The Ohio Supreme Court ruled in favor of NASCAR Holdings Inc. (NASCAR Holdings Inc. v. McClain, Slip Opinion No. 2022-Ohio-4131) in a recent decision that directly impacts the methodology for sourcing receipts from licensing intellectual property (IP) for purposes of the Ohio Commercial Activities Tax (CAT).
Case Background
At issue in the case was the proper sourcing methodology for sourcing NASCAR's receipts from four different categories of revenue: broadcast revenue (licensing the broadcast rights to a national broadcast network to air the NASCAR-sanctioned races), media revenue (from media sponsors to incorporate NASCAR property in marketing efforts, including a website), license fees (granting right to use the NASCAR brand) and sponsor fees (NASCAR agreements with corporate sponsors).
Payments for the broadcast license fees were sold for a one-time flat fee to the television network for a period of three years. The network then sold the broadcast to third parties such as cable and satellite television providers as part of its broadcasting package. Payments for IP used on websites and commercials were also fixed fee arrangements and did not depend on the number of people accessing the site or viewing the commercials. The license fees generated by the sale of consumer goods were paid based on a minimum guaranteed annual amount, plus a potential additional amount based on sales. However, NASCAR had no control over where the products were sold and was not provided a breakdown of sale by location. NASCAR sourced all of the gross receipts from each of these revenue streams outside the state of Ohio.
Section 5751.033 of the statutes sets forth the rules for determining the situs of gross receipts to Ohio.
Section 5751.033(F) is the applicable rule for determining the situs of receipts from intellectual property.
(F) Gross receipts from the sale, exchange, disposition, or other grant of the right to use trademarks, trade names, patents, copyrights, and similar intellectual property shall be sitused to this state to the extent that the receipts are based on the amount of use of the property in this state. If the receipts are not based on the amount of use of the property, but rather on the right to use the property, and the payor has the right to use the property in this state, then the receipts from the sale, exchange, disposition, or other grant of the right to use such property shall be sitused to this state to the extent the receipts are based on the right to use the property in this state.
The court rejected the Ohio Department of Revenue's argument that the statute required a look-through approach to sourcing NASCAR's licensing revenues based on the right to use the property in Ohio measured by the Ohio percentage of audience or population. NASCAR argued that its licensing revenue was not "based on" the right to use the property in Ohio, since the license agreements granted broad rights for use throughout the U.S.
Importance of Case/Refund Opportunity
It is recommended that clients review the sourcing methodology for all licensing revenue streams, focusing on those generated from the licensing of IP to determine whether such licensing revenue was properly sourced under the Ohio Supreme Court's ruling in NASCAR. Those companies utilizing a look-through approach based on the licensee's use of the intellectual property in Ohio may be eligible to file refund claims.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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