On May 2, 2017, the Ohio House passed Am. Sub. HB 49 (Sub. HB 49) containing its version of the 2018-19 biennial budget legislation. Sub HB 49 was passed by a vote of 58-37 and has been sent to the Ohio Senate for further consideration. Senate changes, if any, will then require that the legislation go to a Conference Committee of House and Senate members where differences will be ironed out before sending the final legislation to Governor John Kasich for signature by June 30, 2017.

Sub HB 49 is the product of months of deliberations in the House after hearing input by many interested parties. The House version does not contain most of the tax-related proposals made by Governor Kasich in February (see Tax Alert 2017-226), including the proposed 17% in additional personal income tax rate reductions. The House's action, in part, was based on concerns voiced by the business community regarding the Governor's tax-shifting strategy proposed on other occasions (see Tax Alerts 2015-264, 2015-241, 2013-349, 2013-735), which called for increases in the sales/use tax rate and expansion of the sales/use tax base, along with other business tax increases. It is, however, Ohio's fiscal situation that likely has had the greater effect on the House's deliberations. As of the end of March, tax collections were $615 million below estimate and there is a looming $800 million deficit in the upcoming 2018-19 budget that must be filled.

Tax-related provisions in Sub. HB 49 are summarized below.

Sales and use tax

Sub. HB 49 mainly focuses on increasing use tax collections by adopting a bright-line nexus standard for out-of-state sellers having annual Ohio sales over $200,000 (or 200 separate transactions). Those remote sellers would be required to collect tax on sales to Ohio customers without regard to whether they have physical presence in the state. This is similar to rules and proposals enacted and being contested in other states, such as South Dakota, Tennessee and Alabama. In its recent nexus decision in Crutchfield Corp. v. Testa, Slip. Op. No. 2016-Ohio-7760 (Ohio S. Ct. Nov. 17, 2016) upholding Ohio's bright-line nexus standard for its commercial activity tax (CAT), however, the majority of the Ohio Supreme Court seemed to distinguish the CAT's bright line nexus standard from the physical presence standard required by Quill Corp. v. North Dakota, 504 U.S. 298 (1992) in the context of sales/use tax collection with two justices dissenting specifically citing the Quill case as support for striking down the CAT bright-line nexus test.

Other sales/use tax provisions in Sub. HB 49 would:

— Exempt prescription eyeglasses and contact lenses from tax beginning on or after July 1, 2019

— Exempt sales of digital music to a digital jukebox (a similar proposal was previously enacted by the legislature, but vetoed by Governor Kasich)

— Codify the true-object test to clarify exceptions from tax when certain services are provided and delivered or used through otherwise taxable data processing or electronic information services

The governor's proposed 0.5% sales/use tax rate increase and expansion of the tax to cover additional taxable services were removed by the House.

Commercial activity tax

The House version continues to hold the CAT rate at 0.26%, the same as it has been since its inception in July 2005. The House removed proposals by Governor Kasich that would have eliminated an exclusion for interest received by lenders not subject to the Ohio Financial Institution Tax. Also removed was a proposal to impose a 10% minimum floor on gross receipts received by suppliers to Qualified Distribution Centers.

Personal income tax

As noted, the governor's proposed 17% reductions in personal income tax rates were removed by the House, as well as provisions that would have increased personal exemptions for some taxpayers. Finally, the governor's proposal to reduce individual income tax rate brackets from nine to five was modified to only eliminate one bracket thereby reducing the number of brackets from nine to eight.

Municipal income tax

Sub HB 49 modifies the municipal income tax "throwback" rule on sales of tangible personal property by providing that the sales are sourced based on origin point "only if" one of the following two conditions is met: (a) the property is shipped to a location within the city from a location within the city (i.e., an intra-city sale); or (b) the property is delivered to a location within the city from a point outside the city if the taxpayer has employees in the city regularly engaged in solicitation and the sales resulted from that solicitation. Under this revised sourcing rule, outbound sales would be sourced to destination. It is likely that many Ohio cities will vigorously challenge this proposal since many depend greatly on the city income tax revenues derived from largely outbound distribution center activities.

Governor Kasich's proposal to centralize collection and administration of municipal net profits taxes (e.g., taxes on corporations and pass-through entities) was modified to make participation by municipal corporations voluntary instead of mandatory.

In addition to the foregoing, the House declined to increase severance taxes and taxes on alcohol and cigarettes as proposed by the governor.

Implications

More changes can be expected as deliberations over this legislation continue in the Senate and, possibly, before a joint House-Senate Conference Committee. EY will continue to monitor developments as this process continues.

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