The Ohio Supreme Court ruled in favor of NASCAR Holdings Inc. (NASCAR Holdings Inc. v. McClainSlip Opinion No. 2022-Ohio-4131) in a recent decision that directly impacts the methodology for raising intellectual property (IP) licensing revenue for Ohio Commercial Activities Tax (CAT) purposes.
The case addressed the correct procurement methodology for raising NASCAR revenue from four different revenue categories: broadcast revenue (licensing broadcasting rights to a national broadcast network to broadcast NASCAR-sanctioned races), media revenue (from media sponsors for onboarding). NASCAR ownership in marketing efforts, including a website), royalties (granting the right to use the NASCAR trademark), and sponsorship fees (NASCAR agreements with corporate sponsors).
License fee payments were sold to the television station for a one-time flat fee for a period of three years. The network then sold the show to third parties, such as cable and satellite TV providers, as part of its broadcast package. Payments for intellectual property used on websites and commercials were also fixed fee agreements and were not dependent on the number of people accessing the website or watching the commercials. The royalties generated from the sale of consumer products were paid based on a guaranteed minimum annual amount plus a potential additional amount based on sales. However, NASCAR had no control over where the products were sold and was not given a breakdown of sales by location. NASCAR derived all of its gross revenue from each of these revenue streams outside of the state of Ohio.
Section 5751.033 of the Bylaws establishes the rules for determining the place of gross receipts in Ohio.
Section 5751.033(F) is the applicable rule for determining the location of intellectual property revenue.
(F) Gross proceeds from the sale, barter, disposal or other granting of any right to use any trademark, trade name, patent, copyright or similar intellectual property shall be attributable to that state to the extent that the proceeds are based on the extent of use of the property in that state. If the income is not based on the amount of use of the property, but on the right to use the property and the payer has the right to use the property in this state, the income from the sale, exchange, disposal or other granting of rights of use is this to be assigned to the state insofar as the income is based on the right of use in this state.
The court dismissed the Ohio Department of Revenue’s argument that the law required a look-through approach to raising NASCAR’s licensing revenue based on the right to use the property in Ohio as measured by the percentage of the Ohio audience or population , require. NASCAR argued that its royalty income was not “based” on the right to use the property in Ohio, since the licensing agreements granted extensive usage rights throughout the United States
Importance of Case/Refund Opportunity
It is recommended that customers review the sourcing methodology for all royalty income, focusing on that generated from intellectual property licensing, to determine whether such royalty income has been properly sourced in accordance with the Ohio Supreme Court NASCAR ruling . Those companies that use a look-through approach based on licensee’s use of the intellectual property in Ohio may be eligible for reimbursement claims.