The Ohio Board of Tax Appeals (BTA) recently ruled that the denial of a taxpayer’s request for retroactive application of a consolidated Commercial Activity Tax (CAT) filing election was unreasonable and an abuse of discretion. The taxpayer, an automobile company, engaged in significant intercompany transactions with its affiliates. Under the CAT law, taxpayers making a consolidated election are able to exclude intercompany receipts from the CAT base. However, the downside of the election is that all affiliates, regardless of whether they have nexus with Ohio, are included in the consolidated group. The taxpayer was audited and assessed CAT on amounts that represented intercompany transactions for the 2009 through 2011 tax years. Two days after the audit was initiated, the taxpayer requested that its election to file a consolidated return, which was filed in October 2011, be applied retroactively to January 1, 2009. The Commissioner denied the request, and the taxpayer appealed to the BTA.
Under Ohio law, a group of two or more persons may elect to be a consolidated taxpayer provided that certain requirements are met. Specifically, the statute requires the election be made and the applicable fee be paid “before the beginning of the first calendar quarter to which the election applies.” A regulation allows for the retroactive application of a consolidated election, provided that it is requested by the taxpayer and approved by the commissioner. The Commissioner indicated it was departmental policy to not allow a retroactive consolidation after an audit was begun. On appeal, the BTA determined that nothing in the statute nor Commissioner’s rule foreclosed the retroactive application of the election even if an audit was initiated against the taxpayer. The BTA next looked at whether the Commissioner’s denial was “unreasonable, arbitrary, or unconscionable.” It was apparent from the substance of the taxpayer’s CAT returns, in which the taxpayer had excluded the intercompany transactions, that it had intended to file on a consolidated group basis. In the BTA’s view, the Commissioner’s denial was therefore unreasonable and the taxpayer had “the right to correct what it claimed was a mistake on its part in making the return.” For more information on Nissan North America, Inc. v. McClain, please contact Brandon Erwine at 614-249-1877.