Ohio Rules that Cincinnati Reds Can’t Purchase Promotional Items Using Resale Exemption
When goods are provided as part of a promotional giveaway that exacts no additional cost or consideration, a sale for resale exemption certificate may not be applicable.
By Jess Johannesen, SALT manager
If you’re an Atlanta Braves fan and you were lucky enough to be one of the first 20,000 fans through the gates, you may have received a Bartolo Colon or Dansby Swanson bobblehead during the month of June! Promotional items are a common attraction at sporting events. However, have you ever paused to consider the sales and use tax ramifications of these giveaways with regard to the sale for resale exemption, whether in the context of a sporting event promotion or a general business promotion (e.g., buy two t-shirts, get a free beach bag)? An Ohio Board of Tax Appeals decision released on May 22, 2017, provides useful insight regarding the application of the sale for resale exemption when goods are provided as part of a promotional giveaway. 
In sales and use tax law, the sale of tangible personal property or services is not subject to sales tax if the buyer’s purpose is to resell that item in the same form to another purchaser, such as a wholesaler selling tangible goods to a retailer. Accordingly, such resale exemption is meant to delay the imposition of sales tax until the item is finally sold to the ultimate end-user, such as when the retailer sells the tangible good to its customer.
In the Ohio case, the Cincinnati Reds purchased promotional items from its vendors and claimed the sale for resale exemption. Accordingly, the vendors did not charge sales/use tax to the Reds. The state audited the team and assessed sales/use tax based on the purchase price of these promotional items. The Reds argued that the cost of all promotional items offered throughout the season were incorporated into the ticket prices as part of the budgetary process prior to the start of the season. Essentially, the Reds viewed the promotional items as being purchased for resale since the team viewed the attendees as purchasing the promotional item as part of the purchase of the ticket, and it charged sales tax when selling tickets to fans. 
Under Ohio’s (and other states’) rules, the term “sale” is defined as the transfer or title or possession of tangible personal property for consideration.  Thus, in order for a taxpayer to purchase items under the sale for resale exemption, it must then turn around a “sell” (i.e., receive consideration for) the item. The Board of Tax Appeals determined that the promotional items were not “resold,” but instead were given away for free, primarily to increase attendance at certain games or generally among a broader audience.
Several factors persuaded the Board that the Reds did not receive consideration for the items. First, evidence showed that the ticket price for a particular seat is the same throughout an entire season, regardless of whether the game has a promotional giveaway. Second, fans are not guaranteed a promotional item since there is typically a limited supply. Finally, in many cases, the attendees became eligible to receive a giveaway only after purchasing the game’s ticket (i.e., tickets are often sold before knowing whether or not a particular game will have a promotional item). The Board referred to prior case law which provided that, “[N]o sale for resale can exist where a ‘resale’ exacts no cost or consideration but rather involves a gift of the item.”
Ultimately, Ohio held that the promotional items were given away for free and were not resold. The Reds were not able to claim the resale exemption on such purchases. Accordingly, the Reds were now viewed as the consumers for sales and use tax purposes, and the team was assessed use tax on its purchases of the promotional items.
Businesses that purchase items and claim the resale exemption must monitor their use of those items to make sure that, in fact, those items are resold. Generally, if an item is removed from inventory and not resold, then the business must immediately self-assess use tax on the amount it paid for that item. States may have exceptions to that rule (for example, if the item is used for demonstration purposes). Aprio has experience assisting clients with these issues to make sure that you remain in compliance with sales and use tax rules. We may also be able to assist you in structuring your transactions so that you do not invalidate your sale for resale exemption. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the June 2017 SALT Newsletter. You can view the full newsletter here.
 The Cincinnati Reds, LLC v. Commissioner, Board of Tax Appeals No. 2015-1707, 5/22/2017.
 It is worth noting that the sale for resale exemption can still be valid even if the ultimate sale to the end user is not taxable. For example, a taxpayer that purchases inventory for resale may make a sale to an exempt end-user customer, such as a non-profit organization. The fact that the taxpayer did not charge sales tax on its sale to the non-profit customer does not invalidate the resale exemption it claimed when it purchased that item.
 See Ohio Rev. Code Ann. § 5739.01(B).
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.