The central theses
- The Ohio Supreme Court decision in NASCAR Holdings, Inc. v. McClain is an Ohio business tax case that provides another recent example of state courts struggling with how to use legal language to collect income from intangible property.
- This case could provide persuasive authority for sourcing issues in other states (including recent Pennsylvania law changes) and for other taxes, including sales and income taxes.
- The court’s focus on contract language provides guidance on planning options.
On November 22, 2022, the Ohio Supreme Court issued a much-anticipated opinion on raising gross proceeds from transactions involving intangibles. in the NASCAR Holdings, Inc. v. McClain, 2022-Ohio-4131, the court ruled that broadcast revenue, media revenue, royalties and sponsorship fees generated by NASCAR are not subject to the Ohio Commercial Activity Tax (CAT). The court unanimously rejected an assessment of CAT assessed for broadcast revenue, media revenue and sponsorship fees. A minority of three judges agreed in a partially concurring and partially dissenting opinion as the royalties were duly shifted to Ohio. The court’s decision will have a significant impact on taxpayers who derive income from intangible property.
NASCAR is the sanctioning authority for stock car racing worldwide and is headquartered in Daytona Beach, Florida. The Ohio Tax Commissioner rated NASCAR under the CAT for four categories of gross receipts, as discussed below in order:
- Broadcast Revenue. The FOX Broadcasting Company paid NASCAR $1.664 billion for the right to broadcast a specified number of races over eight years. FOX obtained the rights to broadcast the races in the United States and its territories, and sometimes in Mexico, the Caribbean Basin, and Canada.
- media revenue. NASCAR generated revenue from licensing the right to use its trademark in operating its official website and other online marketing efforts, including an online store and fantasy and non-racing games using its trademark.
- royalties. NASCAR generated fees from licensing the right to use its trademark to manufacturers, insurance companies, banks, food companies, and others. For example, the NASCAR logo could be used on flags, mugs, grill covers, hood ornaments, and fuzzy dice.
- sponsorship fees. Sponsors paid NASCAR for the right to apply to affiliate with the organization. For example, AFLAC Inc. paid $5.5 million for its status as the exclusive supplemental insurance partner for NASCAR in the United States
In the audit, the Commissioner allocated broadcasting and media revenue to Ohio based on the ratio of Ohio cable TV homes to US cable TV homes using Nielsen rating data. Royalties and sponsorship fees were located based on the ratio of the population of Ohio to the total US population using Ohio census data. NASCAR appealed the finding to the Board of Tax Appeals (BTA), but the BTA upheld the finding.
Revenue not based on right to use property in Ohio
The Ohio Supreme Court ruled that the revenue streams in question should not be moved to Ohio because they were not based on the right to use NASCAR’s Ohio property. The court vacated the case and referred the case back to the BTA. Judge Patrick DeWine, speaking for the court, noted that the tax commissioner is “focused more on the general principle underlying the CAT — raising revenue based on where the market is for sale — than the actual one legal language”. § 37. The court identified RC 5751.033(F) as the applicable location determination. This statute treats income as located in Ohio only “to the extent” that it “is based on the right to use the property therein.” [Ohio].” The court ruled that none of the sample contracts examined, representative of the revenue categories in question, linked payments under the contracts to the right to use intellectual property in Ohio. As a result, the court ruled that the revenue could not be attributed to Ohio since none of the revenue streams were based on the right to use the property in Ohio. The court found it significant that the treaties did not specifically address Ohio, instead granting the right to use property over large geographic areas that included Ohio.
The dissenting opinion only objected to the treatment of license fees. Three judges held that the royalties were properly located in Ohio under RC 5751.033(F) because they were based in part on the level of sales the marks leveraged in Ohio and calculated on that basis, rather than being assigned a fixed fee use. The three judges found that NASCAR failed in its burden of proving that the tax commissioner overstated the portion of the royalties attributable to Ohio.
emphasis on contracts
Issues related to document procurement for CAT purposes have become increasingly important in recent years. Sourcing issues are also increasingly arising in the context of sales and income tax. That NASCAR Decision may add to the conversation about states generating revenue based on the location of a customer’s customer rather than the customer themselves, as the Ohio Tax Commissioner attempted NASCAR. Contracts are often at the center of these discussions, and taxpayers should review their contracts to determine the impact of contract terms on revenue generation.