Ohio biennial budget bill enacted: Personal income tax and business tax changes
On July 18, 2019, Ohio Governor Mike DeWine signed into law, Am. Sub. H.B. 166, Ohio’s biennial budget bill (Bill), and exercised his authority to veto certain provisions.
This article discusses key tax provisions in the Bill, including:
- Modifications to the business income deduction.
- Reduction in personal income tax rates by 4 percent.
- Addition of sales and use tax economic nexus thresholds.
- Addition of marketplace facilitator provisions.
- Expansion of the job retention tax credit for manufacturers.
- Addition of a sales tax exemption for equipment and supplies used in cleaning equipment for processing food.
- Several other provisions.
Personal income tax
Business income deduction (BID)
Effective for tax year 2020, the BID applies to “eligible business income,” which is defined to mean business income excluding income from certain lawyers’ and lobbyists’ services. Additionally, the 3 percent flat tax rate on business income above the deduction threshold excludes lawyers’ and lobbyists’ income. There was no change to the $250,000 maximum BID or $125,000 for married filing separate taxpayers. The first $250,000 or $125,000 of “eligible business income” that is included in federal-adjusted gross income earned by taxpayers continues to be 100 percent deductible. “Eligible business income” over the threshold continues to be taxed at a flat 3 percent rate.
The Bill adds the term, “modified adjusted gross income,” which is defined as Ohio-adjusted gross income plus any amount deducted under the BID. This term is used for determining eligibility for several items, including the personal exemption, the personal exemption credit, and the joint filing credit, among others.
Personal income tax rates
The Bill eliminates the lowest two income tax brackets, resulting in the lowest bracket starting at $21,750 instead of $10,500. The Bill also reduces the tax rates by 4 percent, as follows:
|New brackets||New tax rate|
|$21,750 – $43,450||$310.47 plus 2.85% of the amount in excess of $21,750|
|$43,450 – $86,900||$928.92 plus 3.32% of the amount in excess of $43,450|
|$86,900 – $108,700||$2,374.07 plus 3.80% of the amount in excess of $86,900|
|$108,700 – $217,400||$3,202.91 plus 4.41% of the amount in excess of $108,700|
|More than $217,400||$7,999.84 plus 4.79% of the amount in excess of $217,400|
Ohio opportunity zone credit
The Bill adds the opportunity zone investment credit to incentivize economic development and job creation in designated areas in Ohio. This is a nonrefundable, transferrable income tax credit equal to 10 percent of the investment in an Ohio-qualified opportunity fund. A qualified opportunity fund is an investment vehicle (either a partnership or corporation) for investing in eligible property that is located in a qualified opportunity zone, and has self-certified by filing Form 8996 with its federal income tax return. There are over 300 opportunity zones spread across 73 of 88 counties in Ohio. The total tax credits will be limited to $50 million per biennium and up to $1 million per biennium for any one person. Any excess credit may be carried forward up to five years. The credit may be claimed by individuals, taxable trusts and estates, and by qualifying taxpayers electing to be included on a composite income tax return. If the credit is allowed in the year, the investment is made into the opportunity zone property. The qualified opportunity fund is required to hold 100 percent of its invested assets in qualified opportunity zone property situated in an Ohio opportunity zone.
Lead abatement tax credit
Costs incurred to abate lead hazards in residential units constructed before 1978 may be eligible for a nonrefundable income tax credit. The amount of each credit equals the lesser of (a) the lead abatement costs incurred by the taxpayer on the eligible dwelling during the taxable year, (b) the amount of lead abatement costs listed on the application to the to the director of health, or (c) $10,000. Any unused credit may be carried forward up to seven years.
Repeal of certain income tax credits
The following credits are repealed for the 2019 taxable year:
- Credit for campaign contributions
- Credit for a pass-through entity investor’s share of financial institutions tax
Sales & use tax
Substantial nexus – Remote sellers
The term “substantial nexus with this state” is modified to include additional nexus triggering thresholds as a result of the Wayfair U.S. Supreme Court decision. The following remote seller standards were added to the existing standards effective Aug. 1, 2019:
- Gross receipts in excess of $100,000 in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in Ohio or from providing services where the benefit is received in Ohio; or
- Engages in 200 separate transactions in the current or preceding calendar year selling tangible personal property for storage, use, or consumption in Ohio or from providing services the benefit of which is received in this state.
The following nexus provisions were eliminated:
- Click-through nexus
- Content distribution networks
- Use of in-state software
The Bill requires marketplace facilitators to collect and remit use tax if the facilitator’s sales, and the sales of its marketplace sellers, satisfy the Wayfair standards of $100,000 from sales made in Ohio or 200 or more separate transactions made or “facilitated” in Ohio. Sales are “facilitated” if the marketplace facilitator, directly or indirectly, does any of the following to support the marketplace seller:
- Collects payment.
- Provides payment processing services.
- Provides virtual currency that consumers can use.
- Advertises the goods or services for sale.
- Communicates an offer or acceptance.
- Provides electronic or physical infrastructure.
- Provides the marketplace.
- Provides software development or research services.
- Provides fulfillment or storage services.
- Sets the price.
- Provides customer service.
- Brands or identifies the sale as a sale of the marketplace facilitator.
The Bill makes the marketplace facilitator liable for the use tax that should be collected. However, certain marketplace sellers can request a waiver for the facilitator to be relieved of all liability under this provision. If the waiver request qualifies, the Department must grant the waiver, which will shift any liability to the marketplace seller and the purchaser. To be eligible, the marketplace seller must meet all of the following:
- Have annual gross receipts within the United States of at least one billion dollars, including gross receipts of any affiliate.
- Be publicly traded on at least one major stock exchange.
- Be current on all taxes.
- Have not within the past 12 months requested that a waiver be canceled nor had a waiver revoked by the commissioner.
- Be compliant with its sales tax filing obligations.
Exemption for food manufacturing equipment
The exemption for equipment and supplies used to clean processing equipment that is part of a continuous manufacturing operation to produce dairy products is expanded to include equipment and supplies used to clean equipment that is used to process all food for human consumption.
“Food,” for purposes of manufacturing exemptions, is defined “to mean any raw, cooked, or processed edible substance used or intended for use in whole or in part for human consumption. “Food” includes ice, water or any other beverage, food ingredients, and chewing gum.”
Sales & use tax exemptions removed
The Bill removes the following sales tax exemptions:
- Sales to a professional racing team of motor racing vehicles, repair services for motor racing vehicles, and items of property that are attached in motor racing vehicles, including engines, chassis, and all other components of the vehicles, and all parts of vehicles
- Sales of investment metal bullion and investment coins
Peer-to-peer car sharing
The definition of “vendor” is updated to include the operator of any technology platform that connects a consumer with another person who is providing a service subject to sales tax, including a transportation network company or a peer-to-peer car-sharing program operating a technology platform for the purpose of providing transportation network company services or peer-to-peer car sharing program services.
Municipal income tax
The Bill defines the terms “pension” and “retirement benefit plans” for purposes of the pension exemption from municipal income tax. Essentially, all retirement benefit plans are exempt from municipal income tax beginning on or after Jan. 1, 2020. This includes supplemental executive retirement plans (SERPs) or “top hat” plans that are paid to supplement the retirement earnings of certain highly compensated executives.
Financial institutions tax (“FIT”)
Beginning on Jan. 1, 2020, the tax base upon which the FIT is computed is limited such that equity capital in excess of 14 percent of an institution’s total assets are not included in the tax base. “Total assets” are added as a defined term to generally mean the total consolidated assets of the financial institution at the end of the taxable year.
Small business investment credit
The small business investment credit is provided to taxpayers making a qualifying investment in small businesses with a presence in Ohio. The amount of the nonrefundable credit is 10 percent of the qualifying investment, and may not exceed $1 million. The credit is claimed for the taxable year that includes the last day of the two-year holding period of the qualifying investment and unused credits may be carried forward up to seven years. The following Bill modifications apply to investments on or after July 1, 2019:
- The total amount of credits claimed in a biennium may not exceed $50 million, reduced from $100 million
- The 50 full-time employee requirement must be met throughout the two-year holding period
- The business must incur certain costs, and the Bill makes the following modifications: allowing the business to count installation costs to the cost of tangible personal property used in business; replacing the cost of intangible property with the cost of leasehold improvements and construction costs for property used in business; permitting increased compensation for owners, officers, or managers to count toward payroll, only counting the pay of employees hired after the investment
Vapor products excise tax
Beginning Oct. 1, 2019, an excise tax is imposed on vapor products distributors at a rate of $.10 per mL (milliliter) of liquid vapor product or $.10 per gram of nonliquid vapor product.
Motion picture tax credit
Eligibility for the refundable tax credit against personal income tax and commercial activity tax for motion picture production expenditures is expanded to broadway theatrical productions as well as companies involved in motion picture productions that are not themselves production companies. “Broadway theatrical production” means a prebroadway production, long-run production, or tour launch that is directed, managed, and performed by a professional cast and crew and that is directly associated with New York City’s broadway theater district. To claim the credit, the motion picture or broadway theatrical production must be certified by the director of development services. Expenditures for which the credit may be claimed are expanded to include post-production, advertising, and promotional expenses.
Job retention tax credit
The Bill modifies the qualifications for manufacturers to qualify for the nonrefundable job retention tax credit. Manufacturers can qualify for the credit if they made a capital investment over three years equal to the lesser of $50 million or 5 percent of the net book value of tangible personal property used at the project at the end of the three-year period. Under the current law, a $50 million investment is required. Additionally, payroll or employment requirements are no longer required to be met by manufacturers.
Historic rehabilitation credit
The Bill extends to June 30, 2021, a temporary provision authorizing owners of a historic rehabilitation tax credit certificate to claim the credit against the Ohio commercial activity tax, income tax, financial institutions tax, or insurance company franchise taxes.
Partnership audit procedures
The Bill adopts partnership audit procedures to report changes in Ohio personal income tax liability from federal partnership audits. Within 90 days of a final federal adjustment, a partnership must do the following: report the changes in federal liability to Ohio; notify its direct partners of each partner’s share of the adjustments; and submit an amended return that includes any additional tax that would have been due from the entity’s nonresident direct partners if the items requiring adjustment had been reported correctly. The partners are then responsible to file a separate report and pay any additional tax due. Alternatively, the partnership may elect to pay the additional tax directly without the need for the investors to file separate amended returns and pay additional tax separately.