- The Supreme Court of Ohio denied a refund claim for the commercial activity tax (“CAT”).
- The taxpayer in question, Jones Apparel Group (“Jones”) sought a refund for sales it made to DSW, Inc. (“DSW”), a multistate retailer whose sole distribution center was in Ohio.
- While the court agreed that sales sent to the distribution center and subsequently shipped to DSW stores outside of Ohio should not be subject to the CAT, it found that Jones did not meet the evidentiary standards necessary for a refund.
Background
The Supreme Court of Ohio recently issued its decision in Jones Apparel Group/Nine West Holdings v. Harris, Slip Opinion No. 2026-Ohio-74 (Ohio 2026). Jones, the taxpayer, sold products to DSW, which it shipped to DSW’s distribution center in Ohio. Many of these products were shipped to DSW’s stores outside of Ohio, as DSW was a nationwide retailer. Initially, Jones claimed these sales were sitused to Ohio on its CAT returns for 2010 through 2016. It filed a refund claim to reflect the fact that most of these sales, which were shipped to the distribution center, were shipped outside of Ohio for sale. The Tax Commissioner denied the claim. She noted that documentary evidence, such as shipping labels and bills of lading, indicated the inventory was shipped to the DSW distribution center in Ohio. She also noted that if she had to consider secondary evidence, such as the ultimate destination after it reached the DSW distribution center, it was likely she would be required to verify information from a source that was not subject to the audit, namely DSW.
The Board of Tax Appeals Decision
The Board of Tax Appeals (the “Board”) considered Jones’ appeal at a hearing. Jones presented two witnesses. The first was the former assistant treasurer of Jones who was responsible for the CAT filing for the years under consideration. He testified that DSW declined to provide supporting documentation to illustrate the degree to which the merchandise was shipped out of state. Nonetheless, he testified that at least eighty percent of the items shipped to the distribution center were shipped to DSW stores outside of Ohio. He based this estimate on observations he had made of Jones merchandise in DSW stores outside Ohio, an estimate of DSW’s Ohio sales compared to the amount of merchandise that Jones sold to DSW, and other metrics to come to his estimate.
Additionally, a digital solutions development assistant director working for a law firm used a three month sampling period from August to October of 2018 to calculate what he termed an “Ohio offering percentage” to conclude that approximately four percent of Jones’ sales to DSW were ultimately destined for DSW stores in Ohio. A witness for the Commissioner, the auditor assigned by the Department of Taxation, testified that she was not provided with adequate documentation to show the ultimate destination of product shipped to the distribution center.
The Board affirmed the refund’s denial. It considered the language of the statute and concluded that situsing for CAT purposes is based upon where the purchaser receives the property after all the transportation is complete. Although the tax commissioner argued that situsing was appropriate in Ohio because Jones only knowledge at the time of shipment was that the products were destined for DSW’s Ohio distribution center, the Board rejected this argument. It concluded that nothing in the statute or the associated common law required contemporaneous knowledge of the ultimate destination when the product was in transport. However, the Board agreed that Jones had failed to meet its evidentiary burden. It noted that the testimony of the digital solutions assistant director related to a period that was both extremely short and outside the time for which Jones sought its refund.
The Supreme Court’s Decision
The court reviewed the Board’s decision to determine if it was reasonable and lawful in accord with Ohio law. It considered, based upon issues raised by both parties, as to whether receipts from the sale of goods that ultimately end up outside Ohio are subject to the CAT, despite the fact that the taxpayer had no knowledge of the ultimate destination as of the time of shipping. The court reviewed the statutory language of Ohio Rev. Code § 5751.033(E) and found that the statute did not provide for a contemporaneous knowledge requirement. Additionally, it considered the refund statute, Ohio Rev. Code § 5751.08(A) and noted that refund claims must be supported by documentation, but the statute itself did not specify the type of documentation necessary to support the claim. Thus, according to the court, a taxpayer does not need contemporaneous knowledge of a shipment’s ultimate destination to determine whether such sales are properly sitused to Ohio for CAT purposes.
The court then considered Jones’ assertion that it met the relevant evidentiary standard to show that the goods at issue were received outside Ohio. It contended that the testimony of both of its witnesses proved that the goods were received outside the state. It also contended that it was mathematically impossible for all the goods to have stayed in Ohio based upon DSW’s 10-K’s filed with the SEC. Finally, it noted that even the auditor who testified conceded that merchandise shipped to a distribution center in the state will eventually get sold nationally. The court considered these arguments considering both the situsing and refund provisions in the statute. It concluded that Jones would have to “…make a quantitative showing of the amount of the claimed refund with documentary evidence that justifies the issuance of a refund.” While Jones’ evidence created a reasonable assumption that some of the merchandise sold to DSW ended up outside of Ohio, it did not provide sufficient evidence as to what that amount was. The court noted that the assistant treasurer’s testimony amounted to an educated guess unsupported by quantitative evidence. While it found that the digital solutions development assistant director’s analysis was more rigorous, it relied on a small sample size that was drawn from data outside the years in question. It also discounted the argument surrounding the 10-K data, since it likewise did not prove a quantitative amount for the refund.
A two-judge dissent would have granted Jones’ refund claim, finding that Jones’ evidence proved that eighty percent of the goods were destined outside of Ohio, and this was “…no stretch of the imagination.”
Forvis Mazars Insight: This seems like a taxpayer loss. However, upon further reflection, the court’s opinion agreed with Jones’ assertion that taxpayers do not need contemporaneous evidence of shipment destination to source sales outside of Ohio for CAT purposes. Jones’ downfall was evidentiary. The court also denied a refund in a similar case, VVF Intervest, L.L.C. v. Harris, 2025‑Ohio‑5680 (Ohio Dec. 24, 2025); however, in that case, the product in question was already destined for a customer of the taxpayer’s customer. On the other hand, DSW was distributing the product from the Ohio distribution center to its retail stores throughout the country, a subtle but important difference.
How Forvis Mazars Can Help
Forvis Mazars can help you consider whether shipments to intermediaries in Ohio ought to be sitused to Ohio for purposes of the CAT. We can also help analyze data to provide support for a position to source such sales outside Ohio.