The Ohio Supreme Court has ruled that NASCAR’s broadcast, media, licensing, and sponsorship revenue is not subject to Ohio’s Commercial Activity Tax (“CAT”). Ohio’s CAT statute situses gross receipts from intellectual property to Ohio only “to the extent” they are “based on the right to use the property” in Ohio. R.C. 5751.033(F) (emphasis added). The Court interpreted this provision as requiring the receipts to have a causal connection with the right to use the IP specifically in Ohio. Since none of the sample contracts “tied payments to the right to use property in Ohio” and, in fact, did not mention Ohio at all, such a relationship was lacking. Instead, the contracts “granted broad rights to use NASCAR’s intellectual property over large geographic areas,” typically the United States and its territories. See Nascar Holdings, Inc. v. McClain, Slip Opinion No. 2022-Ohio-4131.

The Court applied the plain statutory language to distinguish receipts from the right to use IP in Ohio from fixed fee payments to use IP in larger areas that included Ohio. Since the receipts at issue – broadcast, media, sponsorship, and licensing fees – were not tied to the actual use of the intellectual property in Ohio, they did not have the necessary connection to Ohio to justify taxation under the situsing statute. In other words, the right to use the IP in the United States for a fixed fee, irrespective of location, did not mean the receipts were based on the right to use IP in Ohio. Due to lack of contractual support, the Tax Commissioner would not have prevailed even if he taxed receipts rationally connected to actual Ohio use of the intellectual property.

The case involved multiple sources of NASCAR’s IP-related revenue from: (1) granting networks the right to air NASCAR races (Broadcast Revenue); (2) media sponsors incorporating NASCAR in marketing campaigns (Media Revenue); (3) royalties for NASCAR-branded products and services (License Fees); and (4) fees from corporate sponsors (Sponsor Fees). The Ohio Board of Tax Appeals previously determined that NASCAR’s receipts from the use of its intellectual property was properly sitused to Ohio based upon either the ratio of Ohio viewership using Nielsen rating or U.S. Census data, as more fully explained in our previous post. The Ohio Supreme Court disagreed, however, because NASCAR’s revenue was not based on any right to use the property specifically in Ohio.

The NASCAR ruling significantly hinders Ohio’s ability to impose tax on revenue from granting broad intellectual property rights and provides taxpayers a planning technique to avoid CAT on their IP-related revenue.