This Week in State Tax

The Supreme Court of Ohio recently addressed whether a manufacturer and seller of pharmaceutical products should use its listed price for generic pharmaceutical drugs or the actual price paid by its customers for purposes of its Ohio Commercial Activity Tax (CAT) return. In the case at issue, the taxpayer contracted with retailers to supply drugs at agreed-upon prices and used third-party wholesalers to distribute the drugs to the retailers. When the taxpayer shipped the drugs to a wholesaler, it issued an invoice reflecting the “wholesale acquisition cost” (WAC), i.e., the list price. The parties understood that the distributor would deduct a contractually required chargeback from the WAC and remit the lower retailer contract price to the taxpayer. After selling the drugs to a retailer, the wholesaler remitted the retailer contract price to the taxpayer and submitted a chargeback claim for the difference between the contract price and the WAC; the taxpayer was contractually obligated to honor the chargebacks. The taxpayer reported Ohio CAT receipts based on the sales price after chargebacks. The Tax Commissioner assessed additional tax using the initially invoiced WAC as gross receipts and rejected the taxpayer’s treatment of the chargebacks. On appeal, the Board of Tax Appeals (BTA) reversed the Commissioner, holding that gross receipts for CAT purposes were the net amounts after chargebacks. It relied specifically on the statutory definition of “gross receipts” for CAT purposes which is the “amount realized” by the seller in a transaction.

The Commissioner appealed, objecting primarily to the BTA’s understanding of “gross receipts”. The Commissioner’s argument had several parts: the CAT statute prohibited deducting costs of goods sold or other expenses incurred from gross receipts with certain specified exceptions, but not chargebacks such as at issue here; the BTA definition would render various statutory exclusions from “gross receipts” (e.g., cash discounts and rebates) redundant; the chargebacks did not qualify for the cash discounts exclusion; and the BTA definition would allow some taxpayers to implicitly deduct costs of goods sold by combining buying and selling into a single net transaction.

The Ohio Supreme Court affirmed the BTA decision, agreeing that “gross receipts” is the money or property a seller actually receives in exchange for the property transferred. The taxpayer did not realize the list prices reflected on its invoices because the chargeback mechanism simply reconciled those prices to the lower retailer contract prices. The chargebacks did not represent deductions for expenses or cost of goods sold; instead, they reflected the amount the taxpayer actually received from distributors based on the retailer contract prices. Accordingly, the taxpayer did not realize the uncollected portion of the list price, and that amount was not part of the CAT base.

Please contact Dave Perry with questions about Perrigo Sales Corp. v. Harris.

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The Supreme Court of Ohio recently remanded a sales tax refund case to the Board of Tax Appeals (BTA), stating that the Court was “not sure what the [BTA] decided,” and that the opinion lacked “sufficient clarity” to allow for meaningful appellate review. The case involved a taxpayer who provided services to merchants and financial institutions to facilitate electronic transactions; two services were at issue: (a) debit authorization services used by banks and merchants to determine whether a customer has sufficient funds for a transaction; and (b) disbursement authorization services allowing customers to make electronic payments to a merchant. Also at issue were several services ancillary to each of the primary services that were also billed to the customers.

The taxpayer collected tax on the transactions and later sought a refund, claiming its services were not taxable automatic data processing (ADP) under Ohio law or were otherwise non-enumerated services and not subject to tax. The Tax Commissioner denied the refund claim as lacking sufficient evidence to establish eligibility for exclusion from tax, and the taxpayer appealed to the BTA. In its opinion (October 10, 2024), the BTA held that consistent with the Marc Glassman v. Levin decision of the Buckeye high court, the debit authorization service was not taxable as the true object was a formulaic yes/no answer as to whether the customer had sufficient funds in its account for a transaction. It did not address the taxability of the ancillary services related to debit authorization, saying that each individual service required a separate analysis under the State Supreme Court decision in Cincinnati Federal Savings and Loan (released after the Tax Commissioner final ruling on the refund). As to the disbursement authorization question, the Board disagreed with the taxpayer that the disbursement services should be considered exempt personal or professional services. Beyond that, however, it remanded the dispute to the Commissioner for consideration in light of Cincinnati Federal.

The taxpayer appealed the BTA decision to the Ohio Supreme Court arguing the disbursement authorization service is nontaxable and that the ancillary services for both the debit authorization and the disbursement authorization service are nontaxable. The taxability of the debit authorization service itself was not at issue as the Commissioner did not appeal the BTA finding that it was nontaxable.

The Supreme Court first noted it could not address the merits of whether the disbursement authorization service was taxable or not due to the lack of analysis, saying, “We are not sure what the [BTA] decided.” The BTA had found that disbursement authorization service shared similarities with the debit authorization service, but had also found the disbursement service was not an exempt personal or professional service. The Court noted, as well, that the Commissioner and the taxpayer disagreed as to what the BTA concluded in its opinion. It determined the taxability of disbursement authorization services required remand to the BTA and offered guidance for that review. First, the BTA should determine whether the service meets the definition of ADP under Ohio law and then address the degree to which the service involves personal or professional interaction. The BTA should also consider the various aspects of the disbursement authorization service such as transmitting and organizing payment data and movement of funds. As to the services ancillary to disbursement authorization, it reiterated its holding in Cincinnati Federal and charged the BTA with responsibility to determine the true object of each separately stated ancillary service and determine its taxability. Finally, the Court urged the BTA to expedite its consideration and decision, noting “the refund claim concerns tax periods dating back more than a decade.”

For further questions or information on CheckFree Services Corp. v. Harris, please contact Dave Perry. 

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The South Carolina Department of Revenue issued Information Letter #26-21 addressing the application of the state admissions tax to charges and fees associated with admission tickets. Although the Department has historically interpreted the 5 percent admissions tax to include additional charges and fees in the amount paid for admissions to places of amusement (and therefore included such amounts in the tax base), a temporary proviso in 2026-2027 Palmetto State budget limited the measure of the tax solely to the stated ticket price for one year. Any separate or additional charges are excluded from the tax base between July 1, 2026, and June 30, 2027. Excluded charges include, but are not limited to, service fees, convenience fees, processing fees, delivery fees, handling charges, credit card or payment processing fees, and fees associated with memberships or subscriptions required to purchase tickets. The guidance supersedes SC Revenue Ruling #90-10 and modifies SC Private Letter Ruling #11-2. The proviso will expire on June 30, 2027, unless reenacted by the South Carolina General Assembly.

Contact Nicole Umpleby with questions about Information Letter #26-21. 

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A Washington appellate court determined that genuine issues of material fact rendered a lower court’s grant of summary judgment improper in a case involving an out-of-state taxpayer’s nexus for Business and Occupation (B&O) tax purposes. The taxpayer was a Colorado-based corporation involved in franchising and subfranchising dental practices in various states, including Washington. One taxpayer affiliate sold dental prosthetics to the franchisees and subfranchisees. A sibling corporation, owned by the same shareholders, held the intellectual property and, in Washington, licensed it to a Washington subfranchisor that, in turn, licensed with the local subfranchised practices. Like the taxpayer, both affiliate entities were based in Colorado. Following an audit covering 2012 through 2018 for which the taxpayer provided only limited information, the Washington Department of Revenue issued an estimated B&O tax assessment after determining that certain income received by the taxpayer was attributable to Washington. The taxpayer paid the assessment and filed a refund action, arguing it lacked substantial nexus with Washington and the assessment was based on both improperly attributed and overstated income. Both parties moved for summary judgment. The superior court granted summary judgment to the Department and dismissed the refund action. The taxpayer appealed.

The taxpayer argued it lacked substantial nexus with Washington because the payments received from affiliated entities were profit distributions rather than taxable service income and therefore should not be included in determining substantial nexus with Washington. The taxpayer also challenged the auditor’s revised income classifications and allocations. The appellate court concluded that genuine issues of material fact remained regarding whether the payments were profit distributions, service income, or royalties and how they should be attributed for nexus purposes. It agreed, as well, that the basis for certain revisions made by the auditor remained unexplained. Therefore, the appellate court affirmed the denial of the taxpayer’s motion for summary judgment because the taxpayer failed to establish as a matter of law that it lacked substantial nexus with Washington. However, it also reversed the grant of summary judgment to the Department because genuine issues of material fact remained. It remanded the matter for a de novo review in which the taxpayer will bear the burden of proving that the auditor’s classification of income and calculation of liability was incorrect as well as demonstrating whether it has nexus with Washington, and if so, its tax liability.

Contact Michele Baisler with questions about M’KNIB Co. v. Washington Department of Revenue.

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