State & local tax alert: Ohio Budget Bill and Resulting Tax Changes (H.B. 49)
The changes are intended to make Ohio a more attractive place for new businesses and investments in new jobs. A couple of the major changes include adjusting the individual income tax brackets, the repeal of the throw-back provision for municipal net profits tax, and the imposition of a bright-line nexus threshold requiring sales tax collection. A tax amnesty was also approved. There were several significant proposals which did not survive the legislative process. Increases in the sales tax rate and the Commercial Activity Tax (CAT) rate and a broad expansion of the sales tax base were all removed from consideration. For more detail on provisions noted above along with several others, please read below.
Individual income tax changes
The biennial budget reduces the number of Ohio individual income tax brackets from 9 to 7 by eliminating the bottom two income tax brackets. This results in no tax on the first $10,500 of Ohio adjusted gross income less exemptions and less taxable business income. In conjunction with the elimination of the bottom two tax brackets, the low-income tax credit has been eliminated. These changes are effective for taxable year 2017.
HB 49 increases the maximum income tax deduction for contributions to college savings plans or disability savings accounts from $2,000 to $4,000 for each beneficiary on an annual basis. This is effective for taxable years beginning in 2018 or thereafter.
Municipal income tax changes
HB 49 repeals the "throw-back rule" for municipal net profits tax purposes for tax years beginning on or after Jan. 1, 2018. Businesses that ship goods from Ohio may see a reduction in their Ohio municipal income taxes if there are significant sales to locations outside Ohio where the business has not established an income tax filing requirement. HB 49 retains the general sourcing rules for tangible personal property whereby sales are sourced to a municipality if goods are either shipped from and to the same municipal corporation or are delivered within the municipal corporation where employees of the business regularly solicit sales.
Businesses, except for sole proprietorships, have the ability to opt-in and allow the Department of Taxation to administer their municipal net profits tax beginning in 2018. This will be administered through the Ohio Business Gateway and will allow businesses to comply with their municipal net profits filing requirements through a single return. The election applies each year until revoked. It does not change the administration of municipal taxes for individuals or for payroll withholding. These taxes will continue to be administered by the municipality or its designee, such as RITA or CCA.
The fourth quarter individual municipal income tax payments have been extended by one month for taxable years beginning in 2018. Individuals will have until January 15, whereas calendar year end businesses will still be required to remit the fourth quarter estimate by December 15.
Prior to the passage of HB 49, if municipalities imposed a penalty on late withholding payments, it was required to be 50 percent by law. Language was enacted which clarifies that municipalities may now impose penalties up to 50 percent, thereby granting municipalities statutory authority to impose penalties less than 50 percent. A similar change was not made to the income tax penalty equal to 15 percent. However, the statute already permits a municipality to abate or partially abate penalties and interest related to income tax. The abatement is at the tax administrator’s sole discretion.
Sales and use tax changes
HB 49 requires an out-of-state seller with no physical presence in the state to collect and remit use tax from Ohio customers when certain conditions are met. Ohio is following a string of other states that are attempting to circumvent the long-standing physical presence standard required for sales tax collection as provided by the U.S. Supreme Court ruling in Quill. The collection and filing requirements under HB 49 are met when the seller has annual Ohio sales of at least $500,000 and either of the following:
- The seller uses in-state computer software to make Ohio sales. In-state software is defined as software “stored on property in this state or distributed within this state for the purpose of facilitating a seller’s sales.” This could be applied broadly and could capture all internet retailers who install “cookies” or “apps” on the customers’ electronic devices.
- The seller enters into an agreement with a third party to provide content distribution networks in Ohio to accelerate or enhance delivery of the seller’s website to Ohio consumers. Content distribution networks are defined as “a system of distributed servers that deliver websites and other web content to a user based on the geographic location of the user, the origin of the website or web content, and a content delivery server.”
HB 49 provides a three-day sales tax “holiday” in August 2018 where sales of clothing, school supplies, and instructional materials (subject to price limitations) will be exempt from sales and use taxes. This is similar to the back-to-school holidays enacted in August 2016 and August 2017.
Changes are made to how sales and use tax is sourced for direct mail. Direct mail, other than advertising direct mail, will now be sourced to the location of the direct mail’s consumer. Advertising direct mail continues to be sourced to the delivery locations. However, if the purchaser doesn’t provide the recipient locations, the sale is sourced to the vendor’s ship-from location. Additionally, exemption certificates demonstrating direct mail sourcing will only be valid in the “absence of bad faith”.
Various administrative revisions are made to vendor licensing procedures at the county and state level, including online applications, revocation procedures, and reinstatement procedures. Additionally, prior to HB 49, direct pay holders and the holders’ account numbers were published electronically. HB 49 prescribes that this information is made available for all sales tax licenses.
HB 49 authorizes a tax amnesty program, which will allow taxpayers to come forward voluntarily to report previously unfiled returns and remit past due payments for specific taxes. This includes state taxes, local sales and use taxes, school district income taxes, and local alcohol and cigarette excise taxes. All of the penalties and one half of the interest will be waived. The program will run from Jan. 1, 2018 to Feb. 15, 2018.
Taxpayers can no longer appeal decisions from the Board of Tax Appeals directly to the Ohio Supreme Court unless the appeal involves a substantial constitutional question or a question of great public interest.
HB 49 provides several updates, revisions, and clarifications to economic incentives including the Jobs Creation Tax Credit, New Markets Tax Credit, enterprise zone agreements, sales and use tax exemption for computer data centers, loan programs, and others.
HB 49 codifies specific methods to compute current agricultural use value of agricultural land for property tax purposes along with other related changes.
The “premium cigar” tax is now limited to 50 cents per cigar adjusted for inflation which will reduce the tax applied to many cigars.
Authority was granted to cities in certain counties to make changes to the lodging tax including raising rates. In some cases, the rate could double from 3 to 6 percent.
The governor vetoed a number of provisions in HB 49 including several tax provisions, as follows:
- Sales and use tax exemption on automatic data processing, computer services, and electronic information services when the services are not the true object of the sales transaction
- Sales and use tax exemption for prescription eyewear
- Other administrative and clarifying revisions along with a refundable tax credit for rural and high-growth industry funds