The Supreme Court of Ohio on Tuesday declared NASCAR the winner in its multiyear dispute with the Ohio Tax Commissioner over whether NASCAR owed over a half-million dollars in back taxes and penalties for business activity conducted outside of the state.
The ruling sends a message that while the major pro leagues generate revenue in all 50 states, the ability of each state to tax requires compliance with the law.
At issue in NASCAR v. McClain was whether Ohio could tax NASCAR for revenue derived from nationwide contracts that involved NASCAR licensing intellectual property. The relevant contracts concerned TV, streaming and website activities from 2005 to 2010 and sparked an audit in 2011. Ohio’s commercial-activity tax statute allowed Ohio to tax NASCAR’s receipts “to the extent the receipts are based on the right to use the property in [Ohio].”
Ohio’s tax regulators decided that revenue generated by NASCAR in its $1.7 billion broadcasting contract with Fox fell within the statute’s reach. The state calculated the amount of revenue attributable to Ohio based on Nielsen data and found that residents of the buckeye state made up 4.3% of cable TV viewers in the U.S.
Ohio used a similar metric for determining how much of NASCAR’s earnings from licensing its brand in marketing materials and website activities—for example, in one licensing contract, Turner paid $6 million over six years—should be taxable by Ohio. In terms of NASCAR revenue from licensing fees that allowed banks, insurance companies and other businesses to use its trademark and trade names, Ohio drew from U.S. census data for Ohio’s population versus the national population.
In an opinion authored by Justice Pat DeWine, the court concluded that most of this tax assessment was unlawful. The major problem, DeWine wrote, is that NASCAR contracts did not condition payments on the right to use property in Ohio. In fact, “Ohio was not even mentioned in the contracts.”
Instead, the contracts “granted broad rights to use NASCAR’s intellectual property over large geographic areas—most often the United States and its territories—that include Ohio.” This was problematic, DeWine found, since the contracts indicated no “causal connection between any of the receipts and the right to use NASCAR’s intellectual property in Ohio.”
DeWine detailed the lack of causal connection in the NASCAR-Fox deal. “Fox,” DeWine wrote, “paid NASCAR a fixed fee for the rights—a fee that is unchanged regardless of whether any part of NASCAR’s intellectual property even makes it to Ohio.” DeWine is the son of Ohio Governor Mike DeWine, who won re-election in November.
The state had maintained it could approximate the Ohio proportion based on Nielsen ratings, but DeWine said the law only permits taxing the intellectual property if the receipts are based on the right to use property in Ohio. Since the contract “plainly does not base what NASCAR is paid on the right to use NASCAR’s property in Ohio,” the state lacked the right to tax.
DeWine acknowledged that the NASCAR brand “reaches Ohio in many ways,” including when Ohioans “buy NASCAR grill covers, they watch ads aired by companies that brag of being NASCAR’s ‘official partner,’ and they visit the NASCAR.com website owned by Turner Broadcasting.” But the judge stressed those factors are not determinative in whether the state can impose a tax that hinges on use of property in the state.
Robert Raiola, a CPA to teams and players and director of the sports and entertainment group at PKF O’Connor Davies, agrees with the court’s holding. “States,” Raiola told Sportico, “can often tax leagues, but this ruling shows that there are important limits under tax laws that states must follow.”
(This story has been updated with details of the DeWine’s relationship in the eighth paragraph.)