Ohio businesses have shouldered a
weighty tax burden, including a significant personal property tax. “Ohio has been one of the states with the greatest tax
burden,” says Mary Jo Dolson, associate
director and head of state and local taxes
for SS&G Financial Services, Inc. “Prior to
the decision to phase out the personal
property tax, other states’ overall tax rates
were significantly lower, making it difficult
for Ohio to attract business.”
The Commercial Activity Tax (CAT) is
leveling the playing field for Ohio businesses. The CAT is a low-rate, broad-based tax
on a business’s gross receipts. Rather than
just taxing Ohio-based companies, the tax
is designed to tax all businesses operating
in the state of Ohio whether or not the business was incorporated in Ohio.
Smart Business asked Dolson to discuss
the CAT as well as other significant tax
changes and their impacts on business.
Can you explain more specifically how the
CAT is designed to be a broad-based
excise tax. Ohio wants to level the playing
field, so rather than taxing only Ohio-based
businesses, it is applying a low-rate tax to
all companies doing business in the state.
For example, a company in California that
ships and sells at least $50,000 of product
into Ohio is also subject to the CAT. The
CAT rate, when completely phased in, will
be 0.26 percent on gross receipts of more
than $1 million and $150 per year for gross
receipts of less than $1 million. The CAT
will be fully phased in by April 1, 2009.
Companies with annual gross receipts of
less than $150,000 are not subject to the tax
[bright line nexus test].
What businesses will benefit from the CAT?
CAT is advantageous for businesses that
have a significant investment in business
personal property amounts in the state and
a small amount of Ohio destination sales.
Previously, businesses with significant personal property located within the state of
Ohio were paying significantly higher taxes
than businesses with minimal investments
in tangible personal property. Tangible personal property includes all business furniture, fixtures, supplies, equipment and
inventory. With the CAT, businesses that
suffered under the personal property tax may potentially find relief as that tax is
phased out. The CAT is being considered a
replacement tax for both the personal
property tax and the corporate income tax
that is also being phased out. However,
while leveling the playing field, some businesses will face a larger tax bill than in the
past. In particular, companies that did not
have a significant personal property tax liability but have significant sales in Ohio may
find their overall Ohio tax liability higher
under the CAT than under the current taxing structure in Ohio.
What should business owners understand
about the phasing-in process of the CAT?
The CAT will be fully phased in on April
1, 2009. Prior to this date, the phase-in rate
changes every April 1. As a result of the
phase-in of the full rate, the current CAT
rate is effective for the period April 1, 2007,
through March 31, 2008. The other important item for taxpayers to realize is that the
minimum tax is prepaid every year.
On a different note, how does the Ohio residency law change affect businesses?
Prior to the change, anyone with 120 contact days in Ohio was considered a resident. The state changed this contact period
limit to 182 days, which is significant, especially for snowbirds who split time between Ohio and southern states like
Florida. A contact period is an overnight
stay of any kind in your own home, with
family in a hotel, etc. So, if you have fewer
than 182 contact periods with Ohio, you
are not considered a resident and, therefore, are not subject to Ohio state taxes. As
a result of the law change, beginning on
April 15, 2008, all nonresidents will have to
file a statement with the state of Ohio indicating they had fewer than 182 contact
periods, and they have a permanent residence outside the state of Ohio. If an individual has an ownership interest in a pass-through entity, they will still have a filing
requirement with the state of Ohio, even if
they have less than 182 contact periods
with the state.
How will Michigan’s tax law changes affect
Many Ohio-based companies conduct
business in Michigan. Michigan’s single
business tax is basically a value-added tax.
It starts with federal taxable income and
then requires a taxpayer to make significant adjustments to this income to compute taxable income. The single business
tax has always been disliked by taxpayers
and, as a result, Michigan residents developed an initiative to repeal the tax effective
December 31, 2007. As a result, Michigan’s
governor and Legislature are scrambling
this year to enact a new tax.
The last single business tax return will be
for the period ending Dec. 31, 2007. Even if
you have a fiscal year end, you must still
file a return utilizing the Dec. 31, 2007 date.
For example, if your fiscal year ends June
30, 2007, you will need to file a single business tax return for the period ending June
30, 2007 plus file a return for the period
July 1, 2007 through Dec. 31, 2007.
While no formal decisions have been
made, a modified gross receipt/margin tax
of 0.8 percent has been proposed plus a
corporate income tax at a rate of 5 percent.
The gross receipts/margin tax will be figured on gross receipts minus purchases.
MARY JO DOLSON is an associate director in the tax department at SS&G Financial Services, Inc. Reach her at (330) 668-9696 or via [email protected].