How proposed legislation will change local income tax rules Featured

9:10pm EDT January 31, 2013
How proposed legislation will change local income tax rules

Ohio legislators are considering tax law changes that would relieve headaches for companies that do business across many municipal boundaries.

While Ohio has a uniform law limiting how a municipality may tax, it serves only as a ceiling for what a city may do. Cities can and have imposed their own rules and treatments within those guidelines.

Nonuniform municipal rules and multiple filings have made it difficult for companies to determine what taxes they owe and have deterred others from doing business in the state, says Joseph R. Popp, JD, LLM, tax supervisor at Rea & Associates.

“One of the challenges is the definition of a day. Are you working in a municipality for a day if you’re present at all, or do you have to work half of the day, or the full day? What if your workers pick up a truck at your office and then spend the rest of the day outside that city?” Popp says.

“Cities are taking different approaches, which could result in multiple cities trying to tax you for the same day,” he says. “That’s an example of the complexity that businesses are facing and why they feel that the Ohio municipality taxation structure is burdensome.”

In addition to creating uniform definitions, House Bill 601 would eliminate the need to file tax returns in cities where less than 1 percent of your income is allocated and the tax owed is less than $50. It would also change rules regarding a “free pass” that has been given in cases when workers spend fewer than 12 days in a city. That would be extended to 20 days, and tax would then be collected going forward only.

Smart Business spoke with Popp about the problems posed by current municipal tax laws and what proposed legislation would do to rectify the situation.

What types of businesses does this affect?

Those that are mostly going to be affected will be service-based groups — those that do cable TV installation or something service-based that would take company representatives to many different municipalities while working under the same business umbrella. Temporary agencies that have people going to multiple locations would also be a business group that would have interest in this.

Are there things businesses should do in preparation for the bill’s passage?

Businesses should consider looking at where they might have done things wrong in the past.

A client of ours has a real estate rental company and thought it was in a jurisdiction where tax was not due. However, we found that it was in city limits and tax was due to the city. We’ve prepared returns showing this taxpayer owes $20,000 for a couple of different years. Because of that city’s interest and penalty structures, the client will pay another $20,000 in penalties and interest. Under the new rule, the city would be limited to imposing only $4,000 in penalties and interest, although it’s not clear if the new legislation would be a retroactive change.

So, companies may want to see if there are opportunities to leverage the rule change and end up paying less to the municipality. The municipality may not like the rule change and it wants to get as much tax, interest and penalties as it can now, so that opens up another bargaining chip for businesses to use in their negotiations with a municipality’s tax administrator.

Is the legislation likely to pass?

Yes, and the reason for this confidence stems from how this came about. The major cities are on board with this, the Ohio Society of CPAs is presenting the professional point of view and the members of the legislature are involved in the process. There was a lot of effort put forth to ensure that there was agreement and buy-in by all interested parties.

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Joseph R. Popp, JD, LLM is a tax supervisor at Rea & Associates. Reach him at (614) 923-6577 or joseph.popp@reacpa.com.

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