News and Insights

No Second Bite at the Ohio CAT Apple

Tax Development Jun 15, 2017

Diversified Ingredients, Inc. (“Diversified”) challenged Ohio’s economic nexus standard in federal district court asserting that Ohio was prohibited from assessing its Commercial Activities Tax (CAT) against a taxpayer that merely sells tangible personal property, delivered by third-party carriers, into Ohio under the Interstate Income Act (IIA) commonly referred to as P.L. 86-272.1 The district court did not answer the substantive question but dismissed Diversified’s motion, stating that this was a matter to be decided in state tax court. The decision was appealed to the Eighth Circuit Court of Appeals on the grounds that the federal courts have exclusive jurisdiction to interpret and enforce P.L. 86-272. The Court of Appeals upheld the district court’s dismissal of the action.2 In its opinion, the Court reasoned that P.L. 86-272 only prohibits a state legislature from enacting a law that imposes an income tax on a taxpayer whose in-state activity is limited to the solicitation of sales. The Court cited Wrigley3 for the proposition that P.L. 86-272 “does not divest state courts of jurisdiction to decide whether the IIA [P.L. 86-272] bars a particular state tax assessment.” The opinion also noted that, as enacted, the CAT is an annual tax on “the privilege of doing business” and that the CAT “statute expressly provides that the CAT is ‘not subject to’ the IIA.”

Diversified appealed to the U.S. Supreme Court, and on June 12, 2017, the Court denied certiorari in the matter. This now leaves Diversified to either initiate an action against the CAT assessment or register with the state and pay the assessment. In light of the Ohio Supreme Court’s decision upholding the economic nexus standard in Crutchfield, Corp. v. Testa,4 and the ultimate settlement of the Crutchfield case, it is unlikely that Ohio’s economic nexus standard will be overturned. The next test awaiting the economic nexus standard, overturning Quill,5 is with the courts in the states that have expressly enacted laws that require sellers to collect sales tax in states in which they do not have a physical presence (e.g., South Dakota).

1 Diversified Ingredients, Inc. v. Testa, 2016 WL 2932160 (E.D. Mo. May 19, 2016).
2 Diversified Ingredients, Inc. v. Testa, No. 16-2791 (8th Cir. January 23, 2017).
3 Wis. Dept. of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214, 220-23 (1992).
4 Crutchfield, Corp. v. Testa, 39 N.E.3d 1276 (Ohio November 5, 2015).
5 Quill Corporation v. North Dakota, 112 S.Ct. 1904, May 26, 1992.


Mary Bernard