Ohio is the second state this year to extend a tax obligation to remote internet sellers based on their use of software or internet cookies — temporary or permanent text data files placed on in-state computers and devices to help track tastes so businesses can better market to customers.
This spring, Massachusetts whipped up a sales tax obligation for internet vendors that use such cookies. The policy was challenged and the Massachusetts Department of Revenue ended up revoking it just before it was set to take effect July 1. Yet the setback is temporary: The department says it will propose a similar regulation in the future, “after public notice, comment, and hearing.”
While Massachusetts picks up the crumbs of its policy, the Ohio Department of Taxation may be preparing to bake the new policy into a sales tax information release so it will be more palatable for businesses and consumers alike.
Cookies and agreements may trigger substantial nexus
Under House Bill 49, “substantial nexus” with Ohio is presumed to exist when a seller has gross receipts exceeding $500,000 (in the current or preceding calendar year) from the sale of tangible personal property or taxable services in Ohio, and the seller:
- uses in-state software to sell or lease taxable tangible personal property or services to consumers in Ohio, or
- provides or enters into an agreement with another person to provide a content distribution network in Ohio to accelerate or enhance the delivery of the seller’s web site to consumers
The measure defines “in-state software” as computer software stored on property in Ohio or distributed within Ohio for the purpose of facilitating a seller’s sales. These are the internet cookies, and they’re quite common.
“Content delivery network” (CDN) is defined as “a system of distributed servers that deliver web sites and other web content to a user based on the geographic location of the user, the origin of the web site or web content, and a content delivery server.” It’s because of CDNs that when you search online for restaurants, you see advertisements for nearby restaurants, not for those located across the country or around the globe.
Ohio’s commercial activity tax
There’s a good chance Ohio’s internet cookie tax will be challenged, just as the Massachusetts policy was. It if is, Ohio will surely defend it to the full extent of the law. When its commercial activity tax (CAT) was challenged by no fewer than three plaintiffs, the Ohio Tax Commission defended its policy court by court until it stood before the Ohio Supreme Court, where it prevailed.
The Ohio Supreme Court determined that a business did not have to have a physical presence in Ohio for the state to impose a tax obligation on it. Instead, “CAT’s $500,000 sales-receipts threshold is adequate quantitative standard that ensures that taxpayer’s nexus with Ohio is substantial.” The ruling noted that Ohio defines “doing business” as “engaging in any activity … that is conducted for, or results in, gain, profit, or income, at any time during a calendar year.” Physical presence doesn’t figure in (Ohio tax nexus: no physical presence needed).
Ultimately, the three plaintiffs decided to forgo a petition for review before the United States Supreme Court; they settled with Ohio and agreed to collect and remit the CAT.
However, the CAT is different from sales and use tax, and Ohio may find defending it (if it is challenged) to be a more difficult task. Steve DelBianco of NetChoice, for one, was willing to take Massachusetts to court to argue that “a cookie on your computer is [not] the same thing as a storefront in a strip mall.” It remains to be seen where his appetite for battling a tax obligation stemming from cookies stands now.
States are increasingly thinking outside the box
States wishing to obtain sales and use tax revenue from non-collecting remote sellers are learning to think outside the box. Minnesota and Washington are preparing to tax certain marketplace providers. With Massachusetts and Ohio, it’s cookies. What, one wonders, will be next?
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