Ohio: Certain Receipts of a Car Financing Company Excluded from CAT Base

Recently, the Ohio Board of Tax Appeals ruled in a taxpayer’s favor in a dispute addressing whether three types of receipts were excluded from the Commercial Activity Tax (CAT) base.  The taxpayer at issue, a captive vehicle financing company, was assessed CAT on receipts that were broadly categorized as (1) receipts from sales of retired leased vehicles, (2) receipts from securitization transactions, and (3) subvention payments.  As part of its business, the taxpayer purchased leases from dealers and, in doing so, also purchased the vehicles that were the subject of the leases. The first type of receipts was from vehicles sold at the termination of the vehicle lease. Under the CAT law, “receipts from the sale, exchange, or other disposition of an asset described in Section 1221 or 1231 of the Internal Revenue Code" are not "gross receipts" for purposes of the CAT. The taxpayer argued that the vehicles were Section 1231 assets. The Department of Taxation, however, argued that because the vehicles were always available for purchase by the lessees, they were “dual purpose” properties that were held for both sale and lease, and under federal authorities, could not be section 1231 assets. The Board, agreeing with the taxpayer, noted that the taxpayer did not hold the vehicles for the purposes of simultaneously offering them for sale or lease and the general purpose of the property in the hands of the taxpayer was for lease, meaning they qualified as Section 1231 property.

With respect to the receipts from securitization transactions, the taxpayer, relying on a federal Technical Advice Memorandum (TAM), argued that the receipts were secured financings, not sales, for federal income tax purposes and that characterization should apply for CAT purposes as well. The Board again agreed with the taxpayer that the transactions were properly characterized as financings; the taxpayer was not selling assets, but rather pooling its assets and using them as collateral to generate cash flow via a loan. They were not sales, and were excluded from the CAT base. Acknowledging that the federal TAM was not binding, the Board noted that it found the TAM persuasive given the similarity in factual scenarios.  The final category of receipts were “subvention payments” or interest buy down payments that were received by the taxpayer for its role in special financing programs that allowed leases to be made to customers at below market interest rates. Specifically, these amounts were paid to the taxpayer by the vehicle dealers to reimburse the taxpayer for the difference between the interest it could have collected at a market rate and a reduced interest rate provided to customers as an incentive. The taxpayer argued that these payments were excluded from the CAT as “interest” received. The Commissioner recognized that the subvention payments were treated as interest for federal purposes, but focused on the fact that they were referred to as “subsidy amounts “ in the taxpayer’s financial statements and that the taxpayer was essentially paying someone else’s interest. The Board rejected the Commissioner’s arguments and ruled in the taxpayer’s favor. In conclusion, the Board reversed the Tax Commissioner’s determination.    Please contact Dave Perry with questions on Hyundai Finance Motor Co. v. McClain.