Thomas Zaino, JD, CPA and Derek Heyman, PhD, JD, CPA
Impactful Changes Seem to Go Unnoticed in Ohio's Budget Bill Proposal
Ohio’s proposed operating budget for the next fiscal biennium has been introduced as House Bill 33 (“H.B.33” or “the bill”). The bill contains a number of tax provisions, many of which are quite impactful and yet have received little public discussion at this point in time. The more impactful proposed changes are summarized in this SALT Buzz.
Major Tax Provisions
Income Tax Personal Exemption for Children: The bill would increase the personal exemption for each of a taxpayer’s dependents who are under 18 years old (on the last day of the taxable year) by $2,500 beginning in tax year 2023. This $2,500 is not subject to income limits and will not be adjusted for inflation in subsequent years, although the current amount of the exemption will continue to have limits and be inflation-adjusted, so that the overall exemption will continue to be adjusted for inflation.
Sales and Use Tax Exemptions Added: In another parent-friendly move, five new exemptions to sales and use tax are included in the bill, all related to products for children. Those are: children’s diapers; therapeutic or preventative creams and wipes for use on children; automobile booster seats or other child restraint devices; cribs; and strollers. The new set of exemptions would become effective October 1, 2023.
Criminalizing Certain Sales Tax Violations: The bill also modifies the penalty section of the sales tax, R.C. 5739.99. Current law generally sets forth the potential fine, and in some cases a maximum length of imprisonment, for violating various sales tax provisions, without referring to a classification of the criminal offense (i.e., misdemeanor, felony). The bill classifies each type of violation as a particular degree of misdemeanor or felony. For example, a violation of R.C. 5739.30(A)—failure to file or filing an incomplete, false, or fraudulent return—will, under the bill, result in a third-degree misdemeanor. Current law provides for a penalty of a fine of $100 to $1,000 or imprisonment of not more than 60 days, without any reference to the criminal classification. The bill also specifies negligence as the required mental state for the commission of the offense; current law does not contain any such requirement.
ZHF Observation: Nearly every tax chapter has a penalty provision similar to R.C. 5739.99. However, only the sales tax provision is being changed. It is unclear why the sales tax violations would now be classified as misdemeanors or felonies, while similar violations for other tax types are not being changed. This could lead to confusion for taxpayers, practitioners, and Department of Taxation employees.
Employee Withholding: The bill would remove the requirement that those employers who are required to remit withholding tax on their employees on a semi-weekly basis file a quarterly withholding reconciliation return. Instead, these employers would file an annual reconciliation return like other employers.
Municipal Net Profits Tax: The bill makes some changes to the administration of the municipal net profits tax. Ever since H.B. 49 of the 132nd General Assembly went into effect, taxpayers with filing obligations in multiple Ohio municipalities that impose a net profits tax have been able to elect to have the Department of Taxation (“ODT”) administer those taxes for them, as long as the taxpayer does not have any local tax agreements that create unique situations. H.B.33 alters the following information-sharing requirements:
ODT must report to municipalities, in both May and November, information on any businesses that had net profits apportioned to the municipality. The bill changes this semi-annual reporting so that the report covers only the preceding six months, rather than a full year as under current law.
Municipalities must report any rate increase to ODT at least 60 days before the increase is effective. The bill would require the municipalities to also report any tax rate decreases in the same time frame.
Commercial Activity Tax:
Situsing - The bill provides a clarification to the situsing provisions at R.C. 5751.033(E) and (G)—sales of tangible personal property and transportation services, respectively—by changing the term “motor carrier” to “common carrier” in division (E) and to “common or contract carrier” in (G). The new terminology is broader, encompassing rail, barge, and other types of transportation rather than just motor vehicles. The bill provides that this is a remedial change and should be construed accordingly.
NOL Transitional Credit - The bill also changes from 2030 to 2040 the date at which the nonrefundable commercial activity tax credit for unused net operating losses incurred under the old corporate franchise tax converts to a refundable credit. The credit was enacted with the original CAT law to benefit taxpayers who had deferred tax assets recorded on their GAAP financial books for net operating losses generated under the old corporation franchise tax (an income-based tax). The change will delay the date by which some taxpayers will realize the cash benefit for such net operating losses.
Qualified R&D Credit – See discussion below for changes to this credit.
Financial Institutions Tax:
Who is Included in Group - In another remedial clarification, the bill would change the definition of “financial institution” to read “all entities that are consolidated” in the FR Y-9 or call report, rather than “all entities that are included” in the report. The bill also adds that where a holding company is required to file a parent-only rather than a consolidated FR Y-9, the “financial institution” definition will apply to the FR Y-9 the institution would file if it were required to file a consolidated statement by the Federal Reserve Board.
Qualified R&D Credit – See discussion below for changes to this credit.
Sports Gaming Tax: The bill proposes that the tax rate on sports gaming receipts of a sports gaming proprietor be doubled from 10% to 20% beginning July 1, 2023.
ZHF Observation: Sports gaming became legal in Ohio on January 1, 2023, after years of negotiations with policy makers across Ohio. Now, surprisingly, just months into the new sports gaming law, the bill proposes to double the tax rate that was negotiated during the recent legislative process. We believe this proposed tax increase will not survive the legislative process.
Fuel Use Tax: The fuel use tax is imposed on commercial cars and tractor trailers operated or driven on a public highway in two or more states. The bill enacts a new section 5728.16 that would impose personal liability on those employees of a business that is required to file and pay the fuel use tax imposed by R.C. 5728.06, or any officers or trustees of the business responsible for the business’ fiscal affairs, for the business’ failure to file reports and remit the tax due. The liability of the responsible party will not be discharged by the dissolution, termination, or bankruptcy of the business required to file or remit taxes. If more than one individual is personally liable under the new provision, the liability of all such individuals will be joint and several.
ZHF Observation: While this provision is similar to the personal liability provision contained in the Motor Fuel Excise Tax, any taxpayer and their staff that are required to file and pay the Motor Fuel Use Tax should be concerned about this new provision. It exposes responsible employees’ personal assets to liability for unfiled returns or unpaid tax.
Corporation Franchise Tax (this is not a typo!): Beginning January 1, 2024, the bill eliminates the requirement to file an amended corporate franchise tax report to show changes resulting from a federal income tax audit. The bill also disallows an application for refund based on federal audit adjustments.
Delivery of Tax Notices (All Taxes): Many tax notices are currently required to be sent to the taxpayer by personal service, certified mail, or authorized delivery service. The bill would add to these methods, allowing such notices to be sent either electronically or by ordinary mail. The bill also requires the Tax Commissioner to establish a system to issue electronic notification of assessments to taxpayers through “secure electronic means.” A taxpayer would no longer have to give consent before secure electronic means are used to serve the taxpayer with a notice or order. The Tax Commissioner would have to notify the recipient that such a notice or order is available for electronic review and provide the taxpayer with instructions to access or print the notice or order. This notice may be sent by mail or by electronic means, and the bill provides that the Tax Commissioner may use e-mail, text, or any other form of electronic communication as electronic means of notifying the taxpayer. Such notifications may be sent to a taxpayer’s “last known address,” a phrase whose definition is expanded to mean, with regard to documents sent by secure electronic means, “an electronic mode of communication that is identified on a form prescribed by the commissioner for such purpose or that is associated with the person or the authorized representative of the person on the Ohio business gateway . . . as of the date the notification was sent.”
ZHF Observation: Nothing gets the attention of taxpayers like certified mail from the government. This proposed change seems designed to save the Ohio Department of Taxation postage expense while increasing significant due process risks for taxpayers. Although Taxpayers should be able to choose to have their tax assessments delivered electronically, we believe this should only be allowed with the taxpayer’s express permission and understanding of the implications. Using a taxpayer’s email address to deliver tax notices and orders is fraught with risk, including the following:
Company personnel frequently turn-over and their emails go nowhere;
Individuals, who are taxpayers, often change their email addresses;
Some taxpayers, including elderly taxpayers, often do not have email addresses or understand how to access the Internet; and
Taxpayers may be duped by even more phishing attacks because they can now be contacted by the government tax authorities (or those pretending to be government tax authorities).
Authorizing service by ordinary mail is, perhaps, even more troubling. How does a taxpayer prove that the mailing was not received or, if received, the date it was received. That is particularly troubling when the document being served requires the taxpayer to act within a specific period, i.e., an assessment, the denial of a refund claim, or a final determination.
This proposal will likely result in more taxpayers missing appeal deadlines and further increasing their penalties and interest. In fact, ODT rejected this type of provision in the early 2000s due to similar concerns. During the H.B. 5 municipal income tax reform process in the mid-2010s, the General Assembly also rejected efforts by municipalities to eliminate a requirement to use certified mail for tax assessments. We believe there are some core services that government should be required to pay for to ensure taxpayer’s due process rights are secure: sending a governmental notice or order by certified mail is certainly one of those core services.
Credits and Incentives
Housing Credits: A number of new housing credits are proposed by the bill.
1. Low Income Housing Tax Credit (“LIHTC”)
The LIHTC would be a new Ohio nonrefundable credit that is awarded in conjunction with the federal LIHTC. It may be claimed against the insurance premiums tax, financial institutions tax, or income tax. Taxpayers would apply to the Ohio Housing Finance Agency (“OHFA”) to receive a credit allocation. (They must already apply through OHFA to receive the federal LIHTC.) The credit is claimed over ten years and is limited to the amount of the corresponding federal LIHTC. The bill provides that OHFA may adopt rules, including those instituting application, processing, and reporting fees, to cover the administration of the credit.
2. Single Family Housing Development Credit
The single-family housing development credit would be another new, nonrefundable credit that may be claimed against the insurance premiums tax, financial institutions tax, or income tax. To obtain this credit for developing single-family homes, a local government or quasi-public development entity, in partnership with a private development team, would apply to OHFA. If approved, the credit would be awarded upon completion of the project. The credit equals the amount by which the fair market value of the completed homes exceeds the project’s development costs. The credit would be claimed in ten equal annual increments.
Film and Theater Credit: The cap on Ohio’s refundable tax credit for motion pictures or Broadway-style theatrical productions would be increased from $40 million to $75 million. As the credit is awarded in two rounds—February through July and August through January—the increase is also split evenly at an additional $17.5 million for each round. The increase does not take effect until the second round of the fiscal 2024 application period. The credit would continue to be available against the commercial activity tax, financial institutions tax, or income tax and would continue to equal 30% of a production’s Ohio costs.
Historic Rehabilitation Tax Credit: The amount of historic rehabilitation tax credits that may be authorized in a year was temporarily increased from $60 million to $120 million for both fiscal 2023 and 2024. H.B.33 would extend this increase to fiscal 2025.
Job Creation Tax Credit (“JCTC”) and Job Retention Tax Credit (“JRTC”) Clawback Adjustments: In situations where the Director of Development has determined that a recipient of either the JCTC or JRTC is noncompliant and has notified the Tax Credit Authority, and the latter has certified a clawback amount to either the Tax Commissioner or the Superintendent of Insurance, the bill would allow the Tax Credit Authority to make an adjustment to the amount certified and to certify the adjusted amount to the Commissioner or Superintendent, as appropriate. This adjustment must be made within 90 days of the initial certification and cannot be made if the taxpayer has begun paying the certified amount or if the certified amount has been further certified to the Attorney General for collection.
Qualified Research Expenditure (“QRE”) Tax Credit: The bill makes some changes to the QRE Credit, also commonly known as the Research and Development (or “R&D”) Credit:
Where the credit is claimed by a group of related taxpayers, such as a consolidated elected or combined taxpayer group under the CAT, or a Financial Institution group under the FIT, the bill would require the credit be calculated on a member-by-member basis. Moreover, expenses of a given member may be included in the aggregate credit only if that entity is a member of the group on December 31 of the year in which the QREs are incurred.
The bill would require the taxpayer claiming the QRE credit to maintain records relating to the QREs used in calculating the credit for four years after the later of the return due date or actual date of filing. These records include the year for which the credit was claimed and the three preceding years, which are a part of the base calculation for the credit.
ODT would be authorized under H.B.33 to audit a representative sample of the taxpayer’s QREs to verify that the taxpayer has computed its credit correctly. ODT is required to make a good faith effort to reach agreement with the taxpayer on a representative sample but may proceed with a sample even if such an agreement is not reached.
The points above summarize the major tax and economic development provisions, but there are many other proposals contained in the budget bill. Additional changes will be made as the bill proceeds through the legislative process. Ohio taxpayers are advised to follow the budget process to monitor all tax provisions that may be of interest.
The tax professionals at Zaino Hall & Farrin and the lobbyists at ZHF Consulting LLC, the law firm’s wholly owned government affairs subsidiary, are actively engaged in the budget bill process. If there is something you would want to know more about, do not hesitate to contact Tom Zaino or any of our other tax professionals at (614) 782-1040.