Amy Dison

Wednesday, 28 February 2007 19:00

What SAS 70 can do for you

Many companies outsource support and backroom-operations functions to third-party service providers (service organizations). This option allows companies to invest their resources in providing core services to their customers and often provides access to state-of-the-art technology and processing capabilities, best practices and an overall reduction in costs. The types of services being outsourced include information technology support, payroll processing, claims processing and financial custodial services.

User organizations (companies using the services provided by a service organization) can select from numerous organizations and services. Once a service organization is selected, a user organization must have a process in place to monitor the performance of the service organization and evaluate internal controls of the service organization.

“Historically, companies have conducted site visits, performed audits and/or requested documentation to ensure their outsourcing partners are serving their needs properly,” says David Guenther, director of comprehensive risk services at Alpern Rosenthal. A SAS 70 Review is designed to serve both the needs of the user organization and the service organization says, Guenther.

Smart Business spoke with Guenther about the SAS 70 Review, what the review offers user organizations and how it can be used as a self-evaluation tool to improve the services offered by the service organization.

What is the SAS 70 Review?

The American Institute of Certified Public Accountants Statement on Auditing Standards 70 defines the professional standards used by a service auditor to assess the internal controls of a service organization and issue a service auditors report.

There are two types of reviews. A Type I Review describes the service organization’s controls and evaluates if the controls are adequately designed and in place. A Type II Review includes the elements of a

Type I Review and tests the controls to determine if they are functioning as designed.

How do SAS 70 Reviews benefit a company?

A SAS 70 Review reduces the number of auditor visits and inquiries a service organization will field from its customers. It provides a uniform presentation of its internal control procedures to which all user organizations have access. It can also be used as a marketing tool to differentiate itself from the competition and possibly provide a competitive advantage.

A user organization is able to obtain validation by the CPA firm on the internal controls that are in place at the service organization. It eliminates the need for the user organization to perform an audit of the service organization while still providing a comfort level with the service organization’s procedures and internal control. The SAS 70 Review often provides more information for an organization than a user would obtain if it performed an audit itself.

Given all of the regulatory and compliance challenges companies face today, it is important to understand the internal controls in place at your service organizations. It is a good business practice to have some mechanism in place to monitor their performance and internal controls to ensure they continue to meet your needs and do not expose you to unnecessary risks.

What parts of the SAS 70 Review are critical for a company to review?

Elements of internal control — It is important to gain a keen understanding of the service organization’s structure, which includes control environment, risk assessment, control activities, information and communication, and monitoring.

Systems development life cycle — A cornerstone piece of this document lies within the processes that take place throughout the different cycles. In particular, attention is paid to the controls in the design cycle, development cycle and testing cycle.

General computer controls — General controls are perceived as the vital framework that must be in place for the success of application controls. General controls can be found in operation of the information technology function and information technology security.

Additional general controls — A number of general controls outside the actual computer transactions arena are deemed vital for discussion in a SAS 70 report. They may include data center security, storage and disposal security, other physical security concerns, personnel security and business continuity/disaster recovery.

Application controls — The objectives of application controls, which may be manual or programmed, are to ensure the completeness and accuracy of the records and the validity of the entries made from both manual and programmed processing. Both Type I and Type II SAS 70 reports should contain a detailed examination of application controls.

DAVID GUENTHER is the director of comprehensive risk services at Alpern Rosenthal. Reach him at

Wednesday, 28 February 2007 19:00

No untouchables

Media sources are constantly reporting on white-collar crimes that are taking place from local businesses to national corporations. In the past decade, there have been many high profile, white-collar crime cases.

Fraud cases have been around since the beginning of time because there are always people in the world who try to obtain money, contracts, or something of value by lying and deceiving, says Linda Pence, director for Sommer Barnard.

There is currently a heightened awareness and vigilance with white-collar crimes. The days when the CEOs of companies were thought of as untouchable or gods are gone.

Smart Business spoke with Pence about the increased awareness of such crimes, the steps to take to prevent such crimes and how to recover after being a victim.

What steps should business owners take to protect themselves against white-collar crime?

There are numerous forms of white-collar crimes. They are often considered paper or nonviolent crimes that usually involve illegally taking something of value. They can vary from selling inferior goods, embezzlement, bribery, receipt of kickbacks, securities fraud, price-fixing and antitrust violations. One needs to understand their business to protect themselves properly.

First do a risk assessment. What type of business is your company involved in, and what crimes are typical for such a business? For example, corporations may be at risk for embezzlement. It is hard to know what everyone is doing at all times. Therefore, such companies need to make sure there are financial controls in place to prevent such crime.

Second, set an ethical tone. Act in a manner which you expect others to act. Business owners lead by example. If you, as the head of the company, are misusing company funds, employees are going to notice. Then employees — who would have never thought of acting unlawfully before — begin to think, ‘Who cares? The boss is not being honest, why should I?’

Teach all employees integrity and develop compliance programs. Make sure employees understand the mission of the company.

It is important to bring in people who are reliable, dependable and honest. Controls should be put in place to ensure compliance. If employees know there are internal controls in place, honest management and ethical employees, they are less apt to commit a crime.

What warning signs can business owners look for to protect their company against such crimes?

It is crucial to trust your gut instinct. The people committing these crimes may be your partners and friends, but it is important to investigate every accusation to protect your company.

Crimes occur when responsibilities are given to trusted employees who then are not supervised. Given full reins, an employee can commit numerous crimes. It is important to design a type of checks or balances system to prevent such crimes.

Some people commit crimes to keep their business afloat. In desperate times, people may try to take a little from the company with the intention of paying it back later. This is never acceptable and typically cannot be paid back.

Why should they invest money in protection?

Investigation of wrong-doing is very disruptive and hurts businesses. Employees are questioned, files are audited, and lawyers and investigators are in and out of the office. These interruptions decrease production and make employees uneasy.

Investigations also entail substantial fines. Running the business ethically and investing in means to do so will pay off in the long term.

Business owners often do not learn of a criminal investigation until an investigator shows up asking questions of employees or a subpoena is served. Your entire company quickly becomes part of an investigation. Companies must hire attorneys and investigators.

As these processes take place, time, money and productivity is lost. Employees will be interviewed. This process often frightens employees and makes it difficult to focus on the needs of the business.

Investing money to prevent all of these losses not only saves money but may save your company.

How should a company respond if it is a victim of a white-collar crime?

If a company has been a victim of fraud, it should report the crime immediately. Many federal and state actions protect victims and recover monetary losses. If a corporation is the victim, it must make sure the media is reporting the story accordingly. You want people to know you were the victim.

LINDA PENCE is a director at Sommer Barnard PC. Reach her at

Saturday, 28 October 2006 20:00

Keeping up to date

Demand-driven, ever-dynamic markets require that business owners look for the most up-to-date software and technology to help their business run efficiently and remain competitive in their industry. Enterprise solutions integrate all aspects of business operations, such as customer relationship management, enterprise asset management and enterprise resource planning (ERP).

“Businesses needs this technology to anticipate demand and defuse problems before they happen,” says Michael Finch, account executive for Premier Technologies. “Enterprise solutions require a single source of information that makes programs more efficient, flexible and productive.”

Smart Business spoke with Finch about the competitive edge enterprise solutions can create for a company.

How do enterprise solutions make a company competitive in the market?
Company owners have made an intelligent decision to focus on their core competencies and not attempt to be experts in the computer software business. Not long ago, enterprise solutions were phased out in an attempt to save money. Instead of outsourcing programming and system operations to an expert in that field, companies attempted to design their own home-based systems.

Such systems worked for awhile, but now there is a trend to go back to the ERP or packaged software provider because of the modularity of options that allow companies to be more flexible in the changing marketplace.

No business is an island. Each competes in a specific industry context. ERP providers, in response to demand-driven markets, offer modules for manufacturing, distribution, asset intensive businesses, project-oriented businesses, etc. This allows the client to implement a module with the option to add as the company grows, keeping initial costs down and creating a better and faster return on investment (ROI). The software can scale up in response to the company’s growth.

By purchasing enterprise solutions and paying a software company to maintain the systems, a company can gain efficiency and productivity in operations without being caught in the trap of chasing regulatory changes or accounting standard improvements, or incorporating new technologies. Enterprise solutions help shoulder the responsibilities for meeting the regulatory and compliance issues with a company’s business processes on an ongoing basis. The ROI and pace at which these systems are implemented in a business are so big that most companies need such programs to stay competitive.

How can a process be developed to meet the needs of different companies?
Because companies don’t always need all the bells and whistles, modular systems are the answer. The company can purchase and implement only those applications that make sense for its business. As needs change, the company can implement new modules or applications. This helps cut costs, because the system grows only as the company grows.

It makes sense in that the IT team installs and maintains only those applications that their business currently needs. To alleviate even more stress, a company that provides enterprise solutions can also provide an IT staff that can help develop programs needed as a company changes. It also makes better sense for employees to learn only those applications that they actually use. An example would be implementing financials only as a start-up, adding customer relationship management, then implementing warehousing and distribution.

Why is there a resurgence of such programs?
The resurgence of enterprise solutions is being driven by Sarbanes-Oxley and related regulatory changes that require companies to document the business processes behind financial reporting.

In addition, the transition from traditional batch processing of corporate information to more real-time information is driving a need for overhauling mission-critical systems. The competitive nature of business and the importance of business intelligence in decision-making conspire to make batch processing and paper reports obsolete.

How do enterprise solutions benefit a company?
An enterprise solution will allow the customer to get fast access to a wide range of information. Clients want to control business processes and change them when necessary without having to call on a programmer. Enterprise solutions allow them to do this. Customers also want capabilities designed for their industry instead of a generic solution.

It is important to find a local business partner that will work with the software provider to provide the functional experts for the software modules that a company plans to install. There should be a knowledge transfer to the company’s personnel through training and the development of hands-on skills. Most importantly, tailored solutions are necessary to meet the needs of a vertical industry.

MICHAEL FINCH is an account executive for Premier Technologies. Reach him at (412) 788-8080 or

Thursday, 21 September 2006 20:00

Recovering from disaster

Nationally, 85 percent of a community’s infrastructure is owned by the private sector. If a disaster occurred, participation of the private business sector would be necessary for successful recovery.

For emergency systems to respond properly to a disaster, they must have knowledge of that infrastructure and access to supplies and resources that only private businesses can provide.

“A coalition can be developed to open the communication and planning process of private businesses and public response systems,” says Michael Comiskey, executive director of the Pittsburgh Regional Business Coalition for Homeland Security.

When private businesses prepare themselves for disaster recovery situations, they should work with emergency response organizations to identify and pledge their resources. Coming together prior to a disaster. they must determine the most valuable or vital resources to the region and work to protect those assets, says Comiskey.

Smart Business spoke with Comiskey about how a company can design a disaster plan and the benefits of joining a business coalition.

How can a business prepare for a disaster?
It should develop a plan to prepare for numerous possible disasters. This should include an emergency plan for employees that provides communication before and after a disaster.

A business should speak to employees with special needs and determine an evacuation plan for all employees.

Emergency supplies should be assessed and stored.

The plan should determine in advance which employees will stay during a disaster and when those people should leave. Weather-related disasters as well as medical and terrorist plots should be addressed.

These plans should be communicated and correlated with other companies in the community.

Executives should determine how risks can be minimized and assets protected. This means that businesses such as banks and insurance companies need to develop plans that protect customers’ data. These companies should look for remote storage sites and servers to ensure the security and backup of all information in case of disaster. If a business is located in a flood zone, that business should look for remote storage sites, portable computer devices and proper insurance coverage.

How is a disaster plan beneficial to a business?
Without a plan, owners don’t know what to tell employees, how to protect information, or how to back up systems.

Businesses often do not know what their insurance coverage is relative to a disaster. After a disaster, there can be much anger because businesses find out that they may not receive the local, state or federal help they expected. As difficult as it is, it is much better to face the reality and then plan accordingly.

Businesses are currently not being coached and trained properly by their executives to develop their own disaster plan. Also, they are not being coordinated with emergency systems. This is important because they should be communicating with emergency response systems to outline their needs during a disaster as well as understanding what they in turn can contribute to the emergency responders.

What does the coalition provide for the business community?
A business coalition should assist the business community in preparing itself to better respond and recover from disasters of all types. Also, the coalition should position itself to represent the business community throughout the phases in the disaster-recovery process and provide the needed interface to local emergency-response organizations, as well as state and federal organizations, as needed.

In Pennsylvania Region 13, emergency response in times of disaster is coordinated from the Region 13 Emergency Operations Center. It is important that a business coalition communicate with that representative central command to develop its role in the community disaster plan.

The coalition provides experts in the different areas of disaster planning and lets owners know where to find important information on general disaster planning as well as threat-specific disaster planning information.

How does involvement with the coalition benefit a business?
Many large companies have dedicated resources to disaster planning. They often see the importance of such a coalition in regard to its benefit to small and mid-sized businesses in the community. These small businesses often provide services or materials for the larger corporations in the community, so large companies want to see them protected.

Small and mid-size businesses often do not have departments or the employees with the expertise to develop a disaster plan on their own, so they utilize the resources of the coalition. The coalition offers a Web site to the business community that guides businesses to the information needed to prepare and recover from a disaster. Free disaster-planning manuals and CDs are provided to the businesses in the region to help them with the planning needed to be prepared for disaster. Also, the coalition has member companies that can provide disaster-planning assistance and subject-matter expertise.

MICHAEL COMISKEY is executive director of the Pittsburgh Regional Business Coalition for Homeland Security. Reach him at (412) 392-2416 or

Wednesday, 30 August 2006 03:09

Healthier employees

Health care coverage can be a major expense, so companies often search for the least expensive alternative to reduce costs.

Integration of health care processes is crucial to improving outcomes, says Gilbert Burgos, M.D., chief medical officer of Care Choices. Employees receive better overall health care if a plan is utilized that integrates everything from wellness programs to pharmacy, disease and care management programs. This creates more effective leveraging of resources to better serve the patient.

Smart Business spoke with Dr. Burgos about implementing health programs into the workplace and how health care plans can help employers to achieve better overall health.

How can an employer decide what programs to implement into the workplace?
Many health plans identify members who will benefit from disease management and wellness programs by analyzing medical and pharmacy claims as well as information collected through Health Risk Appraisals.

Health plans often have a tool known as a predictive risk modeling to help employers assess future medical costs by quantifying the relative health status of their employees. Therefore, if an employer identifies a large number of diabetics, he or she might decide to implement or provide additional outreach for a diabetes disease management program.

How can employers encourage employees to join programs or lead a healthier lifestyle?
Due to the rising cost of health care, employers are beginning to implement high-deductible health plans, coupled with a Health Savings Account or a health reimbursement account. This means that employees are accountable for more of the cost of their health care.

Additionally, employers are beginning to base the level of employee contribution on health-related issues. For example, smokers may have a higher contribution to premiums than nonsmokers. It is important, however, that employers provide appropriate tools and programs to encourage and help their employees adopt healthier lifestyles if they intend to base financial incentives on those measures.

Another tool that can be used to encourage employees to take control of their health is a Health Risk Appraisal (HRA). The results of the HRA can guide individuals toward disease management or other programs of specific relevance to their current health status.

How can employers motivate employees and implement incentives properly?
The key is to be constructive. Incentives should be used to make people want to participate. A health plan should offer incentives as well as the tools needed to change unhealthy habits such as medications and counseling to help people with addictions to nicotine.

Encouraging people to participate in programs not only to help their overall health but also to cut their cost of health care will help them see a direct correlation between health care programs and their overall health. People need to see the immediate effect their habits are having on their lifestyle to begin to change.

Implementing exercise on lunch breaks or short walks can help improve both health and concentration.

What are the benefits of having healthy employees?
Having healthier employees means less absenteeism and, in general, a healthier, more productive workforce. This can contribute to the overall profitability of an employer.

When employers look at the cost of health care, they tend to focus on the cost of premiums and how much they increase each year. There is another component that is often overlooked but can play a major role in providing efficient health care. Absenteeism and what is referred to as presenteeism — physically being present but not being mentally focused — often are not measured. This is because they are hard to quantify, but there is a correlation between the implementation of health care programs and the improvement of these factors.

Can managed care plans assist in making employees healthier?
According to a 2004 study by the National Committee for Quality Assurance, nearly 66.5 million avoidable sick days — at a cost to employers of more than $9.6 billion — can be traced to the health care system’s routine failure to provide needed care for just five health care conditions: asthma, depression, diabetes, heart disease and hypertension.

Managed care plans usually have disease management programs available to reduce the frequency of expensive hospitalization and disease complications. Once these members are identified, they are provided with disease-specific information through mailings or work site seminars to help better manage their disease.

GILBERT BURGOS, M.D., is chief medical officer for Care Choices, a nonprofit health care organization and a subsidiary of Trinity Health. Care Choices HMO is ranked as No. 12 among 257 commercial plans nationwide and is the top-rated plan in Michigan, according to U.S. News & World Report/NCQA “America’s Best Health Plans, 2005.” Reach Burgos at (248) 489-5004 or (800) 261-3452.

Friday, 30 June 2006 07:21

Injunctions as insurance

In today’s fast-paced business world where companies are trying to beat the clock and competition and where executives buy out their competition’s best employees for the best ideas, you must protect your assets.

Employees often are asked to sign a nondisclosure agreement when they are working on a ground-breaking idea or project. This is meant to prevent a person from leaving one company and providing a second company with the first company’s ideas. There are still instances where these things happen, and they can be devastating to the future of a company.

Injunctions are a type of lawsuit used to protect both ground-breaking ideas and products. Smart Business spoke with Tony Paganelli, a partner at Sommer Barnard PC, about how to use this type of lawsuit.

How are injunctions used?
Injunctions are orders used to prevent a defendant from doing something that the plaintiff alleges will destroy or permanently harm its business before a lawsuit gets to trial. If a small computer company comes up with a new program and someone working on that project leaves the little company and leaks the idea to one of the larger leading companies in the market, the larger company will be able to use its power to introduce the product to the market first. This could in turn kill or shut down the smaller company completely.

This type of lawsuit is used when financial settlement is not good enough, because monetary value cannot be placed on the situation. It is also used when awarding money after a lawsuit is useless in saving a company.

Preliminary injunctions are used to freeze’the status quo while parties litigate their dispute. Permanent Injunctions are court orders that require a defendant to do something that it agreed in a contract to do, or prohibit a defendant from doing something such as infringing on a patent or competing with a former employer.

On what grounds can a company file an injunction?
Although the requirements vary from state to state, a party that seeks a preliminary injunction generally has to prove four things.

  • The existence of irreparable harm - This means whatever the defendant is doing is so bad or harmful that an award of money at the end of the case will not remedy the situation.


  • The likelihood of success at trial - A court will not give an injunction to a party who will likely lose the lawsuit in the end.


  • The balance of harms favors the plaintiff - Meaning the party on the receiving end of the injunction will not be hurt more by the injunction than the plaintiff would be if the injunction is not entered.


  • The public interest is favored by the injunction - The injunction sought by the plaintiff advances some public policy goal, such as the enforcement of valid contracts or the protection of patent rights, and the public will not be harmed by the injunction.

How does an injunction benefit a company?
A preliminary injunction protects a company that cannot wait until the end of a full-blown lawsuit to recover monetary damages. This occurs when the conduct by the defendants is so harmful that it will quickly kill or cripple the company. A permanent injunction protects nonmonetary rights such as noncompete agreements, patent rights or other trade secrets. It can also force a defendant to perform its contract obligations when other alternatives are not available.

Sometimes an injunction can indirectly determine the outcome of a trial in a shorter time frame. The plaintiff’s lawyer in a new or existing lawsuit files a motion asking the court to schedule an injunction hearing on a highly expedited basis. Much of the lawsuit is then compressed from 12 to 18 months into 30 to 45 days.

How can filing an injunction be a risk to a company?
A company that unsuccessfully seeks an injunction suffers a major loss of momentum in any litigation. Furthermore, the ruling on the injunction request is often a good indication of how the judge views the case, and may be preview of how the court can be expected to rule at trial. A fast-paced and intense schedule causes injunction litigation to be very expensive. The fast pace also does not allow for much time to prepare. Lawyers must devote all of their time to an injunction for it to be successful.

If a company is granted an injunction, it is required to post a bond that the defendant can collect from if, at the end of the case, it is ruled that the defendant was doing something legal and could have been making money during the period of the injunction.

TONY PAGANELLI, a partner at Sommer Barnard PC, concentrates his trial and arbitration practice in four areas: business litigation, criminal defense, real estate/construction litigation and bankruptcy/debtor-creditor litigation. Reach him at

Tuesday, 28 March 2006 08:57

Selling a medical practice

Physicians buy and sell their part of a medical practice when they want to change partners, change locations or leave the profession completely. This is not as easy as quitting one company and joining another.

According to Charles Schultz, a partner at Barnes & Thornburg, there are three major components that have to be considered in the sale or purchase of a practice.

Smart Business spoke with Schultz about the tax benefits and precautions in such sales. He spoke about the three parts of a practice and how both buyer and seller can benefit if they are willing to negotiate.

What is a practice?
A practice is composed of three assets. The first part is the furniture, fixtures and equipment. This includes exam tables, desks, chairs and medical equipment. These are considered the hard assets.

The second part is the accounts receivable. This means all of the money that is due to the practice from services provided prior to the sale. There are [normally] five to six months worth of services provided that have yet to be collected because of a delay in insurance coverage. Receivables can be a large asset.

The third asset is called the goodwill or intangible asset. That is defined as the name or reputation the practice has among patients or other physicians. This is the word-of-mouth reputation that makes the practice valuable.

How can a physician receive a tax break by breaking down the practice into three parts?
We use book value to declare the value of the hard assets. The book value is the purchase price of the equipment less the depreciation the practice has taken on the equipment. You want to allocate the purchase price to the assets that are depreciated as quickly as possible. Furniture and fixtures are depreciated over five to seven years. Other assets are amortized over a longer period of time. Therefore, it is necessary to allocate your price to be able to recoup your purchase price for tax purposes in the shortest period of time.

There are two options with the receivables. First, the buyer does not purchase the receivables. Instead, he or she distributes them to the seller, and the corporation pays a deductible compensation. Another option is for the buyer to purchase the receivables and then distribute them as deductible compensation. This can be compared to taking a loan from the seller, and — instead of paying a lump sum at the sale — working out an agreement where the receivables are paid over a number of years to the seller. This offers a tax break, because compensation is tax deductible.

The goodwill asset also can be a substantial amount of money. To receive a tax break, one should pay that amount of money as a severance benefit. This is deductible to the corporation and not taxable to the buyer. This makes taxes for the seller a little higher because it becomes an ordinary income tax, but a seller can increase the cost of the goodwill to balance this amount.

What should a physician be aware of when selling a practice to a corporation?
Most practices are owned by corporations, many of which are C Corporations. If you sell a practice to your C Corporation, most sales are going to be charged with a double tax. This is a negative aspect, because one ends up being charged at the corporate level and then again at the income tax level. This does not benefit the buyer or seller because the major portion of money is being paid in taxes instead of going to the physician.

How can a physician buy a medical practice?
There are two ways to purchase a practice. The first way is to buy stock in the corporation. From a tax perspective, purchasing stock is often problematic. If someone buys stock, you will want to structure the purchase price as a payment to him or her for something other than stock. This means paying the receivables and goodwill as compensation or severance pay as mentioned previously.

Another risk of purchasing stock involves liabilities. The seller must be honest at the sale to disclose any liabilities, but there is still a risk of malpractice suits and things yet to be filed. The benefit of this purchase is that any contracts, deals or agreements that exist in the practice are honored if the entire stock is purchased.

The other option is to buy the assets of the practice from the physician directly and allocate something that gives you the quickest tax benefit possible. Compensation is immediately deductible. Therefore, you will want to characterize as much of the purchase price to the seller as the severance benefit or compensation for services already provided to receive a deduction. Allocating assets that depreciate faster creates better tax benefits.

CHARLES J. SCHULTZ is a partner at Barnes & Thornburg LLP. He is a member of the Healthcare Department. Reach him at (312) 214-8305 or

Monday, 30 January 2006 09:24

New rules

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

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

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