Four recent appeals to the Ohio Supreme Court over the state’s gross receipts tax highlight a burgeoning trend of taxpayer challenges to states’ attempts to extend their tax base by including out-of-state receipts. This pattern is expected to intensify following the demise of Chevron deference to government agencies.
Ohio, in particular, has adopted an aggressive stance in sourcing receipts with even minimal connections to the state. The state’s approach has been likened to a “heads I win, tails you lose” strategy. The lack of clear guidelines on which receipts are subject to gross receipts taxes may prompt more taxpayer challenges aiming to resolve these ambiguities.
Business-friendly states, however, are already taking steps to mitigate the risk of future disputes over gross receipts taxes. Some have begun to exclude more revenue from these taxes or are moving to abolish them altogether. For instance, Ohio HB 33 aims to increase the commercial activity tax exclusion amount from $1 million to $6 million. Additionally, the recently introduced SB 216 proposes to phase out the Ohio commercial activity tax entirely by 2030. Similarly, Texas SB 3, effective from January 1, increased the franchise tax exemption to $2.47 million, exempting smaller entities from the tax.
The recent overruling of the Chevron doctrine in Loper Bright Enterprises v. Raimondo is likely to impact how courts interpret state tax statutes going forward. Although Chevron specifically addressed federal administrative agency interpretations, its reversal signifies a shift away from judicial deference to agency interpretations. This change is anticipated to embolden taxpayers to challenge state tax interpretations perceived as overly broad.
Ohio currently faces four notable cases, including Total Renal Care, Inc. v. Harris, VVF Intervest LLC v. Harris, Jones Apparel Group/Nine West Holdings v. McClain, and Aramark Corp. v. Harris. The outcomes of these cases may further influence state tax litigation and legislation.
Legal professionals should monitor legislative changes and court decisions impacting gross receipts taxes, paying special attention to how the post-Chevron landscape might affect future challenges. As states grapple with these evolving interpretations, the legal community must stay abreast of the shifting dynamics to effectively advise corporate clients.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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