Ohio Tax Talk: Ohio Apple Bite Turns Sour


With a market capitalization of $ 2.4 trillion and 2020 revenues of $ 275 billion, Apple, Inc. (“Apple”) is arguably one of the most valuable and sophisticated companies in the world. As most people know, Apple has made its fortune selling tangible tech devices like the iPhone, iPad, Mac, and Apple TV, along with related software and third-party digital content and applications. , such as eBooks, Apple Music, and movies.

Apple’s wealth makes it an extremely attractive target for tax authorities around the world, including the Ohio Department of Taxation (the “Department”). In a recent audit of Apple’s operations, the Ohio Tax Commissioner (the “Tax Commissioner”) found Apple had underpaid its Business Activity Tax (CAT) obligations owed to the state for the 2011-2016 tax years, which led to an estimate of approximately $ 4 million. , including interest and penalties.

Apple filed its Notice of Appeal on August 6, 2021, challenging the Tax Commissioner’s final decision (“Final Determination”). Apple argued that the commissioner erred in denying Apple the use of two important exemptions from CAT: the exemption for qualified fulfillment centers and the exclusion for agencies. Ultimately, the case was settled on appeal.

This case serves as a good reminder to Ohio taxpayers that the department and its auditors are rigid in their audits and will seek supporting documentation for positions claimed by taxpayers. Unlike Apple, many Ohio taxpayers do not have the resources (both financial and relationship) to challenge a final decision of the Tax Commissioner. Although the regulations remain confidential, Ohio taxpayers would be wise to inquire about the qualified distribution center exemption and the agency exemption and the documents needed to avail these exemptions from the CAT if the Commissioner fiscal comes knocking on the door.


The CAT is Ohio’s privilege to exercise a business tax that imposes a flat rate 0.26% tax on all gross revenue attributed to the state.[1] The CAT is levied on the entire gross revenue of a taxpayer without deduction. The lack of a deduction for things like cost of goods sold and other expenses primarily separates CAT from an income tax and makes CAT a more complicated tax for taxpayers to understand and dispute. outside the state. Included in the definition of “gross receipts” are receipts from the sale, exchange or disposition of goods, receipts from the provision of services and receipts from the use or possession by a other person of the property of a taxpayer (for example, rents).[2]

Although the CAT is broad in scope, it excludes certain transaction structures from its clutches. Two important exemptions include the qualified distribution center exemption and the agency exemption.

The exemption of qualified distribution centers

The revised Ohio code explicitly exempts “receipts from qualifying distribution centers” from CAT.[3] To properly analyze whether a taxpayer’s revenue qualifies for this exclusion, it is essential to understand a few definitions.

“Qualifying Distribution Center Receipts” are defined by the revised Ohio Code as receipts from “”qualified property which is delivered to a qualified distribution center, multiplied by a quantity equal to one minus Ohio delivery percentage. “[4]

A “qualified distribution center” is a warehouse or warehouse-like facility that holds a certificate of eligibility issued by the Tax Commissioner.[5]

A “qualified good” is in turn a good which is sent to a qualified distribution center for additional shipping somewhere else in or out of the state.[6] Importantly, additional shipping includes “the storage and repackaging of the property in smaller or larger packages, as long as the property is not further manufactured or processed.”[7] In other words, the skilled distribution center can do more than just load and unload trucks and other vehicles.

Finally, “Ohio Delivery Percentage” is defined as “the proportion of the total goods delivered to a destination within Ohio from the qualified distribution center during the reporting period compared to the total deliveries since this distribution center everywhere during the reference period ”.[8] It is essential to understand that the Ohio delivery percentage is determined by the cumulative deliveries from the qualified fulfillment center to all suppliers. This percentage applies to each individual supplier that uses the qualified distribution center, regardless of the percentage of beneficial ownership of the individual supplier that will be shipped out of state.[9]

If a taxpayer fails to provide the appropriate documentation proving that each of these requirements is met, the Department will not hesitate to tax all gross receipts. The following are some examples of the types of evidence that might be useful in supporting a qualified distribution center exemption request, including a Qualified Distribution Center Certificate of Eligibility, a written contract outlining the scope of services provided. by a qualified distribution center and documents tracing the destination of the products shipped by the qualified distribution center.

Agency exemption

Ohio’s revised code also exempts “[p]goods, money and other amounts received or acquired by one agent on behalf of another in excess of the agent’s commission, fees or other remunerationFrom CAT.[10] The Ohio Administrative Code § 5703-29-13 states that “[i]In certain circumstances, portions of amounts received by a person defined as an agent are excluded from the definition of gross revenue. . . The agent is only required to report as gross receipts that part of the amount received that he withholds as a commission or expense rather than the entire amount.[11]

The Ohio Supreme Court has consistently held that an agency relationship exists when “one party exercises the right of control over the actions of another and those actions are intended to accomplish a purpose that the first seeks.”[12] To prove the existence of an agency relationship, the taxpayer is required to provide the tax commissioner with a contract which explicitly establishes the agency relationship; otherwise, the tax commissioner will assume that there is no agency relationship and the taxpayer will have to include the total amount received in their gross receipts.[13]

To support an agency exemption claim, taxpayers should be prepared to present evidence such as a contract that explicitly establishes an agency relationship and outlines the scope of services to be provided by the agent as well as a remuneration structure. Partially redacted documents demonstrating the transfer by the taxpayer of sums received in addition to commissions due to the principal would also be useful evidence to provide to the Ministry during an audit.

Sour apple

Apple’s distribution channels for its tangible products include Apple retail stores (both physical and online) and other third-party channels such as wholesalers, retailers and third-party resellers. In Ohio, Apple uses business partners such as Best Buy (among others) as warehouses / distribution facilities to ship Apple products to Apple third-party retailers and wholesalers. In other words, Apple ships its products to business partners in Ohio, who then ship them to Apple’s third-party distribution partners. Some products end up ending up outside of Ohio. Citing ORC § 5751.40 and § 5751.40 (A) (2), Apple argued that it had relied in good faith on the qualified fulfillment center certificates of its Ohio business partners and had not shipped these products to Ohio trading partners for subsequent shipment. Therefore, according to Apple, the tax commissioner erred in forbidding Apple to exclude such gross receipts from its CAT liability. The presentation by Apple of a qualification certificate from the qualified fulfillment center was likely a key piece of evidence presented.

Apple’s distribution channels for its intangible digital products such as audiobooks, movie rentals, Apple Music, eBooks, and apps are structured into two different models, depending on the digital product. For digital products sold through the Apple App Store or other Apple digital content stores (for example, audiobooks, arcade games, movie rentals, New + service, Apple Music, and music downloads), Apple uses a “buy-and-sell model”. About 50% of Apple’s gross revenue attributable to the App Store comes from the buy-and-sell model, but this model was not involved in this audit.

The remaining 50% of gross Apple App Store revenue comes from Apple’s second model, known as the “agency model”. This model is used to sell e-books and apps owned by third parties but sold through the App Store. For these products, Apple has no control over the product until it is transferred to the customer; Apple simply serves as the marketing and delivery platform through which the product is purchased. As required by OAC § 5703-29-13 (C) (2), Apple has provided the Tax Commissioner with the relevant provisions of its model agency contracts. These provisions explicitly establish that Apple is a commission agent on behalf of the creator / owner of third-party content relating to eBooks and apps sold on the App Store. The agreement’s compensation structure established a commission equal to 30% of the price paid by end users for digital products for Apple.

In its appeal from the final decision, Apple argued that the tax commissioner failed to take into account Apple’s agent status with respect to sales of e-books and apps. Citing the agency exemption in ORC § 5751.01 (F) (2) (l), Apple insisted that its standard agency agreement created an agency relationship between Apple and the relevant third party. Therefore, the only gross revenue submitted to CAT is Apple’s 30% commission, not the full payment Apple receives from the end user.


In the end, Apple’s appeal to the Board of Tax Appeals was dismissed due to a confidential settlement between the parties. Still, Ohio taxpayers using qualified fulfillment centers for delivering tangible products and taxpayers holding receipts through an agency model would be wise to familiarize themselves with what the department was looking for in its Apple audit.

Taxpayers should review the legal authority and guidance on these two important WCB exemptions and contact their tax advisors to ensure that all the necessary documents are in place to avail themselves of these exemptions.

*To note: This article was originally published by Law360 (October 5, 2021)


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