Ohio Supreme Court holds revenue from intangible property rights not sitused to Ohio

December 2022

In brief

The Ohio Supreme Court found that a taxpayer’s receipts from granting the “right to use” intangible property were measured based on whether agreements based such right to use property specifically within Ohio. The agreements conveyed such use to large geographic areas—most often the United States and its territories—that include Ohio, but they did not specifically reference Ohio. Accordingly, the Court found that revenue relating to such intangible property was not sitused to Ohio and, therefore, not subject to the Commercial Activity Tax (CAT). 

The takeaway. This decision emphasizes the importance of contractual language in determining imposition of the CAT. The Court noted that its job was to apply the “plain language” of Ohio law. Ohio law provides that intangible property revenue at issue is sourced to Ohio only when the revenue is “based on” the right to use property in Ohio. The Court emphasized the fact that taxpayer agreements did not convey rights to use property specifically in Ohio. Without such language, the Court declined to situs related revenue to Ohio.  

Three justices would have ruled in favor of the Commissioner when the contract allowed for revenue contingent on a certain level of intangible property use. The majority did not address this issue because it was not raised at the lower level. Accordingly, it remains uncertain how the full court would have ruled on intangible property revenue that would vary based on usage.

Action item. Taxpayers with contractual arrangements similar to that of the taxpayer in this case should consider whether the Court’s analysis could support alternative sourcing of intellectual property revenue.

[NASCAR Holdings, Inc. v. McClain, Ohio Supreme Court No. 2022-OHIO-4131 (11/22/22)] 

In detail


During the 2005 to 2010 tax years, NASCAR Holdings, Inc. (NASCAR) received gross receipts from several revenue streams, including:  

  • Broadcast revenue. Revenue received from the sale of rights to broadcast NASCAR races in the United States and certain other countries.
  • Media revenue. Revenue received from licensing the right to use its brand in marketing efforts and to operate NASCAR’s website (e.g., creating an online store and creating NASCAR fantasy games). Such rights spanned the entire World Wide Web.
  • Licensing fees. Revenue received from licensing the right to use the NASCAR trademark and trade name on various products (e.g., flags, barbeque sets, keychains) to be sold in the United States, Canada, and certain other US territories and locations.
  • Sponsorship fees. Revenue from corporate sponsors granting the exclusive right to advertise themselves as a partner of NASCAR (e.g., to be the supplemental-insurance partner of NASCAR in the United States). 

On audit, the Commissioner generally sitused the above revenue streams using US census data to source revenue based on Ohio’s population as a proportion of the national population. NASCAR sought review of the assessment by the Board of Tax Appeals (BTA). 

The BTA agreed with the Commissioner that the revenue streams were properly sitused to Ohio because NASCAR’s agreements conferred “the right to use the intellectual property in this state.” NASCAR appealed the BTA’s decision to the Ohio Supreme Court. 

CAT Sourcing 

The CAT defines “taxable gross receipts” as those gross receipts that are “sitused to this state.” Receipts are sitused to Ohio according to taxable categories. Two categories relevant to this case are:  

  • Intellectual property use. Receipts from the right to use intellectual property (and not based on the amount of use) are sitused to Ohio “to the extent that the receipts are based on the right to use the property in [Ohio].” 
  • Catchall provision. Gross receipts not otherwise categorized generally are sitused to Ohio in the proportion that the purchaser’s benefit in Ohio bears to the purchaser’s benefit everywhere.

Although the Commissioner sourced licensing fees based on the catchall provision, the BTA found that intellectual property use was the proper situs category. Both the Commissioner and the BTA concluded that the remaining revenue streams were sitused based on intellectual property treatment. 

Intellectual property sourcing 

Ohio law provides two treatments for sourcing gross receipts from the grant of the right to use intellectual property: 

  • Actual use. Receipts are sourced to Ohio to the extent that the receipts are based on the amount of use of the property in Ohio.
  • Right to use. If receipts are (1) based on the right to use property and (2) the payor has the right to use the property in Ohio, then such receipts are sourced to Ohio “to the extent the receipts are based on the right to use the property in Ohio.” 

Revenue streams sourced based on “right to use” 

The Ohio Supreme Court reviewed sample agreements relating to the four revenue streams and concluded that sourcing of such revenue is based on the “right to use” NASCAR’s intellectual property in Ohio. The Court concluded as such because the agreements provided for fixed payments for the right to use NASCAR’s intellectual property. The payments were contingent not on the amount of use, but rather solely on the right to use the property. 

Revenue streams were not sitused to Ohio because payments were not tied to use in Ohio 

The Court found that, under the “right to use” treatment, receipts may be sitused to Ohio only “to the extent” that they “are based on the right to use the property in” Ohio. None of the sample agreements tied payments to the right to use property in Ohio. The Court notes that “Ohio was not even mentioned in the contracts. Rather, the agreements granted broad rights to use NASCAR’s intellectual property over large geographic areas—most often the United States and its territories—that include Ohio.” 

The Court further determined that “there are no traceable receipts that are ‘based on’ a right to use NASCAR’s intellectual property in this state . . . . [N]othing in the contracts before us shows any causal connection between any of the receipts and the right to use NASCAR’s intellectual property in Ohio.”  

NASCAR generally received a fixed fee that was unchanged regardless of whether any part of NASCAR’s intellectual property was used in Ohio. The Court found that the existence of a contractual right to use property in a territory that includes Ohio does not mean that the gross receipts are “based on” the right to use them in Ohio.

Commissioner’s census methodology rejected 

The Commissioner asserted that even though contracts did not base payment on the right to use property in Ohio, he could approximate what the Ohio portion of the rights were worth and impose the CAT on that basis. The Court viewed the Commissioner as focusing on what he contends is the general principle underlying the CAT – that is, to source receipts based on where the market for the sale is located.

The Court disagreed, stating that its job is to apply the plain language of the statute. The Court found that the CAT statute’s “plain language” applies the right to use intellectual property only to the extent that receipts are “based on” the right to use the property in Ohio. Accordingly, the Court reversed the tax assessment with respect to the four revenue streams referenced above.

Partial dissent – Licensing fees should be sourced based on actual use 

Three of the seven Court justices disagreed with the majority’s conclusion regarding licensing fees. The dissenting justices noted that such revenue involved a minimum royalty payment that may be increased depending on sales. As a result, the dissenting justices asserted that NASCAR’s licensing fees should be sitused based on “actual use” rather than the “right to use.” According to the dissenting justices, under such treatment the burden is on the taxpayer to know where the licensee used those rights and revenue is sourced based on such use. 

The majority opinion declined to address application of the “actual use” situsing treatment because the Commissioner’s final audit report emphasized that NASCAR’s sample agreement was based on a “right to use” NASCAR logo on products. The Court concluded that “the Commissioner did not attempt to justify the assessment based on actual use; indeed, he specifically distinguished actual use from the right to use. We will steer clear of new theories for taxability that were neither relied on by the tax commissioner nor argued by the parties.” 

Observation: It is uncertain how the full court might have addressed application of the “actual use” methodology to the facts in this case. Three justices found that contingent revenue measured by use took the analysis away from the “right to use” method and into the “actual use” treatment. Not being bound by the “based on” statutory language, the dissenters seemed more willing to accept the Commissioner’s approximation of Ohio use.

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Ed Geils

Ed Geils

Global and US Tax Knowledge Management Leader, PwC US

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