Ohio Tax Reform Becomes Reality
SALT Tax Alert, June 30, 2005

Ohio's Budget Bill (Am. Sub. H.B. 66) has been signed by the Governor.  It’s the most sweeping change in Ohio tax law in 40 years and goes into effect July 1, 2005. 

I.  Commercial Activity Tax (CAT) Enacted

• New business privilege tax that applies to all forms of business organizations having Ohio taxable annual gross receipts in excess of $150,000.
• The CAT does not apply to the following: financial institutions, dealers and intangibles, insurance companies and public utilities.
• CAT is $150 annually on Ohio taxable gross receipts up to $1 million.
• Receipts greater than $1 million, CAT is $150 plus 0.26% of Ohio taxable receipts annually  [$2,600 per $1 million in Ohio taxable receipts].
• CAT rate is subject to adjustment (upward or downward) on three occasions through 2011 by Tax Commissioner, and without vote of General Assembly, if revenue differs materially from target amounts.
• Every business entity or person subject to the CAT is required to register by November 15, 2005 or within 30 days of first transacting business subject to the CAT.

II. Corporation Franchise Tax

• H.B. 66 phases out the corporation franchise tax over five years for all corporations (other than financial institutions).
• Authorizes corporations that become subject to the CAT to offset some of the financial losses resulting from the loss of future net operating loss deductions in the computation of the franchise tax.
• Credits for new manufacturing machinery and equipment against the franchise and personal income taxes limited to equipment purchased no later than June 30, 2005, and installed no later than June 30, 2006.

III. Personal Income Tax

• Reduces personal income tax rates by 21% over five years, beginning in 2005.  Maximum rate drops from 7.5% to 6%.
• Makes permanent Ohio's taxation of trust income that was scheduled to end with taxable years of a trust beginning in 2004.
• Modifies the definition of a "qualifying investment pass-through entity" as used in determining the taxable income of certain trusts.
• Modifies resident income tax credit.  Specifies that the existing income tax credit for Ohio residents who incur out-of-state income tax liabilities is not available to taxpayers who deduct, or are required to deduct, their out-of-state income tax liabilities in computing their taxable base.
• Specifies that C corporation nonresident shareholders are not indirect owners of the corporation's assets for the purpose of computing tax items, such as applying the corporation's apportionment factors to dividends.
• Creates a three-year apportionment requirement for nonresidents selling their interests in a pass-through entity.  This provision applies only to closely held entities and applies even if the entity converts from being a pass-through entity to another organizational form within that three-year period.

IV. Real and Personal Property Taxes

• Ohio personal property tax on all tangible personal property and inventory will be phased out over four years, eliminating the entire tax in 2009.
• New manufacturing machinery and equipment acquired after January 1, 2005 will not be subject to personal property tax.
• Business real estate tax increase.  Eliminates the 10% rollback for real property classified as commercial.  The 10% rollback remains for residential and agricultural real estate.

V.  Sales and Use Taxes

• Increases the permanent state sales and use tax rate to 5½%, effective July 1, 2005.  This effectively maintains one-half of the temporary 1% sales tax that expires June 30, 2005.
• Continues the 0.9% discount rate for vendors collecting the sales tax.
• Revises the sales and use tax law to conform to the Streamlined Sales and Use Tax Agreement by modifying the sourcing requirements for multiple points of use sales, sales of direct mail, and leases or rental of property requiring periodic payments.
• State cigarette excise tax increased from current 27.5 mills (2.75¢) per cigarette to 62.5 mills (6.25¢) per cigarette, effective July 1, 2005.
• Permits the Tax Credit Authority to enter into agreements for job retention credits after June 30, 2007 — currently the date the program is scheduled to expire.
• Constructively eliminates the additional estate "sponge" tax and generation-skipping tax provisions by revising references to the Internal Revenue Code and incorporating previous federal estate tax changes.
• Repeals the estate tax deduction for family-owned businesses.
• Clarifies the treatment of expenses and losses of a pass-through entity subject to the pass-through entity withholding tax.
• Narrows the definition of a dealer in intangibles.
• Permits County Commissioners to levy additional lodging taxes for convention center construction projects.
• Enacts a temporary tax amnesty program from January 1, 2006 to February 15, 2006.  Removes all penalties and reduces interest by 50% for taxpayers who voluntarily pay outstanding state taxes, tangible personal property taxes, county and transit authority sales taxes, and school district income taxes.  As well, taxpayers conforming to the amnesty program are immune from criminal and civil action in connection with the taxes.

Ohio’s newly-enacted Commercial Activity Tax (CAT)….call Mike Baker, Ohio SALT Leader at Plante & Moran to discuss how to calculate the impact of these massive changes on business. 

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.