On October 19, 2017, the Ohio Department of Taxation (Department) announced¹ that it has opened registration for businesses (e.g., corporations and pass-through entities) to elect to participate in the centralized filing and state administration of municipal net profit tax for the 2018 tax year. The centralized system was enacted as part of Am. Sub. HB 49 ("HB 49"), the Ohio biennial budget legislation (Reference Tax Alert 2017-0758). Businesses that elect into the centralized system will be able to file a single municipal net profits tax return that will encompass every municipality in which they are required to file returns. The Department will be responsible for all administrative functions including audits and appeals.

The centralized system will be limited to municipal net profits (e.g., business) taxes and will not apply to individual taxation or employee withholding; those elements of Ohio municipal income taxation will continue to be administered at the local level.

Election and registration for centralized filing and administration

Ohio Rev. Code Section 718.80 permits a municipal net profits taxpayer to elect to participate in the centralized municipal net profits tax system that will be administered by the Department. Such taxpayers include corporations and pass-through entities. Taxpayers electing to participate in the centralized system must do so for all cities in which there is an obligation to file returns. A taxpayer cannot "opt in" to centralized filings for some cities and continue to file separately with other cities.

The election must be made by the first day of the third month after the beginning of the taxpayer's tax year by filing Form MNP R with the Department. For calendar-year taxpayers, the election to participate for tax year 2018 (e.g., return to be filed in 2019) will need to be made by March 1, 2018. Once made, the election is binding for the tax year for which it is made and for all subsequent tax years until terminated. The notice of termination would have to be provided to the Department and to all municipal corporations in which the taxpayer did business during the previous tax year of its termination of the election. The notice of termination would have to be filed by the first day of the third month of any tax year.²

The Form MNP R can be filed either electronically or via paper submission. The electronic version³ of the form will take a taxpayer to an Excel-based form that can be completed and submitted via secure email. The paper⁴ version of the registration form can be submitted to the address indicated thereon. The registration form requests information about the taxpayer such as entity type, EIN, address, company contacts and whether the business is a new entity filing municipal net profits tax returns for the first time. A business already filing municipal net profits tax returns will have to list all municipalities,⁵ including Joint Economic Development Districts and Joint Economic Development Zones, in which it filed during 2017 for a registration intended to be effective starting in 2018.

There is no fee to make the election. The administration and collection of the tax by the Department will be funded by a fee to be imposed on municipalities of 0.5% of taxes collected by the Department.

Implications of making the election to participate in the centralized system

Ohio Rev. Code Chapter 718 governs the Ohio municipal taxation of individuals and businesses, generally providing rules on the composition of the tax base, apportionment, due dates, including extensions, for filing returns, among other administrative matters.

HB 49 enacted Ohio Rev. Code Section 718.80 to 718.95, which will apply in lieu of other provisions of Ohio Rev. Code Chapter 718 to business taxpayers electing to participate in the centralized system. These provisions govern the computation of the tax base, due dates and extension procedures and audits and assessments (to be conducted by the Department and not the municipalities), and generally draw upon the net profits tax-related provisions enumerated elsewhere in Chapter 718. It appears that taxpayers making the election will be subject to similar rules regarding computation of tax base, apportionment, etc. Nonetheless, taxpayers should carefully compare the provisions of Chapter 718 that will apply to taxpayers continuing with the status quo, with the rules provided in Ohio Rev. Code Section 718.80 to 718.95 that will govern taxpayers electing into the centralized system.

Returns

Taxpayers generally file net profits tax returns directly with the municipalities in which they are required to do so (or with regional authorities authorized by certain municipalities to administer their tax system). There is also an ability to file municipal net profits tax returns via the Ohio Business Gateway (OBG). The current OBG system, however, cannot import information from tax software products, so there is much manual input required.

Taxpayers electing to use the centralized system will be required to file returns electronically through the OBG unless excused from doing so by the Department. HB 49 requires the Department to provide a methodology allowing taxpayers to electronically submit returns and make payments under the centralized system by January 1, 2019. It is understood that the Department is consulting with tax software providers on this matter and that changes to the existing OBG system will be forthcoming.

Consolidated returns (corporations)

An area that will require careful analysis by taxpayers that are considering electing into the centralized system involves consolidated returns. Ohio municipalities historically allowed corporations to elect filing net profits tax on a consolidated basis. A taxpayer could make an election in some cities and continue to file separately in others. There was disparate application of this rule among Ohio municipalities, with some following the federal consolidated group and others limiting the group only to those members with nexus with the municipality. In any event, once the election was made, a taxpayer had to file consolidated returns for all subsequent years unless permission to discontinue such filing was given by the applicable municipality.

HB 5 (HB 5), enacted in late 2014, made a number of changes to Ohio's municipal tax system (see EY Tax Alert 2014-2226). Most changes enacted by HB 5 became effective January 1, 2016, including Ohio Rev. Code Section 718.06, which deals with consolidated municipal net profits tax returns. Section 718.06 was amended to provide that a municipal consolidated return was: (1) to be filed following the federal consolidated group; and (2) was not a "nexus only" return. In addition, elections made under amended Section 718.06 would be generally binding for five years, with the election renewing automatically unless terminated by timely notice to the applicable municipality. If an election were terminated, a corporation would be precluded from electing consolidated filing again for five years. Under these revised provisions, a taxpayer could still "pick and choose" where it could elect consolidated filing and continue to file separately.

Ohio Rev. Code Section 718.86 contains the consolidated return provisions for taxpayers participating in the centralized system. A corporation that has never filed consolidated in any municipal corporations may elect to do so under the centralized system by checking the appropriate box on the Form MNP R. It appears that Section 718.86 will not allow a corporation to pick and choose to file consolidated in some municipalities but not others.⁶

For corporations that had filed consolidated returns in some municipalities but not others, the changes contained in HB 49 will require taxpayers to carefully consider their municipal filing profile if they desire to participate in the centralized system. Form MNP R will inquire whether elections were made to elect consolidated filing in any municipality and whether any elections were discontinued in any municipality within the last five years. Draft administrative rules issued by the Department indicate that a taxpayer that has elected to file consolidated returns in any municipality will be required to so file in all municipalities in which it is required to file if it elects into the centralized system. In addition, the draft administrative rules indicate that taxpayers that file consolidated returns in some municipalities, but had discontinued filing consolidated returns in other municipalities during the last five years, may be precluded from electing into the centralized system until certain conditions are met.

Implications

EY will continue to monitor developments in this area as the Department promulgates administrative rules and other guidance on the centralized system and implements upgrades to the OBG system to accommodate filings for taxpayers electing into the system during 2018 for returns to be filed in 2019. Taxpayers should consider the ramifications of electing into the centralized system, particularly the effect on any consolidated elections they may have made in prior years.

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ENDNOTES

¹ Ohio Department of Taxation

² For example, a calendar-year taxpayer electing to participate starting with the 2018 tax year decides it wants to terminate the election for the 2020 tax year. The termination would have to be filed with the Department and applicable municipal corporations by March 1, 2020.

³ Form MNP R - Electronic version

⁴ Form MNP R - Paper version

⁵ A list of municipalities and municipality codes can be found at here.

⁶ The Tax Commissioner has issued draft administrative rules on these provisions. Draft Ohio Admin. Code 5703-41-04(A), if adopted, would require a corporation participating in the centralized system that elects consolidated filing under RC Section 718.86 to file consolidated returns in all municipalities in which it is required to file.