With Ohio Commercial Activity Tax (CAT) audits on the rise, it’s a good time for taxpayers to revisit their CAT group elections to determine whether or not it’s time to make a change.
What is the Ohio CAT?
The CAT is an annual privilege tax measured by gross receipts delivered within Ohio or when the benefit of a service is received in Ohio.
- The CAT applies to “persons,” which includes most business types, as well as certain individuals with more than $4,500 of Ohio taxable receipts.
- Taxpayers with more than $150,000 Ohio receipts for a calendar year are required to register for CAT.
- During registration, taxpayers make an election to be either a consolidated taxpayer, combined taxpayer or single entity taxpayer.
The Ohio CAT began in 2005, meaning many taxpayers made decisions around their CAT groupings over 15 years ago when the tax was new. Since then, many taxpayers have acquired companies, made new investments or perhaps experienced a change in ownership — all of which could impact their CAT elections.
What Ohio CAT Elections Should You Review?
CAT Combined Group
Taxpayers with common ownership of more than 50% are required to file as a combined taxpayer group. The primary disadvantage of the required combined group is that members are not permitted to eliminate intercompany receipts.
CAT Consolidated Election
In lieu of filing as a combined CAT group, taxpayers may make a consolidated election at 50% or 80% common ownership/control threshold. A CAT consolidated election is binding for eight calendar quarters and is typically effective prospectively. By making a consolidated election, members of the CAT group are permitted to eliminate intercompany receipts.
Having a consolidated election in place is crucial to reduce the CAT liability for taxpayer groups with substantial intercompany receipts. While Ohio law permits the tax commissioner to approve a retroactive consolidated election, Department of Taxation has not consistently approved CAT consolidated elections retroactive to prior periods.
In response to Nissan North America, Inc. v. McClain, Ohio BTA Case No. 2016-1076 (October 9, 2019), Ohio updated ORC 5703-29-02 to provide standardization around the approval of retroactive CAT consolidated elections. The tax commissioner may approve a request for a retroactive consolidated election if the taxpayer made a registration error that is not identified upon audit or if the taxpayer makes a consolidated CAT request through a voluntary disclosure program. A “registration error” exists when the taxpayer failed to make the proper consolidated election but filed the original CAT returns as if the election had been made. Upon an approval of a retroactive CAT consolidated election, a taxpayer is not permitted to amend their prior period CAT returns to take advantage of eliminating intercompany receipts.
What to Do Now
Many taxpayers have not revisited their required CAT combined group or elections since making their initial registrations often over a decade ago. Taxpayers with significant intercompany receipts, which includes transactions with disregarded entity members, are at risk of a material tax liability if they have not properly filed a CAT consolidated election. Your tax advisers can assist in reviewing your current CAT structure, the impact of elections, and can help you officially add or remove qualifying members of your CAT group.
If you realize you have not registered for the Ohio CAT at all, there is a voluntary disclosure program that can offer qualifying non-filers an opportunity to come into compliance for past liabilities, while providing a limited lookback period and a waiver of penalties.
Contact Karen Raghanti at email@example.com or a member of your service team to discuss this topic further.
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.