Court News Ohio
Court News Ohio
Court News Ohio

Tuesday, May 3, 2016

Crutchfield Corp. v. Testa, Case no. 2015-0386, Newegg Inc. v. Testa, Case no. 2015-0483, Mason Cos. Inc. v. Testa, Case no. 2015-0794
Ohio Board of Tax Appeals

State of Ohio v. Cameron D. Williams, Case no. 2015-1478
Ninth District Court of Appeals (Summit County)

Cincinnati Bar Association v. John W. Hauck, Case no. 2016-0260
Hamilton County

Can Ohio Impose Its Commercial Activity Tax on Out-of-State E-Commerce Companies?

Crutchfield Corp. v. Testa, Case no. 2015-0386, Newegg Inc. v. Testa, Case no. 2015-0483, Mason Cos. Inc. v. Testa, Case no. 2015-0794
Ohio Board of Tax Appeals


  • Does Ohio’s commercial activity tax violate the U.S. Constitution’s commerce clause when imposing the tax on businesses that have no physical presence in Ohio?
  • Is the “bright-line presence” rule in the state’s Commercial Activity Tax sufficient to determine if a business has the required substantial nexus with the state to be subjected to a “privilege of doing business”-type tax?

As part of a sweeping overhaul of Ohio’s state tax system in 2005, the General Assembly adopted a commercial activity tax (CAT). To address the issue raised by “brick and mortar” Ohio companies about the surge of e-commerce, Ohio turned to model legislation developed in 2002 by the Multistate Tax Commission. The commission proposed that companies without a physical presence in the state could be required to pay the CAT if the company had at least $500,000 in gross receipts from sales in Ohio. This was labeled the “bright-line presence” rule.

The Ohio tax commissioner began to audit companies believed to have large amounts of Internet sales in Ohio that weren’t paying the CAT. California-based Newegg Inc., which the commissioner noted is the second largest online retailer after Amazon Inc., Virginia-based Crutchfield Corp., and Wisconsin-based Mason Companies, Inc., were among the companies audited and issued tax bills. Refusing to pay the bills from 2005 through 2012, the companies challenged the tax claiming it is a violation of the U.S. Constitution’s commerce clause because it attempts to impose a business tax on a company that has no physical presence or doesn’t conduct any activity through employees or contractors in a state.

In 2015, the Board of Tax Appeals (BTA) upheld the tax commissioner’s determinations for Newegg, Crutchfield, and Mason. The three, which are represented by the same Maine-based law firm and have filed nearly identical challenges, appealed to the Ohio Supreme Court. Because the BTA is an administrative agency, the Court is bound to hear the appeals. The Supreme Court consolidated the three cases to hear oral arguments.

Several amicus curiae briefs have been filed in the case, including a joint brief supporting the tax commissioner from nine national organizations representing state and local governments that include the National Governors Association and the U.S. Conference of Mayors. A brief was filed on behalf of the e-commerce companies by the Council on State Taxation (COST). COST describes itself as advisory committee to the Council of State Chambers of Commerce and represents nearly 600 major corporations engaging in interstate and international business. COST states that Ohio was the first to adopt the Multistate Tax Commission’s bright-line presence rule, and several other states have followed. COST indicates the case is of national importance because this case represents the first time a challenge to the new rule has reached a state’s highest court.

The three e-commerce businesses in their briefs note the General Assembly anticipated a challenge to the bright-line presence rule when it adopted the CAT in 2005. Lawmakers added R.C. 5751.31, which offered a company a direct appeal to the Court to challenge a tax commission ruling based on the bright-line presence rule, which is in R.C. 5751.01(H)(3). The Court prepared to hear a challenge to the statute by retailer L.L. Bean Inc. in 2014, but the company settled with the tax commissioner.

Cruthfield Asserts Only Congress Can Tax Interstate Commerce
The three companies (collectively referred to as Crutchfield) argue that the U.S. Supreme Court in the 1977 Complete Auto Transit, Inc. v. Brady decision ruled a state must establish a “substantial nexus” requirement between the state and a company before imposing a tax measured by gross receipts. In 1987, the U.S. Supreme Court clarified what business activities a company must be undertaking to meet the substantial nexus requirement in its Tyler Pipe Industries v. Washington State Dept. of Revenue decision.

Cruthfield notes the decision indicated the crucial factor in establishing the 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 the state for sales.” The company asserts that Ohio is ignoring the requirement of the Tyler Pipe ruling by establishing a test based entirely on sales within a state. Crutchfield argues it’s a Virginia-based company that conducts sales by catalog, telephone, and online orders with no business activities performed on its behalf in Ohio. The company’s computer servers are located in Virginia as is its warehouse and distribution center, and it has no fixed assets in Ohio.

The company objects to the tax commissioner’s position that online sales are the “functional equivalent” to physical presence and that Ohio consumers interact with the company by accepting “cookies” on their computers so the company can track their movements on the Crutchfield website and by downloading the Crutchfield application on mobile devices.

Crutchfield counters that no court has adopted the theory that computer software is enough to establish the physical presence in a state as is required by Tyler Pipe and that the U.S. Supreme Court has never allowed for a different or lesser standard then set in Tyler Pipe when considering the in-state presence requirement of a state tax. Crutchfield maintains the precedent of allowing Ohio to collect the CAT from out-of-state companies purely marketing to Ohioans online and through the mail would be enormous because not only do states impose “privilege of doing business” taxes like the CAT, but so do many cities and local governments across the nation. The company argues the commerce clause only allows Congress to regulate interstate commerce and levy taxes on companies doing business across state lines where they don’t have a physical presence.

“Indeed, if Ohio is free to impose tax obligations on remote sellers based on nothing more than making sales to customers in the state, the ‘so can every other State, and so, indeed, can every municipality, every school district, and every other political subdivision throughout the Nation’ with power to impose such taxes, resulting in precisely the kinds of ‘local entanglements’ and burdens on interstate commerce that the Commerce Clause is designed to prevent,” Crutchfield’s brief states, quoting the U.S. Supreme Court’s 1967 Natl. Bellas Hess Inc. v. Illinois Dept. of Revenue decision.

Companies Have Presence in State, Tax Commissioner Contends
The tax commissioner contends the software connections and interactions with Ohio customers is enough to consider the companies physically present in order to meet any substantial nexus test, and argues that the physical presence requirement isn’t necessary for Ohio to impose the CAT on out-of-state businesses with significant sales in Ohio. The commissioner notes that Newegg earns more than $269 million annually in sales from Ohioans, while Crutchfield does between $7.2 million and $8.9 million annually in Ohio, and Mason receives about $6 million annually in sales.

In addition to disputing the merits of Crutchfield’s challenge based on the constitutionality of the statute, the tax commissioner also argues the companies are procedurally barred from raising the challenge in the Ohio Supreme Court because they failed to raise the issue before the BTA.

The commissioner explains the CAT replaced Ohio’s two former major business taxes, the corporate-franchise tax and the personal-property tax. Every entity, in-state or out-of-state, that earns less than $150,000 in gross receipts is exempt from the tax. Those that earn between $150,000 and $1 million pay a flat fee of $150. For those earning more than $1 million, the entity pays a 0.26 percent tax rate of gross receipts.

The commissioner found Crutchfield marketed to Ohio consumers and is “harvesting” consumer data from online Ohio users making it physically present. It also argues that the commerce clause challenge doesn’t require a “form over function” physical presence test when an out-of-state company receives significant government benefits from Ohio like physical infrastructure that allows its merchandise to get delivered to customers.

“There is no real question that Crutchfield derives great benefit from the physical infrastructure that Ohio provides, including roads and landfills, telecommunication and internet lines and rights of way, electrical grids and cell towers,” the tax commissioner’s brief states. “Banking law and regulations ensure that credit transactions are processed properly. Ohio’s court system provides a forum for redressing legal disputes, which could include protections of Crutchfield’s intangible property, such as trademarks and copyrights. Ohio school systems provide an educated base of consumers with the ability to hold jobs that provide the monetary means to purchase goods from Crutchfield.”

Friend-of-Court Briefs
In addition to COST, a joint brief was filed by the Buckeye Institute for Public Policy Solutions, the Mackinac Center for Public Policy, the American Catalog Mailers Association, and Netchoice, which is a trade association representing e-commerce and online companies, in support of Crutchfield. Amicus briefs supporting the tax commissioner include the coalition of government groups led by the National Governors Association, the Multistate Tax Commission, and a joint brief by the Ohio Manufacturers’ Association, Ohio State Medical Association, Ohio Dental Association, and the Ohio Chemistry Technology Council.

The group led by the Manufacturers’ Association explains the CAT was enacted to replace the tangible personal property tax, which the group determined was unfairly burdening older, traditional businesses with large physical assets in the state. It states the many loopholes added to the corporate franchise tax diminished its effectiveness. The group maintains upholding the bright-line presence rules is important to all Ohio businesses.

“This Court’s resolution of the issue will have far-reaching implications for economic development in Ohio, fairness among business taxpayers, certainty for Ohioans regarding their tax obligations, and stability for recipients of tax dollars so that they can budget and spend appropriately,” its brief states.

Additional Time Allotted
Instead of the traditional half hour total for arguments, the Court has allotted one hour for oral arguments, with 30 minutes given to the companies and 30 minutes to the tax commissioner.

- Dan Trevas

Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket (2015-0386, 2015-0483, 2015-0794).

Representing Crutchfield Corp. and Newegg Inc.: Martin Eisenstein, 207.786.3566

Representing Mason Companies: David Bertoni, 207.786.3566

Representing the Ohio tax commissioner from the Ohio Attorney General’s Office: Daniel Fausey, 614.995.9032

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Is Imposing Multiple Sentences on Allied Offenses Grounds to Void Sentence?

State of Ohio v. Cameron D. Williams, Case no. 2015-1478
Ninth District Court of Appeals (Summit County)

ISSUE: When a defendant is sentenced on multiple counts that the trial court determined should be joined together, is his sentence void? Or, does the doctrine of res judicata prevent a defendant from challenging the sentence after direct appeal?
In 2008, a jury found Cameron Williams guilty of multiple offenses, including two counts of aggravated murder and one count of murder, each with firearm specifications. Williams was eventually sentenced to 69 years to life in prison. Even though the trial court found the aggravated murder and murder charges were allied offenses and combined them into one count, Williams was sentenced on all three.

Williams Asks Court to Fix Sentences
In April 2014, Williams filed a motion in the trial court to correct the imposition of multiple sentences for counts that were determined to be allied offenses. The trial court denied the request, reasoning Williams’ claim was barred by res judicata because the case had been decided. He appealed to the Ninth District Court of Appeals.

In his appeal, Williams directed the court to State v. Holmes (2014), an Eighth District Court of Appeals case with facts similar to his own. There, the court held that res judicata didn’t bar the defendant’s claim that the trial court improperly imposed a sentence on each count of allied offenses. The Eighth District had subsequently determined the sentence was void.

Conflicting Findings Among Ohio Appeals Courts
The Ninth District, however, upheld the trial court’s decision in Williams’ appeal and found that his sentence wasn’t void even if the trial court improperly sentenced him on merged counts.

The appeals court cited its own case State v. Jones (2011), where it found, “this [c]ourt has held that the ‘Ohio Supreme Court has applied its void-sentence analysis in limited circumstances, and will not extend its reach without clear direction from the Supreme Court.’”

The Ninth District notified the Ohio Supreme Court of the conflict between its decision and the Eighth District’s ruling in Holmes. The Court agreed to consider the issue.

Williams Argues Sentence Is Void
In his brief to the Court, Williams cites State v. Fischer (2010), where the Ohio Supreme Court held “that a sentence which is not authorized by law is void, and res judicata does not prohibit a collateral attack on a void sentence.” Williams argues because R.C. 2941.25(A) prohibits multiple convictions for allied offenses, his sentence isn’t authorized by law and therefore is void.

If a defendant could have raised a due process violation claim on direct appeal, then the doctrine of res judicata prevents the defendant from raising the same claim in any other proceeding. However, Williams argues the doctrine doesn’t apply to void sentences. His reasoning relies on Bowen v. Sheldon (2010), where he contends this Court found “trial courts retain jurisdiction to correct a void sentence at any time, and have an obligation to do so when the error is apparent.” He asks the Court to order the trial court to resentence him on the murder counts.

State Maintains Sentence Isn’t Void
The Summit County prosecutor agrees the trial court was in error in 2008 when it imposed separate, concurrent sentences on the allied offenses, but argues that action doesn’t make Williams’ sentence void. The prosecutor’s reasoning is based on State v. Holdcroft (2015), where this Court stated “void sentence jurisprudence flowing from State v. Fisher … does not apply to most sentencing challenges” including errors complying with general felony sentencing statutes.

Citing the Ohio Supreme Court’s decision in State v. Rogers (2015), the prosecutor acknowledges that the Court ruled a defendant can’t be sentenced for more than one allied offense. However, the Court applied a plain error analysis, which examined whether the defendant demonstrated a reasonable probability that had the court reviewed the potential error the outcome of the trial would’ve been different. The prosecutor concludes in the brief that “plain error where separate sentences may have been imposed on allied offenses does not equate to a void sentence.”

- Rachael S. Ingram

Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.

Representing the State of Ohio from the Summit County Prosecutor’s Office: Richard Kasay, 330.643.2788

Representing Cameron D. Williams from the Ohio Public Defender’s Office: Allen Vender, 614.466.5394

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Attorney Discipline

Cincinnati Bar Association v. John W. Hauck, Case no. 2016-0260
Hamilton County

The Board of Professional Conduct has recommended to the Ohio Supreme Court that Milford attorney John Hauck be indefinitely suspended from the practice of law for his part in helping a man to write and send a letter to his mother and stepfather in violation of a civil protection order (CPO).

Attorney Sends Letter to Friend’s Family
Richard Ellison was convicted in 2005 for aggravated burglary, kidnapping, and abduction following an incident involving his mother and stepfather, Jeanne and Edmund Lee. When Ellison was about to be released from prison in 2010, the Lees obtained a five-year CPO, which prevented Ellison from contacting the Lees in any way, including through another party.

In March 2014, Hauck, who had befriended Ellison, sent a letter to the Lees on behalf of Ellison. The letter, signed by Hauck and printed on letterhead bearing his name and “attorney at law,” specifically requested that the Lees cancel the CPO. (Ellison and Hauck didn’t know at the time that Edmund Lee had died in late 2010.)

Hauck claims in his brief to the Court that the letter was “largely composed by … Mr. Ellison, but it was signed and fully adopted, as his own writing ….” The attorney also explains he and Ellison collaborated for several months to prepare the letter, which was intended to “encourage the Lee family to reconcile with their son ….”

Immunity Granted to Attorney
When she received the letter, Mrs. Lee contacted the police, and a criminal complaint was filed against Ellison alleging he had violated the protection order. Ellison was subsequently arrested and jailed on the charge. The prosecutor in the case said Hauck also could’ve been charged criminally for violating the protection order, but he was granted immunity if he testified against Ellison at trial. Ellison ultimately entered a plea before trial, so Hauck never had to testify.

Hauck Denies Four of Five Allegations
The Cincinnati Bar Association (CBA) filed a complaint against Hauck alleging multiple violations of the attorney Rules of Professional Conduct.

The board found that Hauck gave Ellison his time and advice, edited the letter, and then adopted it as his own by signing it. These actions established an attorney-client relationship, the board states in its report. But Hauck didn’t act competently as Ellison’s attorney when he encouraged his client to send the letter instead of seeking to review the CPO and then discouraging Ellison from violating it. The board also concluded that Hauck committed an illegal act by helping his client to violate the CPO, that he tried to deceive the Lees by sending the letter under his signature and on attorney letterhead, and that he harmed the justice system when he disregarded the Hamilton County court’s order.

Of the five violations found by the board, Hauck denies all but one – practicing law while not in good standing with the Ohio Supreme Court. He admits his license was suspended at the time the events took place. However, he argues the reason for the suspension was because the Court didn’t notify him that his biennial registration was due.

Attorney’s Objections, Bar Association’s Responses
In his objections to the board’s report and recommended sanction, Hauck maintains Ellison was his friend and not his client. Hauck points to the disclaimer he included in the letter that stated he was “… writing strictly as a friend and a Christian who wants to help,” as evidence he was not acting as Ellison’s legal representative.

However, the CBA argues that Hauck’s behavior suggests otherwise, including when he:

  • Used his personal letterhead for the letter sent to the Lees
  • Used his attorney identification card to enter the jail to visit Ellison
  • Wrote three letters to the Terrace Hill Police Department addressing Ellison’s case.

Additionally, Ellison had asserted attorney-client privilege existed between himself and Hauck when he learned Hauck was ordered to testify in the criminal case against him.

While Hauck states that he doesn’t dispute he helped Ellison in writing the letter, he also claims the board sets forth no law to support its ruling that he aided and abetted Ellison in an illegal act.

As far as the CPO itself, Hauck claims R.C. 3113.31, Ohio’s civil protection statute, is unconstitutional. He reasons he can’t be found to have violated the professional conduct rules if the violations are predicated on his disregard of an unconstitutional court order.

Because Hauck didn’t assert the claim in the trial court that issued the protection order, the CBA counters the right to raise it now is waived. And, the CBA also maintains Ohio courts have repeatedly held that the civil protection statute is neither vague nor does it violate any constitutional guarantees.

- Rachael S. Ingram

Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.

Representing the Cincinnati Bar Association: Richard Goldberg, 513.321.2662

John W. Hauck, pro se,513.621.0805

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These informal previews are prepared by the Supreme Court's Office of Public Information to provide the news media and other interested persons with a brief overview of the legal issues and arguments advanced by the parties in upcoming cases scheduled for oral argument. The previews are not part of the case record, and are not considered by the Court during its deliberations.

Parties interested in receiving additional information are encouraged to review the case file available in the Supreme Court Clerk's Office (614.387.9530), or to contact counsel of record.