Cincinnati Reds, L.L.C. v. Testa (Slip Opinion)

Citations: 2018 Ohio 4669; 122 N.E.3d 1178; 155 Ohio St. 3d 512Docket: 2017-0854

Court: Ohio Supreme Court; November 20, 2018; Ohio; State Supreme Court

Original Court Document: View Document

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Cincinnati Reds, L.L.C. v. Testa, Slip Opinion No. 2018-Ohio-4669, addresses the taxation of promotional items distributed at professional baseball games. The court ruled that these items were transferred with the intent to "resell" and thus qualified for a sale-for-resale tax exemption under R.C. 5739.01(E). The decision of the Board of Tax Appeals was reversed, and the case was remanded for further proceedings. The opinion is subject to formal revision before publication in the Ohio Official Reports, and readers are encouraged to report any errors to the Supreme Court of Ohio. The case was submitted on June 13, 2018, and decided on November 21, 2018. The excerpt also reflects on the historical evolution of professional baseball in Ohio, highlighting its significant milestones and figures, illustrating the transition from a pure focus on the game to the business of baseball.

In *Federal Baseball*, the court determined that professional baseball does not fall under interstate commerce and is exempt from antitrust laws, a position reaffirmed in *Flood* when it upheld Major League Baseball’s reserve clause. The court acknowledged that the antitrust exemption for MLB is "an exception and an anomaly," and noted that any changes to this exemption must be enacted by Congress. Following *Flood*, player free agency emerged in MLB through arbitration and collective bargaining, resulting in significant salary increases as league revenues expanded.

As ticket prices rose and competition for entertainment options increased, MLB faced difficulties in attracting fans to games. In response, teams innovated by transforming stadiums into "mini theme parks," incorporating attractions such as fireworks, concerts, and diverse dining options. Promotions, including exclusive merchandise available only at games, became a strategy to draw fans, which are the focus of this appeal.

The case examines the application of state tax law regarding the sale-for-resale exemption of R.C. 5739.01(E) concerning the Cincinnati Reds' promotional items. The conclusion reached is that the exemption applies, thereby reversing the Board of Tax Appeals' decision. 

The factual background includes a use-tax audit conducted by the tax commissioner on the Reds’ purchases from January 1, 2008, to December 31, 2010, specifically regarding promotional items. The Reds' CFO, Doug Healy, testified that these items are intended to boost attendance at games likely to have low turnout, with the increased ticket revenue offsetting the cost of the items. Promotional items are advertised in advance through various media, and while items sold in the Reds' "fan shop" are similar, the promotional items are exclusive to game attendees.

Promotional items are not itemized separately from ticket prices, nor do ticket prices fluctuate based on the availability of these items at specific games. Ticket prices are structured to cover the costs of promotional items along with other overhead expenses. According to testimony from Healy, fans purchasing tickets expect to receive these promotional items as part of their purchase, and failing to provide them could lead to significant public relations issues for the Reds. 

The Reds do not intentionally underorder promotional items; instead, they estimate the quantity needed based on expected attendance. If promotional items run out, the Reds offer alternatives such as different promotional items or complimentary tickets to affected fans. The tax commissioner concluded that promotional items were not resold with game admissions and denied the Reds' request to exclude these items from use-tax assessments. 

The Board of Tax Appeals (BTA) affirmed this conclusion, stating that promotional items were distributed for free to enhance interest in specific games. The BTA noted that ticket prices remain constant throughout the season, regardless of promotional items, and patrons were not charged separately for these items. The Reds argued in their appeal that the transfer of promotional items alongside ticket purchases constitutes consideration for both, and that the BTA's decision lacks supporting evidence.

Use tax under R.C. 5741.02(C)(2) is not applicable to tangible personal property or services that, if acquired in Ohio, would not be subject to sales tax as per R.C. 5739.01 to 5739.31. Thus, the Cincinnati Reds are not liable for use tax on promotional items if these items are exempt from sales tax. The relevant law focuses on whether the Reds intended to resell these items, as defined by R.C. 5739.01(E), which characterizes a "retail sale" as any sale where the consumer does not intend to resell the property. The Reds, having purchased the items, are considered "consumers" under the law (R.C. 5739.01(D)(1)). 

The central issue is whether the Reds purchased the promotional items for resale. According to R.C. 5739.01(B)(1), a "sale" involves the transfer of title or possession for consideration. There is a presumption under R.C. 5739.02(C) that all sales in Ohio are taxable unless proven otherwise, which places the burden on the Reds to demonstrate their intent to resell the items. The Board of Tax Appeals (BTA) found that the Reds intended to give away the items for free rather than sell them. The Reds argue against this finding, claiming that their promise to distribute the items creates a contractual obligation for fans, who effectively provide consideration by purchasing tickets to the games.

The court addresses the issue of "purpose to resell" under R.C. 5739.01(E), emphasizing that the taxpayer claiming a sale-for-resale exclusion must demonstrate a clear intent to resell. The court agrees with the Reds’ claim that the Board of Tax Appeals (BTA) incorrectly determined that the Reds intended to give away promotional items, as this finding lacks reliable evidence and contradicts the record. 

Testimony from Healy indicates that fans provide consideration for promotional items by purchasing tickets to specific games announced in advance. The Reds ensure enough promotional items are available, and if they fall short, they offer equivalent substitutes. The tax commissioner and BTA erroneously concluded that fans do not give consideration for these items since ticket prices remain constant regardless of promotional offerings. Healy countered that promotional item costs are factored into the ticket price, particularly for less desirable games, suggesting fans pay for both game admission and the promotional item.

The court distinguishes these promotional items from random giveaways, asserting that fans buy tickets with the expectation of receiving these items as part of the game experience. Consequently, the court concludes that fans indeed provided consideration for the promotional items, affirming the Reds' intent to resell them.

The court emphasizes that its interpretation of R.C. Chapter 5739 regarding the taxation of promotional items by sports organizations is dictated by the specific facts of the case, suggesting that any desire for tax changes must come from legislative amendment. The tax commissioner’s argument against the promotional items qualifying for a sale-for-resale exemption, citing Hyatt Corp. v. Limbach, is rejected due to factual differences; thus, the exemption applies. In Hyatt Corp., the court determined that while the sale-for-resale exemption applies to transient guests, it does not extend to long-term guests, who do not engage in a "sale" as defined by R.C. 5739.01(B)(2). The court clarified that lodging transactions for transient guests include cleaning services as part of the overall lodging sale; however, for long-term guests, such transactions do not constitute a sale, and the cleaning service cannot be resold under the relevant statutes. Consequently, the court concluded that the sale-for-resale exemption does not apply to long-term lodging arrangements.

The tax commissioner asserts that the sale of game tickets, similar to providing lodging for long-term guests, does not fall under the definition of "sale" in R.C. 5739.01(B). However, this does not apply to the case at hand. In Hyatt Corp., the court found that the taxability of a linen-cleaning service depended on whether it was part of a lodging transaction for transient guests, thus influencing whether it was considered a "sale." In contrast, the current case examines promotional items, which qualify as "sales" under R.C. 5739.01(B)(1) because they are integral to the ticket purchase. Unlike the linen-cleaning service in Hyatt Corp., the promotional items were explicitly included in the ticket transaction, supporting their classification as a sale.

The tax commissioner further contends that classifying promotional items as purchases for resale undermines R.C. 5739.02(B)(35)(a), which exempts certain advertising materials from sales tax. The statute lists specific items, and since promotional items are not included, the commissioner argues they should be taxable. However, the existence of an exemption for some promotional items does not imply all others are taxable. The promotional items in question were purchased by the Reds for resale, meaning they do not constitute a "retail sale" under R.C. 5739.01(E), rendering R.C. 5739.02 provisions irrelevant. Therefore, the court rejects the tax commissioner’s argument regarding the nullification of R.C. 5739.02(B)(35)(a). 

In conclusion, the analysis supports that promotional items are not subject to sales tax due to their intended resale, independent of the tax commissioner’s assertions.

Fans purchasing tickets for Cincinnati Reds games expect to receive promotional items, establishing consideration for the Reds' agreement to provide these items. Consequently, the transfer of promotional items qualifies as a "sale" under R.C. 5739.01(B)(1), making the items eligible for the sale-for-resale exemption outlined in R.C. 5739.01(E). Therefore, the Reds are not liable for use tax on these promotional items as per R.C. 5741.02. The focus of this opinion is solely on whether the Reds received consideration from fans for the promotional items, and no conclusions are drawn on other issues not presented in this appeal. The Board of Tax Appeals (BTA) decision is reversed.

In dissent, Justice Degenaro argues against the majority’s conclusion, asserting that reversing the BTA’s decision would exempt the Reds from sales or use tax obligations on tangible personal property, despite the general applicability of these taxes to such transactions. The dissent emphasizes that the ticket sales themselves are not taxed, and the majority’s reasoning fails to consider that the promotional items were intended for giveaway rather than resale. The dissent contends that the BTA’s findings should be given deference and challenges the majority’s assertion regarding the evidence of consideration for the promotional items.

In the BTA proceedings, the Reds were required to prove their intention to resell promotional items, as established in Satullo v. Wilkins. Sales are assumed taxable unless proven otherwise per R.C. 5741.02(G), a presumption also applicable to use tax. The BTA found that the Reds did not fulfill this burden. The BTA's factual conclusions are upheld if supported by reliable evidence, with deference given to its credibility assessments.

Evidence indicated that Reds' promotional items were advertised as "giveaways" available for free, with no guarantees provided to ticket purchasers. Testimony from the Reds’ CFO revealed that season-ticket holders received earlier stadium access and that many fans often did not receive the advertised items. If complaints arose, the Reds would typically offer substitutes or refunds.

The CFO acknowledged a cost to the promotional items but stressed their role in increasing ticket sales, asserting that the Reds did not operate as resellers of these items. The promotional items' costs were integrated into ticket prices, which remained consistent regardless of promotional offerings. Thus, the BTA correctly concluded that purchasing a game ticket was merely for attendance rights, not for the promotional items, which were used to incentivize ticket sales rather than being resold.

A dissenting opinion challenged the lead opinion's assertion that ticket prices included promotional items, arguing that it meant all ticket purchasers contributed to the cost of promotional items regardless of actual receipt, severing the connection between ticket payments and promotional item offerings.

The CFO of the Reds testified that fans expect to receive promotional items, such as bobbleheads, when advertised, indicating a belief that the Reds would fulfill this promise. However, this testimony was subjective and could be reasonably discounted by the Board of Tax Appeals (BTA). The CFO clarified that the expectation pertains to the distribution of the advertised number of promotional items, not a contractual obligation. Consequently, the BTA determined that the offer of promotional items does not create a contractual obligation based on ticket purchases, categorizing it instead as a "conditional gratuitous promise," which is unenforceable as a contract. The written announcements regarding promotional items do not establish a binding contract requiring mutual consideration. Furthermore, the lead opinion incorrectly conflates the Reds' business motivation to provide promotional items with a legal contractual duty. The BTA's reasoning parallels the case of Hyatt Corp. v. Limbach, where it was held that certain transactions, such as lodging for long-term guests, do not constitute a retail sale under tax law. The BTA correctly concluded that the sale of game tickets, similar to the rental of rooms for long-term guests, does not qualify as a taxable sale.

Hyatt Corp. is deemed inapposite due to the specific bargain for promotional items in this case, which was not present in the rental of hotel rooms that included clean linens. The dissenting opinion disputes the lead opinion's assertion that Hyatt Corp. found linen-cleaning services were not part of the lodging bargain. The dissent clarifies that in a lodging transaction, the hotel provides a full room, which inherently includes the use of linens, thereby constituting a distinct component of the room rental. Since long-term lodging does not qualify as a sales-tax sale, the hotel operator did not "resell" the cleaning service. Similarly, the Reds did not resell promotional items when selling game tickets, as this too was not a sales-tax sale. Therefore, the Reds should be liable for use tax as consumers of these promotional items, based on their purchase. The dissent concludes that the Board of Tax Appeals' decision should be upheld, affirming the Reds' tax liability due to the gratuitous distribution of promotional items. Justice Mayle concurs with this opinion.