Ohio Nonresident is Required to Apportion Gain from Sale of Equity Interest

By: Betsy Goldstein, SALT Senior Manager

At a glance

• The main takeaway: A recent Ohio Department of Taxation decision concluded that a nonresident individual was required to treat the gain from the sale of equity interest in a company as apportionable income when that individual was an active investor in the company.
• Assess the impact: Nonresidents must consider state-by-state tax consequences that can arise from the sale of a business, including asset sales and equity sales.   
• Take the next step: Aprio’s State and Local Tax (SALT) team can help you analyze the applicable state tax rules, calculate state tax liabilities, and recommend potential alternative structures to minimize multistate tax obligations.

Schedule a free consultation today to learn more!

The full story

When a nonresident individual sells equity in a business, the gain from that sale is generally sourced to and taxable by the individual’s state of residence. However, there are several situations where another state may be entitled to a portion of that gain. A recent Ohio Tax Commissioner Final Determination looked at whether Ohio had the right to tax a nonresident owner on her capital gain from the partial sale of her interest in her company.[1]

A closer look at the case

The taxpayer, dermatologist Dr. Kathy Fields (the Taxpayer), is a co-founder of her skincare products company, Roden & Fields, LLC (the Company). The Taxpayer was a spokesperson and face of the business on the Company website and also developed products for the Company. In 2018, the taxpayer sold 25% of her interest in the Company (she owned about 30% at the time). Both before and after the sale, the Taxpayer was a board member of the Company. On her 2018 Ohio income tax return, she apportioned some of the gain to Ohio for purposes computing the nonresident credit.[2] Subsequently, she amended the return to source the gain entirely to California, which increased the nonresident credit and resulted in a refund. Ohio denied the refund, and this appeal ensued.

Under Ohio law, for purposes of computing the nonresident credit, a taxpayer who, directly or indirectly, owns at any time during the three-year period ending on the last day of the taxpayer’s taxable year at least 20% of the equity voting rights of certain qualifying entities (including any pass-through entities) shall apportion any income, including gain or loss, realized from each sale, exchange, or other disposition of a debt or equity interest in that entity. This apportionment is computed by using the average of the entity’s apportionment percentage for the current and two preceding taxable years.[3]

The Taxpayer argued that the refund was proper based on a 2016 Ohio Supreme Court case in which the court held that this apportionment statute was unconstitutional as applied to the taxpayer in that case.[4] However, in that case, the taxpayer, Mr. Corrigan, was a passive investor. In this case, the Tax Commissioner determined (and the Taxpayer acknowledged) that the Taxpayer was an active, rather than passive, investor based on her involvement in the business.

The ruling explained

Notably, the Tax Commissioner explained that even if that rule was not applicable here, the income from the gain would still be considered apportionable business income in Ohio based on a 2022 amendment to the term “business income.”[5] That legislation added to the definition of business income “the sale of an equity or ownership interest in a business” and defined that phrase to mean sales where either or both of the following apply:

• The sale is treated for federal income tax purposes as the sale of assets, or
• The seller materially participated, as described in 26 C.F.R. 1.469-5T, in the activities of the business during the taxable year in which the sale occurs or during any of the five preceding taxable years.

Interestingly, the legislation states that this amendment is remedial and intended to clarify existing law, and that it applies to “any petition for reassessment or any appeal thereof and to any application for refund or any appeal thereof pending on or after the effective date of this section and to any transaction that is subject to an audit by the Department of Taxation on or after that effective date.” Since the Taxpayer’s appeal was pending on and after the effective date, this legislative amendment is applicable to the Taxpayer’s 2018 refund claim.

The bottom line

Aprio’s SALT Team has experience advising businesses on the state tax consequences arising from the sale of a business, including asset sales and equity sales. Our team will analyze the applicable state tax rules, calculate the state tax liabilities, and recommend potential alternative structures to minimize your multistate tax obligations. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] Garry Rayant & Kathy Fields, Ohio Department of Taxation Final Determination, Refund Claim No 0044350439 (March 28, 2024). Kathy Fields is the owner who sold her interest; she filed a joint return with her husband.

[2] Ohio nonresidents first compute their tax as residents and then receive a credit that is computed based on the amount of tax on income that is allocated and apportioned outside Ohio. Ohio Rev. Code Ann. § 5747.05.

[3] Ohio Rev. Code Ann. § 5747.212.  These rules also apply if all of the voting equity of the entity is owned by five or fewer people or if one person owns at least 50% of the voting equity.

[4] See Corrigan v. Testa, 149 Ohio St.3d 18, 73 N.E.3d 381 (2016).

[5] Ohio Substitute House Bill 515, signed on June 24, 2022, and effective on September 23, 2022.