Update: On November 21, 2018, the Supreme Court of Ohio handed down a merit decision in this case.  Read the analysis here.

I asked Professor Stephanie Hunter McMahon, who teaches tax at the University of Cincinnati College of Law, if she would give her impressions of the oral argument in the case of Cincinnati Reds, L.L.C. v. Testa because this case is down her alley. The issue is whether sports teams have to pay tax on bobbleheads and other giveaway items. Despite the horrendous year they are having, I am a devoted Cincinnati Reds fan, and as such, have gotten bobbleheads at games.

As background for Professor McMahon’s observations, it would be helpful to read Dan Trevas’ excellent preview of the case for Court News Ohio here.

Arguing Counsel

Steven A. Dimengo, Buckingham, Doolittle & Burroughs, Akron, for Appellant Cincinnati Reds

Kody R. Teaford, Assistant Attorney General, Columbus, for Appellee, Tax Commissioner of Ohio

Here are Professor McMahon’s Observations On The Oral Argument

Cincinnati Reds, LLC v. Testa,  2017-0854, is about more than the value of bobbleheads (some of us would say that is little, but collectors may disagree).  Oral arguments on June 13, 2018, proved the case should help define consideration for a purchase as opposed to a give-away.

After an audit of the baseball team for the years 2008 through 2010, the state argued that the use tax (an equivalent to the sales tax) applies to bobbleheads and other promotional materials that were given to attendees of a select number of games.  Generally the tax applies to tangible personal property unless a statutory exception applies.  The Reds claim as an exception that they resell the bobbleheads, although their attorney Steven Dimengo fluctuated between whether the ticket price or simple attendance is what the patrons pay for the bobbleheads.

The presumption in the case is for the victorious Department of Taxation, which won in the state’s Board of Tax Appeals (BTA), although not all of the justices seemed to accept the BTA’s application of their conception of consideration.  In the BTA’s May 22, 2017, decision, a critical fact was that not everyone who bought a ticket received a bobblehead, as they were available only while supplies lasted.  Therefore, according to the BTA, these items were not resold to the patrons but given for free, especially as all ticket prices for particular seats remained the same throughout the season.

For this oral argument, Justice DeWine recused himself and Judge Christine Mayle of Ohio’s Sixth District Court of Appeals sat in his stead.  As mentioned above, the big issue the bench had for Red’s attorney Dimengo was consideration.  After Dimengo started with the Reds being obligated to provide these items, Chief Justice O’Connor questioned whether these items were distributed at only some events, were all tickets the same price, and whether resale items needed separate consideration.  Justice O’Donnell favored the Reds with a question about whether the team used the bobbleheads to supplement less desirable tickets.  However, the Reds were reluctant to take the favor because they would admit to owing sales tax on the portion of the ticket price properly allocated to the merchandise, something on rebuttal Dimengo denies is necessary.  Instead, Dimengo stressed that a resale does not need separate consideration, but he did not appear to convince the Court.

Judge Mayle pointedly focused on the meaning of nonmonetary consideration as a legal benefit or detriment, and she questioned whether attending the game is a legal detriment.  She concluded that because the benefit is attending the game (despite the Reds’ current record), both parties to the ticket sale are getting a benefit.  Dimengo argued there was mutual consideration in benefits, but Judge Mayle questioned whether that is illusory because there is no legal detriment.  Failing to convince her, Dimengo turned back to the bobblehead being promised in advance to induce purchase.  Questioning repeatedly returned to whether having to show up is a legal detriment, and there was no greater sense of resolution when Kody Teaford for the state was questioned.

Continuing the focus on consideration, Justice Fischer questioned the state about whether bobbleheads are the single driver of ticket sales, and the Justice appeared to accept the CFO’s statement under oath as sufficient evidence of the fact.  The state argued that the BTA properly weighed all of the evidence, but Justice Fischer concluded that the price of the bobblehead was overwhelmingly proven to be included in the ticket price, which the BTA did not find.  I doubt he was convinced when Justice DeGenaro helped out the state by asking whether the Reds consider all of their costs when setting all prices for the season – so the Reds could not argue that any price is for a particular game at a particular time.  If Justice Fischer persuades a majority, the Reds better plan for the sales tax.

A fundamental issue is whether attendance is enough consideration to avoid use tax because for some consumers, Justice Fischer mentions season ticket holders, a purchased ticket is not required.  As he puts it, season ticket holders get season-long swag.  If that is the case then any attendance, akin to “no purchase is required,” may be sufficient for the Reds to escape tax.  Conversely, if people show up, get the bobblehead, and leave, all the price should properly be subject to sales tax and not an exempt ticket because the ticket price is not for attendance at all.  Consistent with this, Justice DeGenaro appeared concerned, as had the BTA, that not everyone receives the promised item even if the Reds plan for everyone to receive it.  I was glad to learn that the Reds accommodate patrons with other items if the Reds run out so that attendance generally means access to a toy, but I was surprised based on the commercials I have heard.

Aside from the issue of consideration, the Court tentatively touched on taxpaying status.  When Justice DeGenaro questioned Dimengo about who pays the tax, Dimengo dismissed the notion that the bobbleheads must be part of a taxable transaction because, according to Dimengo, under the statute it does not have to be.  However, he first admits that the Tax Authority could impute some value to those items, making them subject to sales tax.  In rebuttal, Dimengo back tracks to conclude that all they need is consideration; if Ohio does not like the result, the legislature can change the statute to make it taxable.

For the state, Teaford argues that all tangible personal items are presumed to be taxable and anything not purchased for the purpose of resale is taxable.  In response to Chief Justice O’Connor’s questioning, Teaford admits there is no other way to get these items, but similar items can be purchased in club shops, and they are taxable.  The issue is that in Ohio tickets are not taxable and so the Reds’ position could push the bobbleheads into a non-taxable transaction.  Judge Mayle questioned the state as to where in the statute exclusions must be a taxable sale.  Teaford argued it is self-evident from the nature of the resale exemption, which does not immunize property from taxation, but only defers it to tax the final consumer.

Some interesting points from briefs did not get much attention in oral argument. Judge Mayle dismissed discussion of other jurisdictions, so mention of the states that have previously dealt with the issue was confined to briefs.  Three states have dealt with this issue already:  Missouri sided with the Kansas City Royals, but in Missouri the tickets were taxable, 32 S.W.3d 560 (Mo. 2000); Wisconsin sided with the state against the Milwaukee Brewers, arguably based on a narrow statutory exception that does not exist in Ohio, 111 Wis.2d 383 (1983); Minnesota also sided with the state against the Minnesota Twins on the grounds they were a “free token of goodwill,” 587 N.W.2d 287 (Minn. 1998).

An under-discussed theme that created a lost educational opportunity, perhaps more appropriate for my classroom, was opposing briefs’ discussion of double taxation.  This case arose because tickets are not subject to sales tax in Ohio.  For items that are subject to sales tax, this issue is mooted because the end consumer bears the tax, but in this case no one pays sales tax.  On the other hand, the Reds are subject to a local admissions tax.  Under general tax principles, that the state has chosen (depending on who wins) to subject the Reds to the admissions tax and the use tax does not mean that the Reds are double taxed.  That the government applies more than one tax to the same business is a political choice that one can agree with or not, but it is not a double tax, which implies the same or equivalent tax is imposed on the same income more than once.  The Reds argue that any time a business is subject to multiple taxes, it is a double tax; ignoring that, in this instance, they are different taxing authorities and the taxes have different measures.  To an extent the legislature has agreed with the Reds and exempted tickets from the sales tax.  However, that exemption is not a blanket exemption for all things Reds.