State Tax Challenges Trend to Accelerate in Post-Chevron Era

Four recent appeals to the Ohio Supreme Court over the state’s gross receipts tax are part of a trend of taxpayer challenges to states’ attempts to over-source receipts and capture them in their gross receipts tax base. That trend is likely to grow with the demise of Chevron deference to government agencies.

This is especially true in Ohio, which has aggressively pursued a “heads I win, tails you lose” approach to the sourcing of receipts that have even the most tenuous connection to the state. Without additional clarity by states with gross receipts taxes on which receipts are taxable gross receipts, states’ tax departments should be prepared for additional taxpayer challenges to clarify such issues.

However, states that hold themselves out as business-friendly may already have taken steps to avoid future taxpayer challenges to their gross receipts taxes.

Some states have begun to exclude more gross receipts or revenue from the gross receipts taxes or to eliminate the gross receipts tax entirely. Ohio HB 33, which was signed into law a year ago, gradually increases the commercial activity tax gross receipts exclusion amount from $1 million to $6 million.

More recently, Ohio introduced SB 216, which—if passed—would phase out the Ohio commercial activity tax by 2030. Similarly, Texas SB 3—which took effect Jan. 1—increased the franchise tax exemption to $2.47 million, which means that taxable entities with annualized total revenue less than or equal to this amount will owe no franchise tax.

To the extent that taxpayer challenges of gross receipts taxes persist, the recent overruling of the Chevron doctrine in Loper Bright Enterprises v. Raimondo may affect future challenges by taxpayers to states’ gross receipts taxes. The doctrine, created 40 years ago under Chevron v. NRDC, mandated that courts defer to reasonable agency interpretations of unclear laws and statutes.

While Chevron’s reversal doesn’t directly affect state tax matters (unless the state had expressly adopted Chevron or its holding), it will no doubt accelerate the trend toward eliminating deference to state tax-agency interpretations, instead requiring that courts apply the standard rules of statutory construction.

In keeping with that trend, we anticipate additional challenges by taxpayers to states’ gross receipts taxes where taxpayers view a tax department’s interpretation to be overbroad and not supported by the statute.

The four pending cases before the Ohio Supreme Court will keep it busy. While the court is considering the merits of each case, taxpayers should keep in mind legislative changes to states’ gross receipts taxes. They also must note how the demise of the Chevron doctrine affects the way state courts may view state tax departments’ interpretations of gross receipts tax statutes when considering whether to challenge a state’s gross receipts tax.

The cases are Total Renal Care, Inc. v. Harris, Ohio, 2019-848, 3/15/24; VVF Intervest LLC v. Harris, Ohio, 2019-1233, 10/23/23; Jones Apparel Group/Nine West Holdings v. McClain, Ohio, 2020-53 and 2020-54, 11/28/23; and Aramark Corp. v. Harris, Ohio, 2019-2975., 7/11/24

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Clark Calhoun is partner at Alston & Bird focused on state tax controversy and litigation matters in Georgia, California, and other states.

Josh Labat is senior associate in the same practice, helping clients navigate complex tax controversy matters.

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