Food Service Provider Not Entitled to Tax Refund

The Supreme Court of Ohio today rejected a commercial activity tax (CAT) refund sought by Aramark Corporation, finding it was not the agent of the businesses and organizations hiring the company to provide food services.

In a 5-2 decision, the Supreme Court affirmed a Board of Tax Appeals (BTA) decision, which denied a $907,532 tax refund Aramark sought for tax years 2012 to 2016.

Writing for the Court majority, Justice Megan E. Shanahan explained Aramark was not entitled to deduct from its CAT the taxes on its gross receipts from reimbursements its clients paid for the purchases of food, labor, and other materials to run cafeterias and other food service operations. Aramark argued it was exempt from payment of CAT on the money it received as reimbursement because it was acting as the agent of its clients.

“Contrary to what Aramark argues, Aramark does not meet the definition of ‘agent’ under R.C. 5751.01(N)(2),” Justice Shanahan stated.

Justices Patrick F. Fischer, R. Patrick DeWine, Jennifer Brunner, and Joseph T. Deters joined Justice Shanahan’s opinion.

In a dissenting opinion, Chief Justice Sharon L. Kennedy wrote that Aramark meets the definition of “agent” in both R.C. 5751.01(N) and R.C. 5751.01(N)(2). Aramark is authorized to make purchases for its clients and is reimbursed for the amount it paid for food and other items, she noted. Aramark then uses the reimbursements to make the next monthly order of products to conduct the food service operations for its clients. Those reimbursement payments are exempt from the CAT, she concluded.

Justice Daniel R. Hawkins joined Justice Kennedy’s opinion.

Food Provider Seeks Refund for Part of Its Operations
Aramark provides food services to private and public clients in multiple industries, including at stands in sports and entertainment venues, and cafeterias in offices, schools, hospitals, and correctional institutions.

Aramark provides services under two main types of contracts: profit-and-loss contracts and management-fee contracts.

Under a management-fee contract, Aramark purchases food, labor, and other miscellaneous materials from vendors and conducts the food service operations for the client. The client pays Aramark a management fee. The client earns a profit or loss depending on the food sales.

Under the profit-and-loss contract, Aramark purchases and owns the inventory. It keeps the receipts earned on the sales, and Aramark, not the client, bears the risk of loss if food sales are not profitable.

Aramark sought a tax refund on reimbursements it received from its management-fee clients. Aramark agreed that it owed CAT on the management fees it earned from its clients, but not the items it purchased on the clients’ behalf.

Company Claimed Reimbursements Not Taxable
Ohio levies the CAT on entities doing business in Ohio. The amount of tax paid is based on gross receipts. The CAT law provides a number of exemptions from the definition of “gross receipts.” Aramark noted R.C. 5751.01(F)(2)(1) excludes “[p]roperty, money, and other amounts received or acquired by an agent on behalf of another in excess of the agent’s commission, fee, or other remuneration.” Aramark argued it acted as the purchasing agent for its management-fee clients and this provision exempted its reimbursements from CAT.

The tax commissioner disagreed and denied the refund. The BTA affirmed the state tax commissioner’s denial, finding that Aramark failed to prove an agency relationship between itself and its management-fee clients.

Aramark appealed the decision to the Supreme Court, which agreed to hear the case.

Supreme Court Analyzed Tax Law
To have its gross receipts for reimbursements excluded under R.C. 5751.01(F)(2)(1), Aramark had to establish it was an “agent,” the opinion noted. Justice Shanahan explained that Aramark claimed it met the definition of “agent” in R.C. 5751.01(N)(2).

The term “agent” under R.C. 5751.01(N)(2) “means a person authorized by another person to act on its behalf to undertake a transaction for the other, including … [a] person retaining only a commission from a transaction with the other proceeds from the transaction being remitted to another person.”

The Court points to the use of the word “retaining,” which is defined as “to hold or continue to hold in possession or in use.” Aramark retains its commission paid in the form of a management fee, and is also keeping the reimbursements the client pays, the opinion stated. It is not passing those payments along to the vendors it purchased supplies from, the opinion noted. Aramark does not qualify as an “agent” under the provision, the Court ruled.

Even if Aramark was viewed as an agent under R.C. 5751.01(N)(2), it would still have to show the reimbursements meet the exclusion it cited under R.C. 5751.01(F)(2)(1). That provision excludes gross receipts that agents receive “on behalf of another.” Aramark did not collect the reimbursements on behalf of another, but on behalf of itself, the opinion stated.

The Court analyzed additional legal arguments Aramark made to justify a refund and rejected them.

Majority Misreads CAT Law, Dissent Maintained
In her dissent, Chief Justice Kennedy wrote the majority’s reasoning is flawed in three ways. The first two pertain to the definition of “agent.” R.C. 5751.01(N) defines an agent as “a person authorized by another person to act on its behalf to undertake a transaction for the other, including the following: …” The dissent stated the law provides additional examples that follow the comma before “including.” The Court should have determined if Aramark was an agent by examining the definition as if the sentence ended before the word “including.”

Aramark was authorized through its management fee contracts to “undertake transactions” when it bought the food and supplies it needed to run the operations. The company provided examples from four contracts explaining how it was authorized by its clients to undertake transactions on their behalf. The company meets the definition of “agent” under R.C. 5751.01(N), the dissent stated.

Aramark also is an agent under R.C. 5751.01(N)(2), the dissent stated. Aramark is not “retaining” the reimbursements for itself. It is purchasing goods and services to run the food operations on an ongoing basis and billing the client monthly for the purchases. The reimbursements are used to make the next month’s purchases, the dissent noted. That money is being passed along to the vendors Aramark uses, the chief justice wrote, and the only payment it is retaining is its management fee.

The majority misunderstood the meaning of “on behalf of another” when it concluded that Aramark was acquiring the reimbursements on behalf of itself, the dissent stated. Aramark purchased goods and services for its clients, and acts on behalf of its clients’ interests when it receives reimbursements and continues to pay vendors for supplies, the dissent noted. Those payments should be excluded from CAT, the dissent concluded.

2023-1540. Aramark Corp. v. Harris, Slip Opinion No. 2025-Ohio-2114.

View oral argument video of this case.

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