NASCAR and Ohio’s CAT… where the rubber meets the road

On November 22, 2022, the Supreme Court of Ohio, in a unanimous decision, ruled that the privately owned National Association for Stock Car Auto Racing, LLC (NASCAR)’s broadcasting revenue, online marketing, and sponsorship fees are not subject to the State’s Commercial Activity Tax (CAT). This is a significant win for NASCAR as the ruling wipes out nearly $550,000 owed to the state in unpaid taxes, interest and penalties.

In 2005, Ohio enacted the CAT, which is levied on “taxable gross receipts for the privilege of doing business in the state.” It is assessed on almost all companies with gross receipts of over $150,000. Additionally, R.C. 5751.033(F) permits the taxation of revenue generated from granting “the right to use” trademarks, copyrights, and other intellectual property “to the extent the receipts are based on the right to use the property in” Ohio. This same law permits taxation “based on the amount of” actual “use of the property” in Ohio, but the tax commissioner taxed NASCAR for its revenue from granting the right to use its intellectual property, not actual use.

In 2012, the state tax commissioner conducted an audit, investigating revenue NASCAR earned for broadcasting its races from July 1, 2005, to December 31, 2010 in Ohio. The Ohio Board of Tax Appeals (BTA) ruled that NASCAR owed taxes for granting use of broadcasting rights to television states, retailers, sponsors and more.

NASCAR argued that applying the tax to their broadcasts in Ohio is “an unconstitutional expansion of tax liability for out-of-state content providers.” NASCAR’s contracts granted the rights to use its trademarks and logos beyond Ohio, both nationally and internationally. Essentially, the contracts did not tie payments to NASCAR for the right to use its property specifically in Ohio, as media companies purchase their intellectual property for broadcasting purposes and are taxed accordingly.

The Supreme Court of Ohio agreed with the American auto racing company, explaining that because NASCAR’s broadcasts, media and sponsorship agreements are based on fixed fees that do not vary with the amount of use. Justice R. Patrick DeWine explained in the majority opinion that since those revenue streams were not “based on” “the right to use” NASCAR’s intellectual property in Ohio, the Court ruled that the CAT does not permit the tax commissioner to tax NASCAR for those revenues. Thus, NASCAR’s broadcasting revenue, licensing revenue, media revenue and sponsorship fees were wrongly subjected to the tax. The decision means a reduction in the amount of NASCAR’s revenue that may be taxed by Ohio under the CAT over a five-and-a-half-year period from $186 million to less than a half-million dollars, with a final tax assessment of $549,520.

The Court came to a split 4-3 on whether the state could tax “licensing fees” that NASCAR grants to banks, insurance companies, and manufacturers, including the maker of NASCAR-branded mugs and fuzzy dice. Justice Melody J. Stewart’s concurrence concluded that NASCAR had the burden to demonstrate that the tax commissioner’s assessment was incorrect with regard to the licensing fees that NASCAR charged. Since NASCAR provided no evidence to contradict the amount, it was found that the BTA correctly permitted the commissioner to assess the sale of licensed items.