Ohio Department of Taxation, Final Determination (September 9, 2020)

The taxpayer applied for refunds of Ohio commercial activity tax (CAT) based on the credit for qualified research expenses (QRE) available under R.C. 5751.51, which allows a CAT credit calculated against a three-year rolling base period of the taxpayer's own qualified research expenses in Ohio, modeled on the base-amount mechanics of the federal research credit under IRC section 41.

Inconsistent Base Period Calculations

The Tax Commissioner found that the claimant's reported base period research expenses fluctuated significantly from filing to filing, without any documented explanation for the swings. Because the size of the base period figure directly determines the amount of credit available in a given year, the Commissioner held that a claimant bears the burden of showing its base period calculation was derived consistently, using the same methodology and the same underlying data, across the years it is claimed.

Expenses of Unregistered Entities Could Not Be Included

The Commissioner further found that a portion of the claimed base period and credit-year research expenses were attributable to affiliated entities that were not registered under the claimant's own CAT taxpayer account. Because R.C. 5751.51 ties the credit to a taxpayer's own qualified research expenses, the Commissioner held that research costs incurred by a separate, unregistered entity could not be bootstrapped into the claimant's own base period or credit calculation, regardless of any corporate affiliation between the entities.

Because the claimant could not produce a reliable, consistent base period figure or properly isolate its own qualifying expenses from those of unregistered affiliates, the Tax Commissioner denied the refund claims in full.

Significance: This determination illustrates that Ohio's commercial activity tax research credit imposes its own independent substantiation demands distinct from the federal credit — a claimant must be able to show a consistently calculated base period tied strictly to its own registered CAT account, and cannot rely on the research expenses of affiliated entities that file under separate CAT registrations.