On February 6, 2020, the Ohio Board of Tax Appeals held that a captive automobile financing company was not subject to commercial activity tax (CAT) on receipts that it earned in connection with three types of revenue streams:
- receipts from sales of retired leased vehicles,
- receipts from securitization transactions, and
- interest subvention payments.
Background: The CAT is a gross receipts tax imposed at a rate of 0.26% of a taxpayer’s total gross receipts. Tax is imposed on total gross receipts; deductions for costs of goods sold or other expenses incurred in producing the receipt are generally not allowed. While the term gross receipts is broadly defined, the statute imposing CAT contains a long list of receipts excluded from the definition of “gross receipts.” Among the exclusions are (i) receipts from the sale of a capital asset (as defined in IRC § 1221) or an asset used in the taxpayer’s trade or business (as defined in IRC § 1231), (ii) receipts constituting interest income, and (iii) receipts from the proceeds of a loan. Ohio Rev. Code Ann. § 5751.01(F)(2)(a), (c), and (e).
These three exclusions were the focus of Hyundai Motor Finance Co v. McLain. The Board held that the taxpayer’s receipts each qualified for exclusion, and thus, did not constitute “gross receipts” for the purposes of the CAT.
1) Sales of Retired Leased Vehicles
The taxpayer was in the business of leasing vehicles to consumers. At the termination of the leases, it sold the vehicles to third-parties, or at the lessee’s option, to the lessee. The Board agreed with the taxpayer that the leases were assets used in the taxpayer’s trade or business within the meaning of IRC § 1231 – notwithstanding the fact that the vehicles were available for purchase to the lessees. Therefore, receipts from disposition of the vehicles were excluded from the CAT under Ohio Rev. Code Ann. § 5751.01(F)(2)(c). In concluding that the assets were IRC § 1231 property, the Board relied on federal case law involving similar vehicle lessors and the fact that the vehicles were subject to depreciation under IRC § 167 (as IRC § 1231(a) requires).
2) Securitization Transactions
The second revenue stream at issue was the taxpayer’s receipts from the securitization of vehicle retail installment sale contracts (RISCs). The taxpayer transferred the RISCs to bankruptcy-remote entities, which issued notes backed by the RISCs as collateral. These securitization transactions are “secured financing” (not sales) for federal income tax purposes under IRC 1001 and IRS Technical Advice Memorandum (“TAM”) 9839001. The Board held that although “not binding,” the federal treatment of the transactions was “persuasive,” and therefore, the financing receipts were excluded from the CAT as proceeds of loans under Ohio Rev. Code Ann. § 5751.01(F)(2)(e).
3) Subvention Payments
Finally, the taxpayer received payments from manufacturers and dealerships for its role in special financing programs that provide below-market interest rates for RISCs and customer vehicle leases. Although the taxpayer identified the payments as “subsidy amounts” in its financial statements, the subvention payments are treated as interest for GAAP and federal income tax purposes. While remarking that the accounting and federal treatment of these payments was “not necessarily controlling,” the Board found them to be “persuasive” and held that the payments were for the use of money and properly excluded from CAT as interest under Ohio Rev. Code Ann. § 5751.01(F)(2)(a).