The Ohio Supreme Court ruled that NASCAR’s broadcast, media, licensing and sponsorship revenues are not subject to Ohio’s rules. Tax on commercial activities (“CAT”). Ohio’s CAT law locates gross intellectual property receipts for Ohio only “to the extent” that they are “based on the right to use the property» in Ohio. RC 5751.033(F) (emphasis added). The Court interpreted this provision to require that receipts bear a causal connection to the right to use the intellectual property specifically in Ohio. Since none of the contract examples “payments are tied to the right to use the property in Ohio” and, in fact, did not mention Ohio at all, such a relationship was lacking. Instead, contracts “granted broad rights to use NASCAR’s intellectual property over broad geographic areas”, generally the United States and its territories. See Nascar Holdings, Inc. v. McClainNotice of Slip No. 2022-Ohio-4131.
The Court applied clear statutory language to distinguish receipts from the right to use the intellectual property in Ohio from payments of fixed fees to use the intellectual property in broader areas including Ohio. Because the revenues at issue – broadcast, media, sponsorship and licensing rights – were not related to the actual use of the intellectual property in Ohio, they lacked the necessary nexus to the ‘Ohio to justify an imposition under the situation law. In other words, the right to use the intellectual property in the United States for a fixed fee, regardless of location, did not mean that the proceeds were based on the right to use the intellectual property in Ohio . Due to the lack of contractual support, the Tax Commissioner would not have prevailed even if he had taxed revenues rationally related to Ohio’s actual use of the intellectual property.
The case involved multiple sources of revenue related to NASCAR intellectual property derived from: (1) granting networks the right to broadcast NASCAR races (broadcast revenue); (2) media sponsors integrating NASCAR into marketing campaigns (Media Revenue); (3) royalties for NASCAR-branded products and services (licensing fees); and (4) corporate sponsor fees (sponsor fees). The Ohio Board of Tax Appeals previously determined that NASCAR’s revenue from the use of its intellectual property was properly attributed to Ohio based on either Ohio’s audience ratio using Nielsen ratings or U.S. Census data, as explained in more detail in our previous article. The Ohio Supreme Court disagreed, however, because NASCAR’s revenue was not based on any rights to use the property specifically in Ohio.
The NASCAR decision significantly hampers Ohio’s ability to impose taxes on income derived from the granting of broad intellectual property rights and provides taxpayers with a planning technique to avoid CAT on their intellectual property-related income.
