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CAT 2006-03 - Commercial Activity Tax Definition of "Agent" -
Issued April 2006; Revised July 2006; Revised October 2006;
Revised November 2007
This rule addresses the definition of an agency relationship
for purposes of Chapter 5751 of the Revised Code. This
revision clarifies that the general contractor must act in
the owner’s best interests with respect to cost issues.
Please direct any questions you may have to the CAT Division
of the Ohio Department of Taxation at 1-888-722-8829.
Proposed Rule 5703-29-13 Commercial activity tax
definition of "agent."
(A) An “agent” is defined in division (P) of section 5751.01
of the Revised Code to include a person authorized by another
to act on its behalf to undertake a transaction for the
other. In certain circumstances, the amounts received by a
person defined as an “agent” under this section and under
this rule are excluded from the definition of “gross
receipts” under division (F) of section 5751.01 of the
Revised Code. The agent is only required to report the
portion of gross receipts it retains as a commission or fee,
and will not be required to report the entire amount as a
“gross receipt."
(B) The Supreme Court of Ohio has held that an agency
relationship exists when one party has the right to control
the actions of another and those actions are directed toward
the attainment of the former’s objectives.(1) An agency
relationship is defined as a “consensual fiduciary
relationship between two persons where the agent has the
power to bind the principal by his actions, and the principal
has the right to control the actions of the agent.”(2) In a
principal-agent relationship, the agent (the person acting
for the principal) has the legal authority to act on behalf
of the principal. The agent may act and make decisions on
behalf of the principal, and generally the principal is bound
by and is liable for the agent’s actions.(3) The party
asserting the existence of an agency relationship bears the
burden of proof in that regard.(4) In determining whether an
agency relationship exists, the rules of statutory
construction applicable to exemptions from taxation must be
followed. Ohio law in this regard is well-established;
exemptions from taxation are strictly construed against the
claim of exemption and in favor of the taxing authorities.(5)
Thus, in determining whether an agency relationship exists,
the facts must be determined under a strict, narrow reading
of the definition. Absent proof of an agency relationship,
the entire gross receipt must be reported by the person
receiving the gross receipt for purposes of the commercial
activity tax.
(C) Division (P) of section 5751.01 of the Revised Code
defines “agent” to include certain individuals acting on
behalf of another. Each of the following individuals is
included in the list in that division and qualifies as an
“agent” for purposes of this rule:
(1)(a) In the case of a person receiving a fee to sell
financial instruments, only the fee received to perform this
service shall be subject to the commercial activity tax by
the agent pursuant to division (P)(1) of section 5751.01 of
the Revised Code.
(b) For example, an out-of-state dealer (i.e., a person
without an office or other place of business in Ohio)
orchestrates the sale of a bond from Franklin County, Ohio.
The dealer contracts with the county to purchase bonds at a
discount to sell them on the county’s behalf. The cost of the
bond is one thousand dollars; the dealer sells the bond to
her client for one thousand fifty dollars. The dealer remits
the full purchase price of one thousand dollars to Franklin
County, Ohio and retains fifty dollars as an administrative
fee. Even though the dealer actually received one thousand
fifty dollars from her client, she would be required to
include only her fifty dollar fee in calculating her total
taxable gross receipts for purposes of the commercial
activity tax.
(2)(a) In the case of a person retaining a commission or fee
from a transaction performed on behalf of another person,
only the portion of the fee retained by the agent shall be
subject to the commercial activity tax by the agent pursuant
to division (P)(2) of section 5751.01 of the Revised Code.
For purposes of this paragraph and paragraph (B) of this
rule, the agency relationship should be explicitly stated in
a contract that is available to the tax commissioner to
inspect. Absent such proof, it will be presumed that no
agency relationship exists and the person claiming the agency
relationship will be subject to the commercial activity tax
on its total taxable gross receipts.
(b) For example, a general contractor enters into a lump sum
contract with a property owner for the general contractor to
construct an office building. The general contractor agrees
to provide specified services for a fixed price of five
hundred thousand dollars, and the general contractor bears
all risk involved in completing the project in a
cost-effective manner. The general contractor may perform the
necessary services itself or it may bid out some or all of
the work to subcontractors. Because the general contractor is
not required to act in the owner’s best interests with
respect to cost issues, and because the general contractor
does not have to disclose cost details with the owner, the
general contractor does not qualify as an agent for purposes
of the agency exclusion. For this reason, the entire contract
price is includable in the general contractor’s gross
receipts.
(c) Alternatively, for example, a general contractor enters
into a costs-plus contract with a property owner for the
general contractor to construct an office building. Under the
terms of the contract, the owner agrees to pay the general
contractor for work completed by the subcontractors at cost
plus a five per cent fee. The general contractor is required
to act in the owner’s best interests with respect to cost
issues. The general contractor, when bidding out the work to
subcontractors, has an agreement in writing with the
subcontractors that states that the general contractor is
acting as the owner’s agent and not as an agent of the
subcontractor. The general contractor acts as a conduit with
regard to any payments made to the subcontractors, in that
the general contractor remits monies received from the owner
to the subcontractors, provided that certain conditions are
met. Accordingly, the general contractor may exclude the
money that the general contractor receives from the owner to
pay the subcontractors from its gross receipts. However, the
five per cent fee retained by the general contractor would be
included in its calculation of taxable gross receipts for
purposes of the commercial activity tax.
(3)(a) In the case of a person issuing licenses and permits
under section 1533.13 of the Revised Code, only the portion
of a fee retained by the issuer shall be subject to the
commercial activity tax by the agent pursuant to division
(P)(3) of section 5751.01 of the Revised Code.
(b) For example, an independent agent at a bait and tackle
shop is authorized under section 1533.13 of the Revised Code
to issue hunting and fishing licenses to Hocking County
residents. The agent collects a fee of twenty-five dollars
for issuing a license and later remits this amount to the
chief of the Wildlife Division of the Ohio Department of
Natural Resources. The independent agent will not be subject
to the commercial activity tax. If, however, the agent
retained a five dollar fee for administering the license,
this amount would be included in the agent’s calculation of
its total taxable gross receipts for purposes of the
commercial activity tax.
(4)(a) In the case of a lottery sales agent who holds a valid
license issued under section 3770.05 of the Revised Code,
only the portion of the fee retained by the lottery sales
agent shall be subject to the commercial activity tax by the
agent pursuant to division (P)(4) of section 5751.01 of the
Revised Code.
(b) For example, a convenience store clerk is licensed under
section 3770.05 of the Revised Code to sell lottery tickets
as part of its store operations. As part of an agreement with
the director of the state lottery commission, the convenience
store may retain one per cent of the gross receipts received
from the sale of lottery tickets as an administrative fee.
The convenience store clerk sells a ticket to a customer for
two dollars and remits one dollar and ninety-eight cents (or
ninety-nine per cent) to the director of the state lottery
commission. The convenience store will be subject to the
commercial activity tax on the two cent (or one per cent)
administrative fee it retains in addition to its other store
operations to the extent required by Chapter 5751. of the
Revised Code.
(5)(a) In the case of a person acting as an agent of the
division of liquor control under section 4301.17 of the
Revised Code, only the portion of the fee retained by the
agent shall be subject to the commercial activity tax by the
agent pursuant to division (P)(5) of section 5751.01 of the
Revised Code.
(b) For example, the owner of a state liquor agency in
Sandusky, Ohio is a statutory agent of the division of liquor
control and is granted the authority to sell spirituous
liquor to its customers. In the contract and as compensation
for this relationship, the division agrees that the agent may
keep five per cent of its annual sales of these beverages as
its commission. The state liquor agency sells five hundred
thousand dollars worth of spirituous liquor in one year and
remits a payment of four hundred seventy-five thousand
dollars to the division of liquor control. The market owner
is only required to include the remaining twenty-five
thousand dollars (or five per cent of the market owner’s
total sales of spirituous liquor) in calculating its total
taxable gross receipts with regard to the agent relationship.
The provisions of division (P)(5) of section 5751.01 of the
Revised Code only apply to state liquor stores or agencies
and do not apply to local markets selling beer, wine or other
types of alcoholic beverages.
(D)(1) In the case of a restaurant or other establishment
that collects gratuity on behalf of another, the portion of
the gross receipts that are considered “tips” or “gratuity”
is not included in the establishment’s gross receipts. This
portion of the gross receipts may be subject to the
commercial activity tax by the person ultimately receiving
the tip if the other requisite requirements under section
5751.01 of the Revised Code are met.
(2) For example, a restaurant in Columbus, Ohio employs a
server to assist in serving its customers. The restaurant
collects a total of one thousand two hundred dollars,
including a twenty per cent gratuity of two hundred dollars.
The restaurant only passes one hundred eighty dollars of the
gratuity on to the server and retains the remaining twenty
dollars. The restaurant is considered an agent for the one
hundred eighty dollar portion of the gratuity that it passes
on to the server. The twenty dollar portion retained is a
gross receipt of the restaurant. (The server does not have
any gross receipts for the one hundred eighty dollar portion
of the gratuity it receives from the restaurant, as such
amount is considered compensation and is specifically
excluded under division (F)(2)(g) of section 5751.01 of the
Revised Code.)
(E)(1) In the case of a person who advances fees on behalf of
a client, the person may exclude the reimbursement of these
fees from their gross receipts when the reimbursement is
received from the client.
(2) For example, an individual retains an attorney to
represent him in a personal injury suit. The attorney
advances a filing fee to the court in order to allow her
client to file a complaint against the company. In addition
to the attorney’s hourly rate, the attorney charges the
client the filing fee, as well as copying charges for copies
made, and telephone charges for calls made all on the
client’s behalf. When calculating the attorney’s commercial
activity tax liability, the attorney may exclude the court
fees that were advanced on her client’s behalf, but may not
exclude the copying fees or the telephone charges for calls
made on the client’s case.
(F)(1) In the case of a property owner who charges a common
area maintenance fees to its tenants or another third party
or bases the fee on the square footage contained within a
particular portion of the building, an agency relationship
does not typically exist. Therefore, when the property owner
collects these fees, it is considered a gross receipt for
purposes of the commercial activity tax. These fees reimburse
the property owner for expenses to the property owner and
expenses may not be deducted from the taxpayer’s total gross
receipts.
(2) For example, a property owner leases a commercial
building to a tenant for one thousand dollars and charges the
lessee an additional one hundred dollars per month for common
area maintenance, including snow plowing, landscaping, trash
removal, and heating and cooling services. The property owner
collects one thousand dollars in rent and one hundred dollars
for the tenant’s common area maintenance fee. The property
owner is required to report the entire one thousand one
hundred dollars as a gross receipt for purposes of the
commercial activity tax.
Footnotes:
(1) See Hanson v. Kynast (1986), 24 Ohio
St. 3d 171, 173, citing Baird v. Sickler (1982), 69
Ohio St.2d 652, 654; Councell v. Douglas (1955), 163
Ohio St. 292; Bobik v. Indus. Comm. (1946), 146 Ohio
St. 187, 191-192; Memorial Park Golf Club, Inc. v.
Lawrence (March 31, 2000), BTA No. 99-K-633.
(2) Evans v. Ohio State Univ. (1996), 112
Ohio App.3d 724, 744, citing Funk v. Hancock (1985).
26 Ohio App. 3d 107, 110; Haluka v. Baker (1941), 66
Ohio App. 308, 312.
(3) See N&G Construction, Inc. v.
Lindley (1978), 56 Ohio St.2d 415, 418, citing Gulf
Oil Corp. v. Kosydar (1975), 44 Ohio St.2d 208
(paragraph two of the syllabus); and Canton v. Imperial
Bowling Lanes, Inc. (1968), 16 Ohio St.2d 47 (paragraph
four of the syllabus).
(4) See Gardner Plumbing, Inc. v. Cottrill
(1975), 44 Ohio St.2d 111, 115, citing Union Mutual Life
Ins. Co. v. McMillen (1873), 24 Ohio St. 67;
Memorial Park Golf Club, Inc, supra.
(5) See National Tube Co. v. Glander
(1952), 157 Ohio St. 407, 409; Beckwith v. Kosydar
(1977), 49 Ohio St. 2 277, 279; Canton Malleable Iron Co.
v. Porterfield (1972), 30 Ohio St. 2d 163, 166;
Memorial Park Golf Club, Inc., supra.