Ohio Supreme Court Rejects Tax Break for Expense Reimbursements

By: Tina M. Chunn, SALT Senior Manager

At a glance  

• The main takeaway: The Ohio Supreme Court ruled that a food services company could not deduct reimbursements it received from customers for food and other items it purchased under its management fee contracts. 
• Assess the impact: Businesses must pay careful attention to the statutory requirements and interpretive authority when drafting contract language and structuring transactions that are intended to achieve a particular tax result.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help review and document your transactions in accordance with each state’s tax requirements to support your tax filing positions.

Schedule a free consultation today!

Several states impose a gross receipts tax on the total revenue from all business transactions, often in lieu of a net income tax. Ohio’s Commercial Activity Tax (CAT) is an example of a gross receipts-based tax that is applied to all receipts exceeding a certain threshold. While gross receipts taxes typically offer limited exclusions and deductions, a significant issue arises regarding how taxpayers should handle expenses that are passed-through to and reimbursed by their customers. In a recent decision, the Ohio Supreme Court denied a taxpayer’s attempt to deduct expense reimbursements for food, labor, and materials used to provide food services to customers.[1]

Aramark’s Food Service Contracts

The taxpayer, Aramark, provides food services to its customers across a variety of industries, including business dining, sports and entertainment, healthcare, and corrections. These services are provided under two types of contracts: profit and loss contract and management fee contracts. Under management fee contracts, Aramark earns a management fee for its services and is separately reimbursed for the food, labor, and materials purchased from third-party vendors. In this arrangement, Aramark’s customers own the inventory and thus earn the profit or loss on the actual food sales. Conversely, under the profit and loss contracts, Aramark owns the inventory and keeps all receipts from the register, thus earning any associated profit or loss.

Understanding the Dispute and Ohio Supreme Court Decision

For the years in question, Aramark paid the CAT on all receipts under both types of contracts. However, it later filed a refund on the amounts received as reimbursements from its customers for food, labor, and material that Aramark purchased from third-party vendors under management fee contracts. Aramark argued that they were acting as an agent for their customers and purchased the items on their behalf. The state denied this claim, and the dispute ultimately reached the Ohio Supreme Court.

According to CAT rules, there is an exclusion from gross receipts for “property, money, or other amounts received or acquired by an agent on behalf of another in excess of the agent’s commission, fee, or other remuneration.”[2] An “agent” is defined as “a person authorized by another person to act on its behalf to undertake a transaction for the other” and includes a person “retaining only a commission from a transaction with the other proceeds from the transaction being remitted to another person.” [3]

In concluding that Aramark was not entitled to the exclusion, the Court relied on the statutory language defining “agent” and providing for the exclusion.

Aramark Not Acting as a Payment Conduit

First, the Court noted that even though Aramark may purchase food and then require reimbursement from its customers, Aramark still “retains” the reimbursement amount and does not specifically pass that amount on to its vendors. In other words, Aramark is not acting as a “payment conduit” where its customer contracts contain provisions for passing the reimbursements on to the vendors. Instead, the contracts only stipulate that its customers pay Aramark for the costs it incurs. Therefore, the Court concluded that Aramark did not meet the definition of an “agent.”

Reimbursements Not on Behalf of Another

Second, the Court explained that even if Aramark could show that it meets the definition of an “agent,” it would still need to demonstrate that it meets the requirement of the exclusion; specifically, that the money (i.e., reimbursements) it received from its customers was on “behalf of another.” In this case, the Court concluded that Aramark was not receiving the reimbursements on behalf of its vendors; rather, it received the reimbursement on behalf of itself. The Court stated that, “Even if Aramark was acting as an agent when it purchased goods and services for its management-fee clients, it was acting on behalf of itself when it received reimbursements from its clients for those purchases.”

The bottom line

This case illustrates that requiring a customer to reimburse its vendor for expenses that the vendor may incur on its behalf does not automatically make those reimbursements eligible for an exclusion from a state’s gross receipts tax base. Careful attention must be given to the statutory requirements and interpretive authority, and then the contracts must be structured to meet those requirements.

Aprio’s SALT team has experience reviewing these types of complex issues, and we can help document and structure your transactions in accordance with each state’s tax requirements in order to provide support for the desired tax outcome. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter. 

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[1] Aramark Corp. v. Harris, 2025-Ohio-2114 (Ohio Supreme Court, June 18, 2025).

[2] R.C. 5751.01(F)(2)(l).

[3] R.C. 5751.01(N)(2).