Ohio Supreme Court Case – Corrigan v. Testa
The Ohio Supreme Court recently decided in Corrigan v. Testa that the state of Ohio cannot tax the gain realized by a non-resident owner’s investment interest in a pass-through entity operating in Ohio. This court case can significantly change Ohio’s current taxing scheme for non-resident owners that own a pass-through entity located in Ohio.
Under current law, Ohio requires a non-resident owner to apportion a portion of the gain realized from the sale of their interest in the pass-through entity to Ohio. This law only pertains to non-resident owners that own 20% or more of the pass-through entity. According to the Corrigan case, Ohio cannot tax the gain realized by a 20% or more non-resident owner generated from the sale of their interest in the pass-through entity. Corrigan’s ownership in the pass-through entity was purely for an investment purpose. It is not known yet if the Ohio Supreme Court would have come to the same conclusion if Corrigan was active in the day-to-day operations of the business.
The Ohio Supreme Court decision leaves some unanswered questions:
- If the owner was involved with the day-to-day operations of the business, would the Court have reached a different conclusion?
- How – or will – Ohio continue to pursue the taxation of gains for non-residents?
- Will Ohio appeal the decision to the U.S. Supreme Court, and if it does appeal, will the U.S. Supreme Court even agree to hear the case?
The state of Ohio has indicated it will provide guidance concerning the Corrigan case, but state officials are currently considering all their options for dealing with Corrigan.
Ohio Supreme Court – Crutchfield v. Testa
Crutchfield v. Testa is another case pending before the Ohio Supreme Court. This case is a challenge to Ohio’s bright line nexus standard that was adopted when the Commercial Activity Tax (CAT) was enacted. The bright line nexus is $50,000 in Ohio property or payroll and $500,000 in Ohio receipts. Other than sales in the state of Ohio, Crutchfield had no additional connections to the state of Ohio. The issue before the Supreme Court is whether Ohio’s bright line nexus is constitutional, is having only sales in the state of Ohio and no other contact, are sufficient to require a taxpayer to pay Ohio’s CAT tax. Oral arguments in the case were heard in May.
Please reach out to Mary Jo Dolson with Skoda Minotti’s State and Local Tax (SALT) area to discuss the potential issues for a taxpayer reflected below:
- Should a protective refund claim be filed if you registered for the CAT purely because your business met Ohio’s bright line nexus standard?
- Should you register your business for the Ohio CAT if your only connection to Ohio is sales or another prong of Ohio’s bright line nexus?
Ohio Upcoming Sales Tax Holiday
Ohio’s back-to-school holiday is scheduled to take place from August 5 to 7. Please follow the link for information concerning Ohio’s upcoming sales tax holiday.
You can learn about other state tax holidays here.
If you have any questions concerning any of the items listed please reach out to Skoda Minotti’s State and Local Tax (SALT) team.