News and Insights

Ohio Constitutional Challenge Settled Before Deadline for U.S. Supreme Court Review

Tax Development Apr 20, 2017

Instead of seeking U.S. Supreme Court review of Ohio’s bright-line economic nexus test for the Commercial Activity Tax (CAT), three taxpayers in a consolidated suit decided to settle their disputes with the state and comply with the tax. Three taxpayers consolidated under Crutchfield Corp. v. Testa, had been challenging Ohio’s bright-line test for economic nexus, which was implemented in 2005. The CAT test is imposed for the privilege of doing business in Ohio. Out-of-state businesses are subject to the tax with more than $500,000 in gross sales in Ohio, regardless of physical presence in the state. These taxpayers challenged the constitutionality of the bright-line test by raising the following issues:

  • Does Ohio CAT tax violate the U.S. Constitution’s Commerce Clause by imposing the tax on businesses with no physical presence in Ohio?
  • Is the bright-line presence rule sufficient to determine if a business has the required substantial nexus with the state to be subjected to a tax on the privilege of doing business?

The Supreme Court of Ohio determined that the privilege of doing business tax does not require in-state business activities. The Court distinguished the CAT tax from a sales and use tax, and therefore, the tax did not violate the physical presence requirement of the Commerce Clause as dictated by Quill. The Court found that the CAT tax was in the same constitutional class as an income tax, which has traditionally not required physical presence.

The Crutchfield case had important national significance in that the U.S. Supreme Court could have had the opportunity to revisit the physical presence requirement. The demise of this case will most likely disappoint those hoping for an extension of the physical presence requirement to income tax, as well as sales and use tax. Ohio’s success may also lead other states to adopt the bright-line economic nexus test to equalize taxation of in-state and out-of-state businesses.


Mary Bernard