Case Name: Crutchfield Corporation, Appellant and Cross-Appellee, v. Testa, Tax Commr., Appellee and Cross-Appellant
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 2016-11-17
Citations: 151 Ohio St. 3d 278
Docket Number: No. 2015-0386
Parties: Crutchfield Corporation, Appellant and Cross-Appellee, v. Testa, Tax Commr., Appellee and Cross-Appellant.
Judges: O’Connor, C.J., and Pfeifer, O’Donnell, and French, JJ., concur.
Reporter: Ohio State Reports, Third Service
Volume: 151
Pages: 278–302

Head Matter:
Crutchfield Corporation, Appellant and Cross-Appellee, v. Testa, Tax Commr., Appellee and Cross-Appellant.
2016-Ohio-7760.]
(No. 2015-0386
Submitted May 3, 2016
Decided November 17, 2016.)

Opinion:
O'Neill, J.
{¶ 1} Appellant and cross-appellee, Crutchfield Corporation, appeals from the imposition of Ohio's commercial-activity tax ("CAT") on revenue it has earned from sales of electronic products that it ships into the state of Ohio. Crutchfield is based outside Ohio, employs no personnel in Ohio, and maintains no facilities in Ohio. The business Crutchfield does in this state consists solely of shipping goods from outside the state to its consumers in Ohio using the United States Postal Service or common-carrier delivery services. In this appeal, Crutchfield contests the issuance of CAT assessments against it, arguing that Ohio may not impose a tax on the gross receipts associated with its sales to Ohio consumers, because Crutchfield lacks a "substantial nexus" with Ohio. Crutchfield argues that a substantial nexus within a state is a necessary prerequisite to imposing the tax under the federal dormant Commerce Clause. Further, citing case law interpreting this substantial-nexus requirement, Crutchfield argues that its nexus to Ohio is not sufficiently substantial because it lacks a "physical presence" in Ohio—i.e., property in the state or agents or employees acting in the state in connection with its sales.
{¶ 2} Appellee and cross-appellant, the tax commissioner, advances a two-pronged defense. First, he argues that the Commerce Clause case law does not impose a physical-presence requirement and that as a result, the $500,000-sales-receipts threshold set forth in the Ohio CAT statute satisfies the Commerce Clause requirement of a substantial nexus. Second, even if the Commerce Clause does impose a physical-presence requirement, the tax commissioner argues, Crutchfield's computerized connections with Ohio consumers involve the presence of tangible personal property owned either by Crutchfield or by contractors acting specifically on Crutchfield's behalf and the presence of that property on computers located in Ohio constitutes physical presence in this state.
{¶ 3} We agree with the first prong of the tax commissioner's argument, and we therefore do not address the second one. Our reading of the case law indicates that the physical-presence requirement recognized and preserved by the United States Supreme Court for purposes of use-tax collection does not extend to business-privilege taxes such as the CAT. We further conclude that the statutory threshold of $500,000 of Ohio sales constitutes a sufficient guarantee of the substantiality of an Ohio nexus for purposes of the dormant Commerce Clause. We therefore affirm the decision of the Board of Tax Appeals ("BTA") and the assessments issued by the tax commissioner against Crutchfield.
The CAT's Statutory Bright-Line-Presence Standard
{¶ 4} The CAT is imposed under R.C. 5751.02(A), which levies "a commercial activity tax on each person with taxable gross receipts for the privilege of doing business in this state." To determine what constitutes "taxable gross receipts," we look to R.C. 5751.01(G), which defines them as "gross receipts sitused to this state under section 5751.033 of the Revised Code." In the case of sales of tangible personal property like those made by Crutchfield, R.C. 5751.033(E) informs us that the sales are "sitused to this state if the property is received in this state by the purchaser." The statute specifies that when property is delivered "by motor carrier or by other means of transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered the place where the purchaser receives the property." Id. It is the tax commissioner's position that by filling orders initiated on computers in Ohio and arranging for its products to be transported into Ohio, the receipts from Crutchfield's sales qualify as "taxable gross receipts" under this provision.
{¶ 5} Next, we turn back to the imposition of the CAT under R.C. 5751.02(A) on the "privilege of doing business." The statute defines "doing business" as "engaging in any activity, whether legal or illegal, that is conducted for, or results in, gain, profit, or income, at any time during a calendar year." Specifically, the statute states that the CAT is imposed on "persons with substantial nexus with this state," id., a phrase defined at R.C. 5751.01(H)(3) to include persons having a "bright-line presence in this state." R.C. 5751.01(I)(3) includes within the bright line of taxability those persons having "during the calendar year taxable gross receipts of at least five hundred thousand dollars."
{¶ 6} There are other statutory bases for imposing the CAT, but the bright-line standard of receipts from sales into the state that amount to $500,000 per calendar year is the one that is relevant in this appeal. We refer to this basis for imposing the CAT as the $500,000-sales-receipts threshold in this opinion.
Factual Background
{¶ 7} This is an appeal from a decision issued by the BTA on February 26, 2015, in consolidated case Nos. 2012-926, 2012-3068, and 2013-2021. The three BTA cases were appeals from three separate final determinations of the tax commissioner:
• In BTA case No. 2012-926, the tax commissioner issued 19 assessments covering audit periods that extended from July 1, 2005 (the inception of the CAT) to June 30, 2010. The assessments amounted to $65,689 in tax, $5,659.94 in preassessment interest, and $37,128.23 in penalties, for a total assessed amount of $106,239.43.
• In BTA case No. 2012-3068, the tax commissioner issued five assessments for five quarterly periods beginning July 2010 and ending September 2011. The assessments were based on estimated tax amounts of $10,000 per period; the total amount assessed with interest and penalties was $60,988.50.
• In BTA case No. 2013-2021, the commissioner issued assessments for the last quarter of 2011 and the first two quarters of 2012 based on estimated tax amounts of $10,000 per quarter. The assessments consisted of tax plus interest and penalties for a total amount of $39,703.01.
{¶ 8} In each instance, Crutchfield contested the original assessments, advancing statutory and constitutional challenges. The tax commissioner issued three final determinations covering all the assessments.
{¶ 9} The final determinations are substantially the same. Each final determination notes that Crutchfield is "a corporation based in Virginia," that it functions as "a direct marketer that sells consumer electronics through the Internet from locations entirely outside of Ohio," and that it "ships its merchandise via the U.S. Mail or using common carriers." The final determinations rejected Crutchfield's objections on the grounds that the taxpayer "has 'substantial nexus with this state,' as that phrase is defined in R.C. 5751.01(H)," inasmuch as Crutchfield "satisfies the third and/or fourth conditions in that division, and therefore is a person on whom the tax is levied."
{¶ 10} Next, the final determinations found that Crutchfield "sells consumer goods through orders received via the Internet and telephone orders," noting that Crutchfield "admits that it has customers in Ohio to which it sells and ships these goods." After further discussion of the relevant statutory provisions, the final determinations state that Crutchfield's "overriding assertion is that the Commerce Clause of the United States Constitution precludes the State of Ohio from subjecting it to the commercial activity tax" and that Crutchfield maintains that "the nexus required is a 'physical presence' in the taxing state, which it alleges it did not have during the assessed periods."
{¶ 11} In all three cases, the tax commissioner found that Crutchfield had "more than $500,000 in sales to customers in Ohio" and that Crutchfield "failed to file and pay the commercial activity tax." The commissioner made no factual finding regarding physical presence but instead noted that he lacked authority to "adjudicate the constitutionality of th[e] statutes." At the BTA, Crutchfield stipulated that it did "not contest the amounts of estimated Ohio Commercial Activity Tax set forth on the assessments" but reasserted that it was immune from the tax.
Proceedings at the BTA
{¶ 12} At the BTA, Crutchfield offered the testimony of two company employees, its senior vice president of finance and its director of Internet marketing. The former testified concerning the company's active intent to avoid nexus anywhere but in its home state of Virginia. The latter testified concerning the general character of Crutchfield's Internet marketing efforts, with the thrust being that no specific effort was targeted at Ohio.
{¶ 13} With respect to the constitutional issues, the parties offered expert opinions concerning Crutchfield's promotion of its products and filling orders in conjunction with its customers' use of computers in Ohio. The tax commissioner offered written reports of two marketing experts, Ashkan Soltani and Joseph Turow, while Crutchfield offered the written report of its own marketing expert, Eric Goldman. The conflicting expert opinions addressed the tax commissioner's theory that interstate sales through the Internet involved "physical presence" because of the physical realities of online transactions.
Crutchfield's Arguments and the BTA's Decision
{¶ 14} Before the BTA, Crutchfield argued that its "gross receipts cannot be taxed consistent with the Constitution," inasmuch as Crutchfield "lacks the in-state business activity required by the Commerce Clause." Crutchfield also argued that "[i]n addition to violating the Constitution," the assessments against Crutchfield violated the provision of the CAT statute that excluded receipts when the tax could not constitutionally be applied.
{¶ 15} In its decision, the BTA rejected Crutchfield's reading of the statutory provisions by relying on the plain meaning of the bright-line $500,000-sales-receipts threshold and citing its earlier resolution of the issue in L.L. Bean, Inc. v. Levin, BTA No. 2010-2853, 2014 Ohio Tax LEXIS 1539 (Mar. 6, 2014). BTA Nos. 2012-926, 2012-3068, and 2013-2021, 2015 WL 1048564, *4 (Feb. 26, 2015). As for Crutchfield's constitutional challenge, the board noted that it lacked jurisdiction to decline to apply statutes on constitutional grounds. Id. at *3. The BTA therefore affirmed the assessments issued by the tax commissioner.
Standard of Review
{¶ 16} This appeal presents questions of statutory construction and the constitutional validity of applying the CAT statute. These constitute legal questions, which we decide de novo. Akron Centre Plaza, L.L.C. v. Summit Cty. Bd. of Revision, 128 Ohio St.3d 145, 2010-0hio-5035, 942 N.E.2d 1054, ¶ 10. As for entertaining the Commerce Clause challenge to the application of the CAT statute, "the BTA receives evidence at its hearing, but we determine the facts necessary to resolve the constitutional question." MCI Telecommunications Corp. v. Limbach, 68 Ohio St.3d 195, 198, 625 N.E.2d 597 (1994).
Crutchfield Properly Raised its Constitutional Challenge to the CAT Assessments
{¶ 17} In his cross-appeal, the tax commissioner renews an argument that we already rejected when we denied the commissioner's motion to dismiss. See 143 Ohio St.3d 1414, 2015-Ohio-2911, 34 N.E.3d 928. Namely, the commissioner contends that "Crutchfield has failed to impart jurisdiction on the BTA, and therefore derivatively on this Court, to consider its as-applied constitutional challenges." While the tax commissioner is correct that a failure to specify an as-applied challenge in the notice of appeal to the BTA would bar that kind of relief, the commissioner is wrong about the content of the notices of appeal that Crutchfield filed at the BTA. Each notice of appeal states in the sixth assignment of error that "[ajpplication of the CAT to Crutchfield would violate the Company's rights under the Commerce Clause of the United States Constitution." The notices of appeal also state that "Crutchfield is protected from imposition of the Commercial Activity Tax ('CAT') under the Commerce Clause of the United States Constitution" and that "[a]s it applies to gross receipts taxes like the CAT, the [Supreme] Court has made clear that the physical presence standard is only satisfied through in-state activities by, or on behalf of, the taxpayer that are significantly associated with its ability to establish and maintain a market in the state."
{¶ 18} Taken together, these assertions adequately specify the constitutional error. We do not recognize any significance to the distinction between a facial or as-applied challenge in the present context. We find that the notices of appeal suffice to place both theories at issue, inasmuch as any facial challenge under the Commerce Clause nexus standard would necessarily have to demonstrate that the statute could not constitutionally be applied to Crutchfield itself; that would be a necessary predicate for showing that the statute is unconstitutional in all its applications. See Harrold v. Collier, 107 Ohio St.3d 44, 2005-Ohio-5334, 836 N.E.2d 1165, ¶ 37 ("A facial challenge to a statute is the most difficult to bring successfully because the challenger must establish that there exists no set of circumstances under which the statute would be valid").
The CAT Statute Manifests Clear Legislative Intent to Impose the CAT Based on the $500,000-Sales-Receipts Threshold
{¶ 19} Crutchfield argues that the CAT statute may be construed and applied to avoid the constitutional infirmity that it raises here, but these arguments do not withstand close scrutiny.
{¶ 20} First, Crutchfield argues that this court should strictly construe "doing business" under R.C. 5751.02(A) to avoid the constitutional infirmity, by holding that Crutchfield's lack of physical presence means that it was not "doing business" in Ohio. But "doing business" is defined in R.C. 5751.02(A) solely for the purpose of establishing that "privilege of doing business," the incidence of the tax, broadly includes profit-seeking activities. Interpreting the term "doing business" to exclude situations in which there is no physical presence simply would not be consistent with the broad intent reflected in the language of the provision.
{¶ 21} Moreover, after defining "doing business," R.C. 5751.02(A) proceeds to explicitly impose the tax on "persons with substantial nexus," which includes, under R.C. 5751.01(I)(3), those persons who satisfy the $500,000-sales-receipts threshold. Thus, far from avoiding the constitutional issue, the "doing business" language of R.C. 5751.02(A) invites the constitutional challenge to be considered on its own terms.
{¶ 22} Crutchfield asserts that the tax commissioner's interpretation of R.C. 5751.02(A) "read[s] out of the statute [its] primary, in-state activities requirement." But the statute speaks of taxing "the privilege of doing business in this state" without stating an "in-state activities requirement," much less any reference to the additional requirement of physical presence within the state. Nor is there any ambiguity to be interpreted in Crutchfield's favor in this section; the reference to a "physical presence" requirement is unambiguously absent, and the insistence that the tax is imposed on persons based on the $500,000-sales-receipts threshold is unambiguously incorporated by reference.
{¶ 23} Second, Crutchfield contends that former R.C. 5751.01(F)(2)(jj) (now (F)(2)(H)) should be construed to preempt imposition of the CAT based on the $500,000-sales-receipts threshold. That provision states that " '[gjross receipts' excludes [a]ny receipts for which the tax imposed by this chapter is prohibited by the constitution or laws of the United States or the constitution of this state." According to Crutchfield, the "only reasonable interpretation of the exclusion is that the General Assembly wished to avoid conflict with all limitations on the State's authority to impose a tax measured by gross receipts, including restrictions arising under the substantial nexus requirement of the dormant Commerce Clause."
{¶ 24} We disagree. The proposed interpretation is irreconcilable with the insistence in R.C. 5751.02(A) that the "[pjersons on which the commercial activity tax is levied include, but are not limited to, persons with substantial nexus with this state." (Emphasis added.) This language invokes by reference the 00,000-sales-receipts threshold for imposing the tax as part of the definition of "substantial nexus with this state" under R.C. 5751.01(H), but the language then proceeds to express legislative intent that the tax not be bound even by that expansive definition. This cannot be squared with attributing to the legislature an intent to acquiesce in the substantial-nexus/physical-presence test that Crutch-field advocates here.
{¶ 25} Moreover, R.C. 5751.01(F)(2)(H) excludes receipts from the "gross receipts" definition; it does not create an exception to the statute's substantial-nexus definition. The exclusion requires the tax commissioner to disregard any receipts that by their character, or the character of the taxpayer itself, are immune or exempt from state taxation as a matter of federal constitutional or statutory law. See NLO, Inc. v. Limbach, 66 Ohio St.3d 389, 394, 613 N.E.2d 193 (1993) ("The federal Supremacy Clause, Clause 2, Article VI, United States Constitution, prevents the state from taxing the federal government and its instrumentalities"). Under the statute's definition of "[ejxcluded person," R.C. 5751.01(E), "the state and its agencies, instrumentalities, or political subdivisions" are not subject to the CAT, R.C. 5751.01(E)(8), but the definition makes no mention of the federal government and its instrumentalities. As a result, it is the gross-receipts exclusion at R.C. 5751.01(F)(2)(H) that removes the federal govern ment and its instrumentalities from the operation of the CAT. It is unnecessary to find additional legislative purposes for the provision.
{¶ 26} For the foregoing reasons, we reject Crutchfield's statutory challenges to the CAT assessments.
"Substantial Nexus" Does Not Require a Taxable "Local Incident"
{¶ 27} Our analysis of this appeal under the Commerce Clause begins with a "before and after" view of the case law. The pivot point is Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), which altered how the dormant Commerce Clause interacts with a state's taxing powers.
{¶28} Before Complete Auto, we characterized the United States Supreme Court case law as "enigmatic," embodying "[a]t the opposite ends of the conceptual spectrum two competing propositions that (1) a state may not levy a tax for the privilege of engaging in interstate commerce and (2) interstate commerce must pay its way in relation to the immediate benefits and protections afforded it by the state." United Air Lines, Inc. v. Porterfield, 28 Ohio St.2d 97, 102, 276 N.E.2d 629 (1971). Whatever other effect it had, Complete Auto abolished the first of these two principles by embracing the doctrine of those cases in which the high court had "rejected the proposition that interstate commerce is immune from state taxation." Complete Auto at 288.
{¶ 29} In place of the old conceptual framework, the high court articulated the now familiar four-prong test, under which a state tax is valid if is "applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State." Id. at 279. It is, of course, the requirement of a substantial nexus that is at issue in this appeal.
{¶ 30} The main flaw in Crutchfield's argument lies in its reliance on case law that embodies the since-discarded theory of interstate-commerce immunity from state taxation. Namely, Crutchfield cites cases in which a taxable "local incident" was required as a predicate for state taxation because the privilege of engaging in interstate commerce was regarded as immune from state taxation. See Freeman v. Hewit, 329 U.S. 249, 252, 254, 67 S.Ct. 274, 91 L.Ed. 265 (1946) ("by its own force," the dormant Commerce Clause "created an area of trade free from interference by the States," with the result that the Commerce Clause barred "a levy upon the very process of commerce across State lines"); Spector Motor Serv., Inc. v. O'Connor, 340 U.S. 602, 608, 71 S.Ct. 508, 95 L.Ed. 573 (1951) (invalidating tax that was "placed unequivocally upon the corporation's franchise for the privilege of carrying on exclusively interstate transportation in the state"). Crutchfield then equates the taxable "local incident" required in earlier cases with "substantial nexus" under Complete Auto.
{¶31} Crutchfield relies in particular on Norton Co. v. Dept. of Revenue, 340 U.S. 534, 71 S.Ct. 377, 95 L.Ed. 517 (1951). In Norton, a Massachusetts manufacturer had a Chicago office through which it made sales in Illinois; it separately engaged in a purely mail-order business in which in-state customers mailed an order to Massachusetts that was then filled by mailing the ordered items back to Illinois. Illinois assessed a retail-business tax measured by gross receipts against the manufacturer, which protested that it was engaged in interstate commerce. The manufacturer's argument was rejected in state court.
{¶ 32} On appeal, the Supreme Court noted that the state statute exempted " 'business in interstate commerce' as required by the Constitution." Id. at 535-536. The court vacated the state-court judgment and remanded the cause to distinguish those transactions involving purely mail-order business; once identified, those transactions would be held immune from the state tax. Id. at 539. The linchpin of the court's analysis is instructive:
Where a corporation chooses to stay at home in all respects except to send abroad advertising or drummers to solicit orders which are sent directly to the home office for acceptance, filling, and delivery back to the buyer, it is obvious that the State of the buyer has no local grip on the seller. Unless some local incident occurs sufficient to bring the transaction within its taxing power, the vendor is not taxable. McLeod v. [J.E.] Dilworth Co., 322 U.S. 327 [64 S.Ct. 1023, 88 L.Ed. 1304 (1944)]. Of course, a state imposing a sales or use tax can more easily meet this burden, because the impact of those taxes is on the local buyer or user. Cases involving them are not controlling here, for this tax falls on the vendor.
(Emphasis added.) Norton at 537.
{¶ 33} At first blush, this passage could be mistaken for a statement about the substantiality of nexus, and that is precisely the error that Crutchfield makes. Read in context, however, the passage does not at all comment on "substantial nexus"; instead, it reflects the interstate-commerce-immunity theory, whereby the sales made by or through local agents in the state—such as the purchases in Ohio of Crutchfield's products—are taxable as local commerce, but the strictly mail-order transactions are immune as purely interstate commerce.
{¶ 34} Crutchfield maintains that the local incident in a case like Norton equates to the substantial-nexus requirement of the Complete Auto test. That is wrong. Complete Auto abolished the prohibition against levying a tax on the privilege of engaging in interstate commerce, and the Supreme Court's articulation of the substantial-nexus test was not intended to resurrect it.
{¶ 35} Essentially, the same is true for the other pre-Complete Auto cases cited and relied upon by Crutchfield. In Standard Pressed Steel Co. v. Washington Dept. of Revenue, 419 U.S. 560, 562-563, 95 S.Ct. 706, 42 L.Ed.2d 719 (1975), the high court rejected the proposed analogy to Norton on the grounds that Norton presented the questions whether the in-state activity related to the interstate aspect of the business and whether the taxpayer had to prove the absence of such a relationship in order to "establish} ] its immunity" from state taxation; by contrast, Standard Pressed Steel had an employee "with a full-time job within the State" that consisted of maintaining the seller's relationship with its in-state customer, Boeing. In Gen. Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430 (1964), the high court invoked the proposition as " 'beyond dispute that a state may not lay a tax on the "privilege" of engaging in interstate commerce.'" Id. at 446, quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959). But the court then distinguished the facts before it as involving taxation of the "in-state activities" performed by "out-of-state personnel"; though maintaining no office in the state, General Motors employees nonetheless regularly performed substantial services within the state to maintain dealer contacts. Id. at 447.
{¶ 36} In Field Ents., Inc. v. Washington, 47 Wash.2d 852, 289 P.2d 1010 (1955), summarily aff'd, 352 U.S. 806, 77 S.Ct. 55, 1 L.Ed.2d 39 (1956), a Delaware corporation published World Book Encyclopedia and Childcraft', it maintained a Seattle office, where its representative took orders that were then filled outside the state with books mailed directly to the customers. The case was decided on the Commerce Clause ground that the in-state activity was sufficient, so that Washington's business tax was not being laid on the privilege of engaging in interstate commerce. Although the interstate-commerce-immunity rationale does not appear on the face of the decision, it is manifest in its reliance on the earlier decision in B.F. Goodrich Co. v. State, 38 Wash.2d 663, 231 P.2d 325 (1951), which—although not itself explicitly mentioning interstate-commerce immunity—exhibits its adherence to the doctrine by its reliance on the United States Supreme Court's decision in Norton.
Quill Does Not Apply to Business-Privilege Taxes, Whether Measured by Income or by Receipts
{¶ 37} The proper focal point of discussion of the physical-presence standard in the case law is Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed.2d 91 (1992). That is so because Quill explicitly considers the substantial-nexus prong of the Commerce Clause test in light of the change in that test effected by Complete Auto and finds the need for a physical presence under the circumstances presented in Quill.
{¶ 38} Quill involved a challenge to the typical state-law requirement that out-of-state sellers act as agents of the state by charging, collecting, and remitting sales or use taxes incurred by in-state buyers when they ordered items for delivery into the state. In Quill, North Dakota imposed the administrative obligation to charge, collect, and remit taxes on persons who " 'engage[ ] in regular or systematic solicitation of a consumer market in th[e] state.' " Id. at 302-303, quoting N.D. Century Code 57-40.2-01(6). The law thereby swept within its ambit mail-order firms that solicited business through advertising within the state. Id. at 303. When Quill resisted, a trial court upheld its position against the state on the authority of Natl. Bellas Hess, Inc. v. Dept. of Revenue of State of Illinois, 386 U.S. 753, 87 S.Ct. 1389, 18 L.Ed.2d 505 (1967), which had held that requiring a Missouri mail-order business to collect the Illinois use tax violated due-process and Commerce Clause standards. The state supreme court reversed, allowing imposition of the collection responsibility on Quill.
{¶ 39} On appeal, the United States Supreme Court reversed. First, the high court rejected the due-process ground of the Bellas Hess holding, concluding that the activity by which North Dakota sought to impose the obligation constituted purposeful availment of the state's benefits and protections. Quill at 307-308. As for the Commerce Clause ground, however, the Quill court reaffirmed the holding of Bellas Hess and prohibited North Dakota's imposition of the collection responsibility. Quill at 310-318.
{¶ 40} With respect to Commerce Clause case law, the court in Quill discerned that the substantial-nexus test carried forward the limitation, set forth in Bellas Hess, that out-of-state sellers could incur use-tax compliance obligations based only on physical presence in the state, Bellas Hess at 758 (distinguishing "between mail order sellers with retail outlets, solicitors, or property within a State, and those who do no more than communicate with customers in the State by mail or common carrier as part of a general interstate business"). Quill, 504 U.S. at 311-313, 112 S.Ct. 1904, 119 L.Ed.2d 91.
{¶ 41} The Supreme Court had concluded in Bellas Hess that this continued limitation was justified by the burdens imposed on interstate commerce by multiple jurisdictions imposing use taxes with differing rates, exemptions, and record-keeping requirements. Bellas Hess, 386 U.S. at 759-760, 87 S.Ct. 1389, 18 L.Ed.2d 505. In Quill, the court noted that the "settled expectations" of mail-order sellers arising from Bellas Hess may have facilitated such interstate business and that the physical-presence rule was therefore worth preserving. Quill at 316.
{¶ 42} We hold today that although a physical presence in the state may furnish a sufficient basis for finding a substantial nexus, Quill's holding that physical presence is a necessary condition for imposing the tax obligation does' not apply to a business-privilege tax such as the CAT, as long as the privilege tax is imposed with an adequate quantitative standard that ensures that the taxpayer's nexus with the state is substantial. Here, that quantitative standard is the $500,000-sales-receipts threshold.
{¶ 43} We discern the basis for our holding in Quill itself and the related United States Supreme Court precedents. First, Quill contains two passages that indicate that the physical-presence standard has not been articulated as a nexus requirement in the business-privilege-tax situation. In rejecting North Dakota's argument that the court had eschewed such a "bright-line test" as physical presence, the Supreme Court conceded that it had not, in its review of other types of taxes, "articulated the same physical-presence requirement that Bellas Hess established for sales and use taxes"; the court then stated that "that silence does not imply repudiation of the Bellas Hess rule." Quill at 314. The contrast was drawn even more trenchantly in the concluding passage of the opinion, in which the court noted that cases "subsequent to Bellas Hess and concerning other types of taxes" did not "adopt[ ] a similar bright-line, physical-presence requirement"; the court then observed that its "reasoning in those cases does not compel that [it] now reject the rule that Bellas Hess established in the area of sales and use taxes." (Emphasis added.) Quill at 317.
{¶ 44} Second, the case law post-Complete Auto establishes that for purposes of applying the four-prong Commerce Clause test, business-privilege taxes should be distinguished from transaction taxes such as the sales and use tax. In Oklahoma Tax Comm. v. Jefferson Lines, Inc., 514 U.S. 175, 115 S.Ct. 1331, 131 L.Ed.2d 261 (1995), a Minnesota bus company had collected and remitted the Oklahoma sales tax on transportation services for trips within Oklahoma but not for trips originating in Oklahoma and terminating outside the state. In bankruptcy proceedings, the state attempted to collect the unremittéd tax through a vendor assessment; there, the state confronted a Commerce Clause defense. One aspect of that defense was that the Commerce Clause required the sales tax to be apportioned to apply only to mileage within Oklahoma itself, see Cent. Greyhound Lines, Inc. v. Mealey, 334 U.S. 653, 68 S.Ct. 1260, 92 L.Ed. 1633 (1948) (holding unconstitutional an unapportioned tax on gross receipts of company that sold tickets for interstate bus travel).
{¶ 45} The United States Supreme Court rejected that position, relying principally on the different identities of the taxpayer: the interstate seller of the bus ticket, on whom a gross-receipts tax is imposed, and the in-state purchaser of the ticket, on whom a sales tax is imposed. The high court stated:
[Central Greyhound and Jefferson Lines] involve the identical services, and apportionment by mileage per State is equally feasible in each. But the two diverge crucially in the identity of the taxpayers and the consequent opportunities that are understood to exist for multiple taxation of the same taxpayer. Central Greyhound did not rest simply on the mathematical and administrative feasibility of a mileage apportionment, but on the Court's express understanding that the seller-taxpayer was exposed to taxation by New Jersey and Pennsylvania on portions of the same receipts that New York was taxing in their entirety. The Court thus understood the gross receipts tax to be simply a variety of tax on income, which was required to be apportioned to reflect the location of the various interstate activities by which it was earned.
(Emphasis added.) Jefferson Lines at 190. Accord Comptroller of Treasury of Maryland v. Wynne, — U.S. -, 135 S.Ct. 1787, 1795, 191 L.Ed.2d 813 (2015) (seeing "no reason why the distinction between gross receipts and net income should matter" in evaluating Commerce Clause challenge to imposition of a state tax).
{¶ 46} Thus, Jefferson Lines puts the United States Supreme Court on record that for purposes of applying the Complete Auto test, a gross-receipts tax on the interstate seller should be viewed as occupying the same constitutional category as an income tax on that same seller—whereas the sales tax on the in-state purchaser occupies a different category. That reasoning tracks the background and purpose of Ohio's CAT, which, enacted to replace the former corporate-franchise tax, is imposed on the privilege of engaging in income-producing activity but is measured by gross receipts instead of income. See Navistar, Inc. v. Testa, 143 Ohio St.3d 460, 2015-Ohio-3283, 39 N.E.3d 509, ¶ 1, 8; Beaver Excavating Co. v. Testa, 134 Ohio St.3d 565, 2012-Ohio-5776, 983 N.E.2d 1317, ¶ 23-24.
{¶ 47} Under these precepts, we follow our own lead along with that of most state courts that, post-Quill, have explicitly rejected the extension of the Quill physical-presence standard to taxes on, or measured by, income. See Couchot v. State Lottery Comm., 74 Ohio St.3d 417, 425, 659 N.E.2d 1225 (1996) ("There is no indication in Quill that the Supreme Court will extend the physical-presence requirement to cases involving taxation measured by income derived from the state"); Capital One Bank v. Commr. of Revenue, 453 Mass. 1, 13, 899 N.E.2d 76 (2009) (declining to "expand the [United States Supreme] Court's reasoning [in Quill] beyond its articulated boundaries" and upholding imposition of tax on out-of-state banks in relation to in-state servicing of credit cards based on the volume of business conducted and profits realized); MBNA Am. Bank, N.A. v. Indiana Dept. of State Revenue, 895 N.E.2d 140, 143 (Ind.Tax 2008) ("Based on [Quill] and a thorough review of relevant case law, this Court finds that the Supreme Court has not extended the physical presence requirement beyond the realm of sales and use taxes"); KFC Corp. v. Iowa Dept. of Revenue, 792 N.W.2d 308, 328 (Iowa 2010) ("We doubt that the United States Supreme Court would extend the 'physical presence' rule outside the sales and use context of Quill "). But see J.C. Penney Natl. Bank v. Johnson, 19 S.W.3d 831, 839 (Tenn.App.1999) (intermediate appellate court, rejecting the state's argument that Quill did not apply, overruled the imposition of the state's franchise and excise taxes on a bank in relation to the servicing of credit cards issued to Tennessee residents, on the ground that the bank had no offices or agents in the state).
{¶ 48} We recognize that Crutchfield seeks to take refuge in a handful of state-court decisions addressing gross-receipts taxes, but we find that those decisions are unavailing for the reasons we discuss in the next section.
Under Tyler Pipe, Physical Presence Is a Sufficient but not Necessary Condition for Imposing a Business-Privilege Tax
{¶ 49} We are now in a position to fully address Crutchfield's argument that "[f]or more than 50 years, in a series of cases decided both before and after Complete Auto, the Supreme Court has made clear that a state's authority to impose a tax measured by gross receipts depends upon the taxpayer conducting business activities within the state that assist the company to develop and maintain a market there." At oral argument, although Crutchfield stated that it was not arguing that the Quill standard per se applies to a privilege tax, it nonetheless invited us to read Tyler Pipe Industries, Inc. v. Washington State Dept. of Revenue, 483 U.S. 232, 107 S.Ct. 2810, 97 L.Ed.2d 199 (1987), as recognizing a "very similar" type of physical-presence standard in the privilege-tax context.
{¶ 50} We disagree. The most accurate characterization of Tyler Pipe, and one that is fully consistent with Complete Auto and with the Quill court's own reading of the case law, is that a taxpayer's physical presence in a state constitutes a sufficient basis for the state to impose a business-privilege tax. We conclude that in construing Tyler Pipe, it is unwarranted to leap from the principle that physical presence is a sufficient condition for imposing a tax to the logically distinct proposition that physical presence is a necessary condition to impose the tax. And as discussed, although Quill recognized physical presence as a necessary condition for imposing the obligation to collect use taxes, that requirement does not extend to business-privilege taxes as a general matter.
{¶ 51} This conclusion derives from not just Tyler Pipe but also the state-court decisions addressing gross-receipts taxes: in each case, a physical presence was found that in turn furnished a sufficient condition for upholding the imposition of the state tax. Koch Fuels, Inc. v. Clark, 676 A.2d 330, 334 (R.I.1996) (noting that the taxpayer "shipped approximately 25.6 million gallons of oil into Rhode Island" over which it "retained title, possession and risk of loss up until the point it reached the flange in Providence"); Saudi Refining, Inc. v. Dir. of Revenue, 715 A.2d 89, 96 (Del.Super.1998) (noting that the taxpayer had "a significantly greater presence in Delaware than [the taxpayer in Koch Fuels] did in Rhode Island"); Ariz. Dept. of Revenue v. O'Connor, Cavanagh, Anderson, Killingsworth & Beshears, P.A., 192 Ariz. 200, 206, 963 P.2d 279 (App.1997) (detailing Arizona contacts of Indiana seller, including installation activity of its agents in the state, that would permit imposition of Arizona gross-receipts tax on that seller); Short Bros. (USA), Inc. v. Arlington Cty., 244 Va. 520, 526, 423 S.E.2d 172 (1992) (taxpayer chose the taxing jurisdiction as its place of business and conducted all its revenue-generating operations from that office). Given our reading of the United States Supreme Court cases, there is no reason for us to view those decisions as authority for the proposition that physical presence would have been a necessary condition as well.
The $500,000-Sales-Receipts Threshold Adequately Ensures a Substantial Nexus for Purposes of Imposing the CAT
{¶ 52} The final point of our analysis has been implicit in some of our earlier discussion, but we make it explicit here. We hold that the $500,000-sales-receipts threshold complies with the substantial-nexus requirement of the Complete Auto test.
{¶ 53} In so holding, we express our view that the quantitative standard is necessary to make the CAT applicable to a remote seller such as Crutchfield because the Commerce Clause standard does require the nexus to be "substantial." This means that in order to render receipts susceptible to taxation by Ohio, the Commerce Clause requires more than the " 'definite link' " to this state, or the " 'purposeful] avail[ment]' " of Ohio's protections, that would satisfy due process, Corrigan v. Testa, 149 Ohio St.3d 18, 2016-Ohio-2805, 73 N.E.3d 381, ¶ 30, 32, quoting Quill, 504 U.S. at 306, 307, 112 S.Ct. 1904, 119 L.Ed.2d 91. The United States Supreme Court has recently reiterated:
By prohibiting States from discriminating against or imposing excessive burdens on interstate commerce without congressional approval, [the dormant Commerce Clause] strikes at one of the chief evils that led to the adoption of the Constitution, namely, state tariffs and other laws that burdened interstate commerce.
(Emphasis added.) Wynne, — U.S. -, 135 S.Ct. at 1794, 191 L.Ed.2d 813.
{¶ 54} In applying the substantial-nexus standard without Quill's physical-presence requirement, we take recourse to more general principles for applying the Commerce Clause limitation. As a general matter, when a state statute "regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits." Pike v. Bruce Church, 397 U.S. 137, 145-146, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970). Obviously the imposition of the CAT on remote sellers has an effect on interstate commerce, and Ohio must ensure that the adverse impact does not become "clearly excessive" in relation to the legitimate exercise of its taxing authority. Were the state to tax all receipts without any regard for the volume of Ohio sales, the CAT could become clearly excessive as to a business with a very small amount of such receipts. The General Assembly has sensibly attempted to foreclose that possibility by setting a minimum sales-receipts threshold.
{¶ 55} Crutchfield points out that the number chosen by the General Assembly, $500,000, can be seen as arbitrary to some degree, but no reason is advanced why a higher number ought to have been selected. Instead, Crutchfield relies on the physical-presence requirement, which we have determined is not a necessary condition here. Although any threshold amount, whether selected by the legislature or the courts, may "seem to reasonable and intelligent persons to represent the drawing of artificial and arbitrary boundaries or lines," we have recognized that the drawing of such lines is justified for the purpose of defining the legal obligations of the taxpaying public. Powhatan Mining Co. v. Peck, 160 Ohio St. 389, 394, 116 N.E.2d 426 (1953); In re Estate of Sears, 172 Ohio St. 443, 448, 178 N.E.2d 240 (1961).
{¶ 56} We hold that given the $500,000-sales-reeeipts threshold, the burdens imposed by the CAT on interstate commerce are not "clearly excessive" in relation to the legitimate interest of the state of Ohio in imposing the tax evenhandedly on the sales receipts of in-state and out-of-state sellers. As a result, the tax satisfies the substantial-nexus standard under the dormant Commerce Clause, and we decline to address the tax commissioner's alternative argument that the physical-presence standard has been satisfied.
Conclusion'
{¶ 57} For the foregoing reasons, we affirm the decision of the BTA and uphold the CAT assessments against Crutchfield.
Decision affirmed.
O'Connor, C.J., and Pfeifer, O'Donnell, and French, JJ., concur.
Kennedy, J., dissents, with an opinion joined by Lanzinger, J.
. The "third condition," R.C. 5751.01(H)(3), refers to the bright-line-presence provision at division (I) of the section, which imposes the tax, given $500,000 in sales receipts; the "fourth condition" is a catchall at R.C. 5751.01(H)(4) that applies when a taxpayer "[ojtherwise has nexus with this state to an extent that the person can be required to remit the tax imposed under this chapter under the Constitution of the United States."
. Crutchfield's BTA brief quoted former R.C. 5751.01(F)(2)(jj) (now (F)(2)(H)), which excludes from the statutory definition of "gross receipts" "[a]ny receipts for which the tax imposed by this chapter is prohibited by the constitution or laws of the United States or the constitution of this state."
. "As a corollary to its sales tax, North Dakota imposes a use tax upon property purchased for storage, use, or consumption within the State." Quill at 302; accord Procter & Gamble Co. v. Lindley, 17 Ohio St.3d 71, 73, 477 N.E.2d 1109 (1985) ("R.C. 5739.02 imposes an excise tax on each retail sale made in Ohio, with R.C. 5741.02 imposing a complementary excise tax on the use of tangible personal property in Ohio").
. Crutchfield characterizes the Tennessee tax as a gross-receipts tax, but at least one commentator has noted that the case involves a net-income tax, Michael T. Fatale, State Tax Jurisdiction and the Mythical "Physical Presence" Constitutional Standard, 54 Tax Lawyer 105, 139 (Fall 2000).
. Crutchfield seizes upon a passage that the United States Supreme Court quoted from the state-supreme-court decision to bolster its claim: " '[T]he crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in this state for the sales.' " Tyler Pipe at 250, quoting Tyler Pipe Industries, Inc. v. State Dept. of Revenue, 105 Wash.2d 318, 323, 715 P.2d 123 (1986). But this passage does not, contrary to Crutchfield's suggestion, articulate a constitutional standard for nexus; instead, it states the state-law standard embodied in the pertinent state nexus regulation. See Tyler Pipe, 105 Wash.2d at 323, 715 P.2d 123, citing Wash.Adm.Code 458-20-193B. The constitutional holding is simply that such a connection is sufficient under the Commerce Clause.
. The $150,000 threshold, which under R.C. 5751.04(B) is the usual amount that triggers the CAT registration requirement, is not at issue in this appeal. Crutchfield has not raised the point, and even assuming that the $150,000 threshold might apply to an out-of-state retailer like Crutchfield, Crutchfield would have no standing to advance such a claim because it accepts the premise that it had receipts in excess of the $500,000 threshold.