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Ohio Imposes Tax on Online Retailers with No Physical Presence in State

Ohio Supreme Court decides physical presence is not a necessary condition for imposing commercial activity tax.

The Ohio Supreme Court recently ruled that Ohio may impose its commercial activity tax (CAT) on out-of-state companies that sell products and services to Ohio customers—even if the companies have no physical presence in the state—if such companies have taxable gross receipts sitused to Ohio of at least $500,000. This ruling is yet another example of the increasing willingness of states to extend taxing jurisdiction to nonresident taxpayers that have business, but no physical presence, in a state.

The US Constitution generally has been interpreted to impose limitations on the ability of states to tax the economic activities of nonresidents. Specifically, under the Commerce Clause, the US Supreme Court has ruled that nonresident taxpayers must have a “substantial nexus” within a state before that state may impose sales and use tax, and that a physical presence in the state—other than solely through the mail or common carriers—is required.[1]

Ohio Supreme Court Decision

On November 17, a split Ohio Supreme Court held that the physical presence standard does not extend to a “business-privilege tax”—even if that tax is measured by receipts from sales of tangible personal property (similar to a sales tax).[2]

In a 5-2 decision, the Ohio high court held that “although a physical presence in the state may furnish a sufficient basis for finding a substantial nexus, Quill’s holding that physical presence is a necessary condition for imposing the tax obligation does not apply to a business-privilege tax. . .” Rather, since the CAT is imposed only on retailers with at least $500,000 in Ohio receipts, the Ohio Supreme Court held that dollar “limit” is sufficient to establish the required substantial nexus for the imposition of a business-privilege tax.

The dissenting judges in the case, by contrast, argued that the silence of the US Congress on nexus issues means that Quill’s “physical presence” requirement should still apply, and that only the US Congress or the US Supreme Court can establish a new rule to determine substantial nexus. The tenor of the dissenting judges’ opinion could signal that this decision may be appealed to the US Supreme Court.

This decision, combined with Ohio’s law that provides that Public Law 86-272[3] protection does not apply to the CAT, means that Ohio now has a tax that is

  • measured by receipts,

  • with no physical presence requirement,

  • which falls outside the federal protection against the imposition of an income-based tax when a taxpayer’s only presence in the state is a sales force.

The Ohio decision follows many recent (and not so recent) state tax rulings that have expanded the scope of state taxing power—even where there is no physical presence—in the face of federal constitutional constraints. Those rulings include the February 2016 decision in Direct Marketing Assoc. v. Brohl by the US Court of Appeals for the Tenth Circuit that upheld Colorado’s remote seller reporting law, as well as recent actions in several states such as Alabama, South Dakota, and Tennessee that have asserted an economic rather than physical nexus standard for sales and use tax.[4]


Taxpayers that have no physical presence in Ohio that sell goods in the state and pay significant CAT should consider preserving their rights to contest the imposition of the CAT by filing refund claims. Taxpayers with multistate or nationwide economic activities should continue to monitor developments regarding state tax nexus requirements.

We will continue to monitor this space and will update our clients and readers as new information becomes available.

[1] Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

[2] Crutchfield Corp. v. Testa, Case No. 2015-368 (Ohio Nov. 17, 2016).

[3] The Federal Interstate Income Act, Title 15 U.S.C.A. Section 381, “Public Law 86-272,” restricts a state from imposing a net income based tax on income of a foreign corporation earned within its borders from interstate commerce, if the corporation’s only business activity within the state consists of the solicitation of orders of tangible personal property.

[4] Direct Mktg. Ass’n v. Brohl, No. 12-1175 (10th Cir. Feb. 22, 2016)

Copyright © 2022 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume VI, Number 327

About this Author

Donald-Bruce Abrams, Morgan Lewis, Tax attorney

Donald-Bruce Abrams’ practice primarily focuses on advising corporations, partnerships, and individuals on federal, state, and international tax controversy and transactional tax planning matters. His transactional practice includes advising clients on structuring and negotiation of mergers and acquisitions; equity and debt financing transactions; and transactions involving the structuring, formation and operation of specialized investment entities (including domestic and foreign hedge funds, regulated investment companies and real estate investment trusts). Don’s...

Charles R. Bogle, Morgan Lewis, Tax attorney

Charles (Chuck) Bogle is a tax partner with more than two decades of experience with the federal income tax aspects of all types of business transactions, including taxable and tax-free acquisitions and dispositions of equity and assets, “mezzanine” investments in subordinated debt and preferred stock, lending transactions, swaps and other derivative investments, asset securitizations, partnerships and joint ventures, and post-transaction tax planning, with a particular focus on the private equity, hedge fund, and investment management spaces.

Cosimo Zavaglia, Morgan Lewis, Corporate tax lawyer

With a focus on state and local tax issues involving corporations, partnerships, and individuals, Cosimo A. Zavaglia advises clients on a range of multistate tax issues, including controversy, planning, and compliance. Cosimo handles matters related to state and local income and franchise taxes, gross receipts taxes, entity-level taxes, sales and use taxes, telecommunications taxes, and real estate transfer taxes. He also develops state tax planning strategies for corporate restructurings, mergers, acquisitions, and dispositions.

Daniel Dixon, Morgan Lewis Law Firm, Tax Attorney
Of Counsel

Daniel Dixon focuses his practice on providing the highest quality State and Local Tax (SALT) counsel and advocacy to Fortune 500 companies and beyond. Often this counsel and advocacy results in saving corporations significant state taxes. He has resolved both through litigation and settlement, difficult state tax matters before administrative appeal boards, tax tribunals, and courts in more than 25 states.