The Ohio Department of Taxation (Department) has revised Information Release ST 2003-01 — Direct Payment Authority Program (Issued December 2004, Revised March 2016) to reflect changes in how it will administer its direct payment authority program (i.e., the program that allows some Ohio businesses to self-assess and remit use tax on their taxable purchases instead of relying solely on their vendors to collect and remit sales tax on such purchases). These changes were adopted last year in response to the Department's review of the direct payment program where it discovered instances where direct payment taxpayers, upon audit, were found to have had both large overpayments and underpayments of tax. These changes are intended to improve compliance by adding new requirements direct payment authority holders will have to meet. The Department undertook a similar initiative a number of years ago (reference Tax Alert 2004-277).

Revised Information Release ST 2003-01 reiterates some of the long-standing requirements of the direct payment program, such as having a procedural agreement on file with the Department. The procedural agreement sets forth the procedures the taxpayer will use to administer its direct payment authority. Under the revised program, the Department periodically (about every four years) will review and validate the taxpayer's compliance with the program and its continuing need for the direct payment authority. The taxpayer also will be required to notify the Department, within specified timeframes, regarding changes in the name of the business, legal entity structure, ownership and other operational changes that might affect its administration of the direct payment authority.

The revised Information Release also sets out the criteria for eligibility for direct payment authority. Candidates for direct payment authority include: (a) manufacturers, contractors or other consumers that purchase goods and services under circumstances where taxability cannot be determined at the time of purchase; or (b) consumers with over 5,000 purchase transactions annually or whose Ohio use tax on such purchases exceeds $250,000 annually. A business applying for direct payment authority also will have to provide a detailed description of its business accounting system, sales/use tax compliance process, a detailed diagram/description of the business' operations and information about its corporate officers and responsible persons.¹ Denials of direct payment authority are not subject to appeal.

Implications

Taxpayers that have not yet been contacted by the Department regarding their direct payment authority may expect to be contacted by the Department for a review of their procedures. This review may include an audit for periods open under the statute of limitations. Further, taxpayers applying for direct payment authority may expect to face more rigorous application procedures and, if admitted to the program, more rigorous direct payment authority administrative requirements. It is expected that direct payment authority may be granted more sparingly under the Department's revised program.

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ENDNOTES

¹ Ohio Rev. Code Section 5739.33 imposes personal liability on officers and other responsible persons for a direct payment authority holder's failure to file returns and/or remit taxes due.