June 29, 2017 Ohio 2018-19 budget legislation includes tax amnesty, sales tax economic nexus provision On June 28, 2017, a joint Ohio House-Senate Conference Committee approved Am. Sub. H.B. 49 (Sub HB 49) containing the 2018-19 biennial budget legislation. The legislation is subject to line-item veto, but is expected to be signed by Governor John Kasich by June 30, 2017. Am. Sub HB 49 is the product of months of deliberations in the House and Senate after hearing input by many interested parties. While most of the proposals made by Governor Kasich in February (reference Tax Alert 2017-226) did not make it into the final legislation, there are nonetheless significant tax changes in the final version, including the adoption of a tax amnesty program along with a severe curtailment of taxpayer appeal rights from Ohio Board of Tax Appeals (BTA) decisions. Also of import are the adoption of an aggressive economic sales and use tax nexus standard, the elimination of the municipal income tax "throwback" rule and the allowance for business taxpayers to elect to make centralized municipal net profits tax filings with the Ohio Department of Taxation (Department) instead of with individual municipalities. Unless otherwise stated, these provisions are effective 90 days after the law is enacted, which will occur when the Governor signs the bill. The tax-related provisions are summarized below. 2018 tax amnesty program The Tax Commissioner would be required to administer a tax amnesty program from January 1, 2018 to February 15, 2018, for most Ohio taxes. The program would apply only to taxes that: (1) were due and payable as of May 1, 2017; (2) were unreported or underreported; and (3) remained unpaid on the date on which the program commences. Amnesty would not apply to any tax for which a notice of assessment or audit has been issued, for which a bill has been issued, that relates to a still-open tax period, or for which an audit has been conducted or is pending. Eligible taxpayers reporting under amnesty would enjoy a waiver of all applicable penalties and half of any interest that accrued on the taxes if, during the program, they pay the full amount of delinquent taxes owed, along with half of any interest on the taxes. Elimination of "as of right" appeals from BTA to Ohio Supreme Court Under current law, taxpayers receiving an adverse decision from the BTA have a right to a direct appeal to the Ohio Supreme Court. The legislation would eliminate this "as of right" appeal and would require the BTA decision to be appealed to the appropriate county Court of Appeals with those decisions subject to the Ohio Supreme Court's discretionary exercise of appellate jurisdiction. Cases appealed to a county appeals court may be transferred to the Ohio Supreme Court if the appeal involves a substantial constitutional question or a question of important public interest. Sales and use tax Beginning January 1, 2018, out-of-state sellers with annual Ohio sales of at least $500,000, regardless of whether they have physical presence in Ohio, would be required to collect and remit tax on sales to Ohio customers, if they: (a) use in-state computer software to make Ohio sales; or (b) provide or enter into an agreement with a third party to provide content distribution networks in Ohio to accelerate or enhance delivery of the seller's website to Ohio consumers. This proposal is similar to economic nexus statutes being contested in other states, such as South Dakota and Alabama. As in other states with similar provisions, the constitutionality of Ohio's new expanded sales and use tax nexus provision is likely to be challenged. The rules for situsing sales and use tax for direct mail would be modified to conform to the Streamlined Sales and Use Tax Agreement. The legislation distinguishes between direct mail used for advertising and all other forms of direct mail. Separate situsing rules would apply for each type. In general, direct mail is printed material mass mailed by the vendor to predetermined recipients on behalf of another party. Advertising direct mail would continue to be sitused as under current law (i.e., recipient location based on information provided by the consumer), but other direct mail would be sitused to the location of the direct mailer's consumer. In addition, Sub. HB 49 would specify that sales of automatic data processing, computer services, electronic information services and electronic publishing services are not taxable where such services are provided primarily for the delivery, receipt, or use of another, nontaxable service. Under current law, such services are not taxable when they are "incidental or supplemental" to another nontaxable service. This provision is intended to apply retroactively to cases pending or transactions made on or after December 21, 2007. Beginning October 1, 2017, an exemption would apply to purchases of digital music purchased from and played by a single-play commercial music machine (i.e., digital jukebox). Similar legislation passed in prior legislative sessions was subjected to Governor Kasich's line-item veto. Beginning for motor vehicle sales occurring on or after July 1, 2018, new and used motor vehicle dealers licensed in Ohio with annual vehicle sales of $20 million or more per vendor's license would be permitted to elect to directly remit the sales and use tax collected on vehicle sales directly to the state on the dealer's monthly sales or use tax return. Under current law, dealers must remit the tax to the Clerk of the County Court of Common Pleas, along with the application for a certificate of title for the vehicle. Dealers would have to notify the Tax Commissioner before making this election and the election would be binding for one year. Electing dealers would be subject to monthly reporting requirements. Sub. HB 49 also would increase the number of years that the operator of a 2013 computer data center project has to meet the capital investment requirement associated with an existing sales and use tax exemption to six years (from five years). Under continuing law, the Tax Credit Authority may fully or partially exempt the purchase of certain computer data center equipment if the operator of the data center agrees to make a $100 million capital investment at an Ohio site within a specified number of years. Beginning July 1, 2019, prescription eyeglasses and contact lenses would be exempt up to the first $650 of such optical aids. Further, Sub HB 49 would establish a three-day sales tax "holiday" in August 2018 during which sales of clothing, school supplies and instructional materials within certain price ranges will be exempt from sales and use taxes. Municipal income tax Businesses subject to municipal net profits taxes could elect to file a single annual or estimated tax return through the Ohio Business Gateway on which the business may report and pay the total tax due to all municipalities in which the business earned net profits. The election to file through the Gateway would automatically renew annually until terminated by the taxpayer. The Department would administer these net profits taxes. There are no similar provisions for individuals filing municipal income tax returns. Beginning in tax year 2018, the municipal income tax "throwback" rule on sales of tangible personal property essentially would be eliminated. Origin sourcing would only apply if one of the following two conditions were met: (a) the property is shipped to a location within the municipality from a location within the municipality (i.e., an intra-municipality sale); or (b) the property is delivered to a location within the municipality from a point outside the municipality if the taxpayer has employees in the municipality regularly engaged in solicitation. Under this new sourcing rule, outbound sales (e.g., sales from distribution centers to destinations outside the origin municipality) would be sourced to destination. Personal income tax The number of personal income tax rate brackets would be reduced from nine to seven, effectively eliminating the bottom two brackets and specifying that taxpayers with Ohio adjusted gross income (less taxable business income) less than $10,000 will owe no tax. This amount would be adjusted annually for inflation. Starting with tax year 2018, the maximum income tax deduction for contributions to a federally tax advantaged college savings plan or disability expense savings account would be increased from $2,000 to $4,000 annually for each beneficiary. Credits and incentives For purposes of the Ohio Job Creation Tax Credit (JCTC), employers could count compensation paid to employees working from their homes for the purposes of qualifying and complying with the terms of the JCTC agreement. The law specifies that "work-from-home" employees are treated the same as employees who work at the project location as long as the work-from-home employees reside in Ohio and are supervised from the project location. Current law allows employers to receive a JCTC based on "home-based employees," but special conditions and reporting requirements apply (i.e., home-based employees must be paid at least 131% of the federal minimum wage and the JCTC agreement must not include any employees who work at the project location and must expire before 2019). Sub HB 49 would authorize a nonrefundable tax credit for insurance companies and financial institutions (taxed under Chapter 5726 of the Revised Code) that invest in special purpose "rural and high-growth industry funds" that are certified by the Ohio Development Services Agency and contribute capital to certain types of businesses with substantial operations in Ohio. The credit would equal the amount of the investor's "credit eligible capital contribution," and would be spread evenly over four years, beginning three years after the date of the contribution. The amount of credits that may be awarded under the program would be limited to $60 million. Commercial Activity Tax (CAT) The result of the legislative process is more notable for what did not happen with the CAT: No significant changes occurred. The CAT rate continues to hold at 0.26%, the same since its inception in July 2005. The House and Senate also eliminated two provisions proposed by Governor Kasich in February. The first would have eliminated an exclusion for interest received by lenders not subject to the Ohio Financial Institution Tax. The second would have imposed a 10% minimum floor on gross receipts received by suppliers to Qualified Distribution Centers. The only CAT change is an extension to July 1, 2019, of a temporary provision authorizing owners of a historic rehabilitation tax credit certificate to claim the credit against the CAT if the owner cannot claim the credit against another tax. ———————————————
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