Did you hear
about the recent tax case concerning the Cincinnati Reds?
It has to do
with sales and use tax. This area is considered dull, even by tax pros, who tend
to have a fairly high tolerance for dull. But it involves the Reds, so let’s
look at it.
The Reds
bought promotional items - think bobbleheads - to give away. They claimed a
sales tax exemption for resale, so the vendor did not charge them sales tax.
Ohio now wants
the Reds to pay use tax on the promotional items.
COMMENT: Sales tax and use tax are (basically) the same thing, varying only by who is remitting the tax. If you go to an Allen Edmunds store and buy dress shoes, they will charge you sales tax and remit it to Ohio on your behalf. Let’s say that you buy the shoes online and are not charged sales tax. You are supposed to remit the sales tax you would have paid Allen Edmunds to Ohio, except that now it is called a use tax.
The amount
is not insignificant: about $88 grand to the Reds, although that covers 2008
through 2010.
What are the
rules of the sales tax game?
The basic presumption
is that every sale of tangible personal property and certain services within Ohio
is taxable, although there are exemptions and exceptions. Those exemptions and
exceptions had better be a tight fit, as they are to be strictly construed.
The Reds argued
the following:
· They budget their games for a
forthcoming season in determining ticket prices.
· All costs are thrown into a barrel:
player payroll, stadium lease, Marty Brennaman, advertising, promotional items,
etc.
· They sell tickets to the games.
Consequently, the costs – including the promotional items – have been resold,
as their cost was incorporated in the ticket price.
· Since there is a subsequent sale via
a game ticket, the promotional items were purchased for resale and qualify for an
exemption.
Ohio took a
different tack:
· The sale of tangible personal
property is not subject to sales tax only if the buyer’s purpose is to resell
the item to another buyer. Think Kroger’s, for example. Their sole purpose is
to resell to you.
· The purpose of the exemption is meant
to delay sales taxation until that final sale, not to exempt the transaction
from sales tax forever. There has to be another buyer.
· The bobbleheads and other promotions were
not meant for resale, as evidenced by the following:
o
Ticket
prices remain the same throughout the season, irrespective of whether there is
or isn’t a promotional giveaway.
o
Fans
are not guaranteed to receive a bobblehead, as there is normally a limited
supply.
o
Fans
may not even know that they are purchasing a bobblehead, as the announcement may
occur after purchase of the ticket.
The Ohio
Board of Appeals rejected the Reds argument.
The critical
issue was “consideration.”
Let’s say
that you went to a game but arrived too late to get a bobblehead. You paid the
same price as someone who did get a bobblehead, so where is the consideration?
Ohio argued and the Board agreed that the bobbleheads were not resold but were
distributed for free. There was no consideration. Without consideration one
could not have a resale.
Here is the Board:
The evidence in the record supports our conclusion that the cost of the subject promotional items is not included in the ticket price.”
The Reds
join murky water on the issue of promotional items. The Kansas City Royals, for
example, do not pay use tax on their promotional items, but the Milwaukee Brewers
do. Sales tax varies state by state.
Then again perhaps
the Reds will do as the Cavaliers did: charge higher ticket prices for promotional
giveaway games.
This is
(unsurprisingly) heading to the Ohio Supreme Court. We will hear of The Cincinnati Reds, LLC v Commissioner
again.
