L.L. Bean Taxed by New Ohio Law

Apparel, outdoor gear and home goods cataloger L.L. Bean appears to be the test case regarding a new Ohio tax law.

The state is telling Freeport, ME-based L.L. Bean that it must pay about $210,000 relative to Ohio’s new tax law known as commercial activity tax (CAT). The CAT law was enacted in 2005, but not fully phased in until March 2009. And now it seems Ohio law enforcement officials are eager to pounce.

A spokesman for Ohio Department of Taxation told The Columbus Dispatch that Bean was the first case of this kind for the state. Ohio Tax Commissioner Richard Levin reportedly sent L.L. Bean a letter dated Aug. 10 that details the amount owed.

The Direct Marketing Association has told its members that the Ohio CAT imposes an aggressive nexus (physical presence) standard known as a “bright line.” Under this standard, a taxpayer is deemed to have nexus if at any time during the year it has any of the following: $500,000 of taxable gross receipts; $50,000 worth of Ohio property; $50,000 of Ohio payroll or other compensation for services in the state; at least 25% of its total property, payroll, or gross receipts in Ohio; or is domiciled in Ohio.

Jerry Cerasale, the DMA’s senior vice president of government affairs, says the Ohio CAT is assessed against the income of a business from sales with Ohio residents, and the state will assess against both in and out-of-state businesses.

“Ohio claims that it may assess the tax against out-of-state marketers based upon economic nexus—the marketer need not have any physical presence in the state and just have economic activity in the state,” he says. Ohio claims that the 1992 Quill v. North Dakota decision, which bans states from requiring out-of-state marketers with no physical presence, applies only to sales and use taxes, Cerasale notes. “So this case is very different from sales tax collection.”

The economic nexus theory on the corporate activity tax has not been tested in court to date, he adds. “No company in Ohio has yet completed the administrative appeal process and, thus, there cannot be a court challenge at this time.” If L.L. Bean appeals, it would be to the Ohio Tax Commission.