Ohio Supreme Court Supports Commercial Activity Tax Determination Based on Prices Lower than Invoiced

The Ohio Supreme Court ruled that a drug manufacturer and supplier was subject to the Commercial Activity Tax (CAT) on amounts that were lower than listed on its invoices to its wholesale distributors because the lower prices reflected amounts actually received.¹ This ruling should prompt sellers whose receipts are subject to the CAT to analyze amounts on their invoices to ensure they reflect what they actually received. 

The taxpayer sells generic drugs and supplies to wholesale distributors that in turn sell the products to various retailers. The invoices the taxpayer provided to the wholesalers list a price for its products. However, the taxpayer also negotiates prices directly with retailers for an amount typically lower than the price listed on the invoice. Subsequently, the distributor pays the taxpayer based on the agreed upon price, rather than the higher invoiced price. This difference between the listed price and the negotiated price is referred to as a “chargeback.” The Tax Commissioner argued that the CAT should be based on the invoiced price. The Board of Tax Appeals (BTA) disagreed and concluded that the CAT is imposed on the amount realized—in this case, the lower, agreed upon price. On appeal, the Ohio Supreme Court affirmed the BTA’s decision.  

The Court explained that gross receipts, for purposes of the CAT, are defined as the total amount realized by a person without deduction for the cost of goods sold or other incurred expenses. While the statute does not define amount realized, the Court said that it was “evident” that the amount a person receives in exchange for the sale of property constitutes a gross receipt. This determination is backed up by the Internal Revenue Service (IRS) definition of amount realized, which refers to the sum of money received for the property. A straightforward application of amount realized shows that the amount realized by the taxpayer was not the listed price on the invoices but the amount actually received. 

The Court rejected a series of arguments put forward by the Tax Commissioner, none of which addressed the definition of gross receipts. The BTA did not, as the Commissioner contended, equate gross receipts with gross income under the Internal Revenue Code (IRC). Secondly, the Commissioner argued that the chargeback was an expense of doing business and, therefore, could not be deducted from the list price. The Court found this argument flawed because the taxpayer never actually received amounts based on the listed price, and the taxpayer did not deduct expenses from the amount realized. The Court rejected arguments that focused on various exclusions from gross receipts and the fact that the taxpayer’s internal accounting recorded the listed price. None of these arguments altered what was actually realized. 

Ryan’s Take and Action Steps 

The Supreme Court’s decision can be distilled to one main point: gross receipts for CAT purposes must reflect the amount actually realized. In this case, any further argument beyond what was actually received, including amounts listed on an invoice, was rejected. This decision should prompt taxpayers to reconcile their invoices with the amounts actually received. Clearly determining the amount realized in a transaction may be the cause of some confusion based on the fact pattern in this case. Ryan is here to assist you in determining what your actual receipts may be to ensure compliance with the Ohio CAT.  

 ¹ Perrigo Sales Corp. v. Tax Commr., 2026-Ohio-3648 (September 22, 2026).

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals.