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The Ohio Commercial Activity Tax (“CAT”) became first applicable to most taxpayers starting in July of 2005. The CAT was intended to be a broad-based tax on gross receipts with few exemptions or exclusions. However, Ohio Revised Code Section 5751.01(F)(2)(l) provides an exclusion from the definition of gross receipts for “property, money, and other amounts received or acquired by an agent on behalf of another in excess of the agent’s commission, fee, or other remuneration.” On July 5, 2016, the Ohio Board of Tax Appeals (“BTA”) issued its first decision interpreting the agency exclusion, Willoughby Hills Development and Distribution, Inc. v. Testa, BTA Case No. 2015-1069 (7/5/2016).
In Willoughby, the taxpayer was a gasoline distributor that bought gasoline and various fuel products from Sunoco, Inc. and then resold the items to various service stations (“retailers”) in Ohio. The taxpayer asserted that many of the terms in its distributor agreement with Sunoco reflected Sunoco’s control over taxpayer’s actions and, therefore, reflected an agency relationship. The distributor agreement provided for the taxpayer’s purchase and resale of the gasoline and fuel products to Sunoco. The distributor agreement also contained limitations on how Sunoco’s trademarks, trade names, etc. could be used. The distributor agreement contained extensive language describing the rules for offering Sunoco credit cards. However, the distributor agreement also contained language describing the taxpayer as an independent contractor free to select its own customers and set its own selling prices and terms, although Sunoco could terminate or withdraw its approval at any time. The distributor agreement further provided that Sunoco was not responsible for any losses, damages, or claims arising from the taxpayer’s business.
The BTA noted that there are a variety of different master-servant relationships and, therefore, “there is no magic talisman for determining one’s employment status.” The BTA stated that the basic test is whether the employer has the right of control over the manner and means of the work being done, although the BTA acknowledged that control can be manifested in a variety of ways. Thus, the BTA concluded that the analysis was essentially a factual decision based on a review of all the surrounding facts and circumstances.
The BTA read the statutory exclusion as requiring that the taxpayer must be “authorized” by Sunoco “to act on its behalf to undertake a transaction for Sunoco.” The BTA concluded that the sale of the gasoline and fuel products to a particular retailer was not undertaken “on behalf” of Sunoco. While the BTA agreed that Sunoco controlled the retailer’s business operations through various standards manuals, the BTA concluded that the same directives were not usually imposed on distributors, such as the taxpayer. The BTA found that the taxpayer was “generically required to act in Sunoco’s ‘best interests’ by complying with company ‘minimum standards,’ ” but that the taxpayer maintained control over its own employees and equipment. Based on these findings, the BTA determined that the facts and circumstances did not support an agency relationship. Further, the BTA noted that no testimony was provided by a Sunoco witness to evidence an agency relationship and thereby negate the contractual language. Because statutory exclusions are construed narrowly and the Tax Commissioner’s findings are presumed correct, the BTA held that the taxpayer had not overcome its burden of proving that an agency relationship existed. The BTA’s decision in Willoughby is currently on appeal to the Ohio Supreme Court.
The agency exclusion is a common issue in many CAT audits, particularly since many contracts contain language limiting the asserted principal’s legal liability, similar to the independent contractor clause described in Willoughby. The Tax Commissioner has taken a narrow view of when an agency relationship exists during audits. There have been at least ten final determinations issued by the Tax Commissioner in the last few years on claims of agency, all determining that an agency relationship did not exist. Some of those cases were not appealed to the BTA. Based on the public record, a few of the cases that were appealed appear to have been settled at the BTA.
While the facts in Willoughby may be distinguishable from other agency cases, the decision highlights a number of important considerations in successfully asserting that an agency relationship exists. There is no set standard for determining that an agency relationship exists; a review of all of the facts and circumstances must be completed. The taxpayer has the burden of proving that an agency relationship exists.
Another important consideration, not necessarily evaluated in Willoughby, is whether an agency relationship exists for a specific purpose, such as the collection or transfer of funds. Likewise, the taxpayer does not appear to have challenged whether the receipts at issue were properly included in the definition of “gross receipts.” For example, in some situations, the taxpayer may not have a claim of right to the receipts and may not have recognized the receipts for federal income tax or accounting purposes.
If you have any questions about Commercial Activity Tax, contact Deb McGraw or any other ZHF professional.