Tax Rules: Final: 5703-29
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, portions of the amounts
received by a person defined as an “agent” 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 as a “gross receipt” the portion of the
amount received that it retains as a commission or fee rather
than the entire amount.
(B)(1) The supreme court of Ohio has held that an agency
relationship “exists only when one party exercises the right
of control over the actions of another, and those actions are
directed toward the attainment of an objective which the
former seeks.” 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, and Bobik
v. Indus. Comm. (1946), 146 Ohio St. 187, 191-192. Also see
Memorial Park Golf Club, Inc. v. Lawrence, 2000 Ohio Tax
LEXIS 471 (BTA No. 99-K-633). 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.” See Evans v. Ohio State Univ.
(1996), 112 Ohio App.3d 724, 744, citing Funk v. Hancock
(1985), 26 Ohio App. 3d 107, 110, in turn citing Haluka v.
Baker (1941), 66 Ohio App. 308, 312. In a principal-agent
relationship, the agent has the legal authority to act on
behalf of the principal, and generally the principal is bound
by and is liable for those actions. 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).
The party asserting the existence of an agency relationship
bears the burden of proof in that regard. 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. Also see Memorial Park Golf Club, Inc, supra. 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. See Natl. Tube Co. v. Glander (1952), 157
Ohio St. 407, 409; Beckwith & Assoc. v. Kosydar (1977),
49 Ohio St.2d 277, 279, and Canton Malleable Iron Co. v.
Porterfield (1972), 30 Ohio St. 2d 163, 166. Also see
Memorial Park Golf Club, Inc., supra. 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.
(2) The commissioner will look beyond the wording of the
contract to the actual facts and circumstances of the
situation to determine whether an agency relationship
actually exists. See H.R. Options, Inc. v. Zaino (2004), 100
Ohio St.3d 373.
(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 enumerated in division (P)(1)
of section 5751.01 of the Revised Code who receives a fee to
sell financial instruments, only the fee received to perform
this service shall be a gross receipt of the agent pursuant
to division (F)(2)(l) 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 on behalf of 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 the 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 the client, the dealer would
be required to include only the client’s fifty dollar fee in
calculating the dealer’s total taxable gross receipts for
purposes of the commercial activity tax.
(2)(a) In the case of a person enumerated in division (P)(2)
of section 5751.01 of the Revised Code who retains a
commission or fee from a transaction performed on behalf of
another person, only the fee retained by the agent shall be a
gross receipt of the agent pursuant to division (F)(2)(l) 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 include
the total amount received in its 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 gross receipts for purposes of
the commercial activity tax.
(3)(a) In the case of a person enumerated in division (P)(3)
of section 5751.01 of the Revised Code who issues licenses
and permits under section 1533.13 of the Revised Code, only the portion
of a fee retained by the issuer shall be included in the
gross receipts of the agent pursuant to division (F)(2)(l) 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 gross receipts for
purposes of the commercial activity tax.
(4)(a) In the case of a lottery sales agent enumerated in
division (P)(4) of section 5751.01 of the Revised Code 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 included in the gross receipts
of the agent pursuant to division (F)(2)(l) 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 include the two cent
(or one per cent) administrative fee it retains in its gross
receipts, in addition to its other receipts from store
operations to the extent required by Chapter 5751. of the
Revised Code.
(5)(a) In the case of a person enumerated in division (P)(5)
of section 5751.01 of the Revised Code who acts 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 included in the gross receipts of the agent
pursuant to division (F)(2)(l) 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 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 amount received that is considered “tips” or “gratuity”
is not included in the establishment’s gross receipts
pursuant to division (F)(2)(l) of section 5751.01 of the
Revised Code. This portion of the gross receipts may be a
gross receipt of 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 the person’s gross receipts when the reimbursement
is received from the client.
(2) For example, an individual retains an attorney to
represent the individual in a personal injury suit against a
company. The attorney advances a filing fee to the court in
order to allow the 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 the client’s
behalf from the attorney’s gross receipts pursuant to
division (F)(2)(l) of section 5751.01 of the Revised Code 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 common
area maintenance fees to its tenants or another third party
or bases the fees 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, they are considered gross receipts 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 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.
Effective: 04/24/2008
R.C. 119.032 review dates: Exempt
Promulgated Under: 5703.14
Statutory Authority: 5703.05
Rule Amplifies: 5751.01
Prior Effective Dates: 10/5/06