Ohio Appeals Board Upholds Audience-Based Sourcing for NASCAR Broadcast Revenue

The BR State + Local Tax Spotlight

The application of market state sourcing to income from intellectual property continues to be a vexing problem in many states. The Ohio commercial activity tax (“CAT”) sourcing statute is no exception, as evidenced by a recent Ohio Board of Tax Appeals (“Board”) decision involving the sourcing of NASCAR’s broadcast and media revenues. NASCAR Holdings, Inc. v. McClain, No. 2015-263, 2021 Ohio Tax LEXIS 780 (Ohio Bd. Tax App. Apr. 5, 2021). The Board held that the Ohio Department of Taxation (“Department”) could source those revenues based on overall Ohio cable television viewership or Ohio’s percentage of the U.S. population. NASCAR holds that revenues from granting a right to use intellectual property over an area that includes Ohio may be sourced to Ohio based on estimates of where the payor’s customers are located.

Facts. NASCAR Holdings, Inc. (“NASCAR”), headquartered in Daytona Beach, Florida, sanctions auto races throughout the United States and abroad. During the years in issue, only seven NASCAR-sanctioned events took place in Ohio. NASCAR, 2021 Ohio Tax LEXIS 780 at *1.

After performing a CAT audit, the Department assessed tax on several categories of NASCAR’s broadcast and media revenues, including broadcast revenues that allowed broadcasters, such as FOX, the right to broadcast racing events over a broadcast area that included, but was not limited to, Ohio. The parties agreed that the broadcast revenues were derived from granting the right to use NASCAR’s intellectual property. The Department sourced NASCAR’s broadcast revenues using Nielsen Ratings, and sourced license fees and sponsor fees using U.S. census data for Ohio. NASCAR claimed that the broadcast revenues should be sourced to Florida, where NASCAR is headquartered and where it received the revenues from its intellectual property. Id. at *8-*12.

The Decision. The Board concluded that NASCAR’s revenue streams should be sourced to where the payors used, or had the right to use, the intellectual property, which included Ohio. Under the CAT sourcing statute, gross receipts from the “right to use” intellectual property, such as trademarks and copyrights, are sourced to Ohio “to the extent the receipts are based on the right to use the property” in Ohio. R.C. § 5751.033(F). Gross receipts from the sale of “all other services . . . and all other business receipts,” are sourced based on the proportion of the “purchaser’s benefit” in Ohio. R.C. § 5751.033(I).

The Board upheld the Department’s use of Nielsen Ratings or census data to determine where the broadcasters used NASCAR’s intellectual property, in part because NASCAR did not furnish evidence of its actual ratings information during the audit. For a similar reason, the Board rejected NARCAR’s argument that the Department’s methodology was flawed because it did not take into account that the broadcast area was also international. NASCAR raised constitutional challenges—none of which are identified—but the Board said that only the courts could address them. Id.

In a significant decision last year, the Ohio Supreme Court held that an independent dealer of ADT, a nationwide security services company, could source its sales to ADT of customer service contracts based on where ADT (its customer) was physically located, and not, as the Department claimed, to where ADT’s own customers were located. Def. Sec. Co. v. McLain, 162 Ohio St. 3d 473 (Ohio 2020). Here, the Board concluded that Defender Security was inapplicable because it applied a sourcing statute that looks to where the purchaser “uses or receives the benefit” of intellectual property, and not, as in NASCAR, to the location of the purchaser’s “use of or right to use” the property. NASCAR, 2021 Ohio Tax LEXIS 780 at *14 (internal citations omitted).

On May 5, 2021, NASCAR filed an appeal with the Ohio Supreme Court asserting, among other things, that none of its intellectual property receipts were based on the use of such property in Ohio, as well as its constitutional challenges not addressed by the Board.

This article is one in a series of articles written for the May 2021 edition of The BR State + Local Tax Spotlight.