Can a Qualified Distribution Center Certificate Cure CAT Uncertainty? | Zaino Hall & Farrin

By Debora D. McGraw, JD, LLM, CPA

Over the last few years, the Ohio Supreme Court (“Court”) has decided several cases related to the sale of tangible personal property to an Ohio distribution center.   Any additional commercial activity tax (“CAT”) on those sellers may result in an increased cost of goods to buyers.  Such buyers with significant goods coming to an Ohio distribution center may consider whether a qualified distribution center (“QDC”) certificate may help mitigate increases in the cost of goods.

Background

As described in this previous buzz, the Court determined in VVF Intervest, LLC v. Harris, 2025-Ohio-5680, that receipts from the sale of goods that traveled to an Ohio distribution center were sitused to Ohio because that is where the buyer received the goods.  In particular, the Court found that the next location to which the goods were shipped related to a second sale between the buyer and the buyer’s customer.   In a second case, Jones Apparel Group/Nine West Holdings v. Harris, 2026-Ohio-74, the goods were initially shipped to the buyer’s Ohio distribution center but were later shipped by the buyer to its various retail stores throughout the country.  The Tax Commissioner denied Jones Apparel’s refund claim based on situsing the sales to the location of its retail stores, based primarily on the Tax Commissioner’s position that taxpayers had to know  the ultimate location where the property will be delivered to the customer at the time of the sale to situs such sale for commercial activity tax (CAT) purposes.  the Court first rejected this position, holding that there is no contemporaneous knowledge requirement in the statute.  Thus, if the second location was part of the first sale (e.g., the goods traveled from the Ohio distribution center to an out of state buyer location), the seller could get information on that second location at a later time; the seller didn’t have to have contemporaneous knowledge of the goods destination at the time of sale to situs its sale to that second location. However, the Court found that Jones Apparel failed to establish specifically where the goods were ultimately delivered and affirmed the Tax Commissioner’s denial of the refund claim on that basis.  The Court found that Jones Apparel’s estimate of the percentage of the goods that were delivered outside Ohio was not sufficient.  The Court’s opinion provides little guidance on the type of evidence that will be required by taxpayers to substantiate the ultimate location.

The opinions in VVF and Jones Apparel may cause an increase in CAT for sellers of goods destined to an Ohio distribution center.  Such sellers may consider requesting a voluntary disclosure agreement (“VDA”) to mitigate any tax due in earlier years.   A VDA limits the audit period and would not include penalties.   Going forward, many sellers may be forced to increase the price of their goods to buyers that request that the goods be shipped to an Ohio distribution center.

QDC Process in a Nutshell

One option available to buyers is to obtain a QDC certificate.  A QDC certificate is an annual certificate that certifies the percentage of receipts destined to Ohio for all sellers for goods shipped to an Ohio distribution center.  It provides certainty on how much of the receipts are Ohio-sitused and subject to the CAT.

An operator of a distribution center can apply for a QDC certificate, but the distribution center must meet two requirements.  The cost of goods from suppliers to the distribution center must be $500 million or more.  Also, greater than fifty percent (50%) of the cost of the qualified property shipped to the location must be destined outside of Ohio.   These two requirements will likely limit some distribution centers.

An application should be filed within forty-five days of a distribution center operating.  Cost estimates typically have to be utilized for at least the first year.  In later years, the application must be filed by September 1^st and actual data is utilized.  The Tax Commissioner should certify the Ohio percentage before the end of the year for the next calendar year.  A $100,000 fee is due each year and an independent certified public accountant must certify the Ohio percentage in the years that utilize actual data.

Conclusion

Because of the requirement of $500 million of supplier cost and the $100,000 annual fee, the QDC process won’t be feasible for all distribution centers.  However, buyers with an Ohio distribution center with significant costs may find the QDC process helpful in mitigating increased costs for their goods.

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If you would like to further discuss the contents of this post, please reach out to Debora McGraw or any of our ZHF professionals.