In 2005, the Ohio legislature made some sweeping changes in the tax code, leaving many business owners scrambling to interpret and understand the new laws.
The good news is that both the corporate franchise and tangible personal property taxes are being phased out, says Paula Divencenzo, senior tax manager with Bober, Markey, Fedorovich & Co. The corporate franchise tax is being phased out in 20 percent increments until 2010, and the personal property tax will be phased out in 25 percent increments until 2009.
“Basically, it was a whole overscaling of what we’ve been used to,” says Divencenzo. “And what it tried to do was spread the tax base around to everybody and encourage people in manufacturing to come to Ohio.”
Perhaps the biggest jolt to businesses is the Commercial Activity Tax (CAT).
“It is a tax that’s considered to be for the privilege of doing business in Ohio, and it’s measured by gross receipts,” says Divencenzo. “Right now, there are very few exceptions to somebody paying the tax. So all businesses in general will [likely] have to pay the commercial activity tax.”
The .26 percent CAT is being phased in over five years and hinges on where the benefit of an Ohio product or service occurs.
“They have to be what the law calls ‘situs’ to Ohio,” she says. “(Legislators) look at that as they have to be Ohio’s receipts and really look at where the receipt is enjoyed. As far as whether a sale is really an Ohio sale, it depends on what you’re doing.
“Obviously, if you have a plant or office in Ohio and you’re delivering goods to Ohio, that’s an Ohio sale. That would be subject to tax. If you had an Ohio plant here and you shipped it through a carrier and it got shipped to Pennsylvania, that’s not subject to the tax.”
Divencenzo says business owners should keep the most accurate, up-to-date information possible in their records to show that property or services really are being directed out-of-state.
CAT also has a provision that requires that the tax be paid on goods that were taken out-of-state but brought back within a year.
“Where that could come into play is if you had an Ohio plant in Cincinnati and you had a plant in Kentucky, they were thinking the people would try to avoid the tax and save tax by sending it to Kentucky and then bringing it back,” says Divencenzo. “What we found is most of our clients say there’s no way they’re going to do that to save a .26 percent tax. The cost of shipping would be much more than that.”
Businesses also need to be aware of deadlines, as they must file quarterly unless their gross receipts are less than $1 million a year. In these cases, businesses must only file annually. The first deadline, which accounted for receipts in the last half of 2005, was Feb. 10. The next deadline is May 10.
The changes may cause business owners to ask themselves whether their current business structure is still the right choice, says Divencenzo.
“It may not make you go back from an S Corporation to a C Corporation, but it may have been that last thing that made you decide that now you should,” she says.
HOW TO REACH: Bober, Markey, Fedorovich & Company, www.bobermarkey.com