United States

Ohio: Receipts from Forward Contracts Sitused Under Provisions Applicable to Tangible Personal Property

Aug 07, 2017
From KPMG TaxWatch

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Recently, the Ohio Board of Tax Appeals addressed whether a taxpayer’s receipts from forward contracts were subject to Commercial Activity Tax or CAT. This determination depended on what situsing rules applied to these receipts. The taxpayer at issue was an agricultural commodities trader headquartered in Florida. The taxpayer sold agricultural commodities, such as soybeans, corn, and wheat, through executing forward contracts and futures contracts. The forward contracts were agreements between the taxpayer and its customers for the customer to buy a particular amount of an agricultural commodity at some point in the future at a set price. Forward contracts are not traded on an exchange and are not regulated by the federal government. The sales price of a forward contract includes a futures price and the basis. The futures price is the price at which the commodity is currently trading and the basis is the difference between the futures price and the agreed upon contract price. After entering into a forward sale contract with a customer, the taxpayer entered into ancillary transactions to hedge its risk and to ensure that it was able to procure the commodity. Specifically, it purchased futures contracts, which are traded on an exchange, for the commodity and entered into a forward purchase contract with a supplier.

The issue before the Board related to the receipts from the taxpayer’s forward contracts with customers. The taxpayer argued that these receipts were from “financial instruments” that should be sitused or sourced to Florida where the trading occurred. The Commissioner argued that the receipts were from sales of tangible personal property that should be sitused to Ohio when the ultimate recipient of the commodity was in Ohio. The Board noted that although the taxpayer’s contracts arguably had some characteristics of financial instruments, the taxpayer took title to commodities to provide them to customers and recognized revenue when title was transferred upon shipment of such commodities to customers. As such, the Board concluded that the situsing rules for tangible personal property applied to the taxpayer’s receipts. The Board next addressed whether the Commissioner properly concluded that the taxpayer’s receipts should include the gross amounts received from commodity purchasers under the forward contracts. The taxpayer argued that the only part of the receipt that was “income” to it was the receipts from the forward contracts less the fair value of the associated futures contracts. The Board again rejected the taxpayer’s position. Although receipts from hedging transactions were specifically excluded in determining Ohio gross receipts, the gross receipts from the taxpayer’s futures contracts were not at issue in the assessment. Rather, the receipts at issue were from sales of tangible personal property that were fully included in determining Ohio gross receipts. Please contact Dave Perry at 513-763-2402 with questions on Central State Enterprises, LLC v. Testa. 

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.