Ohio’s new web cookie tax challenged by ACMA

Update 1.31.2019: The ACMA has voluntarily dismissed its case against the Ohio Department of Taxation. As reported by Bloomberg Tax, the association's executive director Hamilton Davison said, "The Ohio Department of Taxation has, to date, shown laudable restraint in not seeking to enforce economic or virtual nexus theories against remote sellers before the Ohio legislature has the opportunity to address Ohio's sales tax requirements in the wake of the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc."  In Wayfair, the Supreme Court overruled the long-standing physical presence rule, thereby granting states the authority to tax remote sales. An up-to-date list of state remote sales tax laws is available here.

The constitutionality, enforceability, and validity of Ohio’s new reporting requirements for remote retailers, which took effect Jan. 1, 2018, are under fire. The American Catalog Mailers Association (ACMA) claims Ohio’s new law exceeds the limitations on state authority to regulate interstate commerce and discriminates against electronic commerce.

The challenge to Ohio’s law is worth following given it isn’t the only state to hold that placing software and web cookies on in-state devices triggers nexus for remote retailers. Rhode Island also maintains that placing “in-state software on the devices of in-state customers constitutes physical presence.” And a similar policy in Massachusetts is also being challenged (Crutchfield Corp. v. Harding, filed Oct. 24 in the Albemarle County, Virginia, Circuit Court).

Ohio taxes in-state software and network nexus

Under Ohio’s in-state software nexus policy, an out-of-state vendor establishes nexus, or an obligation to collect and remit sales tax, when the seller “uses in-state software to sell or lease taxable tangible personal property or services to consumers” and “has gross receipts in excess of $500,000 in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in this state or from providing services the benefit of which is realized in this state.”

In-state software includes, for example, a catalog application that customers download on their computers, tablets, or phones. Ohio maintains the presence of such software “is significantly associated with” a remote retailer’s ability “to establish and maintain its market.” Furthermore, it “meets the physical presence standard set forth in Quill.” The 1992 Supreme Court decision in Quill Corp. v. North Dakota upheld that a state can only tax a business that has a physical presence in the state.

Under Ohio’s network nexus policy, a seller establishes nexus with Ohio when the seller “provides or enters into an agreement with another person to provide a content distribution network (CDN) in [Ohio] to accelerate or enhance the delivery of the seller’s website to consumers.” The $500,000 sales threshold applies to network nexus, as well.

The ACMA has leveled eight counts against Ohio’s new law, including the following:

The tax exceeds state limitations and “runs afoul of the Quill physical presence standard”

ACMA claims the law “runs afoul of the Quill physical presence standard” in part because it may require a retailer to collect and remit Ohio sales and use tax “based solely on the fact that html and java script coding used to display its website is stored on consumer’s computers and/or cell phones in the state,” or that “a computer application offered by the retailer is downloaded by consumers” and stored in-state on their computers or devices. ACMA also maintains that Ohio’s network nexus runs afoul of Quill, for similar reasons.

The tax is discriminatory and violates the Internet Tax Freedom Act

ACMA claims Ohio’s new law violates the Internet Tax Freedom Act (ITFA), which prohibits any state or political subdivision from imposing “discriminatory taxes on electronic commerce.” It notes that ITFA considers a state tax requirement to be discriminatory on electronic commerce if “it imposes an obligation to collect or pay the tax on a different person or entity than in the case of transactions involving similar property, goods, services, or information accomplished through other means.”

The state cannot do “indirectly what it cannot do directly”

Quill, which predates ecommerce, holds that “a retailer whose only connection with a state is by mail, wire, and/or common carrier lacks a substantial nexus with the state and cannot be compelled to collect the state’s sales or use tax. ACMA argues that the Due Process Clause of the United States Constitution “prohibits a state from doing indirectly what it cannot do directly” (in this case, tax remote sales based on the physical presence of computer software).

See the Complaint for Declaratory Judgment, American Catalog Mailers Association v. Joseph W. Testa … and the Ohio Department of Taxation for more details.

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