On June 30, 2005, Governor Taft signed the Ohio budget
bill (the "Bill"), which makes several major changes
to Ohio tax law. The centerpieces of the Bill are the
phaseout of the corporate franchise tax and the tangible personal property tax for most taxpayers, a reduction
in personal income tax rates, and the enactment of the Commercial Activities Tax (the "CAT"), a gross receipts
tax that applies not only to "C corporations" but also
to S corporations, partnerships, limited liability companies, sole proprietorships, and estates. This bulletin provides
a brief overview of many of the tax provisions of the Bill.
Individual Income Tax Reduction
The Bill gradually phases in an across-the-board 21% reduction in personal income tax rates, with the rates decreasing from current rates by 4.2% for the 2005 tax
year and for each of the four following tax years. The
highest tax rate will be 5.925% when the reduction is
fully phased in for the 2009 tax year.
The Bill also creates a nonrefundable credit for taxpayers whose Ohio taxable income does not exceed $10,000.
Commercial Activities Tax
The CAT is a gross receipts tax imposed on business con-ducted in Ohio, effective July 1, 2005. The first return
and tax payment are due February 15, 2006 for the period from July 1, 2005 to December 31, 2005. After that,
returns must be filed on a quarterly or annual basis,
depending on the amount of the taxpayer's taxable gross receipts.
The CAT generally applies to every person or entity
that does business in and has substantial nexus with
Ohio, including "C corporations," "S corporations,"
limited liability companies, partnerships, sole proprietorships, and estates. Certain businesses are not subject to the CAT, including businesses with less than $150,000
in taxable gross receipts during the calendar year (the
"De Minimis Exception"), nonprofit organizations, and
certain types of businesses that will remain subject to other taxes, such as financial institutions, insurance companies,
and "dealers in intangibles."
Nexus with Ohio
A person or entity has substantial nexus with Ohio, and
is therefore subject to the CAT for a calendar year, if the person or entity has a certificate authorizing it to do
business in Ohio, owns or uses all or part of its capital in Ohio, or is deemed to have "bright-line" presence because
the person or entity has any of the following: (i) Ohio
payroll of at least $50,000 during the year; (ii) taxable
gross receipts sourced to Ohio of at least $500,000 during
the year; (iii) at any time during the calendar year, property
in Ohio with a value of at least $50,000 (with leased property deemed to have a value for this purpose of 800% of the
annual net rental charge); or (iv) at least 25% of its total property, payroll, or sales in Ohio during the year.
Computation of the Tax
The CAT has a bifurcated structure. Assuming the tax-
payer does not qualify for the De Minimis Exception,
the first $1 million of taxable gross receipts are subject
to a flat tax of $150. The tax rates that apply to taxable
gross receipts in excess of $1 million are as follows:
|Period|| ||Applicable Rate|
|7/1/2005 – 3/31/2006|| ||0.06%|
|4/1/2006 – 3/31/2007|| ||0.104%|
|4/1/2007 – 3/31/2008|| ||0.156%|
|4/1/2008 – 3/31/2009|| ||0.208%|
|4/1/2009 and thereafter|| ||0.26%|
Taxable Gross Receipts
The CAT applies to receipts that are (i) "gross receipts"
and (ii) sourced to Ohio. In computing gross receipts,
a taxpayer must use the same method of accounting it
uses for federal income tax purposes. The term "gross receipts" means the total amount realized, without reduction for cost of goods sold or other expenses, from
activities that contribute to the production of income (including receipts from transactions with related
corporations unless an election is made to file as a "consolidated elected taxpayer" as discussed below). However, certain specified types of receipts are excluded
from gross receipts, including the following:
- interest income (other than interest on credit
- dividends or distributions from corporations, and the
distributive or proportionate share of receipts or income of a pass-through
- receipts from the sale of capital assets (as defined
in Internal Revenue Code §1221) or assets the seller has used in the seller’s
trade or business (as defined in Internal Revenue Code §1231);
- proceeds attributable to the repayment of a loan,
bond, mutual fund, certificate of deposit, or marketable instrument;
- compensation received or to be received by an
employee for services rendered;
- contributions to capital or proceeds from the
issuance of taxpayer’s own stock, options, warrants, puts or calls, or from
the sale of treasury stock;
- gifts, charitable contributions, or membership dues
- sales and use taxes and excise taxes on the sale of
gasoline, cigarettes, motor fuel, and alcohol collected by a vendor; and
- the sale, at various stages, of motor fuel.
Gross receipts generally are considered as arising from
Ohio sources in connection with (i) the rental of real
estate and the sale of real estate held for sale in the
ordinary course of business, if the real estate is located
in Ohio; (ii) the rental of tangible personal property,
and the sale of tangible personal held for sale in the
ordinary course of business, if the property is received
by the purchaser in Ohio; (iii) the sale or license of
intellectual property (generally to the extent the amount
paid is based on use of the property in Ohio); (iv) the
sale of services to the extent of the ratio of the purchaser’s benefit in Ohio to the purchaser’s total benefit every-
where; and (v) the sale of transportation services by a
common or contract carrier in proportion to the mileage traveled in Ohio to the total mileage traveled. The Bill includes a provision authorizing the Tax Commissioner
to promulgate rules with alternate sourcing rules for
persons engaged in similar business or trade activities
and allows a taxpayer to contend that the otherwise
applicable sourcing rule does not accurately represent
the person’s Ohio gross receipts.
Combined and Consolidated Returns
The CAT treats all entities having more than 50% of
their ownership interests owned or controlled "through
related interests" as one "combined taxpayer" for the
purpose of applying the De Minimis Exception and the
$1 million threshold beyond which the flat tax no longer applies. All gross receipts from transactions between
the members of the "combined taxpayer" are taxable
unless the members thereof elect to be treated as a "consolidated elected taxpayer." If the election is made,
it must be made with respect to all entities that qualify
for inclusion in the consolidated elected group. The
election has the effect of exempting all sales between members of the consolidated elected group, but also
means that all members are deemed to have nexus with
Ohio and are thereby subject to the CAT.
The CAT provides for five types of credits: (i) a nonrefundable jobs retention credit, (ii) a nonrefundable
credit for qualified research expenses, (iii) a nonrefundable credit for research and development loan payments, (iv) a nonrefundable jobs creation credit, and
(v) a credit allowed in connection with a qualifying
Ohio net operating loss carryover under the Ohio
franchise tax (available starting in 2010).
Corporate Franchise Tax Provisions
The Bill phases out the corporate franchise tax for all corporations other than banks and financial institutions, insurance companies, and certain other entities excluded
from the CAT. As the franchise tax is being phased out,
a taxpayer subject to the franchise tax would pay the
greater of the minimum tax or the amount of tax
otherwise due reduced by a specified percentage. The specified percentage is 20% for 2006, 40% for 2007,
60% for 2008, 80% for 2009, and 100% for 2010. The
Bill would also phase out the pass-through entity tax
with respect to most corporate owners of an interest in
a pass-through entity, reducing the applicable rate by
20% from its current rate for the 2005 tax year and each
year thereafter until the tax is eliminated with respect
to most corporations in 2009.
The Bill provides that the credit against the franchise
tax for the purchase of new manufacturing machinery
and equipment is not available for any equipment
purchased after July 1, 2005 and provides that no
taxpayer may take the credit against the franchise tax
for any tax year ending on or after July 1, 2005. Any
existing credits under the program are to be converted
into grants administered by the Department of Development that can be applied against the franchise tax.
The Bill permits an entity that will become subject to
the CAT to claim a credit against the CAT beginning
with the 2010 tax year for its unutilized Ohio franchise
tax net operating loss carryovers which are in excess
of $50 million and meet certain requirements.
Personal Property Tax Provisions
As described below, the Bill phases out the tax on tangible personal property except for property owned or leased to a public utility (for this purpose, a telephone, telegraph, or interexchange telecommunications company
is not a public utility). The timing of the phaseout differs
with respect to different types of property
The Bill exempts from the property tax all manufacturing equipment first used by a manufacturer in business in
Ohio on or after January 1, 2005. For inventory and all
other property used by a business other than a public
utility, the Bill maintains the current assessment rates
for the 2005 tax year (25% for most property) and
reduces those rates to 18.75% for the 2006 tax year and further reduces the rates by 6.25 percentage points each
tax year thereafter, so that the assessment rate for 2009
and thereafter is 0%.
The Bill also phases out the tangible personal property
tax with respect to property of a telephone, telegraph,
or interexchange telecommunications company, beginning with the 2007 tax year. The assessment rate for
such property is 20% for 2007 and decreases five
percentage points each year until the assessment rate
reaches 0% in 2011.
For an electric company other than a rural electric cooperative, the Bill reduces the assessment rate for transmission and distribution equipment from 88% to
85% and for all other property from 25% to 24%, effective for the 2006 tax year and thereafter. Property owned
or lease to rural electric cooperatives will continue to
be taxed as under current law.
The Bill also eliminates the property tax exemption for patterns, jigs, dies, and drawings for electric utilities
other than rural electric cooperatives, effective with the
2006 tax year.
Sales and Use Tax Provisions
The Bill makes the state-wide sales and use tax rate
5.5%, effective July 1, 2005. The rate had been 5% until
2003, when the rate was increased to 6% for the period
ending June 30, 2005. Under continuing law, local governments have the right to impose additional sales
and use taxes.
The Bill provides that the discount for promptly remitting sales tax collections remains at 0.9% of the amount shown as due on the sales tax return through June 30, 2007. The applicable rate had been 0.9% but was scheduled to
return to 0.75% on July 1, 2005.
The Bill repeals the current law sales tax exemption for
sales of investment metal bullion and investment coins
and creates new sales tax exemptions for (i) sales by a telecommunications service vendor of 900 services other
than "information services" to a subscriber and (ii)
value-added, non-voice data services.
If a party desires to claim a sales tax exemption in connection with the purchase of digital goods, computer
software (other than software delivered to a customer
at the vendor's place of business), or a service, and
intends at the time of the purchase to use such digital
goods, software or service at locations in more than one jurisdiction, the Bill provides a special sourcing rule
and requires a purchaser asserting a sales tax exemption
to provide a sales tax exemption certificate claiming
multiple points of use.
The Bill also clarifies the sourcing rules for prepaid
telephone service and prepaid cellular telephone service
and establishes detailed sourcing rules for "private communications service," which is defined as a service
that entitles a customer to exclusive or priority use of
a communications channel or group of channels between
or among termination points.
Real Property Tax Provisions
The Bill eliminates the 10% "rollback" in real property
taxes for all real property other than property used for
farming, property leased for farming, and one, two, or
three-family dwellings, effective for the 2005 tax year.
The Bill removes the sunset date on the authority of
cities, townships, and counties to create one or more
tax incentive financing districts (an "Incentive District")
and declare improvements within an Incentive District
exempt for a period of time to the extent of a designated portion of the subsequent increase in assessed value.
Under prior law, these authorities had the power to create
an Incentive District, but only through June 30, 2007. However, the Bill also provides that such authorities
may not adopt an ordinance or resolution that creates
an Incentive District if more than 25% of the taxable
value in such jurisdiction is already subject to an exemption in connection with an Incentive District. Under certain conditions, this limitation will not apply to
an Incentive District created by an ordinance or resolution adopted by a city, township, or county prior to
January 1, 2006.
The Bill also provides that the consent of the county
(in the case of an Incentive District created by a city
or township) or the city or township (in the case of an Incentive District created by a county) must be obtained
if the proposed exemption exceeds 75% of the increase
in value or will last more than 10 years. Under continuing
law, the consent of the school district must also be obtained
for an exemption that exceeds the specified thresholds.
Other Tax Provisions
The Bill increases certain taxes on tobacco products from $0.55 per pack to $1.25 per pack.
The Bill creates a tax amnesty program, to be open from January 1, 2006 to February 15, 2006, under which
taxpayers who voluntarily pay certain outstanding state
taxes, personal property taxes, and school district income
taxes are not required to pay penalties and are excused
from paying 50% of the otherwise applicable interest.
The grain handling tax is phased out, reducing the tax
rates in half in 2006 and eliminating the tax in 2007.
For More Information
Please contact Jim Balthaser, Thomas E. DeBrosse, J. Shane Starkey, or William R. Stewart or any member of our Tax practice group for more information.
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