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On May 2, the House Finance Committee introduced a substitute to Governor Mike DeWine's proposed FY 2020–2021 operating budget (introduced as House Bill 166), which did not propose substantial tax changes but did propose $2.8 billion in new spending. The House version, Substitute House Bill 166 (Sub. HB 166), would add additional spending of about $526 million to the Governor's original proposal and introduces several tax changes. The tax changes consist of a mix of increased taxes on businesses and business owners and reduced taxes on some individuals. These changes are discussed next.

Changes to Ohio business income deduction

Under current law, the business income deduction exempts from taxation the first $250,000 ($125,000 if married filing separately) of business income of a sole proprietor or investor in a pass-through entity. Business income above $250,000 ($125,000 if married filing separately) is taxed at a rate of 3% instead of using personal income tax tables, which currently has a maximum rate of 4.997%. Sub. HB 166 would lower the maximum business income deduction to $100,000 ($50,000 if married filing separately), with income above the maximum deduction continuing to be taxed at a 3% rate.

Sub. HB 166 also would limit the ability of taxpayers who take the Business Income Deduction from taking certain means-tested credits, such as the personal exemption credit, the personal exemption deduction, the joint-filing credit, the retirement income credit, the credit for those 65 or over, the credit based on the federal dependent credit, and the homestead credit. Sub. HB 166 would require taxpayers permitted to take the business income deduction to include the deducted amount in determining eligibility for the foregoing credits.

Pass-through entities

Under current law, pass-through entities (e.g., partnerships, S corporations, LLCs treated as partnerships) must withhold tax on the Ohio-apportioned distributive share of income of qualifying investors. A 5% tax rate would apply to income of individual qualifying investors, while an 8.5% rate would apply to income of qualifying investors that are not individuals. Sub. HB 166 would reduce the rate to 3% for all investors for tax years beginning on and after January 1, 2019. Sub. HB 166 would allow individual pass-through entity investors to agree that their income is subject to the Ohio Individual Income Tax and comply with related filing responsibilities instead of being subject to pass-through entity withholding. Finally, Sub. HB 166 would adopt provisions that follow the Multistate Tax Commission's Model Uniform Statute and Regulation for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments.

Other individual income tax changes

Sub. HB 166 would eliminate the bottom two individual income tax brackets, which would eliminate income taxation for individuals earning less than $22,250 of Ohio adjusted gross income. The remaining five brackets would be modified.

Sub. HB 166 would allow for the following credits against the Ohio individual income tax:

• Ohio Opportunity Zone Credit¹
• Lead abatement credit of up to $10,000 for individuals who have incurred expenses to make their homes lead-safe
• Nonrefundable ex-felon work opportunity tax credit (WOTC), equal to 30% of an employer's federal WOTC credit for the tax year, for employers that hire qualified ex-felons

These credits are not available against the Ohio commercial activity tax.

Sales and use tax changes for remote sellers

Sub. HB 166 would expand Ohio's definition of substantial nexus for a seller in two ways. First, it would add an economic nexus provision similar to South Dakota's law. Under this provision, persons would have nexus with Ohio if they have either of the following in the current or proceeding calendar year: (1) Ohio gross receipts of over $100,000; or (2) a minimum of 200 separate transactions in Ohio.

Second, Sub. HB 166 would add the term "marketplace facilitator" to the definition of "seller," which would require a marketplace facilitator to collect Ohio sales tax on sales facilitated on behalf of one or more marketplace sellers. Sub. HB 166 would also eliminate certain existing statutory nexus provisions, including Ohio's "click-through" nexus rules and its provisions relating to using in-state software or content distribution networks if certain sales thresholds are met (i.e., cookie nexus).

Other sales and use tax changes

Current law imposes sales/use tax on the intrastate transportation of persons by motor vehicle or aircraft. Sub. HB 166 would specify that a provider of intrastate transportation would include transportation network company services provided by transportation network companies. Transportation network companies would be required to collect the tax, not the driver. Sub. HB 166 also would amend the definition of "price" to exclude fees paid by the rider, such as airport access fees, booking fees, tolls and any other services not related to the transportation service.

Sub. HB 166 would add an exemption for equipment, supplies, and building and janitorial services used to clean or maintain any tangible personal property, machinery or equipment that is used primarily in a continuous manufacturing operation. It would expand a current exemption for equipment and supplies used to clean processing equipment from certain dairy products to food products generally.

Sub. HB 166 would eliminate some existing exemptions, including exemptions for sales of:

• Vehicles, repair services and parts to a professional racing team
• Investment metal bullion and investment coins
• Certain materials, parts, and equipment for specific aircraft and aircraft-related services
• Full flight simulators used for pilot or crew training

Sub. HB 166 also would eliminate the $800 maximum tax on the sale of aircraft used in a fractional aircraft ownership program

Financial institutions tax change

Sub. HB 166 would limit the amount of equity subject to the Ohio financial institutions tax to 14% of a financial institution's total assets from the tax base.

Implications

The proposed changes to the business income deduction would result in tax increases to businesses and business owners. Additionally, the House may make further amendments to Sub. HB 166 that would repeal the 3% flat tax rate imposed on business income over $250,000 and subject that income to the top marginal rate of 4.997%. The proposed sales/use tax nexus changes would bring Ohio in line with numerous other states that have adopted similar provisions in response to the U.S. Supreme Court decision in Wayfair.

Sub. HB 166 will be considered by the full House over the next week. If approved by the House, it will go to the Senate for further consideration. If the Senate proposes changes to the version sent over by the House, the differences will have to be resolved by Conference Committee. Once resolved, the final bill would then go to Governor DeWine for his signature. This is all typically done by June 30 of every legislative year, otherwise Ohio state government would operate under interim budgets.

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ENDNOTES

¹ This non-refundable income tax credit is based on investments benefiting Ohio-designated opportunity zones (i.e., Ohio qualified opportunity fund). To qualify for the credit, a taxpayer would have to invest in an opportunity zone fund that invests at least 90% of its invested assets in an Ohio qualified opportunity fund. The credit would equal 10% of a taxpayer's investment in such fund in the tax year of the investment. The credit would be capped at $1 million per biennium at the individual level, and at $50 million per biennium for all taxpayers. The Ohio Development Services Agency Director could not issue a credit for a project that also has been issued a small-business investment certificate or InvestOhio certificate.