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Tax Law

Ohio Pushes CAT Envelope on L.L. Bean

As Ohio lawmakers fret over the prospect of an $8 billion deficit for the biennium beginning July 2011, the Ohio Department of Taxation is taking steps to do its part in state government efforts to close the yawning budget gap.  The Ohio DOT's pursuit of L.L. Bean's commercial activity tax (CAT) liability is a daring test of just how far the CAT can reach. If the L.L. Bean effort succeeds, this test could yield a tax windfall for the state from similarly situated online retailers that are located outside the Buckeye state.

The DOT's first foray of this kind seeks $210,000 from the Maine-based retailer. The state says that this sum represents taxes due, plus interest and late fees for a three-year delinquency period from 2005, when the CAT first went into effect. From the point of view of retailers, the constitutional validity of state business activities tax regimes is always a point of interest and debate. In broad terms, the Ohio CAT is applied for the privilege of doing business in the state.  Annual gross receipts sourced to Ohio of at least $150,000 are subject to the CAT. Of course, the lack of physical presence in Ohio is the foundation of L.L. Bean's objections to CAT liability. The retailer's transactions are limited to online and catalog sales.

L.L. Bean's appeal to the Ohio Board of Tax Appeals is likely, and the case could wind up in the Supreme Court of Ohio. Whatever the merits, the DOT and the state have much to gain and little, if anything, to lose by testing the waters to see just how many out-of-state online retailers the CAT can reach. If L.L. Bean prevails on appeal, the state's position will be no worse than it would have been for not having tried.

in distressed economic times, most states, not just Ohio, are exploring every conceivable strategy to uncover new and sustainable sources of revenue. The Ohio CAT / L.L. Bean caper is just one of them.