Unlike almost every other state, Ohio law authorizes income tax to be levied on individuals and businesses at the local level by cities and villages.
As a result, Ohio has more than 540 local jurisdictions that levy an income tax, typically at a rate of about 2 percent. Although each municipality generally is allowed to structure and apply its tax as it sees fit, the Ohio General Assembly can mandate uniformity with respect to various aspects of the tax.
Recently, in Am. Sub. H.B. No. 95, the General Assembly adopted sweeping municipal income tax reforms. In the face of repeated testimony as to the inherent difficulties of a broad-based municipal income tax system (i.e., primarily, a lack of uniformity and simplicity which makes compliance a nightmare and Ohio anticompetitive), the General Assembly made these changes in an attempt to help the business community while not adversely impacting local tax revenues.
Adoption of a uniform net profits tax base. For taxable years beginning on or after Jan. 1, 2004, the net profits tax base will be the same for each city. The base begins with a company’s federal taxable income, then makes adjustments to remove certain nontaxable income and add back certain nondeductible expenses.
Adoption of uniform rule for due dates and extensions. For taxable years beginning on or after Jan. 1, 2004, the due date for all net profits tax and personal income tax returns will be the 15th day of the fourth month following the end of the taxpayer’s taxable year. Federal extensions that are timely filed at the local level will extend the due date to the last day of the month following the month to which the federal return has been extended.
Adoption of a uniform tax and withholding base for employee compensation. For taxable years beginning on or after Jan. 1, 2004, employee compensation will be withheld and taxed based upon the federal Medicare wage base subject to certain uniform adjustments. Special rules allow cities to exempt nonqualified deferred compensation and stock option income pursuant to local ordinance or resolution.
Centralized filing and payment option. Instead of dealing with each city separately, business taxpayers will have the option of using the Ohio Business Gateway for filings and payments. These options will be phased in: (a) extension requests for net profits tax returns (on or after Jan. 1, 2005); (b) net profits tax returns and payments (for taxable years beginning on or after Jan. 1, 2005); and (c) employer withholding returns and payments (for wages paid on or after Jan. 1, 2007).
Optional right of appeal to the Ohio Board of Tax Appeals. Historically, the decisions of local income tax boards of review could be appealed only to the local common pleas court. However, disputes pertaining to taxable years beginning on or after Jan. 1, 2004, may be appealed to the BTA, providing for greater technical expertise in the adjudication of local income tax disputes and leading to more uniform decisions.
Two new credits. In recognition of the possibility that certain compensation may be taxed under the new uniform base but never received by the employee, the new law provides for a refundable credit to get the tax back and a nonrefundable credit to protect against the possibility of two cities taxing the same income or wages in certain situations.
Elimination of the $150 withholding safe harbor. First enacted a few years ago to provide nonresident employers with a withholding exemption for small amounts of compensation, this provision turned out to be more work than it was worth.
Although Ohio’s municipal income tax system may never be entirely uniform, the changes should lessen the business community’s compliance burden and result in an overall improvement to Ohio’s unique local tax structure. Kevin M. 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 at www.vssp.com.
