The Cincinnati Reds may not have had a winning record in Major League Baseball this year, but they were big winners in court. The Ohio Supreme Court ruled 5-2 that the Cincinnati Reds aren’t required to pay taxes on promotional items that they give to fans who attend their games.
You may recall that the Reds challenged the Tax Commissioner of Ohio earlier this year on the question of whether promotional items that come with tickets are subject to use tax.
Like many sports teams (including my Phillies), the Reds use promotional items like bobbleheads, wall posters, and baseball cards, to woo fans to their games. The Reds don’t charge their fans separately for these promotional items: they come along with the ticket purchase. The Commissioner slapped the Reds with a tax bill on the sale of these items, claiming that they should be subject to use tax.
Under Ohio state law (and in most states), however, there is an exemption available to parties who resale an item to a consumer. The Reds argued that they were reselling the promotional items by including them in the ticket price – you can’t get a bobblehead or other item without buying a ticket. If the club is considered a reseller of the item, it is not a taxable user and doesn’t owe tax. The Commissioner disagreed and the matter went to court.
(You can read more about the legal arguments in the case here.)
The case, Cincinnati Reds, L.L.C. v. Testa, Slip Opinion No. 2018-Ohio-4669, was decided in favor of the Reds. Justice Patrick F. Fischer delivered the opinion for the majority.
(You can read the court’s opinion, which downloads as a pdf, here.)
At the hearing, Doug Healy, the Reds’ chief financial officer, testified that the purpose of distributing the bobbleheads and other promotional items is to encourage fans to buy tickets for games that would otherwise not be well attended. Healy explained that the increased ticket revenue more than offsets the cost of promotional items distributed – “[o]therwise we wouldn’t do it.”
The cost of the promotional items is absorbed into the price of the tickets. That is, the price of the tickets isn’t separately stated from the price of the promotional item. You can’t opt out of the promotional item and score a cheaper ticket, and the price of a ticket when the promotional item isn’t so great – a cheap pennant, maybe – doesn’t cost less than the price of an arguably cooler promotional item like a bobblehead.
And if the Reds run out of a promotional item? Healy testified that if that happened, the Reds “will remedy it” by giving another promotional item or complimentary tickets.
The Ohio Board of Tax Appeals (BTA) agreed with the Commissioner that the fans did not pay consideration for the promotional items, which would mean that the Reds were not entitled to an exemption as a reseller. The crux of their argument was that fans pay the same price to attend a game regardless of whether a promotional item is offered and the cost of the promotional item is not included in the ticket price. The BTA agreed and ruled against the Reds.
However, the Supreme Court disagreed with those findings. Healy specifically testified that the costs of promotional items are included in ticket prices and that promotional items are distributed at less popular games. In other words, rather than discount ticket prices for games that aren’t expected to be well attended, the Reds keep the cost of the tickets the same and add a promotional item to lure in fans. The court found, then, that the promotional items were things of value for which fans paid money; the cost is simply included in the ticket price. They are, the court wrote, “an explicit part of the bargain.”
So what does that mean? The transfer of the promotional items from the club to the fans constitutes a “sale” under Ohio state law. That makes the promotional items subject to the sale-for-resale exemption. The Reds are not, therefore, liable for use tax on the promotional items.
And with that, Justice Fischer wrote, “[I]n the familiar words of Marty Brennaman, longtime Reds radio announcer and recipient of the National Baseball Hall of Fame’s Ford C. Frick Award, we determine that ‘this one belongs to the Reds.’”