Ohio
Automated Packaging Systems, Inc., Final Determination
- Year:
- 2022
- Case No.:
- Final Determination (2022)
- Court:
- Ohio Department of Taxation, Office of the Tax Commissioner
- Subject:
- Ohio commercial activity tax research credit — Ohio-situs and four-part qualified research substantiation under R.C. 5751.51
The Ohio Tax Commissioner denied a packaging equipment manufacturer's commercial activity tax refund claim under the qualified research expense credit of R.C. 5751.51, holding that Ohio incorporates the federal definition of qualified research under IRC section 41 but requires the taxpayer to independently prove both that the claimed expenses were incurred within Ohio and that the underlying activities satisfied the section 174 and process-of-experimentation tests.
Download source PDFAutomated Packaging Systems, Inc., an Ohio manufacturer of packaging machinery and materials, sought a commercial activity tax refund based on the qualified research expense credit under R.C. 5751.51, which permits a credit for a taxpayer's qualified research expenses in Ohio in excess of its calculated base period amount.
Ohio Incorporates the Federal Definition, With an Added Geographic Element
The Tax Commissioner explained that R.C. 5751.51 adopts the federal definition of 'qualified research' from IRC section 41(d), meaning a taxpayer must satisfy the same four-part test applied under federal law — including the section 174 uncertainty requirement, the discovering-technological-information requirement, and the process-of-experimentation requirement. Because Ohio's credit is specifically a credit against the state commercial activity tax, however, the Commissioner emphasized that a taxpayer must additionally prove that the research giving rise to any claimed expense was actually performed in Ohio, since research conducted at out-of-state facilities does not qualify regardless of whether it would satisfy the federal test.
Strict Substantiation Required for Both Elements
Applying this framework, the Commissioner found that Automated Packaging Systems had not carried its burden of proof on the claimed expenses, holding that general assertions about engineering and product development work were insufficient without documentation specifically tying the claimed costs to research activities performed in Ohio and satisfying the section 174 and process-of-experimentation prongs for the particular projects at issue.
The Tax Commissioner denied the taxpayer's refund claim.
Significance: This determination is a clear statement of how Ohio's commercial activity tax research credit layers a state-specific geographic substantiation requirement on top of the federal four-part qualified research test, meaning a taxpayer with well-documented federal research credit claims can still be denied the Ohio credit if it cannot separately prove which of those activities occurred within Ohio's borders.