|
CFT 2001- 02 - Corporation Franchise Tax - Nexus Standards,
September 2001 (revised May 19, 2003)
The purpose of this information release is to describe the
standards the Department of Taxation will apply to determine
whether an out-of-state corporation is subject to the
corporate franchise tax, either under the net worth basis or
the net income basis. The limitations and extent of
this state's jurisdiction to impose tax is an evolving area
and this information release is not intended to be an all
encompassing or all inclusive description of this
subject.1 This information release may be modified
by changes in either federal or state laws or by decisions of
the U.S. Supreme Court, the Ohio Supreme Court, the Ohio
Courts of Appeals, or the Ohio Board of Tax Appeals.
This information release may also be modified and reissued to
incorporate nexus guidelines that may be published from
time-to-time by agencies such as the Multistate Tax
Commission or to clarify the Department's position. Where no
conflict exists between this information release and the
Department’s previously published positions relating to
nexus, those positions will remain in effect.
Unless a corporation is exempt from the franchise tax
pursuant to federal law2 or Ohio
Revised Code section (hereinafter "R.C.") 5733.09, the
corporate franchise tax applies to
for-profit3 corporations taxed
pursuant to subchapter C of the Internal Revenue Code
(hereinafter "C corporation"), not-for-profit agricultural
cooperatives, and any entity treated as a C corporation for
federal income tax purposes. Any entity which is treated as a
"disregarded entity" for federal income tax purposes is also
treated as a disregarded entity for franchise tax purposes. A
single member limited liability company, unless it is treated
as a C corporation, will be treated as a division of the
member. Thus, if such a single member limited liability
company has nexus with this state, the corporate member has
nexus with this state.4
ISSUES ADDRESSED
- What is the standard the Department of Taxation will
use to determine whether an out-of-state corporation is
subject to Ohio's corporate franchise tax?
- What activities by or on behalf of an out-of-state
corporation create nexus in Ohio?
- Are there any safe harbor activities where nexus might
exist but where the Department of Taxation will not
currently require the filing of a return and the payment of
the corporate franchise tax?
- What is the impact of Public Law 86-272?
- Are these standards prospective or retroactive?
- When is this information release effective?
- What are the registration and filing requirements for
an out-of-state corporation subject to Ohio's taxing
jurisdiction?
- Once nexus is established, how long does the filing
requirement last?
- Can an unregistered out-of-state corporation subject to
these nexus guidelines request a Voluntary Disclosure
Agreement?
(Note: The page numbers referred to below
are visible in the printer-friendly version).
DEFINITIONS
The following definitions are used in this information
release:
- "Related member" means a person that, with respect to the
out-of-state corporation during all or any portion of the
taxable year, is any of the following:
- An individual stockholder, or a member of the
stockholder's family enumerated in section 318 of the
Internal Revenue Code, if the stockholder and the members
of the stockholder's family own, directly, indirectly,
beneficially, or constructively, in the aggregate, at least
fifty per cent of the value of the taxpayer's outstanding
stock; or
- A stockholder, or a stockholder's partnership, estate,
trust, or corporation, if the stockholder and the
stockholder's partnerships, estates, trusts, and
corporations own directly, indirectly, beneficially, or
constructively, in the aggregate, at least fifty per cent
of the value of the taxpayer's outstanding stock; or
- A corporation, or a party related to the corporation in
a manner that would require an attribution of stock from
the corporation to the party or from the party to the
corporation under R.C. 5733.04(I)(12)(c)(iv), if the
taxpayer owns, directly, indirectly, beneficially, or
constructively, at least fifty per cent of the value of the
corporation's outstanding stock; or
- A component member as defined in section 1563(b) of the
Internal Revenue Code; or
- A person to or from whom there is attribution of stock
ownership in accordance with section 1563(e) of the
Internal Revenue Code except, for purposes of determining
whether a person is a related member, "twenty per cent"
shall be substituted for "5 per cent" wherever "5 per cent"
appears in section 1563(e) of the Internal Revenue Code.
B. "Out-of-state corporation" means (i)
any for-profit C corporation not organized under the
laws of this state, (ii) any not-for-profit
agricultural cooperative not organized under
the
laws of this state, or (iii) any entity treated as a C
corporation for federal income tax
purposes that is not organized under the laws of this state.
C. "Day" means a calendar day or any
portion thereof.
ISSUES DISCUSSED
-
What is the standard the Department of Taxation
will use to determine whether an out-of-state corporation
is subject to Ohio's corporate franchise tax?
Ohio law provides that an out-of-state corporation is
subject to the Ohio corporate franchise tax under any set
of circumstances allowed by the Constitution of the United
States. Specifically, R.C. 5733.01(A) sets forth the legal
standard used by the Department of Taxation to determine
whether an out-of-state corporation is subject to Ohio
corporate franchise tax. An out-of-state corporation is
subject to Ohio’s corporate franchise tax when the
out-of-state corporation engages in any of the following
activities:
- Doing business in this state; or
- Owning or using a part or all of its capital or property
in this state; or
- Holding a certificate of compliance with the laws of Ohio
authorizing it to do business in this
state;5 or
- Otherwise having nexus with this state under the
Constitution of the United States.
-
What activities by or on behalf of an out-of-state
corporation create nexus in Ohio?
- Subject to the safe harbor activities listed on pages
4-5 of this information release, an out-of-state
corporation has nexus in this state when the corporation
directly or through others acting on the corporation’s
behalf is regularly present in this state conducting
activities to establish or maintain the market for the
out-of-state corporation. Such others can be organizations
or individuals who are agents, representatives, independent
contractors, brokers or any person acting on behalf of the
out-of-state corporation. It is irrelevant whether or not
such others reside in Ohio. Activities which create nexus,
whether by the out-of-state corporation or others acting on
the corporation’s behalf, include, but are not limited to,
the following:
- Soliciting sales in this state, including all
activities listed in Issue IV on pages 5-9 of this
information release (Provision L on page 5 provides a
special safe harbor that may apply to this activity);
- Making repairs or providing maintenance or warranty
service in this state;
- Collecting current or delinquent accounts related to
sales in this state through assignment or otherwise;
- Transporting passengers or property for hire in or
through this state;
- Delivering goods or having goods delivered to this
state in vehicles the out-of-state corporation owns, rents,
leases, uses or maintains or having goods delivered to this
state by a related member (Provision B on page 4 provides a
special safe harbor that may apply to this activity);
- Installing or supervising installation in this state;
- Conducting training in this state;
- Providing any kind of technical assistance or
consulting service in this state including, but not limited
to, engineering assistance, design service, quality
control, product inspections, or similar services;
- Investigating, handling, or otherwise providing
assistance in this state to resolve customer complaints;
- Having one or more employees or others acting on the
out-of-state corporation’s behalf in this state conducting
business activity in this state;
- Owning, renting, leasing, licensing, maintaining, or
exercising the right to use any tangible personal property
that is permanently or temporarily located in this state
(Provision B on page 4 provides a special safe harbor that
may apply to this activity);
- Owning, renting, leasing, licensing, maintaining, or
exercising the right to use any real property located in
this state;
- Employing individuals who, for the benefit of the
employer or the employer’s related member, own, rent,
lease, use or maintain an office or other establishment in
this state;
- Having agents, representatives, independent
contractors, brokers or others who own, rent, lease, use or
maintain an office or other establishment in this state if
this property (i) is used in the representation of the
out-of-state corporation in this state and (ii) is
significantly associated with the corporation’s ability to
establish and maintain a market in this state;
- Having a direct or indirect ownership interest as a
general partner or member in a pass-through entity having
nexus with this state;
- For taxable years ending after September 28, 1997,
having an interest in a limited partnership having nexus
with this state or having a similar interest in any other
pass-through entity having nexus with this state (For a
detailed discussion of this issue, see corporate franchise
tax information release CFT 2001-01); or
- Holding a certificate of compliance with the laws of
Ohio authorizing the out-of-state corporation to do
business in this state.
- Lawyers, accountants, investment bankers, and other
similar professionals that are not employees of the
out-of-state corporation or its related members and who in
their professional capacity perform their customary services
in this state for an out-of-state corporation shall not be
considered to be conducting activities to establish or
maintain the market on behalf of the out-of-state corporation
. This provision only applies if the activity done on behalf
of the out-of-state corporation or its related members is not
an activity listed in II.A, above.
-
Are there any safe harbor activities where nexus
might exist but where the Department of Taxation will not
currently require the filing of a return and the payment of
the corporate franchise tax?
If the out-of-state corporation's only
contacts with this state are limited to one or more of the
contacts listed below, the Department of Taxation will not
require the filing of a return and the payment of the
corporate franchise tax. Except for III.A, below, these
safe harbors are not mandated by statutory or case law;
rather, these safe harbors are provided for the purposes of
administrative convenience.
- The out-of-state corporation has property or
representatives on the premises of a commercial printer in
this state (R.C. 5733.09(D)(2)(a)-(c) sets forth the
details of this statutory exemption);
- The out-of-state corporation has tangible personal
property temporarily in this state for no more than seven
days, which need not be consecutive, in a calendar
year;
- The out-of-state corporation owns or uses in this state
intangible property, but the use of such property in this
state does not develop, maintain or enlarge the marketplace
for the out-of-state corporation and/or its related
members;
- The out-of-state corporation grants a license to use
software in this state, but only if the out-of-state
corporation and its related members, agents or
representatives do not provide from or at a location in
this state any technical assistance or other support;
- The out-of-state corporation maintains a website on a
server or similar electronic equipment in this state,
unless the equipment itself is owned, leased or rented by
the out-of-state corporation or its related members;
- The out-of-state corporation conducts meetings in this
state with suppliers of goods or services;
- The out-of-state corporation conducts meetings in this
state with government representatives in their official
capacity;
- The out-of-state corporation enters this state for the
purposes of bringing or defending a lawsuit in a court of
law in this state;
- The out-of-state corporation has employees or others
acting on the out-of-state corporation’s behalf attend
meetings, retreats, seminars, conferences, schools or other
training in this state sponsored by others;
- The out-of-state corporation holds for the benefit of
its employees or the employees of its related members
retreats, seminars, conferences or other training in this
state (but not board of director’s meetings);
- The out-of-state corporation holds recruiting or hiring
events in this state;
- The out-of-state corporation advertises in this state
through various electronic or print media;
- The out-of-state corporation rents customer lists to or
from an entity located in this state;
- The out-of-state corporation has a presence in this
state for no more than seven days, which need not be
consecutive, in a calendar year and the corporation’s
activities in Ohio generate no more than $25,000 in gross
revenue in that same calendar year;
- The out-of-state corporation participates in one or
more trade shows in this state as an exhibitor provided
that the out-of-state corporation does not have employees
present in this state for more than seven days in a
calendar year and the corporation’s activities in Ohio
generate no more than $25,000 in gross revenue in that same
calendar year; or
- The out-of-state corporation attends trade shows in
this state as a consumer.
-
What is the impact of Public Law 86-272?
Public Law 86-272, 15 U.S.C. 381-384, restricts a state
from imposing a tax on or measured by income derived within
the state’s borders if the only business activity of the
company within the state consists of the solicitation of
orders for sale of tangible personal
property.6 This
restriction is limited to orders sent outside the state for
acceptance or rejection and, if accepted, filled by
shipment or delivery from a point outside the state.
P.L. 86-272 does not prohibit this state from asserting
that an out-of-state corporation has nexus. In fact,
implicit in the application of P.L. 86-272 is that
an out-of-state corporation has nexus. P.L. 86-272 merely
prohibits the imposition of the Ohio corporate franchise
tax based on net income in those situations listed in (A)
below. As the net worth basis of the corporate franchise
tax is not a tax on or measured by income, P.L. 86-272
offers no protection from the Ohio corporate franchise tax
based on net worth.
Listed below are protected activities (those that are
ancillary to the solicitation of sales) and unprotected
activities (those that go beyond the solicitation of
sales). Ohio follows, and these lists are generally drawn
from, the Statement of Information Concerning Practices of
Multistate Tax Commission and Signatory States under Public
Law 86-272. This Statement can be found on the Multistate
Tax Commission’s website at http://www.mtc.gov/news&vws/Regs102000.pdf.
- Subject to the safe harbor provisions listed on pages
4-5, the following activities conducted in this state by
the out-of-state corporation or on its behalf create nexus,
subjecting the out-of-state corporation to the corporate
franchise tax calculated on the net worth basis. However,
P.L. 86-272 protects such activities with respect to the
sale of tangible personal property from the imposition of
the corporate franchise tax calculated on the net income
basis:
-
- Soliciting orders for sales by advertising;
- Soliciting orders by an employee or representative of
the company, so long as the individual does not, for the
benefit of the corporation, maintain or use any office or
other place of business in the state other than an
"in-home" office as described in Issue IV(B)(18) on page
8 of this information release;
- Carrying samples and promotional materials only for
display or distribution without charge or other
consideration;
- Furnishing and setting up display racks and advising
customers on the display of the company's products
without charge or other consideration;
- Providing automobiles to sales personnel for their
use in conducting protected activities;
- Passing orders, inquiries and complaints on to the
home office;
- Missionary sales activities; i.e., the solicitation
of indirect customers for the company's goods. For
example, a manufacturer's solicitation of retailers to
buy the manufacturer's goods from the manufacturer's
wholesale customers is protected if such solicitation
activities are otherwise immune;
- Coordinating shipment or delivery without payment or
other consideration and providing information relating
thereto either prior or subsequent to the placement of an
order;
- Checking of customers' inventories, without a charge
therefore, for re-order (but not for other purposes, such
as quality control);
- Maintaining a sample or display room for no more than
twenty-one days, which need not be consecutive, at any
one location within this state during the taxable year;
- Recruiting, training or evaluating sales personnel,
including occasionally using homes, hotels or similar
places for meetings with sales personnel;
- Mediating customer complaints when the purpose is
solely for improving the relationship between the sales
personnel and the customer and facilitating requests for
orders; or
- Owning, leasing, using or maintaining (i) personal
property for use in the employee’s or representative's
"in-home" office, as described in Issue IV(B)(18) on page
8 of this information release, and/or (ii) an automobile
that is solely limited to the conducting of protected
activities. For example, the use of personal property
such as a cellular telephone, facsimile machine, copier,
personal computer and computer software will not subject
the corporation to the net income basis franchise tax so
long as the use of these items is limited to the carrying
on of protected solicitation.
- Any of the following activities conducted in this state
by the out-of-state corporation or on its behalf
are not protected under P.L. 86-272:
- Making repairs or providing maintenance or service to
the property sold or to be sold;
- Collecting current or delinquent accounts through
assignment or otherwise;
- Investigating credit worthiness;
- Installing or supervising installation;
- Conducting training courses, seminars or lectures for
personnel other than personnel involved only in
solicitation;
- Providing any kind of technical assistance or service
including, but not limited to, engineering assistance or
design service, when one of the purposes thereof is other
than the facilitation of the solicitation of orders of
tangible personal property;
- Investigating, handling, or otherwise assisting in
resolving customer complaints, other than mediating
direct customer complaints when the sole purpose of such
mediation is for improving the relationship between the
sales personnel and the customer and facilitating
requests for orders;
- Approving or accepting orders;
- Repossessing property;
- Securing deposits on sales;
- Picking up or replacing damaged or returned property;
- Hiring, training, or supervising personnel, other
than personnel involved only in solicitation;
- Using agency stock checks or any other instrument or
process by which sales are made within this state by
sales personnel;
- Maintaining a sample or display room in excess of
twenty-one days at any one location within the state
during the taxable year;
- Carrying samples for sale, exchange or distribution
in any manner for consideration or other value;
- Owning, leasing, using or maintaining facilities or
property in this state, including, but not limited to,
the following:
- a repair shop;
- a parts department;
- any kind of office other than an in-home office as
described as permitted under Issue IV(A)(2) on page 6 and
IV(B)(18) on page 8 of this information release;
- a warehouse;
- a meeting place for directors, officers, or
employees;
- a stock of goods other than samples for sales
personnel or that are used entirely ancillary to
solicitation;
- a telephone answering service that is publicly
attributed to the company or to employees or agents of
the company in their representative status;
- mobile stores, i.e., vehicles with drivers who are
sales personnel making sales from the vehicles; or
- real property or fixtures to real property of any
kind;
- Consigning stock of goods or other tangible personal
property for sale to any person, including an independent
contractor;
- Maintaining in this state, by any employee or other
representative of the out-of-state corporation, an office
or place of business of any kind, other than an in-home
office located within the residence of the employee or
representative. The maintenance of any office or other
place of business in this state that does not strictly
qualify as an "in-home" office as described below shall, by
itself, cause the loss of protection under P.L. 86-272. For
these purposes it is not relevant whether the corporation
pays directly, indirectly, or not at all for the cost of
maintaining such an in-home office. In order to qualify as
a protected in-home office, the following criteria apply:
- the office cannot be publicly attributed to the
corporation or to the employee or representative of the
corporation in an employee or representative capacity;
- the use of such office must be limited to soliciting
and receiving orders from customers, for transmitting such
orders outside the state for acceptance or rejection by the
out-of-state corporation, or for such other activities
protected under P.L. 86-272 or under Issue IV(A) on pages
6-7 of this information release;
- the office cannot be identified in a telephone listing
or other public listing within this state as a specific
address for the corporation or for an employee or
representative of the company in such capacity;
- as an exception to the above, the normal distribution
and use of business cards and stationery identifying the
employee's or representative's name, address, telephone and
fax numbers and affiliation with the corporation shall not,
by itself, be considered as advertising or otherwise
publicly attributing an office to the corporation or its
employee or representative;
- Entering into franchising or licensing agreements;
selling or otherwise disposing of franchises and licenses;
or selling or otherwise transferring tangible personal
property pursuant to such franchise or license by the
franchisor or licensor to its franchisee or licensee in
this state; or
- Conducting any activity not listed in Issue IV(A) on
pages 6-7 of this information release which is not entirely
ancillary to requests for orders, even if such activity
helps to increase sales.
-
Are these standards prospective or
retroactive?
This information release applies nexus standards
established by the U.S. Supreme Court. Decisions of the
U.S. Supreme Court are the controlling interpretation of
federal law and generally will be given full retroactive
effect to all cases and years still open. Accordingly,
the Department of Taxation will enforce the standards
described within this information release, with the
exception of the safe harbor activities enumerated in
Issues III and IV(A) on pages 4-7, for all open cases and
years.
-
When is this information release
effective?
Some of the limitations enumerated in Issue III on pages
4 and 5 may not be mandated by Ohio law or U.S. Supreme
Court cases. Thus, while Ohio may have a basis for
requiring the filing of a return and payment of the
corporate franchise tax in these instances, beginning
September 1, 2001 the Department of Taxation will not
require the filing of a return and payment of the
corporate franchise tax if a taxpayer's contacts are
limited to those safe harbor activities described in
Issue III on pages 4 and 5. The Department of Taxation
reserves the right to modify and reissue this information
release in order to reflect judicial decisions or to
clarify the Department's position.
-
What are the registration and filing requirements
for an out-of-state corporation subject to this state's
taxing jurisdiction?
An out-of-state corporation which falls within this
state’s taxing jurisdiction will be required to file
reports, and pay the appropriate tax. Information about
taxpayer obligations under the corporate franchise tax is
available by calling 1-888-405-4039, or from the
Department’s website by visiting http://tax.ohio.gov/ and clicking on "Business."
The taxable year of an out-of-state corporation that
becomes subject to this state’s taxing jurisdiction
begins on the first day in which the out-of-state
corporation engages in nexus-creating activities. See,
Ohio Administrative Code 5703-5-03(B)(2) and
5703-5-01(I). Thus, the duty to file reports and pay the
corporate franchise tax commences with the day of the
first nexus-creating contact and applies prospectively
from that date regardless of the fact that more contacts
are needed to establish a regular presence.
Example
On May 4th, 2002, an out-of-state corporation with a
calendar year end first enters Ohio to engage in
nexus-creating activities protected by the safe harbor
provisions in Issue III. In that same calendar year,
the out-of-state corporation’s activities exceed the
safe harbor provisions in Issue III. The out-of-state
corporation must file a corporate franchise tax report
for tax year 2003 and remit the corporate franchise tax
based on the franchise taxable year of May 4th through
December 31st, 2002.7
-
Once nexus is established, how long does the filing
requirement last?
- When an out-of-state corporation no longer has
nexus-creating contacts, the out-of-state corporation may
surrender its certificate of compliance and must file an
exit tax report if required by R.C. 5733.06(H). The
corporate franchise tax only applies to tax years where the
corporation still holds a certificate of compliance in this
state on January 1st of the following calendar year. The
exit tax applies to those corporations that cease to
exercise their franchise before January 1st of the calendar
year following the taxable year.
Example
An out-of-state corporation has had nexus with Ohio
because it maintains a sales office and has sales
representatives in Ohio. On June 15th, 2002 the
out-of-state corporation closes its Ohio office and
ceases sending sales representatives into Ohio.
Consequently, the out-of-state corporation surrenders
its license to the Secretary of State effective June
15th, 2002. Even though the corporation will not be
liable for the corporate franchise tax for tax year
2003, the corporation will be required to file an
exit tax report by May 31st, 2003 and calculate the
tax owed in accordance with R.C. 5733.06(H).
- If the out-of-state corporation re-establishes nexus by
engaging in any nexus creating contacts within twelve
months of surrendering its certificate of compliance, the
Department of Taxation will presume that the new contact
remains part of regularly doing business in Ohio. Thus, the
out-of-state corporation continued to have nexus during the
interim period. Rather than file an exit tax report, the
out-of-state corporation must re-obtain its certificate of
compliance, if applicable, file its report and pay the
corporate franchise tax for that year as normal.
Example
An out-of-state corporation has had nexus with Ohio
because it maintains a sales office and has sales
representatives in Ohio. On June 15th, 2002,
the out-of-state corporation closes its Ohio office
and ceases sending sales representatives into
Ohio. Consequently, the out-of-state
corporation surrenders its license to the Secretary
of State, and legally withdraws from this
state, effective June 15th, 2002. Finding that its
Ohio sales have been seriously harmed by its lack of
presence in Ohio, the out-of-state corporation begins
sending representatives into Ohio performing
unprotected nexus-creating activities on December
1st, 2002. The Department of Taxation will presume
that the December 1st, 2002 contacts remain part of a
regular presence within Ohio. Rather than file and
pay the exit tax, the out-of-state corporation must
re-license, if applicable, with the Secretary of
State, file the corporate franchise tax report, and
pay the corporate franchise tax for the entire 2003
taxable year.
-
Can an unregistered out-of-state corporation
subject to these nexus guidelines request a Voluntary
Disclosure Agreement?
An out-of-state corporation with a filing responsibility
under these nexus guidelines but not yet registered with
or contacted by the Department of Taxation with respect
to audit or criminal investigation, is eligible to
request a Voluntary Disclosure Agreement (VDA). The VDA
guidelines are available on the Department’s website by
visiting http://tax.ohio.gov/ and
clicking on "Business" or by calling the Corporate
Franchise Tax Division at 1-614-433-7645.
If you have any questions regarding this matter, please call
1-888-405-4039 (Ohio Relay Services for the Hearing or Speech
Impaired: 1-800-750-0750).
_____________________________
1The franchise tax nexus standards described in
this information release are not identical to the use tax
nexus standards described in Information Release ST-2001-01
(available on the Department’s website by visiting http://tax.ohio.gov/ and clicking on "Business").
2For example, federal land bank associations are
exempt from state taxes under section 2098, Title 12, U.S.
Code.
3As defined by Ohio law, a corporation’s tax
status under IRC section 501(c) is irrelevant. What is
relevant is how the corporation is registered with the Ohio
Secretary of State. If a corporation has nexus with Ohio and
is registered as "for profit," the out-of-state corporation
is subject to the franchise tax regardless of whether the
corporation operates to produce a profit.
4If the single member is treated as having nexus
with this state, then the statutory deduction, allocation,
apportionment and credit provisions apply to the member and
to the disregarded entity as a whole.
5Cf. R.C. 1703.02 for those out-of-state
corporations not required to register with the Ohio Secretary
of State.
6P.L. 86-272 does not protect corporations
organized under the laws of Ohio.
7If an out-of-state corporation has nexus with
this state and is not protected by any of the safe harbor
provisions on pages 4-5 but relies solely upon the protection
provided by P.L. 86-272, the out-of-state corporation will be
subject to the net income basis franchise tax for its entire
taxable year should its activities at any time during the
taxable year exceed the protection of P.L. 86-272.
|