As promised in my earlier post, here is the more in-depth analysis of the decision in the bobblehead case, Cincinnati Reds, L.L.C. v. Testa, by University of Cincinnati Law Professor Stephanie Hunter McMahon, who teaches tax.

In addition to the guest post from Professor McMahon, readers might also be interested in Dan Trevas’ excellent summary in Court News Ohio.

Guest Post by Professor McMahon

On November 21, 2018, the Supreme Court of Ohio handed down a merit decision in Cincinnati Reds, L.L.C. v. Testa, 2018-Ohio-4669.In an opinion written by Justice Fischer, with Justice French concurring and Chief Justice O’Connor, Justice O’Donnell, and Justice Kennedy concurring in judgment only, the court reversed the Board of Tax Appeals (“BTA”) decision that the Reds owed use tax on bobbleheads and other promotional items given out to attendees at certain games. Justice DeWine recused himself from this case, and Judge Mayle of the Sixth District Court of Appeals sat in his stead.

The issue was narrow:  Whether giving promotional items to attendees of select games constitutes a “retail sale” for purposes of R.C. 5739.01(E), thus making the Red’s initial purchase of these items exempt from the use tax?

Case Background

After an audit of the Cincinnati Reds baseball team for the years 2008 through 2010, the state concluded that the organization owed use tax (an equivalent to the sales tax) on the bobbleheads and other promotional materials that were given to attendees of select games. The tax generally applies to tangible personal property unless a statutory exception applies.

At the BTA hearing, the Red’s chief financial officer, Doug Healy, testified that the purpose of the promotional items was to drive tickets sales for games that would otherwise have lower turnout.  Consequently, the Reds claimed that their initial purchase of the bobbleheads fits within an exception to the use tax because their purchase was for resale.

In the BTA’s May 22, 2017 decision against the Reds, a critical fact was that not everyone who bought a ticket received a bobblehead, as they were available only to attendees and only while supplies lasted.  Therefore, according to the BTA, these items were not resold to patrons but given for free, especially as all ticket prices for particular seats remained the same throughout the season. The Reds appealed the decision of the BTA.

Oral argument on June 13, 2018, reviewed previously for this blog, focused heavily on the nature of consideration and whether the Reds received consideration for the promotional items it distributed.

Key Precedent

R.C. 5739.01(E) (Sale-for-resale Sales Tax Exemption)

Proctor & Gamble Co. v. Lindley, 17 Ohio St.3d 71 (1985)(use tax only applies to something that would be subject to the sales tax if the transaction were made in Ohio.  Therefore, the use tax borrows legal concepts from the sales tax.)

Hyatt Corp. v. Limbach, 69 Ohio St.3d 537 (1994) (The Ohio Revised Code provides that “sales” include the provision of lodging to “transient guests,” but makes no reference to long-term guests. In considering whether paid-for laundry services were resold to long-term residents of the hotel, the court concluded that the laundry services could not be resold to long-term residents because the renting of rooms in that instance did not constitute a sale.)

Merit Decision

Analysis

Despite the presumption being with the Department of Taxation, which won in the BTA, the court sided with the Reds.  After waxing eloquent on the history of baseball, the lead opinion establishes the baseline that the business of baseball is now more than the game.  Faced with the challenge of persuading fans to attend games, organizations shoot off fireworks and offer trinkets, including bobbleheads, becoming “mini theme parks.” [¶4]

Turning specifically to the promotional items and applying Proctor & Gamble, the lead opinion focuses its analysis on whether the Reds’ initial purchase of the promotional items constitutes a “retail sale” for purposes of the sales tax.  Although the Reds became a consumer, their purpose was to resell the items.  According to the court, the Reds met their burden of proof because of the “contractual expectation on the part of fans” to receive the unique items. [¶18]

The lead opinion accepted the Reds’ argument that the promise of distribution was the same as a sale.  This “issue of intent [is] to be determined in light of attendant facts and circumstances.” Based entirely on the “unrefuted testimony” of its CFO, the advertisement, expectation, and provision of items of equivalent value if the Reds ran out of promotional items was held to constitute a resale. [¶19, ¶21]

The lead opinion was not persuaded by the BTA’s argument that the same purchase price being set for all games indicates that there was no consideration for the promotional items offered for only some games.  Instead, the court concluded that “a separate portion of the ticket price accounts for the right to receive the promotional item.” [¶22] This line of argument distinguished between promotional items subject to availability and gratuitous items distributed within the game, such as a foul ball.

The court held this was consistent with Hyatt Corp.  Although the sale of baseball tickets is statutorily excluded from sales, as is lodging for long-term guests, the tax treatment of the promotional items does not depend upon the classification of the ticket sales.  Treated as separate sales, the facts in the Reds’ case differ from the laundry services in Hyatt Corp., because in the latter, the court found the laundry services was “not a separate and explicit part of the bargain.”[¶32]

Calling on the General Assembly to amend the Revised Code if it does not like the court’s result, the lead opinion refused to accept that a legislative provision defining an exemption for promotional items that does not list those types favored by the Reds is sufficient evidence of a desire to tax. [¶25, ¶34]

Dissent

Justice DeGenaro dissented, with an opinion joined by Judge Mayle.  Noting that the result would relieve the Reds of any tax on this transaction, despite the sales and use tax generally applying, the dissent takes the position there was no consideration for these promotional items.  As proof of its interpretation, the dissent supplies the evidence the lead opinion ignores—that advertising stated promotional items were a “giveaway,” for “free,” with only limited quantities.  Observing that sometimes more than 10,000 attendees did not receive promotional items, the Reds did not provide the necessary written guarantees to convert the conditional gratuitous promise and good business practice into legal consideration.  As an overhead expense, the price of these promotional items was included in all ticket sales.  Alternatively, “every ticket purchase at every game helped pay for promotional items.” [¶47]

Concluding Observations

The result of the case either absolves the Reds of sales tax even for what the court sees as a “separate and distinct” transaction, or this second transaction should be taxed.  Under this theory, ticket prices to games with promotional items would be bifurcated.  Despite the fact baseball fans likely feel themselves purchasing only the right to a seat, recipients of this “free merchandise” in the “giveaway” would be required to pay a sales tax at the gate on the portion allocated to the promotional item if they receive one.

Such a result, likely to be unpopular and potentially not administrable, is nevertheless reasonable if everyone receives the promotional items or something of equal value.  Tickets to desirable games might be worth the ticket price and tickets to less desirable games worth only the ticket price minus the value of promotional items.  However, to the extent attendees at the less desirable games do not receive promotional items, the value of these items is nothing.  Within this context, for those ticket holders who receive these items, these items are gratuitous transfers, as the dissent claims.