Crutchfield Corp. v. Testa (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Crutchfield Corp. v. Testa, Slip Opinion No. 2016-Ohio-7760.]

NOTICE
This slip opinion is subject to formal revision before it is published in
an advance sheet of the Ohio Official Reports. Readers are requested
to promptly notify the Reporter of Decisions, Supreme Court of Ohio,
65 South Front Street, Columbus, Ohio 43215, of any typographical or
other formal errors in the opinion, in order that corrections may be
made before the opinion is published.

SLIP OPINION NO. 2016-OHIO-7760
CRUTCHFIELD CORPORATION, APPELLANT AND CROSS-APPELLEE, v. TESTA,
TAX COMMR., APPELLEE AND CROSS-APPELLANT.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as Crutchfield Corp. v. Testa, Slip Opinion No. 2016-Ohio-7760.]
Taxation—Commercial-activity tax (“CAT”)—Physical presence is not necessary
condition for imposing CAT because CAT’s $500,000 sales-receipts
threshold is adequate quantitative standard that ensures that taxpayer’s
nexus with Ohio is substantial—Burdens imposed by CAT on interstate
commerce are not clearly excessive in relation to Ohio’s legitimate
interest in imposing CAT evenhandedly on sales receipts of in-state and
out-of-state sellers—Board of Tax Appeals’ decision affirming CAT
assessments against appellant affirmed.
(No. 2015-0386—Submitted May 3, 2016—Decided November 17, 2016.)
APPEAL and CROSS-APPEAL from the Board of Tax Appeals,
Nos. 2012-926, 2012-3068, and 2013-2021.
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 SUPREME COURT OF OHIO

O’NEILL, J.
{¶ 1} Appellant and cross-appellee, Crutchfield Corporation, appeals from
the imposition of Ohio’s commercial-activity tax (“CAT”) on revenue it has
earned from sales of electronic products that it ships into the state of Ohio.
Crutchfield is based outside Ohio, employs no personnel in Ohio, and maintains
no facilities in Ohio. The business Crutchfield does in this state consists solely of
shipping goods from outside the state to its consumers in Ohio using the United
States Postal Service or common-carrier delivery services. In this appeal,
Crutchfield contests the issuance of CAT assessments against it, arguing that Ohio
may not impose a tax on the gross receipts associated with its sales to Ohio
consumers because Crutchfield lacks a “substantial nexus” with Ohio.
Crutchfield argues that a substantial nexus within a state is a necessary
prerequisite to imposing the tax under the federal dormant Commerce Clause.
Further, citing case law interpreting this substantial-nexus requirement,
Crutchfield argues that its nexus to Ohio is not sufficiently substantial because it
lacks a “physical presence” in Ohio—i.e., property in the state or agents or
employees acting in the state in connection with its sales.
{¶ 2} Appellee and cross-appellant, the tax commissioner, advances a two-
prong defense. First, he argues that the Commerce Clause case law does not
impose a physical-presence requirement and that as a result, the $500,000 sales-
receipts threshold set forth in the Ohio CAT statute satisfies the Commerce
Clause requirement of a substantial nexus. Second, even if the Commerce Clause
does impose a physical-presence requirement, the tax commissioner argues,
Crutchfield’s computerized connections with Ohio consumers involve the
presence of tangible personal property owned either by Crutchfield or by
contractors acting specifically on Crutchfield’s behalf and the presence of that
property on computers located in Ohio constitutes physical presence in this state.

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{¶ 3} We agree with the first prong of the tax commissioner’s argument,
and we therefore do not address the second one. Our reading of the case law
indicates that the physical-presence requirement recognized and preserved by the
United States Supreme Court for purposes of use-tax collection does not extend to
business-privilege taxes such as the CAT. We further conclude that the statutory
threshold of $500,000 of Ohio sales constitutes a sufficient guarantee of the
substantiality of an Ohio nexus for purposes of the dormant Commerce Clause.
We therefore affirm the decision of the Board of Tax Appeals (“BTA”) and the
assessments issued by the tax commissioner against Crutchfield.
The CAT’s Statutory Bright-Line-Presence Standard
{¶ 4} The CAT is imposed under R.C. 5751.02(A), which levies “a
commercial activity tax on each person with taxable gross receipts for the
privilege of doing business in this state.” To determine what constitutes “taxable
gross receipts,” we look to R.C. 5751.01(G), which defines them as “gross
receipts sitused to this state under section 5751.033 of the Revised Code.” In the
case of sales of tangible personal property like those made by Crutchfield, R.C.
5751.033(E) informs us that the sales are “sitused to this state if the property is
received in this state by the purchaser.” The statute specifies that when property
is delivered “by motor carrier or by other means of transportation, the place at
which such property is ultimately received after all transportation has been
completed shall be considered the place where the purchaser receives the
property.” Id. It is the tax commissioner’s position that by filling orders initiated
on computers in Ohio and arranging for its products to be transported into Ohio,
the receipts from Crutchfield’s sales qualify as “taxable gross receipts” under this
provision.
{¶ 5} Next, we turn back to the imposition of the CAT under R.C.
5751.02(A) on the “privilege of doing business.” The statute defines “doing
business” as “engaging in any activity, whether legal or illegal, that is conducted

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for, or results in, gain, profit, or income, at any time during a calendar year.”
Specifically, the statute states that the CAT is imposed on “persons with
substantial nexus with this state,” id., a phrase defined at R.C. 5751.01(H)(3) to
include persons having a “bright-line presence in this state.” R.C. 5751.01(I)(3)
includes within the bright line of taxability those persons having “during the
calendar year taxable gross receipts of at least five hundred thousand dollars.”
{¶ 6} There are other statutory bases for imposing the CAT, but the bright-
line standard of receipts from sales into the state that amount to $500,000 per
calendar year is the one that is relevant in this appeal. We refer to this basis for
imposing the CAT as the $500,000 sales-receipts threshold in this opinion.
Factual Background
{¶ 7} This is an appeal from a decision issued by the BTA on February 26,
2015, in consolidated case Nos. 2012-926, 2012-3068, and 2013-2021. The three
BTA cases were appeals from three separate final determinations of the tax
commissioner:
 In BTA case No. 2012-926, the tax commissioner issued 19 assessments
covering audit periods that extended from July 1, 2005 (the inception of the
CAT) to June 30, 2010. The assessments amounted to $65,689 in tax,
$5,659.94 in preassessment interest, and $37,128.23 in penalties, for a total
assessed amount of $106,239.43.
 In BTA case No. 2012-3068, the tax commissioner issued five assessments for
five quarterly periods beginning July 2010 and ending September 2011. The
assessments were based on estimated tax amounts of $10,000 per period; the
total amount assessed with interest and penalties was $60,988.50.
 In BTA case No. 2013-2021, the commissioner issued assessments for the last
quarter of 2011 and the first two quarters of 2012 based on estimated tax
amounts of $10,000 per quarter. The assessments consisted of tax plus
interest and penalties for a total amount of $39,703.01.

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{¶ 8} In each instance, Crutchfield contested the original assessments,
advancing statutory and constitutional challenges. The tax commissioner issued
three final determinations covering all the assessments.
{¶ 9} The final determinations are substantially the same. Each final
determination notes that Crutchfield is “a corporation based in Virginia,” that it
functions as “a direct marketer that sells consumer electronics through the Internet
from locations entirely outside of Ohio,” and that it “ships its merchandise via the
U.S. Mail or using common carriers.” The final determinations rejected
Crutchfield’s objections on the grounds that the taxpayer “has ‘substantial nexus
with this state,’ as that phrase is defined in R.C. 5751.01(H),” inasmuch as
Crutchfield “satisfies the third and/or fourth conditions in that division, and
therefore is a person on whom the tax is levied.”1
{¶ 10} Next, the final determinations found that Crutchfield “sells
consumer goods through orders received via the Internet and telephone orders,”
noting that Crutchfield “admits that it has customers in Ohio to which it sells and
ships these goods.” After further discussion of the relevant statutory provisions,
the final determinations state that Crutchfield’s “overriding assertion is that the
Commerce Clause of the United States Constitution precludes the State of Ohio
from subjecting it to the commercial activity tax” and that Crutchfield maintains
that “the nexus required is a ‘physical presence’ in the taxing state, which it
alleges it did not have during the assessed periods.”
{¶ 11} In all three cases, the tax commissioner found that Crutchfield had
“more than $500,000 in sales to customers in Ohio” and that Crutchfield “failed to
file and pay the commercial activity tax.” The commissioner made no factual

1
The “third condition,” R.C. 5751.01(H)(3), refers to the bright-line-presence provision at
division (I) of the section, which imposes the tax given $500,000 in sales receipts; the “fourth
condition” is a catchall at R.C. 5751.01(H)(4) that applies when a taxpayer “[o]therwise has nexus
with this state to an extent that the person can be required to remit the tax imposed under this
chapter under the Constitution of the United States.”

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finding regarding physical presence but instead noted that he lacked authority to
“adjudicate the constitutionality of th[e] statutes.” At the BTA, Crutchfield
stipulated that it did “not contest the amounts of estimated Ohio Commercial
Activity Tax set forth on the assessments” while reasserting that it was immune
from the tax.
Proceedings at the BTA
{¶ 12} At the BTA, Crutchfield offered the testimony of two company
employees, its senior vice president of finance and its director of Internet
marketing. The former testified concerning the company’s active intent to avoid
nexus anywhere but in its home state of Virginia. The latter testified concerning
the general character of Crutchfield’s Internet marketing efforts, with the thrust
being that no specific effort was targeted at Ohio.
{¶ 13} With respect to the constitutional issues, the parties offered expert
opinions concerning Crutchfield’s promotion of its products and filling orders in
conjunction with its customers’ use of computers in Ohio. The tax commissioner
offered written reports of two marketing experts, Ashkan Soltani and Joseph
Turow, while Crutchfield offered the written report of its own marketing expert,
Eric Goldman. The conflicting expert opinions addressed the tax commissioner’s
theory that interstate sales through the Internet involved “physical presence”
because of the physical realities of online transactions.
Crutchfield’s Arguments and the BTA’s Decision
{¶ 14} Before the BTA, Crutchfield argued that its “gross receipts * * *
cannot be taxed consistent with the Constitution,” inasmuch as Crutchfield “lacks
the in-state business activity required by the Commerce Clause.” Crutchfield also
argued that “[i]n addition to violating the Constitution,” the assessments against

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Crutchfield violated the provision of the CAT statute that excluded receipts when
the tax could not constitutionally be applied.2
{¶ 15} In its decision, the BTA rejected Crutchfield’s reading of the
statutory provisions by relying on the plain meaning of the bright-line $500,000
sales-receipts threshold and citing its earlier resolution of the issue in L.L. Bean,
Inc. v. Levin, BTA No. 2010-2853, 2014 Ohio Tax LEXIS 1539 (Mar. 6, 2014).
BTA Nos. 2012-926, 2012-3068, and 2013-2021, 2015 WL 1048564 or 1048699,
*4 (Feb. 26, 2015). As for Crutchfield’s constitutional challenge, the board noted
that it lacked jurisdiction to decline to apply statutes on constitutional grounds.
Id. at *3. The BTA therefore affirmed the assessments issued by the tax
commissioner.
Standard of Review
{¶ 16} This appeal presents questions of statutory construction and the
constitutional validity of applying the CAT statute. These constitute legal
questions, which we decide de novo without deference, Akron Centre Plaza,
L.L.C. v. Summit Cty. Bd. of Revision, 128 Ohio St.3d 145, 2010-Ohio-5035, 942
N.E.2d 1054, ¶ 10. As for entertaining the Commerce Clause challenge to the
application of the CAT statute, “the BTA receives evidence at its hearing, but we
determine the facts necessary to resolve the constitutional question.” MCI
Telecommunications Corp. v. Limbach, 68 Ohio St.3d 195, 198, 625 N.E.2d 597
(1994).
Crutchfield Properly Raised its Constitutional Challenge to the CAT
Assessments
{¶ 17} In his cross-appeal, the tax commissioner renews an argument that
we already rejected when we denied the commissioner’s motion to dismiss. See

2
Crutchfield’s BTA brief quoted former R.C. 5751.01(F)(2)(jj) (now (F)(2)(ll)), which excludes
from the statutory definition of “gross receipts” “[a]ny receipts for which the tax imposed by this
chapter is prohibited by the constitution or laws of the United States or the constitution of this
state.”

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143 Ohio St.3d 1414, 2015-Ohio-2911, 34 N.E.3d 928. Namely, the
commissioner contends that “Crutchfield has failed to impart jurisdiction on the
BTA, and therefore derivatively on this Court, to consider its as-applied
constitutional challenges.” While the tax commissioner is correct that a failure to
specify an as-applied challenge in the notice of appeal to the BTA would bar that
kind of relief, the commissioner is wrong about the content of the notices of
appeal that Crutchfield filed at the BTA. Each notice of appeal states in the sixth
assignment of error that “[a]pplication of the CAT to Crutchfield would violate
the Company’s rights under the Commerce Clause of the United States
Constitution.” The notices of appeal also state that “Crutchfield is protected from
imposition of the Commercial Activity Tax (‘CAT’) under the Commerce Clause
of the United States Constitution” and that “[a]s it applies to gross receipts taxes
like the CAT, the [Supreme] Court has made clear that the physical presence
standard is only satisfied through in-state activities by, or on behalf of, the
taxpayer that are significantly associated with its ability to establish and maintain
a market in the state.”
{¶ 18} Taken together, these assertions adequately specify the
constitutional error. We do not recognize any significance to the distinction
between a facial or as-applied challenge in the present context; we find that the
notices of appeal suffice to place both theories at issue, inasmuch as any facial
challenge under the Commerce Clause nexus standard would necessarily have to
demonstrate that the statute could not constitutionally be applied to Crutchfield
itself; that would be a necessary predicate for showing that the statute is
unconstitutional in all its applications. See Harrold v. Collier, 107 Ohio St.3d 44,
2005-Ohio-5334, 836 N.E.2d 1165, ¶ 37 (“A facial challenge to a statute is the
most difficult to bring successfully because the challenger must establish that
there exists no set of circumstances under which the statute would be valid”).

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The CAT Statute Manifests Clear Legislative Intent to Impose the CAT
Based on the $500,000 Sales-Receipts Threshold
{¶ 19} Crutchfield argues that the CAT statute may be construed and
applied to avoid the constitutional infirmity that it raises here, but these arguments
do not withstand close scrutiny.
{¶ 20} First, Crutchfield argues that this court should strictly construe
“doing business” under R.C. 5751.02(A) to avoid the constitutional infirmity, by
holding that Crutchfield’s lack of physical presence means that it was not “doing
business” in Ohio. But “doing business” is defined in R.C. 5751.02(A) solely for
the purpose of establishing that “privilege of doing business,” the incidence of the
tax, broadly includes profit-seeking activities. Interpreting the term “doing
business” to exclude situations in which there is no physical presence simply
would not be consistent with the broad intent reflected in the language of the
provision.
{¶ 21} Moreover, after defining “doing business,” R.C. 5751.02(A)
proceeds to explicitly impose the tax on “persons with substantial nexus,” which
includes, under R.C. 5751.01(I)(3), those persons who satisfy the $500,000 sales-
receipts threshold. Thus, far from avoiding the constitutional infirmity, the
“doing business” language of R.C. 5751.02(A) invites the constitutional challenge
to be considered on its own terms.
{¶ 22} Crutchfield asserts that the tax commissioner’s interpretation of
R.C. 5751.02(A) “read[s] out of the statute [its] primary, in-state activities
requirement.” But the statute speaks of taxing “the privilege of doing business in
this state” without stating an “in-state activities requirement,” much less any
reference to the additional requirement of physical presence within the state. Nor
is there any ambiguity to be interpreted in Crutchfield’s favor in this section; the
reference to a “physical presence” requirement is unambiguously absent, and the

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insistence that the tax is imposed on persons based on the $500,000 sales-receipts
threshold is unambiguously incorporated by reference.
{¶ 23} Second, Crutchfield contends that former R.C. 5751.01(F)(2)(jj)
(now (F)(2)(ll)) should be construed to preempt imposition of the CAT based on
the $500,000 sales-receipts threshold. That provision states that “ ‘[g]ross
receipts’ excludes * * * [a]ny receipts for which the tax imposed by this chapter is
prohibited by the constitution or laws of the United States or the constitution of
this state.” According to Crutchfield, the “only reasonable interpretation of the
exclusion is that the General Assembly wished to avoid conflict with all
limitations on the State’s authority to impose a tax measured by gross receipts,
including restrictions arising under the substantial nexus requirement of the
dormant Commerce Clause.”
{¶ 24} We disagree. The proposed interpretation is irreconcilable with the
insistence in R.C. 5751.02(A) that the “[p]ersons on which the commercial
activity tax is levied include, but are not limited to, persons with substantial nexus
with this state.” (Emphasis added.) This language invokes by reference the
$500,000 sales-receipts threshold for imposing the tax as part of the definition of
“substantial nexus with this state” under R.C. 5751.01(H), but the language then
proceeds to express legislative intent that the tax not even be bound by that
expansive definition. This cannot be squared with attributing to the legislature an
intent to acquiesce in the substantial-nexus/physical-presence test that Crutchfield
advocates here.
{¶ 25} Moreover, R.C. 5751.01(F)(2)(ll) excludes receipts from the “gross
receipts” definition; it does not create an exception to the statute’s substantial-
nexus definition. The exclusion requires the tax commissioner to disregard any
receipts that by their character, or the character of the taxpayer itself, are immune
or exempt from state taxation as a matter of federal constitutional or statutory law.
See NLO, Inc. v. Limbach, 66 Ohio St.3d 389, 394, 613 N.E.2d 193 (1993) (“The

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federal Supremacy Clause, Clause 2, Article VI, United States Constitution,
prevents the state from taxing the federal government and its instrumentalities”).
Under the statute’s definition of “[e]xcluded person,” R.C. 5751.01(E), “the state
and its agencies, instrumentalities, or political subdivisions” are not subject to the
CAT, R.C. 5751.01(E)(8), but the definition makes no mention of the federal
government and its instrumentalities. As a result, it is the gross-receipts exclusion
at R.C. 5751.01(F)(2)(ll) that removes the federal government and its
instrumentalities from the operation of the CAT. It is unnecessary to find
additional legislative purposes for the provision.
{¶ 26} For the foregoing reasons, we reject Crutchfield’s statutory
challenges to the CAT assessments.
“Substantial Nexus” Does Not Require a Taxable “Local Incident”
{¶ 27} Our analysis of this appeal under the Commerce Clause begins
with a “before and after” view of the case law. The pivot point is Complete Auto
Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), which
altered how the dormant Commerce Clause interacts with a state’s taxing powers.
{¶ 28} Before Complete Auto, we characterized the United States Supreme
Court case law as “enigmatic,” embodying “[a]t the opposite ends of the
conceptual spectrum * * * two competing * * * propositions that (1) a state may
not levy a tax for the privilege of engaging in interstate commerce * * * and (2)
interstate commerce must pay its way in relation to the immediate benefits and
protections afforded it by the state.” United Air Lines, Inc. v. Porterfield, 28 Ohio
St.2d 97, 102, 276 N.E.2d 629 (1971). Whatever other effect it had, Complete
Auto abolished the first of these two principles by embracing the doctrine of those
cases in which the high court had “rejected the proposition that interstate
commerce is immune from state taxation.” Complete Auto at 288.
{¶ 29} In place of the old conceptual framework, the high court articulated
the now familiar four-prong test, under which a state tax is valid if is “applied to

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an activity with a substantial nexus with the taxing State, is fairly apportioned,
does not discriminate against interstate commerce, and is fairly related to the
services provided by the State.” Id. at 279. It is, of course, the requirement of a
substantial nexus that is at issue in this appeal.
{¶ 30} The main flaw in Crutchfield’s argument lies in its reliance on case
law that embodies the since-discarded theory of interstate-commerce immunity
from state taxation. Namely, Crutchfield cites cases in which a taxable “local
incident” was required as a predicate for state taxation, because the privilege of
engaging in interstate commerce was regarded as immune from state taxation.
See also Freeman v. Hewit, 329 U.S. 249, 252, 254, 67 S.Ct. 274, 91 L.Ed. 265
(1946) (“by its own force,” the dormant Commerce Clause “created an area of
trade free from interference by the States,” with the result that the Commerce
Clause barred “a levy upon the very process of commerce across State lines”);
Spector Motor Serv., Inc. v. O’Connor, 340 U.S. 602, 608, 71 S.Ct. 508, 95 L.Ed.
573 (1951) (invalidating tax that was “placed unequivocally upon the
corporation’s franchise for the privilege of carrying on exclusively interstate
transportation in the state”). Crutchfield then equates the taxable “local incident”
required in earlier cases with “substantial nexus” under Complete Auto.
{¶ 31} Crutchfield relies in particular on Norton Co. v. Dept. of Revenue,
340 U.S. 534, 71 S.Ct. 377, 95 L.Ed. 517 (1951). In Norton, a Massachusetts
manufacturer had a Chicago office through which it made sales in Illinois; it
separately engaged in a purely mail-order business in which in-state customers
mailed an order to Massachusetts that was then filled by mailing the ordered items
back to Illinois. Illinois assessed a retail-business tax measured by gross receipts
against the manufacturer, which protested that it was engaged in interstate
commerce. The manufacturer’s argument was rejected in state court.
{¶ 32} On appeal, the Supreme Court noted that the state statute exempted
“ ‘business in interstate commerce’ as required by the Constitution.” Id. at 535-

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536. The court vacated the state court judgment and remanded the cause to
distinguish those transactions involving purely mail-order business; once
identified, those transactions would be held immune from the state tax. Id. at 539.
The linchpin of the court’s analysis is instructive:

Where a corporation chooses to stay at home in all respects
except to send abroad advertising or drummers to solicit orders
which are sent directly to the home office for acceptance, filling,
and delivery back to the buyer, it is obvious that the State of the
buyer has no local grip on the seller. Unless some local incident
occurs sufficient to bring the transaction within its taxing power,
the vendor is not taxable. McLeod v. [J.E.] Dilworth Co., 322 U.S.
327 [64 S.Ct. 1023, 88 L.Ed. 1304 (1944)]. Of course, a state
imposing a sales or use tax can more easily meet this burden,
because the impact of those taxes is on the local buyer or user.
Cases involving them are not controlling here, for this tax falls on
the vendor.

(Emphasis added.) Norton at 537.
{¶ 33} At first blush, this passage could be mistaken for a statement about
the substantiality of nexus, and that is precisely the error that Crutchfield makes.
Read in context, however, the passage does not at all comment on “substantial
nexus”; instead, it reflects the interstate-commerce-immunity theory, whereby the
sales made by or through local agents in the state—such as the purchases in Ohio
of Crutchfield’s products—are taxable as local commerce, but the strictly mail-
order transactions are immune as purely interstate commerce.
{¶ 34} Crutchfield maintains that the local incident in a case like Norton
equates to the substantial-nexus requirement of the Complete Auto test. That is

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wrong. Complete Auto abolished the prohibition against levying a tax on the
privilege of engaging in interstate commerce, and the Supreme Court’s
articulation of the substantial-nexus test was not intended to resurrect it.
{¶ 35} Essentially, the same is true for the other pre-Complete Auto cases
cited and relied upon by Crutchfield. In Standard Pressed Steel Co. v.
Washington Dept. of Revenue, 419 U.S. 560, 562-563, 95 S.Ct. 706, 42 L.Ed.2d
719 (1975), the high court rejected the proposed analogy to Norton on the grounds
that Norton presented the questions whether the in-state activity related to the
interstate aspect of the business and whether the taxpayer had to prove the
absence of such a relationship in order to “establish[ ] its immunity” from state
taxation; by contrast, Standard Pressed Steel had an employee “with a full-time
job within the State” that consisted of maintaining the seller’s relationship with its
in-state customer, Boeing. In Gen. Motors Corp. v. Washington, 377 U.S. 436, 84
S.Ct. 1564, 12 L.Ed.2d 430 (1964), the high court invoked the proposition as
“ ‘beyond dispute * * * that a state may not lay a tax on the “privilege” of
engaging in interstate commerce.’ ” Id. at 446, quoting Northwestern States
Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct. 357, 3 L.Ed.2d
421 (1959). But the court then distinguished the facts before it as involving
taxation of the “in-state activities” performed by “out-of-state personnel”; though
maintaining no office in the state, General Motors employees nonetheless
regularly performed substantial services within the state to maintain dealer
contacts. Id. at 447.
{¶ 36} In Field Ents., Inc. v. Washington, 47 Wash.2d 852, 289 P.2d 1010
(1955), summarily aff’d, 352 U.S. 806, 77 S.Ct. 55, 1 L.Ed.2d 39 (1956), a
Delaware corporation published World Book Encyclopedia and Childcraft; it
maintained a Seattle office, where its representative took orders that were then
filled outside the state with books mailed directly to the customers. The case was
decided on the Commerce Clause ground that the in-state activity was sufficient,

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so that Washington’s business tax was not being laid on the privilege of engaging
in interstate commerce. Although the interstate-commerce-immunity rationale
does not appear on the face of the decision, it is manifest in its reliance on the
earlier decision in B.F. Goodrich Co. v. State, 38 Wash.2d 663, 231 P.2d 325
(1951), which—although not itself explicitly mentioning interstate-commerce
immunity—exhibits its adherence to the doctrine by its reliance on the United
States Supreme Court’s decision in Norton.
Quill Does Not Apply to Business-Privilege Taxes, Whether Measured by
Income or by Receipts
{¶ 37} The proper focal point of discussion of the physical-presence
standard in the case law is Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct.
1904, 119 L.Ed.2d 91 (1992). That is so because Quill explicitly considers the
substantial-nexus prong of the Commerce Clause test in light of the change in that
test effected by Complete Auto and finds the need for a physical presence under
the circumstances presented in Quill.
{¶ 38} Quill involved a challenge to the typical state-law requirement that
out-of-state sellers act as agents of the state by charging, collecting, and remitting
sales or use taxes3 incurred by in-state buyers when they ordered items for
delivery into the state. In Quill, North Dakota imposed the administrative
obligation to charge, collect, and remit taxes on persons who “ ‘engage[ ] in
regular or systematic solicitation of a consumer market in th[e] state.’ ” Id. at
302-303, quoting N.D.Century Code 57-40.2-01(6). The law thereby swept
within its ambit mail-order firms that solicited business through advertising within
the state. Id. at 303. When Quill resisted, a trial court upheld its position against

3
“As a corollary to its sales tax, North Dakota imposes a use tax upon property purchased for
storage, use, or consumption within the State.” Quill at 302; accord Proctor & Gamble Co. v.
Lindley, 17 Ohio St.3d 71, 73, 477 N.E.2d 1109 (1985) (“R.C. 5739.02 imposes an excise tax on
each retail sale made in Ohio, with R.C. 5741.02 imposing a complementary excise tax on the use
of tangible personal property in Ohio”).

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the state on the authority of Natl. Bellas Hess, Inc. v. Dept. of Revenue of State of
Illinois, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967), which had held that
requiring a Missouri mail-order business to collect the Illinois use tax violated
due-process and Commerce Clause standards. The state supreme court reversed,
allowing imposition of the collection responsibility on Quill.
{¶ 39} On appeal, the United States Supreme Court reversed. First, the
high court rejected the due-process ground of the Bellas Hess holding, concluding
that the activity by which North Dakota sought to impose the obligation
constituted purposeful availment of the state’s benefits and protections. Quill at
307-308. As for the Commerce Clause ground, however, the Quill court
reaffirmed the holding of Bellas Hess and prohibited North Dakota’s imposition
of the collection responsibility. Quill at 310-318.
{¶ 40} With respect to Commerce Clause case law, the court in Quill
discerned that the substantial-nexus test carried forward the limitation, set forth in
Bellas Hess, that out-of-state sellers could incur use-tax compliance obligations
based only on physical presence in the state, Bellas Hess at 758 (distinguishing
“between mail order sellers with retail outlets, solicitors, or property within a
State, and those who do no more than communicate with customers in the State
by mail or common carrier as part of a general interstate business”). Quill at 311-
313.
{¶ 41} The Supreme Court had concluded in Bellas Hess that this
continued limitation was justified by the burdens imposed on interstate commerce
by multiple jurisdictions imposing use taxes with differing rates, exemptions, and
record-keeping requirements. Bellas Hess at 759-760. In Quill, the court noted
that the “settled expectations” of mail-order sellers arising from Bellas Hess may
have facilitated such interstate business and that the physical-presence rule was
therefore worth preserving. 504 U.S. at 316, 112 S.Ct. 1904, 119 L.Ed.2d 91.

16
 January Term, 2016

{¶ 42} We hold today that although a physical presence in the state may
furnish a sufficient basis for finding a substantial nexus, Quill’s holding that
physical presence is a necessary condition for imposing the tax obligation does
not apply to a business-privilege tax such as the CAT, as long as the privilege tax
is imposed with an adequate quantitative standard that ensures that the taxpayer’s
nexus with the state is substantial. Here, that quantitative standard is the
$500,000 sales-receipts threshold.
{¶ 43} We discern the basis for our holding in Quill itself and the related
United States Supreme Court precedents. First, Quill contains two passages that
indicate that the physical-presence standard has not been articulated as a nexus
requirement in the business-privilege-tax situation. In rejecting North Dakota’s
argument that the court had eschewed such a “bright-line test” as physical
presence, the Supreme Court conceded that “we have not, in our review of other
types of taxes, articulated the same physical-presence requirement that Bellas
Hess established for sales and use taxes”; the court then stated that “that silence
does not imply repudiation of the Bellas Hess rule.” Quill at 314. The contrast
was drawn even more trenchantly in the concluding passage of the opinion, in
which the court noted that “our cases subsequent to Bellas Hess and concerning
other types of taxes” did not “adopt[ ] a similar bright-line, physical-presence
requirement”; the court then observed that “our reasoning in those cases does not
compel that we now reject the rule that Bellas Hess established in the area of
sales and use taxes.” (Emphasis added.) Quill at 317.
{¶ 44} Second, the case law post-Complete Auto establishes that for
purposes of applying the four-prong Commerce Clause test, business-privilege
taxes should be distinguished from transaction taxes such as the sales and use tax.
In Oklahoma Tax Comm. v. Jefferson Lines, Inc., 514 U.S. 175, 115 S.Ct. 1331,
131 L.Ed.2d 261 (1995), a Minnesota bus company had collected and remitted the
Oklahoma sales tax on transportation services for trips within Oklahoma but not

17
 SUPREME COURT OF OHIO

for trips originating in Oklahoma and terminating outside the state. In bankruptcy
proceedings, the state attempted to collect the unremitted tax through a vendor
assessment; there, the state confronted a Commerce Clause defense. One aspect
of that defense was that the Commerce Clause required the sales tax to be
apportioned to apply only to mileage within Oklahoma itself, see Cent.
Greyhound Lines, Inc. v. Mealey, 334 U.S. 653, 68 S.Ct. 1260, 92 L.Ed. 1633
(1948) (holding unconstitutional an unapportioned tax on gross receipts of
company that sold tickets for interstate bus travel).
{¶ 45} The United States Supreme Court rejected that position, relying
principally on the different identities of the taxpayer: the interstate seller of the
bus ticket, on whom a gross-receipts tax is imposed, and the in-state purchaser of
the ticket, on whom a sales tax is imposed. The high court stated:

[Central Greyhound and Jefferson Lines] involve the identical
services, and apportionment by mileage per State is equally
feasible in each. But the two diverge crucially in the identity of the
taxpayers and the consequent opportunities that are understood to
exist for multiple taxation of the same taxpayer. Central
Greyhound did not rest simply on the mathematical and
administrative feasibility of a mileage apportionment, but on the
Court’s express understanding that the seller-taxpayer was exposed
to taxation by New Jersey and Pennsylvania on portions of the
same receipts that New York was taxing in their entirety. The
Court thus understood the gross receipts tax to be simply a variety
of tax on income, which was required to be apportioned to reflect
the location of the various interstate activities by which it was
earned.

18
 January Term, 2016

(Emphasis added.) Jefferson Lines at 190. Accord Comptroller of Treasury of
Maryland v. Wynne, ___ U.S. ___, 135 S.Ct. 1787, 1795, 191 L.Ed.2d 813 (2015)
(seeing “no reason why the distinction between gross receipts and net income
should matter” in evaluating Commerce Clause challenge to imposition of a state
tax).
{¶ 46} Thus, Jefferson Lines puts the United States Supreme Court on
record that for purposes of applying the Complete Auto test, a gross-receipts tax
on the interstate seller should be viewed as occupying the same constitutional
category as an income tax on that same seller—whereas the sales tax on the in-
state purchaser occupies a different category. That reasoning tracks the
background and purpose of Ohio’s CAT, which, enacted to replace the former
corporate-franchise tax, is imposed on the privilege of engaging in income-
producing activity but is measured by gross receipts instead of income. See
Navistar, Inc. v. Testa, 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d 509, ¶ 1,
8; Beaver Excavating Co. v. Testa, 134 Ohio St.3d 565, 2012-Ohio-5776, 983
N.E.2d 1317, ¶ 23-24.
{¶ 47} Under these precepts, we follow our own lead along with that of
most state courts that, post-Quill, have explicitly rejected the extension of the
Quill physical-presence standard to taxes on, or measured by, income. See
Couchot v. State Lottery Comm., 74 Ohio St.3d 417, 425, 659 N.E.2d 1225 (1996)
(“There is no indication in Quill that the Supreme Court will extend the physical-
presence requirement to cases involving taxation measured by income derived
from the state”); Capital One Bank v. Commr. of Revenue, 453 Mass. 1, 13, 899
N.E.2d 76 (2009) (declining to “expand the [United States Supreme] Court’s
reasoning [in Quill] beyond its articulated boundaries” and upholding imposition
of tax on out-of-state banks in relation to in-state servicing of credit cards based
on the volume of business conducted and profits realized); MBNA Am. Bank, N.A.
v. Indiana Dept. of State Revenue, 895 N.E.2d 140, 143 (Ind.Tax 2008) (“Based

19
 SUPREME COURT OF OHIO

on [Quill] and a thorough review of relevant case law, this Court finds that the
Supreme Court has not extended the physical presence requirement beyond the
realm of sales and use taxes”); KFC Corp. v. Iowa Dept. of Revenue, 792 N.W.2d
308, 328 (Iowa 2010) (“We * * * doubt that the United States Supreme Court
would extend the ‘physical presence’ rule outside the sales and use context of
Quill”). But see J.C. Penney Natl. Bank v. Johnson, 19 S.W.3d 831, 839
(Tenn.App.1999), in which an intermediate appellate court, rejecting the state’s
argument that Quill did not apply, overruled the imposition of the state’s franchise
and excise taxes on a bank in relation to the servicing of credit cards issued to
Tennessee residents, on the ground that the bank had no offices or agents in the
state.4
{¶ 48} We recognize that Crutchfield seeks to take refuge in a handful of
state court decisions addressing gross-receipts taxes, but we find that those
decisions are unavailing for reasons we discuss in the next section.
Under Tyler Pipe, Physical Presence Is a Sufficient but not Necessary
Condition for Imposing a Business-Privilege Tax
{¶ 49} We are now in a position to fully address Crutchfield’s argument
that “[f]or more than 50 years, in a series of cases decided both before and after
Complete Auto, the Supreme Court has made clear that a state’s authority to
impose a tax measured by gross receipts depends upon the taxpayer conducting
business activities within the state that assist the company to develop and
maintain a market there.” At oral argument, although Crutchfield stated that it
was not arguing that the Quill standard per se applies to a privilege tax, it
nonetheless invited us to read Tyler Pipe Industries, Inc. v. Washington State
Dept. of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987), as

4
Crutchfield characterizes the Tennessee tax as a gross-receipts tax, but at least one commentator
has noted that the case involves a net-income tax, Michael T. Fatale, State Tax Jurisdiction and
the Mythical “Physical Presence” Constitutional Standard, 54 Tax Lawyer 105, 139 (Fall 2000).

20
 January Term, 2016

recognizing a “very similar” type of physical-presence standard in the privilege-
tax context.
{¶ 50} We disagree. The most accurate characterization of Tyler Pipe,
and one that is fully consistent with Complete Auto and with the Quill court’s own
reading of the case law, is that a taxpayer’s physical presence in a state constitutes
a sufficient basis for the state to impose a business-privilege tax. We conclude
that in construing Tyler Pipe, it is unwarranted to leap from the principle that
physical presence is a sufficient condition for imposing a tax to the logically
distinct proposition that physical presence is a necessary condition to impose the
tax.5 And as discussed, although Quill recognized physical presence as a
necessary condition for imposing the obligation to collect use taxes, that
requirement does not extend to business-privilege taxes as a general matter.
{¶ 51} This conclusion derives from not just Tyler Pipe but also the state
court decisions addressing gross-receipts taxes: in each case, a physical presence
was found that in turn furnished a sufficient condition for upholding the
imposition of the state tax. Koch Fuels, Inc. v. Clark, 676 A.2d 330, 334 (R.I.
1996) (noting that the taxpayer “shipped approximately 25.6 million gallons of oil
into Rhode Island” over which it “retained title, possession and risk of loss * * *
up until the point it reached the flange in Providence”); Saudi Refining, Inc. v.
Dir. of Revenue, 715 A.2d 89, 96 (Del.Super. 1998) (noting that the taxpayer had
“a significantly greater presence in Delaware than [the taxpayer in Koch Fuels]

5
Crutchfield seizes upon a passage that the United States Supreme Court quoted from the state
supreme court decision to bolster its claim: “ ‘[T]he crucial factor governing nexus is whether the
activities performed in this state on behalf of the taxpayer are significantly associated with the
taxpayer’s ability to establish and maintain a market in this state for the sales.’ ” Tyler Pipe at
250, quoting Tyler Pipe Industries, Inc. v. State Dept. of Revenue, 105 Wash.2d 318, 323, 715
P.2d 123 (1986). But this passage does not, contrary to Crutchfield’s suggestion, articulate a
constitutional standard for nexus; instead, it states the state-law standard embodied in the pertinent
state nexus regulation. See Tyler Pipe, 105 Wash.2d at 233, 715 P.2d 123, citing Wash.Adm.Code
458-20-193B. The constitutional holding is simply that such a connection is sufficient under the
Commerce Clause.

21
 SUPREME COURT OF OHIO

did in Rhode Island”); Ariz. Dept. of Revenue v. O’Connor, Cavanagh, Anderson,
Killingsworth & Beshears, P.A., 192 Ariz. 200, 206, 963 P.2d 279 (App.1997)
(detailing Arizona contacts of Indiana seller, including installation activity of its
agents in the state, that would permit imposition of Arizona gross-receipts tax on
that seller); Short Bros. (USA), Inc. v. Arlington Cty., 244 Va. 520, 526, 423
S.E.2d 172 (1992) (taxpayer chose the taxing jurisdiction as its place of business
and conducted all its revenue-generating operations from that office). Given our
reading of the United States Supreme Court cases, there is no reason for us to
view those decisions as authority for the proposition that physical presence would
have been a necessary condition as well.
The $500,000 Sales-Receipts Threshold Adequately Ensures Substantial
Nexus for Purposes of Imposing the CAT
{¶ 52} The final point of our analysis has been implicit in some of our
earlier discussion, but we make it explicit here. We hold that the $500,000 sales-
receipts threshold complies with the substantial-nexus requirement of the
Complete Auto test.
{¶ 53} In so holding, we express our view that the quantitative standard is
necessary to make the CAT applicable to a remote seller such as Crutchfield,
because the Commerce Clause standard does require the nexus to be “substantial.”
This means that in order to render receipts susceptible to taxation by Ohio, the
Commerce Clause requires more than the “ ‘definite link’ ” to this state, or the
“ ‘purpose[ful] avail[ment]’ ” of Ohio’s protections, that would satisfy due
process, Corrigan v. Testa, __ Ohio St.3d __, 2016-Ohio-2805, __ N.E.3d __,
¶ 30, 32, quoting Quill, 504 U.S. at 306, 307, 112 S.Ct. 1904, 119 L.Ed.2d 91.
The United States Supreme Court has recently reiterated:

By prohibiting States from discriminating against or imposing
excessive burdens on interstate commerce without congressional

22
 January Term, 2016

approval, [the dormant Commerce Clause] strikes at one of the
chief evils that led to the adoption of the Constitution, namely,
state tariffs and other laws that burdened interstate commerce.

(Emphasis added.) Wynne, ___ U.S. ___, 135 S.Ct. at 1794, 191 L.Ed.3d 813.
{¶ 54} In applying the substantial-nexus standard without Quill’s physical-
presence requirement, we take recourse to more general principles for applying
the Commerce Clause limitation. As a general matter, when a state statute
“regulates even-handedly to effectuate a legitimate local public interest, and its
effects on interstate commerce are only incidental, it will be upheld unless the
burden imposed on such commerce is clearly excessive in relation to the putative
local benefits.” Pike v. Bruce Church, 397 U.S. 137, 145-146, 90 S.Ct. 844, 25
L.Ed.2d 174 (1970). Obviously the imposition of the CAT on remote sellers has
an effect on interstate commerce, and Ohio must assure that the adverse impact
does not become “clearly excessive” in relation to the legitimate exercise of its
taxing authority. Were the state to tax all receipts without any regard for the
volume of Ohio sales, the CAT could become clearly excessive as to a business
with a very small amount of such receipts. The General Assembly has sensibly
attempted to foreclose that possibility by setting a minimum sales-receipts
threshold.
{¶ 55} Crutchfield points out that the number chosen by the General
Assembly, $500,000, can be seen as arbitrary to some degree, but no reason is
advanced why a higher number ought to have been selected.6 Instead, Crutchfield
relies on the physical-presence requirement, which we have determined is not a

6
The $150,000 threshold, which under R.C. 5751.04(B) is the usual amount that triggers the CAT
registration requirement, is not at issue in this appeal. Crutchfield has not raised the point, and
even assuming that the $150,000 threshold might apply to an out-of-state retailer like Crutchfield,
Crutchfield would have no standing to advance such a claim because it accepts the premise that it
had receipts in excess of the $500,000 threshold.

23
 SUPREME COURT OF OHIO

necessary condition here. Although any threshold amount, whether selected by
the legislature or the courts, may “seem to reasonable and intelligent persons to
represent the drawing of artificial and arbitrary boundaries or lines,” we have
recognized that the drawing of such lines is justified for the purpose of defining
the legal obligations of the taxpaying public. Powhatan Mining Co. v. Peck, 160
Ohio St. 389, 394, 116 N.E.2d 426 (1953); In re Sears’ Estate, 172 Ohio St. 443,
448, 178 N.E.2d 240 (1961).
{¶ 56} We hold that given the $500,000 sales-receipts threshold, the
burdens imposed by the CAT on interstate commerce are not “clearly excessive”
in relation to the legitimate interest of the state of Ohio in imposing the tax
evenhandedly on the sales receipts of in-state and out-of-state sellers. As a result,
the tax satisfies the substantial-nexus standard under the dormant Commerce
Clause, and we decline to address the tax commissioner’s alternative argument
that the physical-presence standard has been satisfied.
Conclusion
{¶ 57} For the foregoing reasons, we affirm the decision of the BTA and
uphold the CAT assessments against Crutchfield.
Decision affirmed.
O’CONNOR, C.J., and PFEIFER, O’DONNELL, and FRENCH, JJ., concur.
KENNEDY, J., dissents, with an opinion joined by LANZINGER, J.
_________________
KENNEDY, J., dissenting.
{¶ 58} This case is not about the wisdom of imposing a business-privilege
tax on Ohio corporations or the constitutionality of the commercial-activity tax
(“CAT”) in general. This case is about whether online purchases made by Ohio
residents—or even a single Ohio resident—from an out-of-state business create a
substantial nexus between that business and Ohio for purposes of the dormant
Commerce Clause if the transactions meet the statutory threshold of $500,000 in

24
 January Term, 2016

Ohio sales. While I am sympathetic to all Ohio-based businesses that must pay a
business-privilege tax such as the CAT, this court nevertheless should follow the
law as it exists today. Therefore, I must dissent.
{¶ 59} The power to regulate interstate commerce is given to Congress
under Article I, Section 8, Clause 3 of the United States Constitution. If Congress
is silent—neither preempting nor consenting to state regulation—and a state
attempts to regulate in the face of that silence, the United States Supreme Court,
going back to Gibbons v. Ogden, 22 U.S. 1, 231-32, 238-39, 6 L.Ed. 23 (1824)
(Johnson, J., concurring), has interpreted the Commerce Clause to limit state
regulation of interstate commerce through what has come to be known as the
dormant Commerce Clause. Accordingly, the Commerce Clause is both an
express grant of power to Congress and an implicit limit on the power of state and
local government. See Comptroller of the Treasury of Maryland v. Wynne, __
U.S. __, 135 S.Ct. 1787, 1794, 191 L.Ed.2d 813 (2015).
{¶ 60} The majority interprets Congress’s silence as authorizing Ohio to
tax a corporation based solely on its Internet sales in Ohio when it has no physical
presence in the state and the only connection it has with Ohio is Ohioans’
purchases of its products. This reasoning runs counter to the United States
Supreme Court’s reasoning in Quill Corp. v. North Dakota, which is the last word
from that court on this issue. 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91
(1992).
{¶ 61} While the shifting seats on the high court might present the
possibility the court will overturn its past precedents on the dormant Commerce
Clause and hold that a business-privilege tax does not violate the dormant
Commerce Clause, until that day, we are bound by the court’s prior holdings and
by Congress’s inaction on this issue, given its power to regulate interstate
commerce. See Quill at 298; see also Tyler Pipe Industries, Inc. v. Washington
State Dept. of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987).

25
 SUPREME COURT OF OHIO

Therefore, I would remand this matter to the Board of Tax Appeals (“BTA”) for a
determination of whether appellant, Crutchfield Corporation, has a physical
presence in Ohio under Quill.
I. Analysis
{¶ 62} Before delving into the specifics of this case, it is worth
summarizing the constitutional framework at issue. Congress has the power to
regulate commerce among the states; this includes the power to authorize the
states to place burdens on interstate commerce. Prudential Ins. Co. v. Benjamin,
328 U.S. 408, 434, 66 S.Ct. 1142, 90 L.Ed. 1342 (1946). Absent such
congressional approval, a state law violates the dormant Commerce Clause if it
imposes an undue burden on both out-of-state and local producers engaged in
interstate activities or if it treats out-of-state producers less favorably than their
local competitors. See, e.g., Pike v. Bruce Church, Inc., 397 U.S. 137, 142, 90
S.Ct. 844, 25 L.Ed.2d 174 (1970); Philadelphia v. New Jersey, 437 U.S. 617, 624,
98 S.Ct. 2531, 57 L.Ed.2d 475 (1978); Granholm v. Heald, 544 U.S. 460, 472,
125 S.Ct. 1885, 161 L.Ed.2d 796 (2005). As we noted earlier this year, the
United States Supreme Court has described the purpose of the dormant
Commerce Clause as follows:

“By prohibiting States from discriminating against or imposing excessive
burdens on interstate commerce without congressional approval, [the
dormant Commerce Clause] strikes at one of the chief evils that led to the
adoption of the Constitution, namely, state tariffs and other laws that
burdened interstate commerce.”

(Brackets sic.) Corrigan v. Testa, __ Ohio St.3d __, 2016-Ohio-2805, __ N.E.3d
__ ¶ 16, quoting Wynne, __ U.S. __, 135 S.Ct. at 1794, 191 L.Ed.2d 813.
{¶ 63} The Commerce Clause grants Congress the authority to regulate (1)

26
 January Term, 2016

“the use of the channels of interstate commerce,” (2) “the instrumentalities of
interstate commerce, or persons or things in interstate commerce, even though the
threat may come only from intrastate activities,” and (3) “those activities having a
substantial relation to interstate commerce, * * * i.e., those activities that
substantially affect interstate commerce.” United States v. Lopez, 514 U.S. 549,
558-559, 115 S.Ct. 1624, 131 L.Ed.2d 626 (1995). Federal circuit courts that
have examined the issue agree that the Internet is a “channel” or “instrumentality”
of interstate commerce. See, e.g., United States v. Panfil, 338 F.3d 1299, 1300
(11th Cir.2003); United States v. Extreme Assocs., Inc., 431 F.3d 150, 161 (3d
Cir.2005).
{¶ 64} The majority relies on the absence of United States Supreme Court
decisions directly on point and treats this case as though it exists in a vacuum. It
does not. And the majority’s approach ignores the clues that we do have—all of
which point to a business’s physical presence in the state as the lynchpin of a
substantial nexus between the business and the state. The most relevant cases are
those dealing with sales and use taxes—Quill, 504 U.S. 298, 112 S.Ct. 1904, 119
L.Ed.2d 91, is the latest—and a case evaluating a similar gross-receipts tax, Tyler
Pipe, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199. In all those cases, the
businesses subject to the taxes had a physical presence in the taxing jurisdictions,
and the majority should not ignore these cases.
{¶ 65} In Quill, the United States Supreme Court reaffirmed the Bellas
Hess rule that the physical presence of the business established the necessary
substantial nexus with the state when a state sought to impose use-tax-collection
duties on mail-order sellers. Quill at 311, citing Natl. Bellas Hess, Inc. v. Illinois
Dept. of Revenue, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967). The
companies in Quill and Bellas Hess were solely mail-order companies that had no
in-state physical locations and made contact with the states only by delivering
goods through the mail and other common carriers. Quill at 302; Bellas Hess at

27
 SUPREME COURT OF OHIO

753-754. The Bellas Hess court created a bright-line rule that a state can require
an out-of-state mail-order retailer to collect use taxes only when the retailer has a
physical presence in the state. Bellas Hess at 757-758. The court noted, however,
that the physical presence could be satisfied by local agents, who need not even
be regular employees. Id., citing Scripto, Inc. v. Carson, 362 U.S. 207, 80 S.Ct.
619, 4 L.Ed.2d 660 (1960) (ten independent brokers sufficient for state to
mandate use-tax collection). Nevertheless, those agents must be physically in the
state to provide the substantial nexus necessary to defeat a taxpayer’s Commerce
Clause challenge.
{¶ 66} In the years after Quill, this court applied Quill, holding that an
out-of-state company selling merchandise by direct mail to Ohioans did not
establish a substantial nexus with the state because the company did not have a
physical presence in Ohio and, therefore, Ohio could not force the out-of-state
company to collect use taxes. SFA Folio Collections, Inc. v. Tracy, 73 Ohio St.3d
119, 123, 652 N.E.2d 693 (1995).
{¶ 67} I see no evidence that gross-receipts taxes are meaningfully
different from use taxes for substantial-nexus purposes, and I view Tyler Pipe’s
reliance on physical presence as more indicative of a requirement than an option.
That opinion suggests as much by its lack of other nexus-producing details.
There, the Supreme Court evaluated a gross-receipts tax (which I view as similar
to business-privilege taxes like the CAT—both are measured by gross receipts),
specifically concerning the sufficiency of Tyler Pipe’s connection with the state to
justify its imposition of the tax on the company’s sales. 483 U.S. at 249-250, 107
S.Ct. 2810, 97 L.Ed.2d 199. The company had no office, property, or employees
residing in the state. Id. at 249. Moreover, it manufactured all its pipe products
out of state. Id. As the court noted, however, Tyler Pipe had an independent sales
representative located in the state. Id. That independent contractor (and its
salespeople) did enough local work to maintain Tyler Pipe’s market and protect

28
 January Term, 2016

its interests that it constituted a sufficient nexus with the state and justified the
state’s gross-receipts tax. Id. at 250, citing Scripto at 211.
{¶ 68} Nowhere in Tyler Pipe did the Supreme Court indicate that
anything less than a third-party contractor operating within a taxing state on a
taxpayer’s behalf would satisfy the substantial-nexus requirement established in
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 51
L.Ed.2d 326 (1977). Yet the majority brushes Tyler Pipe aside, concluding that
“it is unwarranted to leap from the principle that physical presence is a sufficient
condition for imposing a tax to the logically distinct proposition that physical
presence is a necessary condition to impose the tax.” (Emphasis sic.) Majority
opinion at ¶ __. It is the majority that takes an unwarranted leap in concluding
that physical presence is merely sufficient, not necessary. Absent evidence that
an expansion is warranted—and we have none—I will not ignore the mandates of
federal constitutional law.
{¶ 69} The majority’s reliance on state-court decisions that speculate as to
the unlikelihood of the Supreme Court expanding Quill’s physical-presence
requirement beyond sales and use taxes is unwarranted. Half of those cases
involved physical presence, and the other half fell under a different type of tax
that the Supreme Court has not held to require physical presence. To be sure,
even this court has speculated about the physical-presence requirement. See
Couchot v. State Lottery Comm., 74 Ohio St.3d 417, 425, 659 N.E.2d 1225
(1996). Couchot, however, involved an out-of-state resident who bought an Ohio
lottery ticket in Ohio and redeemed it in Columbus. That is quintessential
physical-presence-based substantial nexus. In KFC Corp. v. Iowa Dept. of
Revenue, a corporation licensed intangible intellectual property for use by its in-
state franchisees. 792 N.W.2d 308 (Iowa 2010). Although the corporation lacked
property or employees in the state, the Iowa Supreme Court concluded that the
franchisees’ physical presence in the state coupled with the value of the

29
 SUPREME COURT OF OHIO

intangibles sufficiently localized KFC’s income from the franchisees’ transactions
in the state such that Iowa could tax it. Id. at 323. In support of this conclusion,
the KFC court cited Internatl. Harvester Co. v. Wisconsin Dept. of Taxation, 322
U.S. 435, 441-442, 64 S.Ct. 1060, 88 L.Ed. 1373 (1944) (“A state may tax such
part of the income of a non-resident as is fairly attributable * * * to events or
transactions which, occurring there, are subject to state regulation and which are
within the protection of the state and entitled to the numerous other benefits
which it confers”). It is true that Internatl. Harvester was a due-process case, but
the Supreme Court rendered that decision at a time when due process and the
Commerce Clause were considered coextensive. See id. at 444; Quill, 504 U.S. at
305, 112 S.Ct. 1904, 119 L.Ed.2d 91.
{¶ 70} The other two decisions upon which the majority relies in
questioning the physical-presence requirement are inapplicable here because they
deal with a type of tax specific to banks—financial-institution excise taxes. See
Capital One Bank v. Commr. of Revenue, 453 Mass. 1, 899 N.E.2d 76 (2009);
MBNA Am. Bank, N.A. v. Indiana Dept. of State Revenue, 895 N.E.2d 140
(Ind.Tax 2008). The Supreme Court has never addressed, much less stated, a
physical-presence requirement for financial-institution excise taxes. Therefore,
the state courts’ reasoning in these financial-institution-tax cases is not applicable
to the case at bar.
{¶ 71} Because half of them involve sufficient physical presence and the
other half involve an irrelevant tax on financial institutions, these opinions of
other state courts criticizing the physical-presence rule as constitutionally
outmoded for substantial-nexus purposes are not persuasive.
{¶ 72} The majority’s citations to state-court decisions addressing gross-
receipts taxes are a step in the right direction but provide no sounder a foundation
for its decision today. Interestingly, the majority places great weight on the fact
that each case involved a physical presence in the state sufficient to uphold

30
 January Term, 2016

imposition of the tax. It then somehow reads all these state-court physical-
presence cases to mean that “there is no reason for us to view those decisions as
authority for the proposition that physical presence would have been a necessary
condition as well.” Majority opinion at ¶ 51. That extrapolation is not well
founded.
{¶ 73} The physical-presence requirement is grounded in the reasoning
that the dormant Commerce Clause is designed to prevent regulation and taxation
from being an undue burden on interstate commerce.

Undue burdens on interstate commerce may be avoided not only
by a case-by-case evaluation of the actual burdens imposed by
particular regulations or taxes, but also, in some situations, by the
demarcation of a discrete realm of commercial activity that is free
from interstate taxation.

Quill, 504 U.S. at 314-315, 112 S.Ct. 1904, 119 L.Ed.2d 91. This reasoning is not
limited to sales and use taxes, and the language of Quill should be applied as
written—applying to the “discrete realm of commercial activity” at issue in the
case, which was commercial activity involving companies without a physical
presence in the taxing state. Id. This reasoning is in line with common sense
because these companies should not be forced to comply with Ohio’s CAT based
solely on the fact that Ohioans choose to buy products from them. Under the
CAT as construed by the majority, a business could be forced to pay Ohio taxes if
just one Ohioan spent more than $500,000 on its products. It is easy to imagine
an Ohio manufacturing business ordering one machine from an out-of-state
business, and that would trigger a requirement for that business to comply with
the CAT. The business could have no other connection with the state, but Ohio
could drag it into Ohio’s taxing scheme based on one act of interstate commerce.

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This is an undue burden on interstate commerce of the sort that the Quill court
was attempting to avoid.
{¶ 74} I recognize that Quill might be overturned by the Supreme Court or
abrogated by an act of Congress. Only two members of the Quill court remain on
the bench—Justices Kennedy and Thomas—and Justice Kennedy has expressed
his opinion that the case should be revisited in light of the technological changes
caused by the proliferation of online retailers. Direct Marketing Assn. v. Brohl,
__ U.S. __, 135 S.Ct. 1124, 1135, 191 L.Ed.2d 97 (2015) (Kennedy, J.,
concurring) (“Given these changes in technology and consumer sophistication, it
is unwise to delay any longer a reconsideration of the Court’s holding in Quill”).
Nevertheless, Quill is the law of the land, and it must be followed.
{¶ 75} Congress could also authorize the states to impose taxes on out-of-
state retailers like Crutchfield. In his concurring opinion in Quill, which was
joined by Justices Kennedy and Thomas, Justice Scalia wisely remarked that
whatever constitutional rule the court fashioned based on the dormant Commerce
Clause was subject to revision by Congress: “Congress has the final say over
regulation of interstate commerce * * *. We have long recognized that the
doctrine of stare decisis has ‘special force’ where ‘Congress remains free to alter
what we have done.’ ” Quill at 320 (Scalia, J., concurring), quoting Patterson v.
McLean Credit Union, 491 U.S. 164, 172-173, 109 S.Ct. 2363, 105 L.Ed.2d 132
(1989). Proposed legislation is pending in Congress that would abrogate the Quill
rule and permit states to require online retailers to collect sales taxes. See
Marketplace Fairness Act of 2015, S.698, 114th Congress (introduced in Senate
Mar. 10, 2015). Congress has the power and authority to regulate interstate
commerce to ensure that there is an equal playing field between in-state and out-
of-state companies.
{¶ 76} Currently, Ohio responds to this gap in taxation by imposing the
use tax on purchases that are not subject to sales tax. See R.C. 5741.12(B).

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 January Term, 2016

Ohioans are asked to voluntarily report on line 12 of the personal-income-tax
Form 1040 the amount of out-of-state purchases made over the Internet that are
not subject to sales tax. Ohio Department of Taxation, 2015 Universal IT 1040
Individual Income Tax Return, http://www.tax.ohio.gov/Portals/0/forms
/ohio_individual/individual/2015/PIT_IT1040.pdf (accessed Oct. 21, 2016). If
Ohioans report out-of-state purchases, they must pay a use tax at a rate equal to
the sales-tax rate in their county. Ohio Department of Taxation, Ohio 2015
Instructions for Filing Personal Income Tax 17,
http://www.tax.ohio.gov/portals/0/forms/ohio_individual/individual/2015/PIT_IT
1040_Booklet.pdf (accessed Oct. 21, 2016). Just as it would require an act of
Congress to require out-of-state retailers to collect sales taxes, federal legislation
is necessary before Ohio can impose the CAT on out-of-state businesses. It is not
the role of this court to bless a state’s attempt to regulate interstate commerce
through a taxing scheme just because Congress has been silent.
{¶ 77} I understand and am sympathetic to the arguments made by amici
curiae Ohio Manufacturers’ Association, Ohio State Medical Association, Ohio
Dental Association, and Ohio Chemistry Technology Council because “they have
a critical and substantial interest in ensuring that this tax is applied fairly and
equitably.” However, the desire to “fairly” apply the CAT to out-of-state
companies cannot supersede binding United States Supreme Court precedent, see
Complete Auto Transit, 430 U.S. at 274, 97 S.Ct. 1076, 51 L.Ed.2d 326, and
Quill, 504 U.S. at 298, 112 S.Ct. 1904, 119 L.Ed.2d 91. I disagree with amici
curiae when they state that none of the Supreme Court’s decisions “state that a
physical presence was the sine qua none [sic] for finding that a substantial nexus
existed.” As stated above, the reasoning that the Supreme Court used in Quill and
Tyler Pipe to determine whether a substantial nexus exists between an out-of-state
business and a taxing state turns on whether or not the out-of-state business has a
physical presence in the taxing state.

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 SUPREME COURT OF OHIO

{¶ 78} As for the BTA’s assertion that Crutchfield’s computerized
connections with Ohio consumers constitutes physical presence in this state, the
BTA never made a factual determination that Crutchfield has a physical presence
in Ohio. On the contrary, the BTA concluded that “under the plain language set
forth therein, the pertinent CAT statutes do not impose such an in-state presence
requirement.” Since it did not believe that in-state physical presence was a
requirement, the BTA did not make a finding as to Crutchfield’s in-state presence.
“The BTA is responsible for determining factual issues * * *.” Vandalia-Butler
City Schools Bd. of Edn. v. Montgomery Cty. Bd. of Revision, 130 Ohio St.3d 291,
2011-Ohio-5078, 958 N.E.2d 131, ¶ 12. In my view, it is the BTA’s
responsibility to evaluate the evidence and make a factual determination whether
Crutchfield has a physical presence in Ohio.
II. Conclusion
{¶ 79} While I am sympathetic to Ohio-based businesses that are forced to
pay a business-privilege tax such as the CAT, I nevertheless must follow the law
as it is exists today. The power to regulate interstate commerce rests exclusively
with Congress under Article I, Section 8, Clause 3 of the United States
Constitution. Because the last word from the United States Supreme Court is that
a state’s ability to tax an out-of-state business depends on a substantial nexus
created by a physical presence, Quill Corp. v. North Dakota, 504 U.S. 298, 112
S.Ct. 1904, 119 L.Ed.2d 91; see also Tyler Pipe Industries, Inc. v. Washington
State Dept. of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199, I must
dissent. I would remand the matter to the BTA for a determination of physical
presence under Quill.
LANZINGER, J., concurs in the foregoing opinion.
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 January Term, 2016

Brann & Isaacson, Martin I. Eisenstein, David W. Bertoni, and Matthew
P. Schaefer; and Baker Hostetler and Edward J. Bernert, for appellant and cross-
appellee.
Michael DeWine, Attorney General, and Daniel W. Fausey and Christine
Mesirow, Assistant Attorneys General, for appellee and cross-appellant.
Macey, Wilenski & Hennings, L.L.C., and Peter G. Stathopoulos; and
Robert Alt, urging reversal for amici curiae Buckeye Institute for Public Policy
Solutions, Mackinac Center for Public Policy, NetChoice, and American Catalog
Mailers Association, Inc.
Fredrick Nicely and Nikki Dobay, urging reversal for amicus curiae
Council on State Taxation.
Goldstein & Russell, P.C., Eric F. Citron, and Thomas C. Goldstein,
urging affirmance for amici curiae National Governors Association, National
Conference of State Legislatures, Council of State Governments, National
Association of Counties, National League of Cities, U.S. Conference of Mayors,
International City/County Management Association, International Municipal
Lawyers Association, and Government Finance Officers Association.
Bricker & Eckler, L.L.P., Mark A. Engel, and Anne Marie Sferra, urging
affirmance for amici curiae Ohio Manufacturers’ Association, Ohio State Medical
Association, Ohio Dental Association, and Ohio Chemistry Technology Council.
Bruce Fort, urging affirmance for amicus curiae Multistate Tax
Commission.
_________________

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