/? I L received STATE OF OHIO
BEFORE THE BOARD OF TAX APPEALS \ jAN 1 0 2020 1 STATE OF OHIO
Cavaliers Holdings. LLC 1 Center Court Cle\-eland. Ohio 44115 Case No: (Commercial Activity Tax)
Appellant.
\'S. Amount in Contro\ ers\': approx. $110,315.00
.feffrey A. McClain Tax Commissioner of Ohio State Office Tower, 22nd Floor 30 East Broad Street Columbus. Ohio 43215.
■Appellee.
NOTICE OF APPEAL
Pursuant to Section 5717.02 of the Ohio Revised Code (■'Il.C.'') and section 5717-1-05 of
the Ohio Administrati\’e Code (■■O..A.CT‘). Ca\’aliers Holdings. LLC ("Holdings" or ".Appellant")
hereby gi\ es notice of appeal to the Ohio Board of Tax Appeals from a Final Determination of
Ohio Commercial .Actix'itv Tax ("C.AT") issued b\' .!effre\' .A. McClain. Tax Commissioner of the State of Ohio (the "Tax Commissionef). with respect to tax periods October 1.2009 through
September 30. 2011. A true copy of said Final Determination ("Determination"), in the form of a
Journal entry dated October 31. 2019. is attached hereto as Exhibit .A and is incorporated herein by reference to the same deuree as if fulh' rewritten, Holdiims received the Tax Commissioner's
Determination on No\'ember 12. 2019. See. Exhibit B.
1 STATEMENT OF FACTS
A. General Overview
Holdings was formed under the laws of Delaware on December 14. 2004. Holdings
files its commercial acthdtv tax returns on a consolidated basis. Holdiims ser\es as the
"reporting person" for the consolidated group. See. R.C. 5751.01(R).
One member of Holdings' consolidated group is Ca\’aliers Operating Company. LLC
("Opco"). Opco was formed under the laws of Delaware on December 14. 2004. Holdings
owns 100% of Opco.
Opco owns and operates Quicken Loans Arena ("Arena”). The .Arena is located in
Cleveland. Ohio. Opco also owns various professional sports teams (e.g.. the Cle\'eland
Ca\ aliers of the National Basketball .Association, the Cleveland Monsters of the .American
Hockey League, etc...). Such teams use the Arena for their "home” games.
B. The .Arena
The Arena opened in 1994. 'fhe .Arena's seating capacit}' \'aries depending on the e\'ent taking place. For basketball games the Arena can seat 19.463 people, which is the .Arena's maximum seating capacity.
C. Events/Performanecs
When Opco's sports teams are not using the .Arena Opco rents the Arena to unrelated parties ("Entertainment Producers'') so such Entertainment Producers can provide their
"entertainment services” to the ticket buying public. In this regard, the .Arena Ruictions much like Nationwide .Arena here in Columbus. Entertainment Producers consist of solo artists (e.g.. Taylor Swift. Miley Cyrus, etc.), musical groups (e.g.. Metallica. Pearl .lam. etc.), athletic contests (NC.A.A college basketball games), ice shows (e.g.. Disney on Ice), and
On April 9, 2019 Opco changed the name of the Arena to Rocket Mortgage Fieldhouse.
9 general entertainment (e.g., Cirque dii Soleil, professional wrestling, monster truck racing.
etc.).
D. Opco’s Services to Entertainment Producers
Opco provides \'arious ancillary and necessary ser\ ices to Entertainment Producers in
connection with renting the Arena to them. While each of Opco's contracts with the various
Entertainment Producers list all the services specifically the services consist broadh' of the
followintz.
1. Ticket sellins and ticket takinu as well as ushers, watchmen, stauehands. etc. to service
the event. Included herein is collectiinz Cit\' of Clev eland admissions tax and remittiim
same to the Citv.
2. Telephone service through the Arena's switchboard.
3. Staging.'labor and materials required to fit the premises for the Entertainment
Producer's event including anv plumbing, carpentry or electrical work required.
4. Operating scoreboards and/or electronic boards.
D. Utilities, excluding special effects, lighting and spotlights specific to the Entertainment
Producer's event.
6. Restoration of the .Arena to its pre-event condition.
E. Rental Formula
Opco and Entertainment Producers execute one of two tvpes of rental contracts - - either a fixed fee rental contract or a formula based rental contract. In a fixed fee rental contract.
Opco's rental fee is set in advance and is not impacted by the Entertainment Producer's ticket sale proceeds. In a formula based rental contract. OpcoT fee is calculated based on a percentage of the total ticket sale proceeds (less certain amounts set forth in the contract such as the
Cleveland admissions tax). In some instances the formula based rental contract sets forth a
j minimum fixed rental fee., Reeardless of whether the rental contract is fixed fee or formula
based. Opco does not separately charge the Entertainment Producer for the services described
abo\'e; nor does Opco itemize its invoice to show the fees for the services and the fees for the use
of the Arena. In other words. Opco's serx ices are embedded in the cost of the rental fee that
Opco charges Entertainment Producer.
PROCEDURAL OVERVIEW
A. Timeline
On .lanuar}' 27. 2012 the Ohio Department of Taxation's audit dix ision ("Department”)
mailed its C.AT audit commencement letter to Holdinus.
On or before April 5. 2012. Holdings responded to the Department's initial request for
information.
During the xxeek of May 21. 2012 the Department conducted its field audit at Opco's
office.
On Februarx' 25. 2014. the Department mailed its preliminary audit findings to Holdings.
On June 3. 2014. the Department mailed its final audit findings to Holdings.
On July 7, 2014. the Department issued its assessment.
On September 5. 2014. Holdings filed its petition for reassessment.
On Januarx’ 20. 2016. Holdings had its hearing before the Department's tax appeals dixision.
On April 4. 2016 and June 30. 2016 Holdings filed post hearing documents xxith the
Department's tax appeals division.
On October 31. 2019. the Commissioner issued his final determination.
On Nox’ember 12. 2019. Holdings receix ed the Commissioner’s final determination.
B. The .Assessment
4 The Assessment was $114,769.00. This amount consisted of $102,126.00 of tax and
$12,643.00 of interest. The Department did not assess a penalty.
The Department assessed CAT on numerous sources of gross receipts. The largest source
was Opco's rental fees from formula based contracts. The Department implied that it was not
assessing Opco's rental fees from fixed fee contracts because the Department acknowledged that
Opco self-reported the rental fees from fixed fee contracts on its originally filed CAT returns.
See. the Department's final audit findings letter at pages 2-3.
In actuality the Department assessed Opco on the re\'enue Opco collected from the sales
of tickets to the public - - that Opco made on behalf of the Entertainment Producer - - whether
the Linderlvintz rental contract with the Entertainment Producer was fixed fee or formula based.
I'he Department then gave Opco credit for the rental fees from fixed fee contracts that Opco self- reported. 95.5% of the Assessment is attributable to these transactions. In terms of dollars
$42,377 of the Assessment was for ticket proceeds that Opco sold on behalf of the Entertainment
Producer pursuant to fixed fee rental contracts and $55,136 of the Assessment was for ticket proceeds that Opco sold on behalf of the Entertainment Producer pursuant to formula based rental contracts.
Stated differentl}-. the Department assessed Opco on the total gross receipts from all tickets that Opco sold on behalf of the Entertainment Producer twen though the formula based contracts did not entitle Opco to 100% of the ticket rex’enue. and the fixed fee rental contracts did not entitle Opco to an\- portion of the ticket revenue.
The Department asserted Opco did not rent the Arena to the Entertainment Producer.
Instead. Opco purchased an entertainment ser\’ice from the Entertainment Producer and then
Opco resold that entertainment ser\-ice when Opco sold a ticket to the public. The Department's assertion is contrar>' to the plain language of the fixed fee and formula based rental contracts.
5 C. The Final Determination
The Final Determination reduced the assessment of tax to $98,136.00. Interest was
reduced correspondingly to $12,179.00. The Tax Commissioner reduced the assessment because
the Department made a math error in calculating the assessment as to certain fixed fee rental
contracts.
OPERATIVE OVERVIEW OF THE OHIO COMMERCIAL ACTIVITY TAX
Ohio imposes its CAT "...on each person with taxable gross receipts for the privilege of
doing business [in Ohio]." Emphasis added. See. R.C. 5751.02(A). "...’Doing business' means
engaging in any activity...that is conducted for. or results in. gain, profit, or income, at any time
during a calendar }'ear." Id. "Persons on which [the CAT] is le\ ied include, but are not limited
to. persons with substantial nexus [with Ohio]." Id.
Taxable gross receipts means gross receipts sitused to Ohio pursuant to R.C. 5751.033.
See. R.C. 5751.01(G).
.4 person's first one million dollars of taxable gross receipts is subject to a minimum
C.4T that can range from SI 50 to $2,600 depending on the amount of the person's total taxable
gross receipts. See. R.C. 5751.03(B) and (C). Each dollar of taxable gross receipts in excess of
one million dollars is multiplied against the CAT rate of two and six-tenths mills (i.e.. .0026).
See. R.C. 5751.03(.4).
Gross receipts" means the total amount realized b\' a person, without deduction for the cost of goods sold or other expenses incurred, that contributes to the production of aross
income of the person. See. R.C. 5751.01(F). .4 taxpayer's method of accounting for gross receipts for a tax period shall be the same as the taxpayer's method of accounting for federal income tax purposes for the taxpa>'er's federal taxable year that includes the tax period. If a taxpayer's method of accounting for federal income tax purposes changes, its method of
6 accounting for gross receipts under this chapter shall be changed accordingly. See. R.C.
5751.01(F)(4).
"Gross receipts” excludes "[PJroperty, money, and other amounts received or acquired by an agent on behalf of another in excess of the agent's commission, fee. or other remuneration.
See. R.C. 5751.01(F)(2)(1). .4n "[.4]gent" means a person authorized by another person to act on its behalf to undertake a transaction for the other..." See. R.C. 5751.01(P).
Gross rents from real property located in Ohio is sitused to Ohio. See. R.C. 5751.033(A).
Gross rents from tangible personal property located in Ohio is sitused to Ohio. See. R.C.
5751.033(B).
Gross receipts from the sale of ser\ ices are sitused pursuant to R.C. 5751.033(1). This statute reads as follow s:
Gross receipts from the sale of all other ser\ ices. and all other gross receipts not otherwise sitused under this section, shall be sitused to this state in the proportion that the purchaser's benefit in this state with respect to what was purchased bears to the purchaser's benefit ever}'where with respect to what was purchased. The plnsical location where the purchaser ultimately uses or recei\'es the benefit of what was purchased shall be paramount in determining the proportion of the benefit in this state to the benefit everywhere. If a taxpayer's records do not allow the taxpayer to determine that location, the taxpa}er may use an alternative method to situs gross receipts under this division if the alternatic'e method is reasonable, is consistently and uniformh' applied, and is supported by the taxpa}er's records as the records exist when the service is provided or within a reasonable period of time thereafter. Emphasis added.
LEGAL ISSUES
1. Did Opco ha\'e "gross receipts" when Opco sold a ticket to the public on behalf of the
Entertainment Producer pursuant to either a fixed fee rental contract or a formula based
rental contract?
7 2. Did Opco. as a matter of fact, purchase an entertainment service from the Entertainment
Producers?
3. When Opco sold a ticket to an Entertainment Producer's event did Opco make that sale
as an "agent" of the Entertainment Producer?
4. Did the Tax Commissioner's delay in issuing his Final Determination violate Opco's
rights to procedural due process?
3. Did the Department's failure to suitably inform Opco as to the transactions that the
Department assessed violate the Taxpayer Bill of Rights set forth at R.C. 5703.051?
APPELLANT’S INTRODUCTORY STATEMENT
The Final Determination is contrar\- to law because the Final Determination requires
Opco to pa}- C.4T on 100% of the ticket sale proceeds from events held at the Arena pursuant to
fixed fee rental contracts and formula based rental contracts. The Final Determination did not describe accurately the contractual relationship between Opco. Entertainment Producers, and the ticket-buying public in at least two fundamental ways.
First, the Tax Commissioner belie\ed Opco pro\'ided "entertainment ser\ ices“ to ticket biners. The Tax Commissioner's understanding is not correct. Entertainment Producers provided entertainment services to ticket buyers. Opco did not pro\-ide entertainment ser\'ices to an\one. Opco simply rented the Arena to Entertainment Producers so the Entertainment
Producers had a place to prox’ide their entertainment services to ticket bip'ers. In connection with renting the Arena to Entertainment Producers. Opco provided ^•arious ancillar}' services to the Entertainment Producers - - one of which included selling tickets to the public on the
Entertainment Producer's behalf
Second, the Tax Commissioner believed that (i) Opco "realized" 100% of the proceeds from ticket sales; (ii) Opco had a "cost of goods sold" or an "expense'' when Opco paid Entertainment Producers their share of the ticket proceeds; and (iii) Opco was attempting to
deduct such expense for CAT purposes. The Tax Commissioner was wrong on all three counts.
Opco did not realize 100% of the ticket sale proceeds for book or federal income tax
purposes. Moreover, pursuant to the plain language of the contracts. Opco did not "purchase"
entertainment services from the Entertainment Producers. Opco did not incur a cost of goods
sold or an expense when Opco ga\'e the Entertainment Producers their contractual share of the
ticket proceeds.
Opco sold tickets to the events on behalf of Entertainment Producers. Opco held the
ticket proceeds for the Entertainment Producer until the event was completed and the parties
determined the final amounts due each part}’ under the formula based contract or fixed fee
contract (as the case ma}' be). At that time, the Entertainment Producer paid the rental fee to
Opco. Entertainment Producers paid such rental fees out of the ticket sales proceeds.
The Tax Commissioner mistakenly equated Opco's temporary possession of the ticket
sale proceeds and the corresponding recordkeeping associated with the holding of such proceeds
as a "realization" of gross income. The Tax Commissioner's misunderstanding is contrarv to the
plain and unambiguous terms of the fixed fee rental contracts and formula-based contracts (as the
case may be). In this regard Opco rhetoricall}' asks: how could Entertainment Producers pa}'
Opco a rental fee based on ticket sale proceeds if Opco is entitled to 100% of the ticket sale proceeds (as the Tax Commissioner believes)? Pursuant to the contract. Opco was ne\'er entitled to 100% of the ticket proceeds. The Final Determination is contrary to the terms and conditions of the formula based rental contracts and the fixed fee rental contracts. Consequent!}’, the Final
Determination is contrar^’ to Ohio law.
There are only two ways to interpret formula based rental contracts relative to Opco's and the Entertainment Producers’ respective C.AT liabilities. First. Entertainment Producers are
9 entitled to 100% of the ticket sale proceeds and Entertainment Producers pay Opco a rental fee
(i.e.. the Entertainment Producers have a cost of goods sold deduction, or expense). Under this
interpretation, Entertainment Producers pay CAT on 100% of the ticket sale proceeds and Opco
pays CAT on its rental fee. Second. Entertainment Producers are entitled to their percentage of
the ticket sale proceeds and Opco is entitled to its percentage of the ticket sale proceeds. Under
this interpretation. Entertainment Producers and Opco pay CAT in the aggregate on 100% of the
ticket sale proceeds. Either interpretation renders the Final Determination erroneous.
unreasonable and unlawful.
The Tax Commissioner's approach is not a plausible third interpretation because the Tax
Commissioner's approach is contrary to the formula based rental contract's terms and conditions.
Opco ne\'er pro\’ided entertainment services to ticket buyers; nor did Opco purchase entertainment ser\ ices from Entertainment Producers to resell to ticket buvers.
fhere is only one way to interpret fixed fee rental contracts relati\'e to Opco's and the
Entertainment Producers' respective CAT liabilities. Entertainment Producers are entitled to
0/ 100 /o of the ticket sale proceeds and Entertainment Producers pay Opco a rental fee (i.e.. the
Entertainment Producers ha\’e a cost of goods sold deduction, or expense). Entertainment
Producers pa}' C.AT on 100% of the ticket sale proceeds and Opco pa\ s C.AT on its rental fee.
The Final Determination is contrary to the facts and the plain language of the formula based rental contracts and fixed fee rental contracts.
The Final Determination is contrar\’ to law.
Opco accurately reported on its C.AT returns the taxable gross receipts from renting the
.Arena to Entertainment Producers. .Accordinuh'. the Board must \ acate the Tax Commissioner's
Final Determination in its entirety and find the Final Determination is erroneous, unreasonable. and unlawful as a matter of fact and law.
10 SPECIFICATIONS OF ERROR
The Commissioner's Determination is erroneous, unreasonable, and unlawful for each of
the follow ing reasons.
Specification One
The Determination is contraiw to law because the Tax Commissioner made erroneous
conclusions of fact. The Tax Commissioner misread the plain and unambiguous language set
forth in the formula based rental contracts and fixed fee rental contracts.
Opco did not buy "entertainment ser\ ices" from the Entertainment Producers and resell
same to ticket biw’ers. Entertainment Producers provided entertainment services to ticket buyers.
Opco did not provide entertainment ser\’ices to anyone. Opco simpl)- rented the Arena to
Entertainment Producers so the Entertainment Producers had a place to prcwide their entertainment seix ices to ticket buvers.
Opco did not "realize" gross income equal to 100% of the ticket sale proceeds. Opco realized gross income just to the extent of its rental fees. The contracts are clear that Opco is not entitled to the total ticket sale proceeds, except to the e.xtent such proceeds are attributable to
Opco's rental fee. The Determination did not calculate Opco's gross receipts in accordance with
R.C. 5751.01(F)(1).
Specification Two
The Determination is contrary to law because Opco did not recognize or realize "gross income" under generally accepted accounting principles ("G.AAP") or federal income tax accounting until after the e\-ent concluded. The Determination is contrary to R.C. 5751.01(F)(1) and R.C. 5751.01(F)(4).
G.AAP and federal income tax accounting are aligned and both support Opco's argument that Opco did not realize gross income when Opco sold a ticket on behalf of an Entertainment
11 Producer. When Opco sold a ticket Opco debited Cash (an asset account) and credited Advance
Box Office Sales (a liability account). This accounting entry did not cause Opco to realize gross
income, gross receipts, or gross re\ enue. When Opco and the Entertainment Producer settled up
at the conclusion of the event Opco made two accounting entries. First. Opco debited .4d\'ance
Box Office Sales (a liability account) and credited Box Office Sales (a revenue account).
Second. Opco debited Box Office Sales (a revenue account) and credited a liabilit}- account
styled Payments to Promoter. .4t the conclusion of these two accounting entries Opco realized
gross income - - and Opco paid C.4T on this amount when Moldings filed the consolidated
group's CAT returns. That said the Determination imposed CAT on the Entertainment
Producer's share of the gross receipts from ticket re\’enue (for performing its Entertainment
Ser\ice) that Opco ne\'er realized for G.4AP and federal income tax purposes. The
Determination is contrar>' to R.C. 5751.01(E) and R.C. 5751.01(F)(4).
Specification Three
The Determination is contrar>' to law because the Determination held that Opco did not ser\’e as the Entertainment Producer's "agent" when Opco sold a ticket on the Entertainment
Producer's behalf Because Opco was the Entertainment Producer's agent for this limited purpose Ohio law did not require Opco to pa\' CAT on the portion of the ticket sale proceeds that
Opco was contractual!)' obligated to remit to the Entertainment Producer. The Determination is contrary to R.C. 5751.01(F)(2)(1).
The statutory exclusion for gross receipts received by an agent is set forth at R.C.
5751.01(F)(2)(1). This statute states that "gross receipts excludes...property, mone)'. and other amounts received or acquired by an agent on behalf of another in excess of the agent's commission, fee. or other remuneration." R.C. 5751.01(P) defines an agent as; "...a person
12 authorized by another person to act on its behalf to undertake a transaction for the other..." See
also. O.A.C. 5703-29-13.
The Ta.x Commissioner erroneously concluded the agency e.xclusion did not apph’
because the rental contracts did not affirmatix'ely name Opco as the Entertainment Producer's
agent. This is a gross misreading of the administrati\'e rule and the contract. O.A.C. 5703-29-
13(B)(1) states in relevant part;
The supreme court of Ohio has held that an agency relationship "e.xists only when one party exercises the right of control over the actions of another, and those actions are directed toward the attainment of an objecti\e which the former seeks." An agenc}' relationship is defined as a ■’consensual fiduciary relationship between two persons where the agent has the power to bind the principal by his actions, and the principal has the right to control the actions of the agent." In a principal-agent relationship, the agent has the legal authorit}’ to act on behalf of the principal, and generally the principal is bound by and is liable for those actions. Citations omitted.
The Tax Commissioner's conclusion that Opco is not the Entertainment Producer's agent demonstrates a gross misunderstanding of the rental contracts. O.A.C. 5703-29-13(B)(2) states:
'‘The contmissioner will look beyond the wording of the contract to the actual facts and circumstances of the situation to determine whether an agency relationship actually exists. ”
Emphasis added. The contract terms as well as the actions of the Entertainment Producer and
Opco relative to each other demonstrate quite clearly that as to the sale of tickets Opco was the
Entertainment Producer's agent.
When Opco sold a ticket on the Entertainment Producer's behalf the ticket established a contractual relationship between the Entertainment Producer and the ticket bu\er. The ticket bu\er bought an entertainment ser\ ice to be proc ided by the Entertainment Producer at a future time. The Entertainment Producer agreed to provide an entertainment service to the ticket buc er.
Opco's contract with the Entertainment Producer was a consensual fiduciary relationship in
13 which the Entertainment Producer authorized Opco to seii tickets to the generai pubiic on the
Entertainment Producer's behaif with the understandinu that the saie of a ticket created a
contractuai reiationship between the Entertainment Producer and the ticket buyer. Opco's act of
seiiing a ticket obiigated the Entertainment Producer to perform its entertainment ser\'ice to the
ticket buver.
Ciearix' the Entertainment Producer had the right to controi Opco. The rentai contracts
are repiete with terms and conditions e\-idencing the Entertainment Producer's controi. Opco
was to seii tickets to the pubiic at the Entertainment Producer's direction. The Entertainment
Producer set the number of seats ax’aiiabie for the show. The Entertainment Producer set the
iocation of the seats. The Entertainment Producer set the ticket prices. The Entertainment
Producer appro\’ed the ticket manifest. The Entertainment Producer required fuii access to
Opco's ticket saies records and seating manifests. The Entertainment Producer did not aiiow
Opco to seii tickets to other e\'ents at the .4rena on the da>' before, or the da\' of tiie
Entertainment Producer's e\'ents. .Aii the Entertainment Producer tasked Opco with was simpi_\ the perfunctory function of operating the ticket window, i.e.. the ph\ sical act of accepting the ticket buyer's casfecredit in exchange for the Entertainment Producer's ticket.
Specification Four
The passage of time since the Department held Moldings' hearing is significant. This passage of time breached Holdings' rights to procedural due process. See. Morgan r. Ohio
Liquor Conlrol Conunission. 2009-Ohio-3232. 10''’ dist. Ohio court of appeals, (.lime 30. 2009)
(Administrati\'e agency \’iolated Morgan's due process rights because agency did not hold
Morgan's hearing until approximately thirtj'-nine months had passed since agenc>- issued
\ iolation notice. Administrati\’e auencN' has a dtitv to hear matters before it without unreasonable delay and with due regard for the rights and interests of the litigants before it.). The Department
14 waited approximately sixteen months to hold Holdings’ hearing. Approximately forty-six
months have now passed since the hearing. No taxpayer should have to wait almost four }'ears to
exercise their appeal rights. This unreasonable passage of time significantly hampers Holding's
ability to fairly litigate its appeal relati\ e to presenting fact witnesses at the Board.
Specification Five
The Assessment violated the Taxpayer Bill of Rights. Holdings is not liable for an)'
interest assessed as to the ticket sales from fixed fee e\’eiit rental contracts. The Assessment
violated the Ohio Taxpayer Bill of Rights because the Audit Division's preliminary proposal and
final proposal did not disclose that the Department intended to assess ticket sales from fixed fee
e\ ent rental contracts. Before issuing an assessment, the Department is required to pro\'ide an
explanation of the basis for the assessment. See. R.C. 5703.051(C)(1). The Department failed to
do so. Holdings disco\'ered this portion of the .Assessment onh' by conducting a detailed review
of the tax agent's workpapers. Accordingl)'. e\en if the adjustment is proper Holdings is not
liable for an)’ interest associated with the adjustment and the Department must reduce the
Assessment accordingly. See. R.C. 5703.051(1).
DEMAND FOR RELIEF
Appellant, having been aggriev'ed by the Tax Commissioner’s Determination, hereb)' appeals pursuant to R.C. 5717.02 and requests the Board of Tax Appeals to vacate the Tax
Commissioner's Determination in its entiret\'. and find that the Determination is erroneous. unreasonable, and unlawful as a matter of fact and law.
REQUEST FOR HE.4RING
In accordance with R.C. 5717.02 and O..A.C. 5717-1-16. Appellant requests the Board of
Tax Appeals or its attorney examiners schedule this matter for a de novo e^■identiary hearing in
Columbus. Ohio in connection with the aforementioned specifications of error.
15 NOTICES
Appellant further requests that a copy of each and every notice, communication and determination in connection with this matter be sent to;
David A. Froling Jeffrey Allen Miller Vorys, Sater. Seymour and Pease LLP 52 East Gay Street Post Office Box 1008 Columbus, Ohio 43216-1008
Respectfully submitted.
VORYS. S.ATER. SEYMOUR AND PEASE LLP 52 East Gay Street Post Office Box 1008 Columbus, Ohio 43216-1008 (614) 464-3022 (telephone) (614) 719-4959 (facsimile) Y\ By David A, Froling (00648®) Jeffrey Allen Miller (0072702) Attorneys for Appellant, Cavaliers Holdings, LLC
16 CERTIFICATE OF SERVICE
The undersigned hereby certifies that a copy of the foregoing Notice of Appeal was filed with Jeffrey A. McClain, Tax Commissioner of Ohio. 30 East Broad Street. 22"^' Floor.
Columbus, Ohio, via hand delivery, this 'C of January, 2020.
/- • ■-'1 / V David A. Froling
17 Department of Taxation FINAL Oflice of the Tax Commissioner 30 E. Broad St, 22^ Floor * Columbus, OH 43215 DETERMINATION
Date:
Cavaliers Holdings, LLC ATTN: Tax / Accounting Department EXHIBIT 1 Center Court Cleveland, OH 44115 i k Re: Commercial Activity Tax Assessment No. 17201417609441 Commercial Activity Tax - October 1, 2009 through September 30, 2011
This is the final determination of the Tax Commissioner with regard to a petition for reassessment filed pursuant to R.C. 5751.09 concerning the following commercial activity tax (CAT) assessment:
Tax Interest Penalty Total $102,126.00 $12,643.00 $0.00 $114,769.00
I. Background
Cavaliers Holdings, LLC (Cavs Holdings) is the reporting person pursuant to R.C. 575L01(R) for a CAT consolidated elected taxpayer group. Cavs Holdings is the single member in several limited liability companies (LLC’s) that operate sports franchises in Northeast Ohio. The first sports franchise was acquired in 2005 which was the Cleveland Cavaliers (Cavs) of the National Basketball Association (NBA). Along with the ownership of the Cavs, Cavs Holdings acquired the Gund Arena located in Cleveland, OH (now known as Quicken Loans Arena or Q Arena) and the Cavs’ retail store operations located within the Q Arena. Cavaliers Operating Company, LLC (Cavs Operating Company), a wholly owned subsidiary of Cavs Holdings, manages the operations of the Cavs NBA franchise.
Cavs Holdings does not have any locations outside Ohio. Cavs Holdings is based out of Quicken Loans Arena in Cleveland, Ohio. The Cleveland Cavaliers of the NBA, the Lake Erie Monsters hockey team, and the Cleveland Gladiators football team all play their home games at Quicken Loans Arena.
Cavs Operating Company periodically enters into event agreements with third parties in providing entertainment events in the Q Arena when the sports teams are not using the Q Arena. The types of events hosted by Q Arena include musical acts, ice shows, circuses and professional wrestling. The Q Arena typically enters into two different types of event agreements with a promoter, a fixed-fee basis or a fee based on a formula. The usual fomiula-based fee includes a minimum fixed-fee plus a percentage of receipts from the sale of tickets to the event, less refunds, a per-ticket facility fee and applicable taxes.
Cavs Operating Company enters into event agreements with the producer of an event, typically providing that producer with a short-term lease to use the Q Arena along with providing certain ancillary services which includes ticket selling and ticket taking as well as ushers, watchmen, stagehands, etc. to service the event; telephone service through the Q Arena’s switchboard; staging, such as labor and materials required to fit the premises for the event, including plumbing, carpentry or electrical work required; scoreboard and/or other electronic boards; and utilities, excluding special effects, lighting and spotlights specific to the event.
The petitioner’s authorized representative states that, for the fixed-fee contracts, Cavs Holdings only reported the rental fee portion of the fixed fees as taxable gross receipts on their CAT returns. As for the sales under its formula-based contracts, Cavs Holdings only reported the amounts they retained per the agreement and did not report on its CAT returns the amounts forwarded to the producer of the events.
The Department issued this assessment to adjust the petitioner’s taxable gross receipts. For fixed-fee events, the assessment adjusted taxable gross receipts so that the entire ticket sales and not only rental fees are recorded as taxable gross receipts. For formula-based fee events, the taxable gross receipts were adjusted so that one hundred percent of ticket sales are reported as taxable gross receipts. The petitioner timely filed a petition for reassessment. The Department of Taxation held an in-person hearing on this matter with the petitioner’s representative and this matter is now decided based on the totality of evidence currently available to the Tax Commissioner.
II. Petitioner’s Contentions
The petitioner contends that Cavs Operating Company, LLC does not realize 100% of the proceeds from ticket sales from fixed-fee events and formula-based fee events and argues that the Department of Taxation should not count 100% of ticket sales as taxable gross receipts. For fixed-fee events, the petitioner argues that only Cavs Operating Company’s rental fee should be considered taxable gross receipts.
As an additional argument, the petitioner contends that it does not owe CAT on many of its sales, arguing that it has an agency relationship which would allow it to exclude gross receipts from many sales from CAT.
The petitioner contends that certain gross receipts should not have been assessed and argues that it already included these receipts in quarterly CAT returns filed with the Department.
III. Authority
A. A Gross Receipts Tax
The CAT is a tax imposed on the privilege of doing business in Ohio and is measured by gross receipts. “Gross receipts” is defined in R.C. 5751.01(F) as “the total amount realized by a person, without deduction for the cost of goods sold or other expenses incurred, that contributes to the production of gross income of the person, including the fair market value of any property and any services received, and any debt transferred or forgiven as consideration”.
Page 2 of 7 B. Exclusion for Amounts Received as an Agent - R.C. 5751.01 312m While exclusions are generally not allowed when computing gross receipts for CAT purposes, Chapter 5751 specifies some receipts that taxpayers may exclude pursuant to R.C. 5751.01(F)(2). Division (F)(2)(l) of that section provides that “[pjroperty, money, and other amounts received or acquired by an agent on behalf of another in excess of the agent’s commission, fee, or other remuneration' are excluded from the definition of “gross receipts.”
C. Relevant Authority on Agency
The starting point for an agency analysis for purposes of CAT is R.C. 5751.01(P), which defines an “agenf’ as a person authorized by another person to act on its behalf to undertake a transaction for the other. Underpinning this statutory definition, the common law principal of actual authority is the standard under which agency has been established between entities such that they may be subject to the CAT’s agency exception.' Actual authority is “an expression of intent by the principal that the agent act on behalf of the principal, along with the understanding of the agent.^ The primacy of a putative agent’s authority to act for another arises by virtue of R.C. 5751.01(P)’s definition of “agent,” which uses the term “authorized” to modify “person.”^ Stated differently, where a company is not endowed with actual authority to bind another entity, then no agency relationship is fonned, and no exception may be claimed.
An agency relationship also exists where a principal actually exerts its control over its agent.'* More specifically, an agency relationship “exists only when one party exercises the right of control over the actions of another, and those actions are directed toward the attainment of an objective which the former seeks.^ That is to say, simply having the option or an agreement to exercise an agency relationship or failing to act in a principal-agent capacity despite having the option to do so does not give rise to an agency relationship under Ohio law. An agent cannot make contracts on the principal’s behalf without actual authority to do so.^ Actual authority is “an expression of intent by the principal that the agent act on behalf of the principal, along with the understanding of the agent.”'' In a principal- agent relationship, the agent has the legal authority to act on behalf of the principal, and generally the principal is bound by and is liable for those actions.®
D. Narrow Construction of Exclusions
> Cincinnati GolfMgt, Inc. v. Testa, 132 Ohio St.3d 299,2012-Ohio-2846, 971 N.E.2d 929. ^ Id., citing 1 Restatement of Law 3d, Agency, Section 3.01. ^ Willoughby Hills Development and Distribution, Inc. v. Testa, 155 Ohio St.3d276, 2018 WL 5833000, 2018 -Ohio- 4488 (Nov. 7,2018). Ohio Adm.Code. 5703-29-13(B)(1) citing Hanson v. Kynast, 24 Ohio St,3d 171, 173, (1986). ^ Id. * Willoughby Hills Development andDist., Inc. v. Testa, 155 Ohio St.3d 216, 2018 WL 5833000. ’ Id., citing 1 Restatement of the Law 3d, Agency, Section 3.01. * N&G Construction, Inc. v. Lindley, 56 Ohio St.2d 415, 418 (1978), citing Gidf Oil Corp. v. Kosydar, 44 Ohio St.2d 208 (1975) (paragraph turn of the syllabus) and Canton v. Imperial Bowling Lanes, Inc., 16 Ohio St.2d 47 (1968) (paragraph four of the syllabus). Page 3 of7 Ct Dll 3 I Taxpayers claiming exemption or exclusion from taxation must affirmatively establish their right thereto.^ Ohio law in this regard is well-established; exemptions from taxation are strictly construed against the claim of exemption in favor of the taxing authorities. 10' Thus, in determining whether the taxpayer is entitled to the exclusions which it seeks, the facts must be determined under a strict , narrow reading of the relevant definitions. In addition, taxpayers must provide the Tax Commissioner with concrete evidence supporting its request for exclusions and refunds, and mere speculation is insufficient."
This notion of narrowly construing exclusions is especially well-established with respect to agency. In particular, the party asserting the existence of an agency relationship bears the burden of proof in that regard.*^ In determining whether an agency relationship exists, the rules of statutory construction applicable to exemptions from taxation must be followed. Ohio law in this regard is well-established; exemptions from taxation are strictly construed against the claim of exemption and in favor of the taxing authorities." Thus, in determining whether an agency relationship exists, the facts must be determined under a strict, narrow reading of the definition. Absent proof of an agency relationship, the entire gross receipt must be reported by the person receiving the gross receipt for purposes of the commercial activity tax.
IV. Analysis
A. The Amounts Realized by the Petitioner are Gross Receipts
In formula-based fee agreements, Cavs Holdings provides all ticket selling and ticket taking services for the event and pays all costs incurred in connection with these sales. Cavs Holdings is responsible for collecting all money from the sale of tickets and maintaining regular books and records for the engagement. All money collected is to be deposited promptly in a bank account established by and in the name of Cavs Holdings as Lessor. As part of the agreement, Cavs Holdings agrees to transfer a portion of these monies to Lessee, with the understanding that Cavs Holdings will retain enough funds to cover any sums due to it in the agreement. Cavs Holdings is also responsible for distributing any refunds and paying all taxes due.
Cavs Holdings reports gross receipts from formula-based fee agreements as the amount that they retain from the ticket sales after they have distributed the promoter’s share pursuant to the contractual agreement. All ticket sales are booked as box office sales with a credit to the general ledger, with either a debit to a receivable or cash account. When payments are forwarded to the event promoter a contra revenue account is debited. When reporting the taxable gross receipts for CAT for formula-based fees for this period, Cavs Holding believes that the gross receipt is the difference between the total amount of box office ticket sales minus the contractual percentage of net sales later distributed to the promoter of the event.
5 Dayton Sash & Door Co. v. Glander, 36 Ohio St.2d 120, 304, 304 N.E.2d 388 (1973). See Natl. Tube Co. v. Glander, 157 Ohio St. 407, 409 (1952); Beckwith & Assoc, v. Kosydar, 49 Ohio St.2d 277, 279 (1977), and Canton Malleable Iron Co. v. Porterfield 30 Ohio St.2d 163, 166 (1972). Also see Memorial park Golf Club, Inc. V. Lawrence, 2000 Ohio Tax LEXIS 471 (BTA No. 99-K-633) “ See, Greenscapes Home and Garden Products, Inc. v. Testa, BTA No. 2026-350 (July 19, 2017), citing Lakota Local School Dist. Bd. ofEdn. v. Butler Cty. Bd. of Revision, 108 Ohio St.3d 310, 2006-0hio-1059 (2006), ^15. Gardner Plumbing, Inc. v. Cottrill, 44 Ohio St.2d 111, 115 (1975), citing Union Mutual Life Ins. Co. v. McMillen, 24 Ohio St. 67 (1873). Also see Memorial Park Golf Club, Inc., supra. Supra. Footnote 9. Page 4 of 7 fO' 1 /1 As previously identified, gross receipts are defined in R.C. 5751.01(F) as the “total amount realize a person, without deduction for the cost of goods sold or other expenses incurred, that contributes to the production of gross income of the person”. This definition broadly encompasses all receipts in money or remuneration from activities entered into by taxpayers. When Cavs Holdings sells a ticket to an event, either a fixed-fee event or a formula-based fee event, the total amount of cash received for the ticket is booked into their accounting records and deposited into a bank account in their name. This amount deposited into Cavs Holdings’ bank account constitutes “total amount realized” pursuant to R.C. 5751.01(F) and is properly characterized as taxable gross receipts. It’s worth reiterating that the CAT is a tax measured by gross receipts, without deduction for cost of goods sold or for certain other costs, such as expenses incurred in the production of such receipts, including payments made to event producers for bringing an event into Quicken Loans Arena.
B. The Claimant & Its Purchasers were Engaged in a Business Relationship, not an Agency Relationship
The petitioner’s authorized representative also contends that the taxable gross receipts at issue should be excluded from the CAT, arguing that Cavs Operating Company serves as the event producers’ agent for the events held at Quicken Loans Arena.
With its June 30, 2016 letter, the representative submitted a copy of the standard “event agreemenf’ used by Cavs Operating Company. Paragraph 20.6 of this standard agreement provides:
Licensee and the Company are independent contractors and this Agreement is not intended to and shall not be construed to create a partnership between them or to constitute either of them an agent of the other, nor shall the Company be a contractor for hire in any respect of any services furnished hereunder.
The petitioner submitted a copy of an agreement between Ringling Bros.-Bamum & Bailey and Cavs Operating Company as “Exhibit A” in one of its submissions. Article 33 of this agreement provides:
“INDEPENDENT PARTIES: The parties hereto are acting as independent contractors and independent employers. This Agreement is not intended to create, nor shall it be construed as creating, a joint venture or partnership.”
As seen in paragraph 20.6 of the standard agreement for events, and the Ringling Brothers’ agreement described above, Cavs Operating Company is expressly providing in the terms of the agreement that the parties are independent contractors and not agents of one another. The petitioner’s representative is disregarding this express language in the contract in an attempt to obtain a reduction in CAT for the petitioner. The petitioner states the parties are independent contractors in order to limit its liability from operations, which ignores the independent contractor language.
Further, the standard event contract spells out each party’s obligations to the other. Based on the contracts provided and the facts and circumstances present in these transactions, at no point in the perfonnance of the contract or during the event is either party in control of the other. Cavs Operating Company does not have authority to act on behalf of the event promoter. Rather, Cavs Operating Company handles the advertising for an event, sells tickets for the event, and issues any refunds due from the event. The event agreement provides a formula for determining how much Cavs Operating Company owes the promoter for producing the event. This amount that Cavs Operating Company pays
Page 5 of 7 :T 3 121 if to the event promoter is a cost incurred by Cavs Operating Company in order to generate event revenue.
As explained above, Ohio Adm.Code 5703-29-13(B)(l) requires that the principal assert control over the agent for an ageney relationship to exist. In the case at hand, the purported principal event promoters cannot tell purported agent Cavs Operating Company how to perform its tasks under the event agreement. Under the standard agreement, Cavs Operating Company is required to “provide all personnel, services, and facilities required for the sale and accounting of tickets”. However, the event promoter does not control how Cavs Operating Company handles its tasks. Cavs Operating Company has much leeway in how it can conduct its contractual duties.
The research citations above show that in an agency relationship, an agent has the ability to make contracts on the principal’s behalf, and generally the principal is bound by the agent’s actions. In the instant case, based upon the contracts provided, the event promoter, i.e. the purported principal, is not responsible for any breach by Cavs Operating Company, i.e. purported agent. The event promoter is not responsible to pay any costs incurred by Cavs Operating Company that Cavs Operating Company does not pay. This fact pattern indicates the existence of a contractual relationship, not a prineipal- agent relationship.
Many provisions of the contracts allow purported agent Cavs Operating Company to operate without the approval and actual authority of the purported principals. Pursuant to Willoughby Hills, supra, an agent must have actual authority from its principal to make contracts for the principal. Cavs Operating Company, pursuant to the event agreement, operates autonomously under its own authority without much input from the event promoters.
Section 10.4 of the standard event agreement provides:
Any tickets consigned to Licensee [event promoter] for sale must be supported by a certified check or letter of credit three (3) days before commencement of Event. All monies received from sale of tickets or any unsold tickets must be turned over to the Company [Cavs Operating Company] no later than five (5) days before Event.
This language shows that Cavs Operating Company is not an agent. If Cavs Operating Company was an agent, the money at issue would be the event promoter’s money, and Cavs Operating Company would be required to turn over all money to the purported principal, the event promoter. However, according to the terms of the contract, all money is required to be turned over to Cavs Operating Company. Therefore, Cavs Operating Company is not an agent.
As explained above, the event promoters do not control how Cavs Operating Company runs its operations, and Cavs Operating Company does not bind the event promoters to its purchases or give rise to liability for Cavs Operating Company’s actions. As such, because no agency relationship exists, no agency exclusion can be granted.
C. Adjustment for Gross Receipts Already Reported
As noted above, the petitioner contends that for certain events, gross ticket sales shown in the petitioner’s “Exhibit B”, as well as certain other sales, were assessed as taxable gross receipts when Page 6 of 7 such gross ticket sales have already been reported by the petitioner on its CAT return! •iieof Jt.msO.'’ f contention is well taken in part. The taxable gross receipts listed in a submission denoted by the petitioner as Exhibit B shall be removed from the assessment, and the Department shall reduce taxable gross receipts to reflect this, which will reduce the CAT assessed by $3,990.00. Preassessment interest shall also be reduced proportionately to reflect this reduction in CAT.
VI. CONCLUSIOxN
As explained above, the petitioner’s contentions regarding the taxability of its receipts and agency exclusion are denied. The contention regarding certain taxable gross receipts being included twice in the assessment is well taken in part.
Accordingly, the assessment shall be adjusted as follows:
Tax Interest Penalty Total $98,136.00 $12,179.00 $0.00 $110,315.00
Current records indicate that no payments have been applied on these assessments, leaving the adjusted balance due. However, due to payment processing and posting time lags, payments may have been made that are not reflected in this final determination. Any unpaid balance bears post-assessment interest as provided by law, which is in addition to the above total. Payments shall be made payable to “Ohio Treasurer”. Any payment made within sixty days of the date of this final determination should be forwarded to: Department of Taxation, Compliance Division, P.O. Box 1090, Columbus, Ohio 43216-1090.
THIS IS THE TAX COMMISSIONER'S FINAL DETERMINATION WITH REGARD TO THIS MATTER. UPON EXPIRATION OF THE SIXTY-DAY APPEAL PERIOD PRESCRIBED BY R.C. 5717.02, THIS MATTER WILL BE CONCLUDED AND THE FILE APPROPRIATELY CLOSED.
I CERTIFY TH.4T TOIS IS A TRUE ^\ND ACCURATE COPY OF THE ENTRY RECORDED UN' THETAX COMMISSIONER'S JOURNAL /s/ Jeffrey A. McClain
Jeffrey A. McComn Jeffrey A. McClain Tax Co.NUMissiOxNER Tax Commissioner
Page 7 of 7 Department of Ohio Taxation
Dear Taxpayer:
Enclosed is the Tax Commissioner's final determination regarding your case. The title is captioned either “Journal Entry" or “Final Determination.”
You have the right to appeal this decision to the Board of Tax Appeals. Unlike appeals to the Tax Commissioner, proceedings before the Board of Tax Appeals are very formal, and the Board’s procedures must be carefully follovyed. An appeal to the Board may be done in the following v^ay:
• You have only sixty (60) days from the date you received this final determination to appeal.
If you choose to appeal, you must send the Board of Tax Appeals your original notice of appeal and two copies, unless filed using an electronic method. A copy of the enclosed final determination should also be attached to each notice of appeal. Your notice of appeal must clearly state why you are appealing and include a request for the relief sought. The law requires you to describe carefully each error which you believe the Tax Commissioner made.
■ You must also send the Tax Commissioner a copy of your notice of appeal and a copy of the enclosed final determination. The Tax Commissioner's copies must be mailed or delivered in person. There is no electronic option.
• The Board of Tax Appeals and the Tax Commissioner must each receive the notice of appeal and the copy of the final determination within sixty (60) days of your receipt of this final determination. In order to file your appeal on time, you must send the notices by certified mail, express mail, fax, authorized delivery service or electronic transmission to the board and make sure that the recorded date is within sixty (60) days of your receipt of the enclosed final determination. Ordinary mail delivery is not considered received until each agency actually receives your notice of appeal. If the notice of appeal is filed by fax or electronic transmission, the date and time the notice is received by the board shall be the date and time reflected on a timestamp provided by the board's electronic system. Alternatively, you may personally deliver the notices before the sixty (60) days are up to be sure both agencies receive it within the sixty (60) day time limit. Appeals which are received late do not meet the requirements of the law and cannot be considered.
Ohio Revised Code Section 5717.02 is the section of the Code stating the requirements for a proper appeal to the Board of Tax Appeals. You must follow all of these mandatory requirements in order to appeal. If you don’t, you may lose your right to appeal.
The mailing address of the Board of Tax Appeals is: 30 East Broad Street 24th Floor State Office Tower Columbus, OH 43215-3414 The Tax Commissioner’s mailing address is: 30 East Broad Street 22nd Floor State Office Tower Columbus, OH 43215-3414 uor O.L.U! 11-^ - uor o lclUM^y^!y fAtibUllb
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