Does free really mean free? That’s a question that the Ohio Supreme Court will attempt to settle next month when it hears a dispute between the Cincinnati Reds and Ohio’s tax department. The case focuses on the taxation of promotion items, including the fan favorite bobblehead dolls.
Here are the facts. The Cincinnati Reds are a major league baseball team, and they rely on revenue from, among other things, ticket sales to games. Like other sports teams, the Reds use promotional items, like bobbleheads, jerseys, t-shirts, wall posters, and baseball cards, to woo fans to their games. This can be especially true during a season, like one that begins 7-24, where play alone may not be enough to drive in the crowds (sorry, Reds fans). None of that is in dispute.
Here’s where things get tricky. The Reds don’t charge their fans separately for these promotional items. They are essentially “free” with the purchase of a ticket to the game. No, those quotation marks aren’t a mistake: Whether the promotional items are free or “free” (wink, wink) is the issue at stake in the litigation.
The Tax Commissioner of Ohio agrees that the promotional items have value but maintains that they are free to fans. That means, the Commissioner claims, that they are subject to use tax which the Reds must pay since the Reds use the items to boost ticket sales. The Reds argue that the promotional items are not free to fans but are instead included in the cost of the ticket.
Why does the distinction matter? Sales tax. Under Ohio state law (and in most states), there is a resale exemption available to parties who resale an item to a consumer. Let’s use a candy bar as an example. When you buy a candy bar from, say, Target, you (as the consumer) pay the sales tax. You don’t pay the state the sales tax directly. Rather, you pay the sales tax at the store and the store remits the tax to the proper authorities. Target doesn’t pay additional sales tax for the candy bar after your purchase, and it doesn’t pay when it initially receives the candy bar from the manufacturer or distributor. That’s because Target is not intended to be the end user of that candy bar which makes it exempt from sales tax. Got it?
The Reds argue that they, like Target, are just passing an item along to the end user. Their promotional items, they argue, are intended to “induce ticket sales by supplementing the value for tickets to games which may not be as highly desired.” That means, they claim, that the ticket price includes the cost of the promotional item, making the club a reseller of the item and not a taxable user. And, the Reds claim, under state law, no separate price needs to be stated for an item to qualify for the resale exemption.
The Commissioner agrees that the Reds do not separately state the cost of the items from the ticket price, and they note that ticket prices do not fluctuate based on the nature of the promotional item (and let’s face it, a tea towel doesn’t have the same value as a bobblehead). That, the Commissioner argues, supports the idea that the items are free to fans – but taxable to the Reds. Citing R.C. 5741.01, the Commissioner claims that an item is subject to tax when a person “gives or otherwise distributes it, without charge, to recipients in this state.” Further, the Commissioner argues, Ohio courts have long supported the idea that promotional items are taxable.
But let’s assume for a moment that the Reds are right and the team really did qualify for a resale exemption. The idea of the resale exemption is to exempt the reseller from paying sales tax because the tax will be collected from the end user. It’s basically legislative maneuvering to avoid a double tax on the same item.
That’s not what happens here, according to the Commissioner. Here, the promotional items would never be subject to sales tax if the Reds claimed the exemption because Reds’ tickets are not taxed (their admission fees are not taxable sales under Ohio law). If the Reds don’t pay sales tax on the promotional items when they receive them, the items would not be taxed to the end user, the fans, as part of subsequent ticket sales.
Of course, lots of teams offer promotional items to attract fans to games, and it shouldn’t come as a surprise to learn that this issue has been litigated before. The Milwaukee Brewers argued a similar case in front of the Supreme Court of Wisconsin and lost (Wisconsin Dept. of Rev. v. Milwaukee Brewers, 111 Wis.2d 571, 577 (1983)). Ditto for the Minnesota Twins (Minnesota Twins Partnership v. Commissioner of Revenue, 587 N.W.2d 287 (Minn. 1998))
But what about the Kansas City Royals? The Missouri Supreme Court ruled a little differently in that case (Kansas City Royals v. Director of Revenue, 32 S.W.3d 560, 562 (Mo. 2000) (en banc)). The Court found that “[a]lthough the promotional items are ostensibly given away, the cost of purchasing those items is factored into the price charged for each ticket of admission to a Royals game.” The Commissioner, however, argues that those facts are distinguishable. Unlike Reds’ tickets, Royals’ tickets are taxable. To tax the promotional items to the Royals and then again to the fans is double taxation and the resale exemption is intended to avoid that very problem. Under Ohio law, the Commissioner claims, there is no such issue with double taxation because tickets are not taxed in the first place.
Finally, even if it made sense to have a resale exemption on promotional items, the Commissioner argues that such an exemption doesn’t currently exist. The court isn’t the place to change that, the Commissioner argues, writing in a court filing, “If the Reds wish such promotional items to be exempt, they should ask the General Assembly for an exemption.”
So far, the Reds have not been able to sway legal opinion to their side. Last year, the Ohio Board of Tax Appeals ruled against the team claiming they have “not provided this board with competent and probative evidence in support of the position that it does not owe the assessed tax.” The team appealed to the Ohio Supreme Court. Now, oral arguments in the case will begin on June 13, 2018. The case is 2017-0854: The Cincinnati Reds, LLC v. Joseph W. Testa, Tax Commissioner of Ohio. Emails to attorneys for the State and the Reds were not immediately returned.