LAW360 | Cincinnati Reds Win Bobblehead Tax Break In Ohio High Court

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By Paul Williams

Law360 (November 21, 2018, 5:15 PM EST) — The Cincinnati Reds do not owe use tax on purchases of bobbleheads and other promotional items that incentivize fans to attend games, the Ohio Supreme Court ruled Wednesday, holding that consideration for the objects is factored into ticket prices.

In a 5-2 decision, the court found that promotional items, such as bobbleheads, that are distributed to fans at certain baseball games qualify for the state’s sale-for-resale exemption. The majority ruled that the Reds resold the bobbleheads to fans, who paid for the items’ value when they bought ballgame tickets.

Writing for the majority, Justice Patrick F. Fischer said, “The unique promotional items were an explicit part of the bargain, along with the right to attend the game, that the fans obtained in exchange for paying the ticket fee.”

The court was persuaded by the Reds’ argument that bobbleheads are doled out to boost attendance for games that are not expected to sell out. The team charges the same price for tickets, regardless of whether a promotional item will be given away, but the court agreed that in place of a discount in ticket prices “for less desirable games,” fans are made whole by the right to receive a promotional item, to which a portion of the ticket price is attributed.

“Based on this record, we accordingly conclude that the promotional items constituted things of value in exchange for which fans paid money that was included in the ticket prices,” the opinion said.

The opinion overturned an Ohio Board of Tax Appeals 2017 decision that sided with the state tax commissioner, who determined that the Reds owed $88,000 in use tax on bobbleheads from 2008 to 2010 after an audit. The board had ruled that the ticket price paid by fans constituted consideration only for the ticket itself and not the promotional item.

At oral arguments in June, Kody R. Teaford, state assistant attorney general for taxation, argued that if the Reds were reselling the bobbleheads “with consideration,” as the team contended, the Reds should charge sales tax on each one since the item does not qualify for Ohio’s resale exemption.

According to the opinion, the commissioner asserted that the bobbleheads were taxable based on a 1994 state Supreme Court case, Hyatt Corp. v. Limbach , where the justices ruled that linen cleaning services for long-term lodging guests were subject to tax.

However, the court found that ruling to be distinguishable from the current case, saying that the Hyatt Corp. court found that the cleaning service “was not a separate and explicit” part of the bargain for the lodging, while the bobbleheads at issue were part of the ticket fees.

Quoting Marty Brennaman, longtime announcer for the baseball team, the opinion said, “This one belongs to the Reds.”

At the same time, the majority acknowledged that the opinion could be seen as “exposing a ‘loophole’’’ that permits sports teams to avoid paying tax on promotional items. The court emphasized that its conclusions were drawn from its interpretation of Section 5739 of the state code and invited state lawmakers to address the statute if they felt it to be troublesome.

“If the General Assembly prefers that sports organizations pay use tax on promotional items under the circumstances presented here, it can amend the revised code to require them to do so,” the opinion said.

In dissent, Justice Mary DeGenaro disagreed with the majority’s interpretation of Hyatt Corp., saying the reason that the benefit of cleaning services was determined to be taxable was that state law at the time did not state that long-term lodging was a taxable sale. As such, the hotel operator could not resell the cleaning service in the price of the transaction, she said.

Similarly, because sales of baseball tickets in Ohio are not subject to state sales tax, Justice DeGenaro said that the Reds could not resell promotional items because ticket sales are not a sales-tax sale.

“Consequently, the Reds should, by the same reasoning as that applied in Hyatt Corp., be liable for use tax as the consumer of the promotional items based on the Reds’ own purchase of them,” she said.

Justice DeGenaro added that because the Reds testified that the cost of the promotional items is built into all ticket prices before the season begins, every ticket purchaser pays for a portion of the items, whether or not an item is received.

“The lead opinion’s interpretation of the evidence confuses the business motive of the Reds to provide promotional items that have already been promised with a contractual obligation to do so,” she said.

Steven A. Dimengo of Buckingham Doolittle & Burroughs LLC, who represented the Reds, told Law360 that the dissent’s analysis of Hyatt Corp. was not relevant to the promotional items because the state’s treatment of sales of services, which was at issue in that case, differs from its treatment of sales of tangible personal property.

“We proved that the Reds received some consideration in the transfer of the title of the bobbleheads,” Dimengo said by phone. “It is no different from Walmart selling bobbleheads that it purchased from a wholesaler.”

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Steve Dimengo is the Taxation Practice Group Chair and Managing Partner of Buckingham, Doolittle & Burroughs, LLC.