Ohio Commercial Activity Tax

Ohio has created a new Commercial Activity Tax on business and other entities that generate business income effective July 1, 2005. This tax is imposed on "the privilege of engaging in any activity conducted for or resulting in gain, profit, or income." This tax is part of the price used in determining sales and use tax. The new law specifies the tax is only on the person receiving the gross receipts and may not be passed on as a separately stated item to the consumer. However, the price of the goods or services may be increased to cover this tax.

The tax applies to any legal person with more than $150,000 in annual taxable gross receipts except for the state and its agencies and political subdivisions, banks, financial companies, savings and loans, financial service companies and their affiliates. For the first six months of the tax, the $150,000 exclusion applies to all the receipts during 2005.

For 2006 and later, the tax is $175 on the first $1,000,000 of annual taxable receipts and 0.26% on the excess over $1,000,000. This tax is phased in. For 2005 the tax is $88 on the first $500,000 and 0.06% on the excess of $500,000.

Taxable gross receipts are the total receipts without any deductions reduced by any allowable exclusions. Gross receipts includes the fair market value of any property or service transferred and any debt transferred or forgiven. It includes any amounts received from the sale, exchange or disposition of property, any amount received for services, and any rental, leases, or payments for the use or possession of the taxpayer's property or capital.

Exclusions are as follows:

• Interest income not in the ordinary course of business, except credit card sales.
• Dividend income, distributions received from corporations and pass-through entities.
• Receipts from capital gains, except in the normal course of business.
• Receipts of principal payments of a loan, bond, mutual fund,certificate of deposit, or other marketable instrument.
• Principal amount received under a repurchase agreement of a loan.
• Contributions received by a retirement plan.
• compensation received by and employee or former employee including fringe benefits and expense reimbursements.
• Proceeds from the sale of the taxpayer's own stock, options, warrants, puts, or calls or the sale of treasury stock.
• Proceeds from life insurance policies.
• Damages in excess of amounts that, if received without litigation, would be gross receipts.
• Property, money and other amounts received by an agent in excess of the agent's commission.
• Receipts realized by a person engaged in selling securities in excess of the gain on those securities.
• Tax refunds and other tax benefit recoveries.
• Pension reversions.
• Contributions to capital.
• Sales and use taxes collected by vendors, including out of state vendors.
• Federal and state excise taxes on cigarettes, tobacco, liquor, alcoholic beverages,gasoline, diesel and other motor fuels.
• Receipts of an auto dealer from the sale to another dealer to meet the need of a specific customer's preference for a motor vehicle.
• Receipts for a loan or credit account management services provided to a financial institution, provided they are both at least 50% controlled by common owners.
• Receipts from selling accounts receivable, provided the receivable was included in the seller's taxable gross receipts.
• Receipts from administering anti-neoplastic drugs and other cancer chemotherapy, biologicals, therapeutic agents, and supportive drugs in a physician's office to cancer patients.
• From commissions of horse racing permit holders, any amounts that must be paid as a tax under horse racing law and amounts specified under that law that are required to be used as purse money.
• Amounts received by a professional employer organization from a client in excess of the administrative fee.
• Amounts received from the sale of tangible personal property that is delivered or shipped from a qualified foreign trade zone or a qualified intermodal facility.
• Funds received by a mortgage broker under a table-funded or warehouse-lending mortgage loan.
• Receipts of a real estate broker in excess of the fees retained by the broker and not paid to another broker or associated sales person.

After July 1, 2008, there will be allowed four credits to be applied against this tax. They are the refundable jobs creation credit, the nonrefundable jobs retention credit, the non refundable qualified research expenses credit, and the non refundable credit for research and development loan payments.

Everyone subject to the tax must register by November 15, 2005 or within 30 days of becoming subject to the tax. If you register on line, the one time fee is $15. If you register by paper the one time fee is $20. If you register on time the fee will be credited against the tax due. If a taxpayer registers late the penalty is up to $100 per month with a maximum penalty of $1,000. This penalty cannot be credited against the tax. If you do not begin business before December 1st or do not have more than $150,000 taxable gross receipts by this date are exempt from the fee.

Controlled groups may elect to pay the tax on a consolidated basis and thus exclude any intercompany transactions from taxable gross receipts. A controlled group is defined as having " at least 80% ownership interest or a more-than-50% ownership interest as chosen by the group." You may include all foreign corporations if you wish. You may included excluded entities if you wish.

Controlled groups that do not elect to pay the tax on a consolidated basis are required to file as a combined taxpayer group. The exemption for taxpayers having taxable gross receipts of $200,000 does not apply to combined taxpayers. Also, combined taxpayers may not exclude intercompany transactions from gross taxable receipts.

All taxpayers will calculate their tax on a calendar year period. Taxpayers with less than $1,000,000 in gross taxable receipts will file annual returns. Taxpayers with greater than $1,000,000 in gross taxable receipts will file quarterly returns and must file them electronically.

Taxpayers must file their final commercial activities tax returns within 15 days of quitting business or selling their business. The purchaser or successor must hold enough money in escrow from the purchase price to cover the final commercial activities tax obligation until the former owner produces a receipt showing the tax is paid or no tax is due. The purchaser will be liable for any unpaid tax due.