On June 30, 2005, Ohio Governor Taft signed an historic budget bill which significantly changed the Ohio Tax Code.  Amended House Bill 66, designed to foster Ohio economic development, overhauls the Ohio tax system with a new low-rate broad-based privilege tax, lower sales tax, lower personal income tax and elimination of the Ohio corporate franchise and personal property tax.   An overview of this comprehensive tax reform package follows. 

COMMERCIAL ACTIVITY TAX REGISTRATION

Under the new Ohio tax provisions, applicable taxpayers were required to file the Ohio Commercial Activity Tax registration form by NOVEMBER 15, 2005.  According to the most recent numbers, the State of Ohio expected 350,000 to 400,000 registrations and has only receive approximately 93,000 (Akron Beacon Journal "Companies slow to adopt new tax" November 21, 2005)  Our firm prepared numerous registrations in the past few months and forwarded them to our clients for review and signature.  If you planned to file your own registration form and have not or have questions on how your registration form was filed, please contact Theresa Mullen, State and Local Tax Leader. 

COMMERCIAL ACTIVITY TAX
(View the Ohio Dept. of Taxation's CAT TAX Summary Brochure)

The Commercial Activity Tax (CAT) is the centerpiece of the Governor's tax reform plan.  Most taxpayers doing business in Ohio with taxable gross receipts in excess of $150,000 will be affected.  After being phased in over a five-year period, the annual tax will equal $150 on taxable gross receipts up to $1 million, plus 0.26% on taxable gross receipts in excess of $1 million. The CAT will be applied to gross receipts received on or after July 1, 2005.

Persons Subject to Tax

Under the CAT provisions, the following are subject to the new tax:

Sole Proprietor/Landlord	Limited Liability Partnerships
Receivers	Limited Liability Companies
Assignees	Associations
Trustees in Bankruptcy	Joint Ventures
Joint-Stock Companies	Corporations
Business Trusts	Qualified subchapter S subsidiaries
Estates	Qualified subchapter S trusts
Partnerships	Disregarded entity for federal tax purposes (i.e. SMLLC)

Excluded from the tax include public utilities, financial institutions, dealers in intangibles, and insurance companies.  These entities continue to be subject to their own specific tax.  Nonprofit entities were also exempted in the final legislation.

Gross Receipts

"Gross receipts" are defined as the total amount realized from sales by a person, without deduction for the cost of goods sold or other business expenses.  The value of property the taxpayer transfers into Ohio for their use within one year after receipt of property outside Ohio is includable.  There are numerous exceptions to the "gross receipt" definition. 

Compliance

Persons with annual receipts of $1 million or less may elect to be calendar taxpayers.  The taxpayer must file a single annual return by the 40th day after the end of the prior year and pay the $150 minimum tax.

Taxpayers with annual receipts in excess of $1 million must be calendar quarter taxpayers.  Quarterly returns are due and the tax must be paid by the 40th day after the end of each calendar quarter. 

For the 7/1/05 - 12/31/05 period, the CAT must be paid by February 10, 2006 for both calendar and calendar quarter taxpayers. 

All CAT taxpayers (those with gross receipts of at least $150,000) must register and pay a one time fee by November 15, 2005.  The registration fee is $15 if done electronically; otherwise the fee is $20.

Refer to the Ohio Department of Taxation's CAT Tax summary brochure to view CAT Tax phase-in percentages.

CORPORATE FRANCHISE TAX

Beginning with the 2006 tax year, the corporation franchise tax will be phased out over a five-year period. Financial institutions, affiliates of financial institutions and insurance companies will continue to pay tax under the old law.

Refer to the Ohio Department of Taxation's CAT Tax summary brochure above to view the phase-out Corporate Franchise tax percentages.  

PERSONAL INCOME TAX

Beginning in the 2005 tax year, the personal income tax dollar amounts and rates gradually will be reduced by 21% over five years.  The top marginal bracket is reduced to 5.95% in 2010.

TRUSTS

The legislation extends the tax on trust income.  Under prior law, the income tax applied to trusts was due to expire in 2004.

SALES AND USE TAX

Effective July 1, 2005, the permanent rate of Ohio state sales and use tax is 5.5%.  The county "piggyback" rate remained the same.

COUNTY	OLD SALES TAX RATE (pre-7/1/05)	NEW SALES TAX RATE (7/1/05)
Summit	6.75%	6.25%
Stark	6.5%	6.0%
Cuyahoga	8.0%	7.5%
Medina	6.5%	6.0%
Wayne	6.75%	6.25%
Portage	7.25%	6.75%

The 0.9% discount currently afforded to Ohio vendors who file sales tax returns and pay tax due in a timely manner is extended through June 30, 2007.

PERSONAL PROPERTY TAX

The Ohio personal property tax has long been an impediment to the growth of Ohio business.  This high tax created a large tax burden on the State's economic development pursuits. 

The legislation phases out the personal property tax on tangible personal property used in business over four years.

Refer to the Ohio Department of Taxation's brochure for the phase-out personal property tax percentages.

The legislation exempts from the tangible personal property tax newly installed machinery and equipment, described as property not previously used in business in the state by its owner before 2005.

OHIO ESTATE TAX

Ohio's additional estate tax (sponge) tax is eliminated.  The Ohio basic estate tax remains in effect.

KILOWATT HOUR TAX

In the final version of the legislation, there is no increase in the Kilowatt Hour tax.

SUMMARY

As discussed, the Ohio tax code has been significantly revised.  Tax compliance procedures have been altered with new requirements, new forms and new due dates.  The specific financial impact to your entity cannot be quantified merely by the high level analysis on the legislation we have presented. Although the new CAT is a basic tax on gross receipts, there are items that can minimize some of the burden.  Proper recordkeeping, consolidated elections and applying for incentives can, depending on the circumstances, result in a lower CAT liability.    Over the next five years, there are taxes "phasing-in" while others are "phasing-out." We can provide assistance to you and your entity in properly updating the compliance procedures, interpreting specific tax provisions and projecting tax savings or tax cost under the Ohio tax reform plan.  

The BC tax experts are happy to discuss with you how this new legislation impacts your tax situation. Please contact your Engagement Executive or Theresa Mullen, MT, State & Local Tax Consultant, at 330.497.2000.