There have been many changes in Ohio tax law that may affect your 2018-2019 Ohio and local business and personal taxes. Below is a brief summary of the items taxpayers should consider.
1. Ohio Municipal Centralization
Centralized filing started in 2018. Business taxpayers filing multiple local income tax returns are permitted to register with Ohio to file in one centralized area — giving taxpayers the ability to electronically remit one single payment for city estimates and returns. The 2019 tax return registration deadline is quickly approaching. For business taxpayers with a 2019 calendar year-end, there is a March 1, 2019, deadline to either:
- Opt in for the 2019 tax year, or
- Opt out of the program.
Before proceeding either way, we recommend discussing with your tax advisor.
>> Learn more in “Registration Open for Ohio’s New Centralized Municipal Business Filing System.”
2. Ohio Municipal Law Changes Effective in 2018
There were a few key changes Ohio municipal law to be aware of this year:
- The local throwback provision has been eliminated for tax years beginning on or after January 1, 2018, for sales of tangible personal property originating in Ohio.
- The local NOL rules will dramatically change and, beginning with a 2017 loss incurred, all Ohio municipalities must now allow a five-year net operating loss (NOL) carryforward. However, in 2018 and the subsequent four years, new NOLs are limited to a 50% deduction.
>> Read more on these changes in “Ohio 2018-19 Budget Offers Tax Amnesty, Centralizes City Tax, Alters Incentives and More.”
3. Ohio Residency
This much-awaited guidance will be valuable to those with a home in, or who spend a significant amount of time in, Ohio yet consider themselves a resident of another state:
- Ohio is reinstating a bright-line test for individuals considering establishing Ohio non-residency status, effective for tax years beginning on or after January 1, 2018.
- A taxpayer meeting ALL five requirements and timely filing the new Ohio Non-Resident Affidavit (OH-IT-NRS) will establish an irrebuttable presumption of Ohio non-residency.
- If you did not meet the bright-line test in 2018, which was not issued until June 2018, please contact your tax advisor as there may still be an opportunity to claim non-residency.
>> Learn more in “House Bill 292 Updates Ohio Residency Rules for Individuals.”
4. Sale of a Business
Ohio reissued information release 2016-01 this month reminding taxpayers evaluating their Ohio tax liability of the Ohio Supreme Court's decision in Corrigan v. Testa. The decision found that the Ohio statute providing special rules for apportioning the gain from a taxpayer’s ownership interest in a “closely held” investment is NOT unconstitutional in all instances:
- The Corrigan decision will impact both resident and non-resident taxpayers selling equity or the assets of a business operating in Ohio. Taxpayers must consider how to source a gain of equity versus a sale of assets.
- The taxpayer must weigh how decisions made in sourcing the gain will impact the very favorable Ohio Small Business Deduction. This deduction allows a pass-through entity owner the opportunity to pay no Ohio tax on their first $250,000 of income and only 3% tax on any amount above this. The standard Ohio top tax rate is nearly 5%. As such, the Ohio Small Business Deduction can provide considerable savings to both Ohio resident and non-resident taxpayers.
- If a taxpayer believes they are entitled to a refund of Ohio tax on a previous sale of an equity interest, please contact your tax advisor. A refund request must be filed within four years of the overpaid tax.
>> Learn more about Ohio nonresidents and sales of Ohio businesses held for investments in the information release by the Ohio Department of Taxation.
5. CAT Decision
Non-Ohio taxpayers continue to argue the Ohio Commercial Activity Tax (CAT) is unconstitutional but have yet to change Ohio's far-reaching nexus provisions. The latest blow comes from a 2019 Court of Appeals decision in Greenscapes Home and Garden Products, Inc. v. Testa, as detailed below:
Greenscapes engages in the wholesale of lawn and garden products to national retailers. The company fulfills all sales from its Georgia warehouse, and the title-to-product transfers at the time a customer picks up the product. Greenscapes does not arrange the transportation of product, but upon pickup Greenscapes will provide the customer's driver a bill of lading, which will list the destination of goods, some of which are delivered to Ohio distribution centers.
The Court found Greenscapes knows from each shipping document where the product is destined, and therefore any sales shipped from Georgia to Ohio warehouses are subject to Ohio CAT.
Sourcing sales of tangible personal property "by motor carrier or by other means of transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered the place where the purchaser receives the property." However, Ohio requires taxpayers to know where the products are ultimately destined at the time of original shipment, to look through to the ultimate destination when sourcing gross receipts, and further requires the taxpayer has documentation supporting each good’s intended final delivery.
Greenscapes reasoned that a portion of product arriving at Ohio distributions centers was likely ultimately delivered to retail destinations outside of Ohio. However, Greenscapes was unable to provide documentation to support this assertion.
This ruling points out the importance of paying close attention to Ohio's CAT sourcing provisions and the need to strengthen documentation of each shipment's ultimate destination.
6. Airplane Lease Sales Tax Decision
The case discussed below highlights considerations for taxpayers who have purchased a plane tax-free using the resale exemption:
A Michigan resident owned several hair salons in southern Ohio. The salon business created a separate entity, Pi in the Sky, LLC to purchase an airplane, tax-free, and then claimed the sale for the resale exemption.
The LLC intended to lease the plane to the salon business for business trips at $80 per flight hour.
Upon review, Ohio deemed the LLC was not engaging in an activity for gain and unable to claim the resale exemption.
The state considered the following factors in its decision: the owner of the salon signed all documents related to the purchase of the plane and subsequent related party lease; the owner was the only individual to consistently use the plane, and most of her trips were to/from Ohio and her residence in Michigan; and the plane was not used to transport any other business passengers. Furthermore, at an $80 per hour rate, based on reflected usage the LLC would never generate enough money to service the debt taken to purchase the plane.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
If you or your business have purchased a plane tax-free using the resale exemption, we recommend revisiting your facts in light of the Pi in the Sky, LLC vs. Testa decision issued December 7, 2018.
For questions regarding any of these Ohio tax law changes or other state or municipal tax-related questions, please contact a member of your service team, or contact Karen Raghanti at email@example.com or Hannah Prengler at firstname.lastname@example.org for further discussion.