By Gil Fried
The Ohio Board of Taxation ruled in 2018 that the Cincinnati Reds owed $88,000 in back sales taxes on promotional items the team gave away to fans. The top give-away were bobbleheads.
The Reds appealed that to the Ohio Supreme Court and, in November 2018, the court sided with the Reds.
Normally with regards to sales tax, you pay a tax when you buy something. However, if you are buying something to resell you do not have to pay taxes. The Ohio taxation authorities argued that the Reds were the end users since they gave the promotion away. This would mean that the Reds would have to pay taxes to the manufacturer. The Reds argued they were actually reselling the promotional items to fans, so they did not have to pay any taxes. This argument was based on the premise that the fans actually pay the tax when they purchase a ticket as a tax is included in the ticket price.
The court concluded, based on the Red’s CFO’s testimony, that the team advertises which games will include promotional items in advance, so fans purchase their tickets expecting to receive the promotion. The ticket prices reflect the cost of the bobbleheads or other promotions. The Reds went on to claim that they “smooth out” the costs over all 81 home games. Thus, even when no promotion is given, fans are paying a higher price for tickets. Since fans know in advance when there is a promotion, they often buy a ticket expecting a give-away so in essence, they are buying the “free” promotion. The court even went on to discuss that the bobblehead is consideration for the fan purchasing the ticket.
If the promotion is really not “free” but something that has been purchased by the fans, then the next question raised by the court was what about the limited quantities. Often teams say that the “free” promotion is given to the first 10,000 fans. So if the fans in essence buy the promotion, what happens when a team runs out of the promotional item? In the words of the court:
The tickets themselves do not state or include any guarantee regarding promotional items. However, [The Reds’ CFO] testified that fans who purchase tickets to games at which promotional items are offered “[a]bsolutely” believe that they are purchasing both the promotional item and the right to view the game at the ballpark. He said that fans expect and feel entitled to receive the promotional items, and he explained that it would be a “public relations nightmare” if the Reds reneged on the commitment to distribute them . . .
. . . In the event that the Reds run out of any given promotional item, Healy (the CFO) testified that the Reds “will remedy it.” He acknowledged that in these instances, the Reds may not be able to provide exactly the same promotional item, but he said that the Reds would “make it right” in ways such as giving another promotional item or complimentary tickets to fans who had failed to receive the designated items.
Thus, if a team wants to avoid some potential taxes, they can explore changing their “free” promotions to an added element associated with each ticket. If such a route is chosen, then the team would need to make sure they have a policy in place if a promotional item is exhausted. This does not mean that the policy needs to be publicized, but if a policy exists then it would help employees understand how to respond to upset fans.
Gil Fried is an internationally recognized expert on stadium safety and risk management, sport finance, and sport analytics. He is also a sports law professor and chair of the sports management department at the University of New Haven.
