Ohio budget bill and resulting tax changes (HB 64)
Governor Kasich signed the final version of the biennial budget bill on June 30, 2015, after review and debate by the Ohio House of Representatives and the Ohio Senate. The budget resulted in many changes in tax policy, allowing for modifications of Ohio spending. The changes also were intended to make Ohio a more attractive place for new businesses and investments in new jobs.
Individual income tax changes
The biennial budget reduces the personal income tax rates by 6.3 percent for the taxable years beginning in 2015 and thereafter. For the taxable year beginning in 2014, the highest marginal rate was 5.333 percent. With passage of the budget bill, the highest marginal rate in Ohio is now under five percent with a rate of 4.997 percent.
Small business income tax changes
For taxable years beginning in 2015, taxable small business income, which is income apportioned to Ohio that flows through to individuals from S Corporations, partnerships, limited liability companies taxed as partnerships, and income for sole proprietorships, is reduced by the lesser of 75 percent of Ohio business income or $187,500. This deduction is limited to $93,750 for spouses filing separate returns. For taxable years beginning in 2016 and thereafter, taxable small business income is reduced by the lesser of 100 percent of Ohio business income or $250,000. This deduction is limited to $125,000 for spouses filing separate returns. Also, for taxable years beginning in 2015 or thereafter, the tax imposed on business income will equal a flat three percent.
Sales and use tax changes
Ohio has followed many other states and adopted affiliate or “click-through” nexus for sales and use tax purposes. Substantial nexus is created if a seller enters into an agreement with one or more residents of Ohio for a commission or other consideration to refer potential customers to the seller. There is a bright-line test for this type of activity and the cumulative gross receipts from sales to consumers referred to the seller by all of its affiliates must exceed $10,000 during the preceding 12 months.
Additionally, Ohio has adopted many other provisions which expand the definition of substantial nexus. Substantial nexus will be created if the seller uses any person other than a common carrier to advertise, promote, or facilitate sales by the seller to customers, or uses any person to deliver, install, assemble, or perform maintenance services. Additionally, nexus will be created if the seller uses a person who facilitates the seller’s delivery of tangible personal property to customers in Ohio by allowing the customers to pick up property sold by the seller at an office, distribution facility, warehouse, storage facility, or similar place of business. Finally, the budget preemptively allows for sales tax to be collected on remote sellers that lack substantial nexus if the Market Place Fairness Act (or any similar provision) is enacted by federal law.
Tax Credits and Exemptions
The main tax credits offered by the Tax Credit Authority are the Jobs Creation Tax Credit and the Jobs Retention Tax Credit. These credits were originally computed on an agreed-upon percentage of a company’s Ohio income tax withholding and subject to a cap of 75 percent. HB 64 changes how the credits are calculated and they are now computed on a company’s employee payroll instead of income tax withholding. Additionally, the credit cap of 75 percent has been removed.
Municipal Income Tax
A provision in HB 64 allows publicly traded partnerships to elect to be taxed as if the partnership were a C corporation for municipal income tax purposes. Generally, partnership income is taxed at the owner level, while C corporations are taxed at the entity level. The election to be taxed as a C corporation would be made on an annual basis and would need to be made on every municipal return where net profits are taxed.
The bill also changes the annual return filing deadline for taxpayers to the 15th day of the fourth month following the end of the taxpayer’s taxable year.
Finally, the bill requires a municipal tax administrator to grant a taxpayer a six-month filing extension even if the taxpayer did not request a federal extension.
The version of the bill passed by the Senate included a provision that would limit the amount of information the Tax Commissioner may ask to confirm a person’s identity if the person was to fail the online identity confirmation quiz. Also, the bill required that the Tax Commissioner administer a temporary tax amnesty program from January 1, 2016, to February 15, 2016 with respect to a variety of Ohio taxes. Governor Kasich was very active with his line item veto powers and these two provisions were part of the 44 items the Governor vetoed on June 30, 2015.
On the Horizon
The budget bill also establishes a seven-member commission to review Ohio’s tax structure and policies to make recommendations on how to further increase Ohio’s competitiveness by 2020 and how to transition to a flat personal income tax of either 3.5 percent or 3.75 percent by tax year 2018. This analysis is due no later than October 11, 2017. Additionally, this committee will look at how to reform the state’s severance taxes and must report on this analysis by October 1, 2015.