By Jodi Littman Tomaszewski
Partner
“. . . And This One Belongs to the Reds.”
While the Cincinnati Reds may not have won many games on the field this year, they did hit a home run with the Supreme Court of Ohio in a recent tax case involving the team’s bobblehead giveaways.
In the case of Cincinnati Reds LLC v. Testa; Slip Opinion No. 2018-Ohio-4669; BTA No. 2015-1707, the Ohio Supreme Court had to decide whether the Reds were required to pay use tax in connection with the purchase of certain promotional items – such as bobbleheads – which were given away to fans at certain home games.
How ‘use tax’ works under Ohio law
In order to understand the Court’s decision, it is important to know how ‘use tax’ works under Ohio law.
The Ohio use tax applies to certain retail sales in the State of Ohio. Specifically, the tax applies in situations where sales tax was due but was not collected by the seller. In these situations, a use tax of equal amount is imposed on the customer.
The “sale-for-resale exemption”
The crux of the case turned on whether the Reds purchased the promotional items with the intent to give them away for free or with the intent to resell them.
This distinction is important due to a caveat in Ohio use tax law known as the “sale-for-resale exemption.”
ORC §5739.012(E) The sale-for-resale exemption provides that no use tax is due when an item is purchased with the intent of resale.
It was undisputed in this case that the price of the promotional items was not separately listed from the ticket prices, and it was also undisputed that price of game tickets are not increased for the games involving promotional giveaways.
Consequently, the Court had to determine whether such swag was included in the price of the ticket and thus “resold” to the fans, or if it was simply a free giveaway without payment from the attendees who received the items.
If the Court found that the swag was included in the ticket price, then no use tax would be due. If, on the other hand, the Court found these promotional items to be a free giveaway, then the Reds would be liable for the payment of use tax.
Siding with the Reds
In a 5-2 decision, the Ohio Supreme Court sided with the Reds.
The Court based their decision primarily on the hearing testimony of the Reds’ chief financial officer who testified that fans did, in fact, pay for the promotional items.
The CFO testified that while the Reds may not separately state the price of the promotional items on the tickets, the cost of such items are taken into consideration by the Reds when ticket prices are set prior to the start of the season.
He also testified that these promotional items are offered at games where attendance is expected to be low. Thus, instead of discounting ticket prices to these low attendance games, the Reds include a promotional item with the expectation that such a giveaway will increase ticket sales.
Based on this testimony, the Court reasoned that “…by including the cost of the promotional item in the ticket price, one portion of the ticket price accounts for the right to attend the less desirable game and a separate portion of the ticket price accounts for the right to receive the promotional item.” Cincinnati Reds LLC v. Testa at ¶ 22
The Court further explained:
“Because the specific evidence in the record establishes that fans who purchase tickets to Reds games at which unique promotional items will be distributed do so with the expectation that they will receive those promotional items, we conclude that consideration is given in exchange for the Reds’ agreement to supply fans with those promotional items. The transfer of promotional items to fans thus constitutes a “sale” pursuant to R.C. 5739.01(B)(1), and the promotional items are subject to the sale-for-resale exemption of R.C. 5739.01(E). We accordingly conclude that the Reds are not liable for use tax on the promotional items pursuant to R.C. 5741.02.”
Cincinnati Reds LLC v. Testa at ¶ 36
“…This One Belongs to the Reds.”
To cap off its thoroughly entertaining opinion filled with baseball jargon and Ohio baseball history, the Court borrowed the words of longtime Reds’ radio announcer Marty Brennaman concluding, “this one belongs to the Reds”.
Now let’s just hope that the Reds are as successful on the field this year as their attorneys were in the Courtroom.
The information presented in this post is not legal advice and does not form a lawyer/client relationship. Laws and circumstances can differ and change.
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