supplies lasted.2 Accordingly, the BTA concluded that these promotional items were not resold to patrons but given for free, as an incentive to increase attendance to Reds games.

The Reds appealed to the Ohio Supreme Court, arguing that when a transfer of valuable property is made to induce the purchase of another item, the consideration paid is for both the property and the other item. A separately stated price for the property is unnecessary to establish that the property was transferred for consideration. In addition, the Reds claimed that the BTA’s decision was unreasonable and unlawful because the BTA’s material findings were not supported by any reliable and probative evidence.

Determination of what constitutes consideration The Ohio Supreme Court began its analysis with the proposition that use tax does not apply when the acquisition of property is exempt from sales tax.3 To prove that the acquisition of the promotional items at issue was exempt from tax, the Court examined the definition of “retail sale.” Ohio defines “retail sale” as “all sales, except those in which the purpose of the consumer is to resell the thing transferred or benefit of the service provided, by a person engaging in business, in the form in which the same is, or is to be, received by the person.”4 Pursuant to the definition, it was acknowledged that the Reds purchased promotional items as a “consumer,”5 leaving open the issue of whether the Reds purchased the promotional items for the purpose of reselling them.

In considering whether the Reds’ purchase of the promotional items had the purpose to “resell,” with the intent to make sales of the actual items, the Court then considered the Ohio statutory definition of “sale.” This definition includes “[a]ll transactions by which title or possession, or both, of tangible personal property, is or is to be transferred, or a license to use or consume tangible personal property is or is to be granted.”6 However, the key to applying this definition lies in whether the “transactions [are] for a consideration.”7 As such, the Reds were required to prove that they purchased the promotional items for the purpose of reselling them to fans, and whether fans provided consideration in exchange for the Reds' promise to give out promotional items at the games.

In trying to prove that the Reds purchased the promotional items in order to resell them to fans, the Reds argued that the team resells the promotional items by promising to distribute the items to fans. This promise creates a contractual expectation by the fans, who purchase tickets and attend the games as consideration for receiving the unique promotional items. The Court, basing its analysis on precedent, examined the issue of intent, determining, under the facts and circumstances, whether the taxpayer claiming the sale-for-resale exclusion bears the burden to prove its actual intent to resell.8 Under this examination, the Court agreed with the Reds’ second proposition of law, determining that the BTA was incorrect and unsupported in finding that the Reds intended to give away promotional items rather than to sell them. The Court pointed to testimony providing that the Reds advertise in advance to notify fans when specific promotional items will be distributed. Accordingly, fans purchase tickets to those specific games, expecting they will receive a promotional item. Further, in the event that the Reds run out of promotional items to provide to each fan, the Reds testified that they provide another item of equivalent value, such as a different promotional item or a ticket to a future game. Additionally, the costs of promotional items are included in ticket prices when they are set at the start of a season, taking into consideration that promotional items are specifically planned to be distributed at less desirable games in which tickets are not expected to sell out. The Reds’ rationale behind including the cost of the promotional item in the ticket price is twofold: one part of the ticket price accounts for the right to attend a less desirable game, and a separate part of the ticket price accounts for the right to receive the promotional item. Therefore, the Court concluded that the Reds met their burden to prove that they purchased promotional items for the purpose of reselling them to fans, as the promotional items constituted items of value, of which fans exchanged money (consideration), included in the ticket prices, highlighting that fans did not receive the promotional items unexpectedly, but rather as an explicit part of the bargain, along with the right to attend the game.

Application of the resale exemption The Commissioner argued that the Court’s holding in Hyatt Corp. v. Limbach9 applied in this case, and that the promotional items were not resold because the Reds did not make a taxable “sale” of the promotional items. In Hyatt, a hotel operator that paid cleaning companies to launder linens for its guests claimed that the linen-cleaning services were resold to guests and did not constitute a “retail sale.” The Court disagreed with the hotel operator with respect to sales to long-term (as opposed to transient) guests by relying on the definition of “sale.” The definition of “sale” includes “[a]ll transactions by which lodging by a hotel is or is to be furnished to transient guests.”10 In coming to this determination, the Court did not rely on a statute that had specifically subjected laundry cleaning services to tax, treating this statute as inapplicable to hotel stays by long-term guests.11

The Commissioner likened the present case and Hyatt in that the furnishing of lodging to long-term guests equates the sale of game tickets, thus falling outside the definition of “sale.” In the Reds’ case (and in contrast to Hyatt), the Court was not deciding whether the promotional items were considered taxable and constitute a “sale.” This is because transactions involving promotional items are defined as “sales,” which provides that “[a]ll transactions by which title or possession, or both, of tangible personal property, is or is to be transferred” are “sales.”12 The promotional items were an explicit part of the bargain, along with the right to attend the game that fans obtained in exchange for purchasing tickets. In contrast, in Hyatt, the Court found that the linen-cleaning service was not a separate and explicit part of the bargain between the hotel and its customers.

Further, the Commissioner argued that Ohio law exempting from sales tax certain enumerated advertising items that are purchased with the intent of using them to facilitate retail sales13 prevented the Reds from treating the promotional items in this case as purchases for resale. The Commissioner argued that due to the fact that the promotional items at issue in this case were not included in the statute, lawmakers must have intended that these promotional items be subject to tax. The Court disagreed, noting that the Reds’ purpose for purchasing the promotional items was to resell them along with the baseball game tickets.

Commentary This case struck a fine balance between the established basis of consideration given under contract law, and the facts and circumstances surrounding what justifies sale for resale treatment. In concluding that the transfer of promotional items to fans constituted a “sale” subject to the sale-for-resale exemption, so that the Reds were not liable for use tax on the promotional items, the Court strongly emphasized the expectation of the end consumer within the purchase.

As many other states have similar definitions for consideration and “retail sale” or “price,” businesses that provide promotional items to the consumers as an enticement for a sale may take this same issue up, given the prominence of promotional items associated with sporting event admissions. At least two other baseball teams have litigated the same issue, with differing results. In Wisconsin Department of Revenue v. Milwaukee Brewers Baseball Club,14 the Wisconsin Supreme Court ruled in favor of the Wisconsin Department of Revenue, holding that the costs of the Brewers’ acquisitions of promotional items were subject to use tax. However, in Kansas City Royals Baseball Corp. v. Director of Revenue,15 the Missouri Supreme Court held that a resale of promotional items had occurred and the resale exemption applied, as a transfer, barter or exchange of the title to or the use of the promotional items occurred. Although the promotional items were given away for free, the cost of purchasing those items was factored into the price for the tickets.

Further, companies in other industries that utilize similar promotional giveaways to drive business, or even as a means to compensate their employees via an informal fringe benefit, may want to consider whether such purchases should be subject to use tax. For example, the Nevada Supreme Court in Sparks Nugget, Inc. v. Nevada 16 explored the use tax implications on prepared foods (meals) served to customers and employees on a complimentary basis. In this case, a resort did not pay sales tax on purchases of the food, pursuant to the sales tax exemption for unprepared foods. However, once the food was prepared, some of it was sold to customers, for which sales tax was collected, and some of the food was given away to customers and employees as complimentary meals. The resort did not collect sales tax on the complimentary meals, but did pay use tax on the food used to prepare those meals. The resort filed a claim with the Nevada Department of Taxation seeking a refund of the use tax paid on those meals, but this claim was denied by the Department. The resort argued that the food it purchased and used for complimentary meals was not subject to sales or use tax, based on three Nevada provisions exempting “food for human consumption.” The Department’s denial cited one of the provisions’ exceptions, which provides that the food exemption does not apply to “prepared food intended for immediate consumption.” Upon appeal, the Court held for the resort. In doing so, the Court found that at no point in the transactions that occurred (the purchasing of unprepared foods/selling and/or giving of prepared foods) was the resort itself a purchaser of “prepared food intended for immediate consumption.” Further, the Court held that a state constitutional exemption17 was not violated when the resort prepared and distributed its exempted food in the form of complimentary meals. 



1 Cincinnati Reds, L.L.C. v. Testa, Ohio Supreme Court, No. 2018-Ohio-4669, Nov. 21, 2018.
2 Ohio Board of Tax Appeals, No. 2015-1707, May 22, 2017.
3 See Procter & Gamble Co. v. Lindley, 477 N.E.2d 1109 (Ohio 1985), which held that a manufacturer's purchase of artwork from artists was exempt from sales and use tax when the artwork was transferred to suppliers to prepare packaging and advertising materials used by the manufacturer.
4 OHIO REV. CODE ANN. § 5739.01(E).
5 OHIO REV. CODE ANN. §§ 5739.01(D)(1); 5741.01(F); 5739.03(A); 5741.02(B).
6 OHIO REV. CODE ANN. § 5739.01(B)(1).
7 OHIO REV. CODE ANN. § 5739.01(B).
8 Satullo v. Wilkins, 856 N.E.2d 954 (Ohio 2006).
9 634 N.E.2d 995 (Ohio 1994).
10 OHIO REV. CODE ANN. § 5739.01(B)(2).
11 OHIO REV. CODE ANN. § 5739.01(B)(3)(d).
12 OHIO REV. CODE ANN. § 5739.01(B)(1).
13 OHIO REV. CODE ANN. § 5739.02(B)(35)(a). This statute provides that the sales covered by its terms “consist[] of newspaper inserts, catalogues, coupons, flyers, gift certificates, or other advertising material that prices and describes tangible personal property offered for retail sale.”
14 331 N.W.2d 383 (Wis. 1983).
15 32 S.W.3d 560 (Mo. 2000).
16 179 P.3d 570 (Nev. 2008).
17 NEV. CONST. art. 10, § 3(A) establishes a broad sales and use tax exemption with respect to “food for human consumption,” stating that “the legislature shall provide by law for . . . [t]he exemption of food for human consumption from any tax upon the sale, storage, use or consumption of tangible personal property.” Although § 3(A) does not specifically define “food for human consumption,” it does specify that “[p]repared food intended for immediate consumption” and “[a]lcoholic beverages” must be excluded from the exemption.



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