Ohio state legislators are working to eliminate taxes that once discouraged potential business, and are developing a new tax designed to better serve business owners.
This new tax, the Commercial Activity Tax (CAT), seems appealing and is designed to work, but there are risks for business owners, says Kevin Czerwonka, a lawyer with the Vorys, Sater, Seymour and Pease LLP law firm. Legislatures in the region are keeping a close eye on Ohio to see if the CAT is successful and if they should implement such a tax in their own state.
Smart Business spoke with Czerwonka about the new tax.
What is the CAT?
It is a gross receipts tax levied for the privilege of doing business in Ohio. It was developed when the Ohio General Assembly and Governor Bob Taft and his administration concluded the current tax structure in Ohio was anticompetitive with other states in the region.
A personal property tax was in place that acted as a deterrent for business investment in Ohio. For example, if you were a business owner who spent a large sum of money on equipment to create new jobs in Ohio, you would be heavily taxed on the equipment under the personal property tax. Another tax that contributed to the problem was the corporate franchise tax, which applied primarily to large corporations. It had a high rate but did not produce much revenue for the state.
While these taxes acted as a deterrent for business, the state could not simply eliminate such taxes because they provided funds for schools and local government in the state. The CAT was designed as a broad-based, low-rate replacement tax that would apply to all types of businesses. Under this design, the CAT would appeal to potential investors and business owners in Ohio.
When does the CAT go into effect?
The tax took effect July 1, 2005. The first taxable period was the last six months of 2005. The return for that period is due February 10, 2006. From that point on, participants with gross receipts of at least $1 million during the calendar year are required to file on a quarterly basis. Any business with an amount below that will file on an annual basis.
Once you are required to file, the tax on the first $1 million is a flat $150, similar to a small business exemption. Any gross receipts more than $1 million are based on the tax rate scale.
Who is required to file the CAT?
The tax applies to anybody doing business with Ohio customers. It applies to all types of business entities, including corporations, limited liability companies, partnerships and sole proprietors. It applies to anybody who has Ohio gross receipts of more than $150,000 annually. This means if you are selling goods to Ohio customers, you are required to file. A person also qualifies if they are selling services for the benefit of people in Ohio.
What are the risks with the CAT?
There is a risk of a major spike in the tax rate. The CAT is being phased in over five years as the former two taxes are being phased out. When the tax is fully phased in, the rate is scheduled to be 0.26 percent.
This rate was based on projected estimates with the hope that it will generate the same amount of money as the other two taxes. To determine the accuracy of the rate, periodic test checks will be done to compare the amount the CAT actually generates to the amount it was projected to generate.
How can people register for the CAT?
Businesses subject to the CAT must register with the Ohio Department of Taxation. The deadline for registration was November 15, 2005. The Department is still accepting registrations, with the focus being more on getting everyone signed up rather than penalizing late registrants. The Department is aware that not everyone who is subject to this tax was notified.
To register, people must fill out the paperwork. There is a $20 fee to mail registration forms to the Department of Taxation and a $15 fee to register electronically. These fees are later applied as a credit on a person’s first return.
One can register electronically through the Ohio Business Gateway. This is an online computer system set up for businesses to make various filings with state agencies. People also can obtain registration materials and find more information about the CAT at www.tax.ohio.gov
Kevin Czerwonka is a partner in the Columbus office of Vorys, Sater, Seymour and Pease LLP, where he practices in the area of state and local tax planning, compliance and litigation. Reach him at (614) 464-5648 or [email protected].