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CAT 2006-03 - Commercial Activity Tax Definition of "Agent" - Issued April, 2006
This is a draft rule defining agency for purposes of Chapter 5751. of the Ohio Revised Code. The Ohio Department of Taxation (ODT) has issued several information releases concerning Ohio’s new Commercial Activity Tax (CAT). Many of these releases contain drafts of rules for the Ohio Administrative Code. Prior to adopting a rule defining agency, ODT is seeking public comment on the draft of that rule.
Please make any comments directly related to this proposed rule by the end of the business day on April 21, 2006.
Reason for rule. R.C. 5751.01(P) defines “agent” for purposes of the CAT. The tax commissioner is promulgating this rule in order to clarify the definition included in Chapter 5751. and to provide examples as guidance to the public.
Draft of Rule 5703-29-13 Agency, defined.
(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”. The remaining portion of the gross receipt not reported by the agent may be subject to the commercial activity tax by the person ultimately receiving the 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) 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.
(a) 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) 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.
(a) 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.
(b) 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, 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) 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.
(a) 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) 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.
(a) 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) 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.
(a) 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 server serves twenty tables and collects a total of one thousand two hundred dollars in gross receipts, including twenty per cent gratuity (or two hundred dollars). The server passes one thousand dollars in receipts from food and drink sales to the restaurant and keeps twenty per cent as tips paid to the server by its customers. The server is considered an agent of the restaurant and will only be required to include two hundred dollars in its calculation of total taxable gross receipts. Alternatively, assume the restaurant collects a total of one thousand two hundred dollars in gross receipts, including twenty per cent gratuity (or two hundred dollars). The restaurant passes the twenty per cent gratuity on to the server and retains one thousand dollars in receipts from food and drink sales. The restaurant is considered an agent of the server and will not be required to include the two hundred dollars gratuity it passed on to the server in its calculation of total taxable gross receipts.
(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.
(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.