Thomas M. Zaino, JD, CPA – Managing Member
Ohio’s Biennial Budget Bill Enacted – Ohio Takes One Step Forward, Two Steps Back on Tax Policy
Ohio Governor John Kasich signed the state’s biennial budget bill, Am. Sub. H.B. No. 49 (the “Bill”), as of June 30, 2017. The Bill contains significant tax law changes, including centralization of municipal net profits tax filings and elimination of the municipal tax throwback rule, which is an important step toward improving Ohio state and local tax system. However, this progress was overshadowed by the elimination of a direct appeal to the Ohio Supreme Court in tax matters, taking Ohio’s tax policy back to the pre-World War II era.
The Bill did not include the $3.2 billion of personal income tax reductions, nor the corresponding $3.1 billion of increases to other taxes, as originally proposed by Governor Kasich. The Governor exercised his line-item veto authority on forty seven provisions, primarily applying his veto pen on Republican efforts to limit the growth in Medicaid. He vetoed five provisions related to taxes. The leaders of the House and Senate have warned members to be available in case the General Assembly would like to override any of Governor Kasich’s vetoes.
Final Tax Provisions
The Bill contains many tax law changes. Below is a description of the more significant tax law changes. Future SALT Buzzes will discuss some of these changes in more detail.
Important Taxpayer Appeal Right Is Eliminated
Without a single public hearing, the General Assembly and Governor have eliminated the longstanding right of taxpayers and taxing authorities to obtain a mandatory review by the Ohio Supreme Court (“Supreme Court”) of decisions rendered by the Ohio Board of Tax Appeals (“BTA”). Until now, taxpayers and taxing authorities could appeal a decision of the BTA either directly to the Supreme Court or to the Court of Appeals in which the taxpayer resides. If the appeal was filed directly with the Supreme Court, the Court was required to hear the appeal. If the appeal was filed with the Court of Appeals, the decision of the Court of Appeals could be further appealed to the Supreme Court, but only if the Supreme Court agreed to accept the appeal.
ZHF Observation: The right for a mandatory review of BTA decisions by the Supreme Court has been a part of Ohio’s tax policy since 1939, which was shortly after the first statewide sales and use tax law was enacted. It seems obvious that policy makers in 1939 understood the importance of having one statewide interpretation of Ohio state and local tax laws.
Under the new appeal procedure, taxpayers and taxing authorities must now appeal BTA decisions to one of the twelve courts of appeals located in Ohio, depending on where the taxpayer resides. (Of course, determining where a business taxpayer resides is especially problematic for those businesses with multiple locations in the state.) After filing a notice of appeal with the appropriate court of appeals and if the appeal involves a substantial constitutional question or a question of great general or public interest, a party may petition the Supreme Court and request the appeal be transferred to the Supreme Court. However, whether the Supreme Court approves the petition is solely within the Supreme Court’s discretion and it is not required to accept such appeal. If the taxpayer or taxing authority loses at the Court of Appeals, the loser may file another request for the Supreme Court to review the Court of Appeal’s decision. However, as under current law, the Supreme Court is under no obligation to accept review of the Court of Appeal’s decision either.
ZHF Observations: Because no public hearings have been held, it is hard to understand the perceived problem this major change to taxpayer rights is attempting to solve. The change helps no taxpayers and will certainly make taxpayers less able to exercise their rights to challenge government tax assessments because of the added costs and uncertainty that will inevitably be created by the new appeal procedure.
In fact, the new appeal procedure will adversely impact Ohio’s competitiveness by increasing the cost of tax appeals and eliminating uniform application of tax laws within Ohio. For example, even though a court of appeals rules in favor of one taxpayer within its jurisdiction, the Ohio Department of Taxation ("ODT") will not be bound to treat taxpayers in all other court of appeals jurisdictions in the same way. As a result, a taxpayer with plants in two different Ohio jurisdictions could have its state and local taxes related to those plants applied differently. Also, ODT could apply tax rules differently to individuals, depending on where the individual resides. Additional litigation by other taxpayers will be required in order to obtain a uniform, statewide application of tax law.
Finally, because the BTA also makes decisions on the application of the municipal tax by city tax officials, the municipal tax law that applies to a taxpayer will depend heavily on the court of appeals jurisdiction in which the municipality is located. As a result, in spite of all the efforts made in H.B. 5 to impose greater statewide uniformity on the municipal income tax system, over time the new municipal tax system will not be uniformly applied across Ohio unless the Supreme Court agrees to weigh in on all appeals.
Personal Income Tax:
Two Lowest Brackets are Eliminated: The number of income tax rate brackets are reduced by eliminating the bottom two individual income tax brackets. Individuals earning less than $10,500 will not owe any Ohio tax because the lowest tax bracket will now apply to income over $10,500 and up to $15,800. The tax for this lowest bracket will equal $77.96 plus 1.980% of the amount of income above $10,500 and less than $15,800.
Low Income Tax Credit is Eliminated: The low-income tax credit is eliminated because no tax would otherwise be due as a result of the lower brackets being eliminated.
College Savings Plan Deduction is Doubled: The amount of tax deduction taxpayers may claim for contributions to a qualified college savings plan (i.e., a section 529 plan) is doubled from $2,000 to $4,000 per each beneficiary per donee. The change is effective for tax years beginning in 2018 (i.e., the 2018 tax year for most taxpayers).
Business Income Deduction Reporting Required: ODT will now be required to separately compute and report to the Office of Budget and Management (OBM) specific data regarding the Business Income Deduction (“BID”). OBM must then separately report actual and estimated revenues, the amount of income tax revenue arising from the taxation of business income taxable at three per cent, and the amount of such revenue arising from nonbusiness income taxable under the graduated rate schedule.
ZHF Observation: This requirement seems targeted at helping the General Assembly better track the impact of the BID on state revenues because the BID has been blamed by some for Ohio’s lower than anticipated personal income tax revenues.
Municipal Income Tax:
Option to Elect Centralized Filing and Administration of Municipal Net Profit Returns is Enacted: For taxable years beginning on or after January 1, 2018, businesses may opt-in and out of the centralized filing and administration of the municipal net profits tax by ODT. Businesses may continue to file locally and be subject to local audit and administration, or choose to file centrally through the Ohio Business Gateway and have ODT review and audit the net profit tax returns. Once a taxpayer opts into the centralized filing and administration, the election will automatically renew each year unless the taxpayer opts out of the program. These new provisions are contained in Chapter 718 (the municipal tax chapter) in an effort to ameliorate municipal concerns that the state might abscond with their tax dollars. The cost of administering the tax will be bourne by the municipalities, which will be charged a fee equaling one-half per cent of the municipal tax collected by ODT. Tax collected by ODT will be remitted once per month to the municipalities. [Watch for a future SALT Buzz providing more detail on these dramatic changes to Ohio’s municipal income tax system.]
Throwback Rule Eliminated: The municipal tax throwback rule is eliminated for taxable years beginning in or after 2018.
Estimated Tax Payment Modification: Individual taxpayers will be allowed to pay fourth quarter estimated payments by the 15th day of the first month of the ensuing taxable year (January 15th for calendar year taxpayers). The provision is effective for taxable years beginning in 2018. However, calendar year business taxpayers must continue to use the current fourth-quarter estimated tax payment deadline of December 15th.
MeF Feasibility Study Required: ODT is required to study the feasibility of allowing municipal taxpayers to file city tax returns through the joint federal and state Modernized e-File program (“MeF”). MeF is a web-based electronic tax filing system developed and maintained by the I.R.S. and made available to taxpayers through approved private sector tax filing software providers.
Municipal Tax Late Payment Penalty Changed: A provision related to the penalty for late payment of withholding taxes is changed from “fifty per cent” of the unpaid amount to “not exceeding fifty per cent” of the unpaid amount.
ZHF Observation: This change helps affirm a municipal tax administrator’s discretionary authority to charge less than the full fifty per cent penalty.
Sales and Use Taxes:
Sales Tax Holiday: A three-day sales tax "holiday" is provided in August, 2018, during which sales of clothing, school supplies, and instructional materials within certain price ranges will be exempt from sales and use taxes. The holiday is similar to an upcoming sales tax holiday in August, 2017.
Remote Sellers Required to Collect Tax: Internet sellers will now be required to begin collecting sales tax from Ohio buyers by expanding the list of activities by sellers that establishes “substantial nexus” with Ohio. The requirement to collect tax from Ohio consumers will apply to any seller that has Ohio gross receipts in excess of $500,000 in the current or preceding calendar year and does one of the following activities:
Uses in-state software to sell or lease taxable tangible personal property or services to consumers; or
Provides or enters into an agreement with another person to provide a content distribution network in Ohio to accelerate or enhance the delivery of the seller’s web site to consumers.
“In-state software” means computer software that is stored on property in Ohio or is distributed within Ohio for the purpose of facilitating a seller’s sales. This would apply to virtually any web-based seller because retail web-sites generally copy software “cookies” on a user’s computer. A “content delivery network” means a system for distributed servers that deliver web sites and other web content to a user based on the geographic location of the user, the origin of the web site or web content, and a content delivery server.
ZHF Observations: This provision is similar to recent efforts by states to ignore the U.S. Supreme Court’s ruling in Quill v. North Dakota, which held that a physical presence is necessary in order to require an out-of-state vendor to collect sales tax. Of course, the above two requirements could be viewed as creating the physical presence required by Quill.
The Legislative Service Commission did not provide an estimate of the increased revenues that could result from this provision. In any event, this change would likely result in many Ohioans paying a tax they did not pay before the bill was enacted (although the tax was legally required to be reported and paid by them as Use Tax).
Jukebox Music Exemption Modified: A new exemption will now be available for purchases of digital multimedia, such as songs, sold through a digital jukebox from the sales and use tax. The exemption is limited to digital music purchased from and played by a single-play commercial music machine (i.e., jukebox).
Direct Mail Definitional and Exemption Certificate Changes: Numerous definitional changes related to direct mail are added, including the following provisions:
Exemption certificates related to direct mail will only be valid if received by the vendor in the absence of bad faith.
Modifies rules for situsing sales and use tax for direct mail to conform with the Streamlined Sales and Use Tax Agreement (SSUTA) and an Information Release previously issued by ODT.
Distinguishes between direct mail used for advertising purposes and all other forms of direct mail and applies separate situsing rules for each type. (In general, direct mail is printed material mass mailed by one party -- the "vendor" -- to predetermined recipients on behalf of another party -- the "consumer.")
Requires that advertising direct mail continue to be sitused as under prior law, but other direct mail is sitused to the location of the direct mail's consumer (who is no longer permitted to furnish delivery information that would require situsing to delivery locations).
ZHF Observation: “Absence of bad faith” is a very tough standard and is not a requirement for other exemption certificates if received within 90 days of the date of the sale. It is unclear why a different standard is warranted for direct mail. Other exemption certificates received after the 90-day limit do have a good faith standard applied to them.
Vendors’ License Changes: A number of changes related to vendors licenses have been enacted, including the following:
A requirement that ODT provide an online system for the county auditors to provide vendor licenses;
ODT may cancel vendor and similar licenses where fraudulent or incorrect returns are filed; and
ODT is required to make public an electronic list of names and account numbers for vendor’s license, direct pay permit and sellers use tax account holders.
Real Property Taxes:
CAUV Property Valuation Methods Changed: Two new factors to be considered in calculating the current agricultural use value (“CAUV”) are added, “typical cropping and land use patterns” and “typical production costs,” and one existing factor is deleted—“market value.” Also, the equity yield rate used to calculate the capitalization rate must equal the 25-year average of the “total rate of return on farm equity” published by the U.S. Department of Agriculture and the holding period for the purposes of calculating the components of capitalization is deemed to be 25 years (rather than just 5 years under prior law).
Homestead Exemption Filing Deadline is Extended: The filing deadline by which manufactured and mobile home owners must apply for the homestead exemption has been extended by 18 months, from the first Monday in June of the year preceding the year for which the exemption is sought, to December 31st of the year for which the exemption is sought.
Contents of Property Tax Resolutions Expanded: Property tax resolutions will now be required to include the following additional information: (i) whether the tax is a renewal or a replacement of an existing tax with an increase or decrease, (ii) the term of the tax, (iii) the subdivision's territory in which the tax will be voted upon and levied, (iv) the date of the election, (v) the first tax year to which the tax will apply, and (vi) each county in which the subdivision has territory.
Real Property Tax Exemption: A real property tax exemption is now available for property that meets all four of the following conditions: (i) less than 75% of the rentable square footage is rented to tenants, (ii) it is owned by a municipality, after being conveyed by a Community Improvement Corporation (“CIC”), (iii) it was conveyed to that CIC by a federal agency, and (iv) the property is subject to an agreement that requires the municipal corporation to convey the property back to the CIC before the property may be developed. The exemption applies beginning in tax year 2016 and all years thereafter.
Community Reinvestment Area: Under certain circumstances, a county or municipal corporation is now authorized to extend the term of a community reinvestment area (“CRA”) property tax exemption without triggering an existing law requiring that the CRA conform to various requirements and limitations enacted in 1994.
Charitable Nonprofit Housing Organization Exemption Added: A real property tax exemption is added for a retail store operated by a charitable nonprofit housing organization that sells primarily donated household items from real property taxation beginning with tax year 2017. The proposal applies the exemption to any exemption applications pending or on appeal when the provision takes effect.
ZHF Observation: This provision is generally understood to be adopted for the benefit of Habitat for Humanity Restore retail operations.
Ohio has adopted its fourth tax amnesty program since the 2002, and the second one under the Kasich Administration. The program would run from January 1, 2018, to February 15, 2018, and apply to delinquent state taxes, tangible personal property taxes, county and transit authority sales taxes, and school district income taxes that were due as of May 1, 2017. The benefits of the program for participants will be elimination of all applicable penalties and payment of only half the interest that would otherwise be due. [Watch for a future SALT Buzz providing more detail on this latest tax amnesty program.]
ZHF Observation: Taxpayers interested in participating in the proposed tax amnesty program should evaluate whether ODT’s voluntary disclosure program or other available audit alternatives would be a more effective approach for dealing with delinquent liabilities.
Economic Development Incentives:
Data Center Exemption Tweaked: The time period for making capital expenditures under the data center sales and use tax exemption is increased from 5 years to 6 years for projects that started in 2013.
Job Creation Tax Credit: Employees who work from home will now qualify to be included in the job creation totals for purposes of measuring the job creation tax credit.
Motion Picture Credit Provision Modified: The motion picture tax credit has been changed by requiring that a project must have fifty per cent of the total production budget of the motion picture secured to be eligible; requiring that priority be given to television or miniseries projects; authorizing the Director of the Development Services Agency to charge an application fee equal to one per cent of the estimated credit or $10,000, whichever is less; and allowing unused credits to roll into the next year.
Regional Transportation Improvement Project (“RTIP”) Limitations: Counties are permitted to participate in a RTIP to create a financing mechanism similar to a Tax Increment Financing District and to make a $250,000 appropriation for RTIPs involving Carroll, Columbiana and Stark counties.
Conditions Placed on Extension of a Pre-1995 Township Tax Increment Financing Arrangement: A township is now required to obtain the approval of affected school districts before extending the term of a tax increment financing property tax exemption originally granted before 1995, unless the district has waived that requirement.
Tourism Development Districts: The permissible size for a tourism development district is temporarily increased to 600 acres.
Enterprise Zone Provisions Made Permanent: The ability of a county or a municipal corporation to enter into an Enterprise Zone Agreement with a business is made permanent.
ZHF Observation: Under prior law, this authority would have expired on October 15, 2017.
Kilowatt Hour Tax Tweaked: Electricity used in the chlor-alkali manufacturing process will now be exempt from the Kilowatt Hour Tax.
Lodging Tax Changes: Several provisions essentially add authority for certain counties to increase their tax rates or change how the tax revenue is utilized.
CAT Rehabilitation Credit Extended: For Commercial Activity Tax (“CAT”) periods ending on or before June 30, 2019, owners of an historic rehabilitation tax credit certificate may claim the credit against the CAT if the owner cannot claim the credit against another tax.
Other Tobacco Products – Tax Limit Added on Premium Cigars: Beginning on July 1, 2017, a maximum tax is imposed on the newly defined "premium cigar," equal to $0.50 per cigar. The Bill decreases revenue because the current rate is seventeen per cent of the retail price, which is often more than $0.50. A “premium cigar” is defined as a roll of tobacco with (a) a binder and wrapper consisting entirely of leaf tobacco, (b) no tip or filter or mouthpiece that is not made of tobacco, and (c) a weight of at least six pounds per 1,000 rolls. The provision also requires the Tax Commissioner to annually increase the $0.50 rate at the same rate as an increase in the Consumer Price Index.
ZHF Observation: It is unprecedented in Ohio for a tax rate to automatically increase or decrease with the rate of inflation.
Provisions Not Retained by the Conference Committee
In case you had your eye on something that was included in either the House-passed version or the Senate-passed version of the budget bill, the following are of some of the provisions that did not survive the budget bill process:
Making the business income deduction available for owners paid by a PEO.
Requiring ODT to provide a unified sales and use tax return for taxpayers.
Providing a time extension for Board of Revision decisions.
Miscellaneous alcoholic beverages excise tax provisions.
Limiting ODT’s ability to take retroactive positions.
Requiring that attorney’s fees be paid to a taxpayer if the government loses an appeal.
As mentioned above, Governor Kasich exercised his veto pen on 47 provisions. His primary target was language that limited the growth of Medicaid. Five of the vetoed provisions relate to taxes, briefly described as follows:
An exemption for prescription eyewear from sales and use tax.
Changes to the exclusion of personal & professional services from the sales tax on automatic data processing and electronic information services.
Changes to the sales tax remittance procedures for motor vehicle dealers.
A clarification of the valuation method to be used to value oil and gas reserves.
Creation of a rural and high-growth industry funds refundable tax credit.
It is quite possible that the General Assembly will attempt to override some of the Governor’s vetoes, especially his elimination of limits on Medicaid expansion. We should learn soon whether it has the appetite to override those vetoes.
In the meantime, taxpayers should review the actual language from the budget bill to evaluate the impact on their tax liability. If you would like to discuss how any of these specific provisions may apply to you or your company, please contact one of our tax professionals. 1
1 Sources: Sources for this SALT Buzz include the actual legislative language and amendments, Governor Kasich’s veto message, and Legislative Service Commission fiscal analysis, comparison documents, and other related documents available here.