Ohio Supreme Court Rules That Resale Exemption Applies to Purchase of Promotional Items

December 14, 2018

Although promotional items purchased and given away for free are typically not eligible for a resale exemption, there may be limited situations where the resale exemption is applicable.

By Jess Johannesen, SALT Manager

In our June 2017 SALT Newsletter, we detailed an Ohio Board of Tax Appeals (“BTA”) decision in which the BTA upheld a use tax assessment on the Cincinnati Reds by denying a sale for resale exemption related to promotional items such as bobbleheads.  In short, the BTA held that the resale exemption did not apply because the Reds gave away the promotional items for free, citing that (a) ticket prices for a particular seat were the same throughout the season regardless of whether the game included a promotional item, (b) fans were not guaranteed a promotional item based upon supply, and (c) fans became eligible to receive the promotional item only after purchasing the game’s ticket.  These factors led the BTA to conclude that fans did not provide consideration for the promotional items, and this ultimately disallowed the resale exemption since there was no “sale” of promotional items.

However, on Nov. 21, 2018, the Supreme Court of Ohio (the “Court”) issued an opinion and reversed the BTA ruling.[1]  In a set of specific and limiting facts detailed below, the Court concluded that the resale exemption did indeed apply in the Reds’ case.  The Reds appealed to the Court, arguing that the BTA’s decision was not supported by the evidence on record relied upon to conclude that the Reds did not resell (i.e., that consideration was not received for) the promotional items.  The Reds asserted that a separately stated price for the promotional item is unnecessary to establish that it was transferred for consideration.

The Court relied on the testimony of the Reds’ CFO regarding the treatment of promotional items.  He testified that the Reds advertised in advance that specific promotional items will be distributed at particular games.  The cost of promotional items is not separately stated from ticket prices, and ticket prices do not vary depending upon whether promotional items are offered at a particular game.  Instead, the Reds, “smooth [the] ticket prices throughout the year,” by setting the season’s overall ticket prices to cover the cost of the promotional items along with other overhead costs.  Promotional items are distributed at “less desirable” games that are not expected to be sold out.  While tickets themselves do not include any guarantee regarding the promotional items, the fans believe and expect to receive the promotional items when purchasing those particular games’ tickets.  The Reds estimate the expected amount of promotional items needed for the game, and in the event that supply runs out the Reds would, “remedy it,” and “make it right,” by providing another promotional item or complimentary tickets to those fans who did not receive the designated items.

Analyzing the issue of whether consideration is received for the promotional items and considering the above evidence, the Court explained that the BTA focused its findings on the fact that fans pay the same price to attend a game regardless of whether a promotional item is offered.  The Court cited the CFO’s testimony that costs of promotional items are included in ticket prices when those prices are set before the start of a season.  When promotional items are distributed at less desirable games for which tickets are not expected to sell out, the Court reasoned that a portion of the ticket price includes a discounted ticket price (due to the less desirable game) while a portion of the ticket price accounts for the right to receive the promotional item.

Another factor that the Court looked at in addressing the issue of consideration was that the evidence on record supported the fans’ expectation that they would receive a promotional item with the ticket purchase.  The Court noted that this was distinguished from situations in which fans may receive “unexpected, gratuitous items” such as a foul ball or a t-shirt tossed into the stands, for which there is no expectation of these items when purchasing a ticket.  Instead, the unique promotional items were explicitly advertised and part of the bargain, along with the right to attend the game, for the fans purchasing those specific games’ tickets.  The Court therefore concluded that fans furnished consideration for the Reds’ promise to hand out these unique promotional items.

By concluding that consideration is indeed furnished for the promotional items, the Court held that the transfer of promotional items to fans constitutes a “sale” and that the resale exemption applies to the Reds’ purchase of these promotional items.[2]

It is important to highlight the unique and limiting facts here to emphasize that, in general, businesses that purchase promotional items to giveaway to customers for free should self-assess and remit use tax (assuming the vendor did not already charge sales tax when the business purchased the items).  However, if your business provides promotional items in a manner similar to the facts described above, it may be worth examining the possibility of a sales tax refund, keeping in mind that other states are not bound by this Ohio Supreme Court opinion (although they may view the opinion as persuasive).

Aprio’s SALT team has experience assisting businesses with these issues to make sure that your business remains in compliance with sales and use tax rules.  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.

Contact Jess Johannesen, SALT manager, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the November/December 2018 SALT Newsletter.

[1] Cincinnati Reds, LLC v. Testa, Slip Opinion No. 2018-Ohio-4669.

[2] OH Rev. Code §5739.01(B)(1) and §5739.01(E)

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.