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Ohio Supreme Court to decide Cincinnati Reds bobbleheads case
SHERRY KARABIN
Legal News Reporter
Published: July 16, 2018
Many businesses, including sports teams, use promotional items to help attract customers.
But not all companies charge a separate price for the items used to induce the entire purchase.
Like many sports teams, the Cincinnati Reds often use promotional products like bobblehead dolls, player cards and other Reds-themed memorabilia to give patrons an extra push to purchase seats at no additional cost beyond the ticket price and coming to the ballpark.
The practice has led to a major court battle between the Reds and the Ohio Department of Taxation over whether the team is required to pay use tax on these items.
On June 13 Ohio Supreme Court justices heard oral arguments in The Cincinnati Reds, LLC v. Joseph W. Testa, Tax Commissioner of Ohio.
Buckingham, Doolittle & Burroughs partners Steven A. Dimengo and Richard Fry III, who are representing the Reds, said the Ohio Supreme Court decision will ultimately impact not only the Reds but other teams and businesses in the state that use promotional campaigns to induce customers to purchase a certain product or service.
“What the Reds are doing is no different than what a customer might experience if they buy an iPad and get a free case included in the price,” said Dimengo. “Clearly, the customer is purchasing both the iPad and case together. There is no justification for treating the Reds’ sale of a ticket and bobblehead any differently.”
According to a merit brief filed by the Tax Commissioner of Ohio on Dec. 1, 2017, the case arose out of a Department of Taxation use tax audit on purchases the team made between Jan. 1, 2008 and Dec. 31, 2010. Following the audit, the Reds were assessed use tax on several items that the department contended were taxable purchases, including the promotional products.
The Reds appealed many of the disputed issues to the Ohio Board of Tax Appeals (BTA) and most, with the exception of the taxability of the promotional items, were resolved with the Commissioner before the BTA hearing, which took place on Dec. 20, 2016.
“Under Revised Code Section 5739.01(E) of the Ohio Revised Code, purchases of tangible personal property or services are not subject to sales or use tax if the buyer resells the item purchased to another buyer in the same form,” said Fry.
The Reds used the resale exception/exemption when they bought promotional products from their vendors since the team asserted the items were being resold as part of its ticket sales.
The Department of Taxation determined the resale exception/exemption was not valid, arguing the Reds provided the bobbleheads to fans as a gift.
“According to the Department of Taxation, the Reds owed use tax on these promotional items because they were not resold for consideration,” said Fry.
“The cost of the promotional items was incorporated into the ticket price paid by the fans,” said Fry. “Importantly, consistent with the Reds pre-game advertisements and representations, fans must purchase a ticket and attend the game to receive the item, which are consideration for the bobbleheads, meaning they were resold.”
But on May 22, 2017, the Ohio Board of Tax Appeals ruled against the Reds, determining the free promotional products were not resold and requiring the team to pay approximately $88,000 in taxes on the items.
Fry and Dimengo filed an appeal on behalf of the Reds with the Ohio Supreme Court on June 21, 2017.
“What this comes down to is what is a sale? Under Ohio’s statute a sale is simply defined as the transfer of title in exchange for consideration without regard to whether the sale is taxable,” said Dimengo.
“There was clearly a transfer of title, so the only question is was there consideration received by the Reds in exchange for the bobbleheads?
“Of course there was in the form of the mandated ticket purchase and game attendance,” said Dimengo. “These bobbleheads were not gifts. They were provided in exchange for the fans’ acts.”
The Ohio Attorney General’s Office represented the Tax Commissioner in the case.
When asked to comment, Dan Tierney, a spokesperson for the Ohio AG’s Office, issued the following statement via email: “This case is about who should pay taxes on promotional items: The fans or the team. Our argument before the court emphasized that the law requires imposing the tax on the team, not their fans.”
It’s not the first time the issue has been litigated. The Milwaukee Brewers argued a similar case, as did the Minnesota Twins. Although both these teams lost their battles, Fry said Wisconsin had a different statute addressing these items.
“More recently the Kansas City Royals case before the Missouri Supreme Court had a different outcome with the court determining that the Royals did resell the promotional items to fans,” said Fry.
“Consistent with the Reds’ position, the Missouri Court concluded the cost of the promotional items was factored into the ticket purchase, and thus, the items were resold to fans as part of the ticket purchase,” said Fry.
The issue in Ohio is likely to remain unresolved for at least the near future as the justices decide the case, which some legal experts believe could take months.
“Professional teams present a unique circumstance since the tickets are not subject to sales tax in Ohio,” said Fry. “Instead, tickets to professional sporting events are subject to a local admissions tax, which the Reds pay to the city of Cincinnati on its ticket sales.
“The General Assembly could change this tax structure, but the current statute does not impose tax on the Reds for these bobbleheads since they are resold as part of the ticket purchase.”