Ohio Supreme Court Decision: Retailer Not Entitled to Reduction in Taxable Value of Goods Based on Markdown Allowances From Suppliers

Retailer Not Entitled to Reduction in Taxable Value of Goods Based on Markdown Allowances From Suppliers

Supreme Court Reverses Ruling of Tax Appeals Board

2009-0437. Rich’s Dept. Stores, Inc. v. Levin, Slip Opinion No. 2010-Ohio-957.
Board of Tax Appeals, No. 2005-T-1609. Decision reversed, and Tax Commissioner’s assessment reinstated.
Moyer, C.J., and O'Connor, Lanzinger, and Cupp, JJ., concur.
Pfeifer, Lundberg Stratton, and O'Donnell, JJ., dissent.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2010/2010-Ohio-957.pdf

(March 18, 2010) The Supreme Court of Ohio ruled today that a retailer is not entitled to a reduction in the taxable value of merchandise held in its inventory based on “vendor markdown allowances” through which manufacturers compensate merchants for having to mark down slow-moving items from their expected retail price in order to sell them.

The Court’s 4-3 decision, authored by Chief Justice Thomas J. Moyer, reversed a ruling in which the Ohio Board of Tax Appeals (BTA) held that the state tax commissioner’s valuation of inventory held in Rich’s Department Stores in Ohio during the 2000, 2001 and 2002 tax years should be reduced to reflect vendor markdowns granted to the stores during those years.

While noting that the Court generally defers to factual findings made by the BTA, the Chief Justice wrote that in this case “a careful review of the evidence in light of the pertinent statutes and administrative rules shows that the BTA did err in construing and applying Administrative Rule 17.”

“The BTA specifically held that subtracting markdown allowances constituted a valid part of determining ‘cost as disclosed by the books of the taxpayer,’ treating markdown allowances as one of the factors that comprise book value under the rule,” wrote Chief Justice Moyer. “The BTA plainly misconstrued the phrase ‘cost as disclosed by the books of the taxpayer’ in Administrative Rule 17. That rule was promulgated to effectuate the general mandate that ‘depreciated book value shall be taken as the true value of such property, unless the assessor finds that such depreciated book value is greater or less than the then true value of such property in money.’ R.C. 5711.18. It follows that any ‘cost’ factor under the rule must relate to how the inventory is carried as a value on the books of the company following proper accounting principles and methods. ... The BTA’s decision violates this plain intent. As noted above, the record shows that ‘ending inventory’ or ‘ending inventory at cost’ is the accounting category that pertains to carrying the value of inventory on the books. Rich’s evidence demonstrates that markdown allowances should be subtracted when computing the ‘cost of goods sold’ on the profit-and-loss statement. But the evidence is uncontroverted that ... allowances from merchandise vendors ‘should not result in a reduction in the ending inventory.’

“In essence, Rich’s has proven nothing more than that its enjoyment of vendor markdown allowances entails a reduction of the cost of goods sold for accounting purposes and, more generally, can be viewed as an after-the-fact offset against the original acquisition cost of the merchandise. The former does not, as already discussed, justify an adjustment to book value; nor does the latter more directly establish true value than do the accounting methods.”

“Rich’s argument effectively claims that it should pay less tax, through a reduction in the value of its inventory, because it has received a benefit from its vendors in the form of a credit against monies owed. The inventory itself and the expected retail price thereof do not change merely because Rich’s has been granted a markdown allowance. While the need to mark down merchandise may indicate a reduced value for some items still held in inventory, the retail inventory method properly establishes a conservative valuation overall by stating the value of merchandise inventory at cost rather than at expected profit.”

“We hold that the record furnishes no factual basis upon which the BTA could predicate a reduction from book value in the amount of markdown allowances ... The foregoing analysis causes us to conclude that the BTA erred in its construction and application of Administrative Rule 17, and our resolution of that issue renders the commissioner’s other arguments moot. We therefore reverse the BTA’s decision and reinstate the Tax Commissioner’s final assessment certificates as issued.”

Chief Justice Moyer’s opinion was joined by Justices Maureen O’Connor, Judith Ann Lanzinger and Robert R. Cupp.

Justice Terrence O’Donnell entered a dissent, joined by Justices Paul E. Pfeifer and Evelyn Lundberg Stratton, in which he noted that Administrative Rule 17 permits additional adjustments after the cost of inventory is determined on the books of the taxpayer, and the BTA found that cost, as disclosed on Rich’s books, includes markdown allowances. Noting that the BTA had considered extensive witness testimony and factual evidence prior to arriving at its ruling in favor of Rich’s, he wrote: “After considering the foregoing evidence and other evidence that was competent and probative, including expert witness testimony in support of the Tax Commissioner, the board held that markdown allowances ‘are indeed a reduction in inventory cost’ and that subtracting such allowances from inventory value constituted a valid adjustment in arriving at the prima facie book value of inventory pursuant to Administrative Rule 17 ... This is compelling analysis in my view.”

Quoting from prior decisions in which the Supreme Court has deferred to factual determinations by the BTA, he wrote: “‘The fair market value of property for tax purposes is a question of fact, the determination of which is primarily within the province of the taxing authorities, and this court will not disturb a decision of the Board of Tax Appeals with respect to such valuation unless it affirmatively appears from the record that such decision is unreasonable and unlawful.’ ... Accordingly, I respectfully dissent and would affirm the decision of the Board of Tax Appeals in this instance.”

Contacts
Mark A. Engel, 513.870.6700, for Rich’s Department Stores Inc.

Barton A. Hubbard, 614.466.5967, for the State Tax Commissioner.

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