July 26, 2019 Ohio enacts tax law changes as part of 2020-21 budget On July 18, 2019, Governor Mike DeWine signed Amended Substitute House Bill 166 (HB 166), Ohio's fiscal year 2020-21 budget legislation. Ohio had been operating on a temporary budget since June 30 due to state legislators' inability to come to an agreement on the legislation before the legal deadline. The House and Senate were ultimately able to negotiate a compromise version that was signed by the Governor subject to some line-item vetoes discussed later. As finalized, HB 166 contains significant tax changes, including expansion of the state's sales/use tax nexus standards (which apply to marketplace facilitators), reduction of individual income tax rates and changes to Ohio's business income deductions. A summary of certain tax-related provisions in HB 166 follows. Sales and use tax nexus standards modified HB 166 modifies the definition of "substantial nexus" in Ohio Rev. Code Sections 5741(H)(2)(g) and (h) to create a presumption of nexus for a seller meeting either of the following thresholds in the current or prior year:
Ohio's previously existing nexus provisions (including click-through nexus and Ohio's so-called cookie nexus provisions) were repealed. Sections 757.80 and 812.20 of the uncodified provisions of HB 166 indicate these changes are effective on August 1, 2019. Marketplace facilitator nexus adopted Effective August 1, 2019, HB 166 modifies Ohio Rev. Code Section 5741.01(H)(2)(4) to provide that marketplace facilitators are presumed to have nexus if they either:
HB 166 adds Ohio Rev. Code Section 5741.01(T), which defines a "marketplace facilitator" as a person that owns, operates or controls a physical or electronic marketplace1 through which retail sales are facilitated on behalf of one or more marketplace sellers,2 or an affiliate of a marketplace seller. A "marketplace facilitator" does not include a person that provides advertising services if the advertising services platform does not (i) collect the price of any goods or services sold from a consumer and/or remit such payments to the marketplace seller, (ii) process payments, or (iii) provide virtual currency that consumers may use to purchase the goods or services that are the subject of the sale. HB 166 also adds Ohio Rev. Code Section 5741.01(W), which lists activities that are deemed to "facilitate" a sale of tangible personal property or taxable services (not including lodging by a hotel). This list is broad and generally contemplates marketplace facilitators that (i) list and/or otherwise promote a marketplace seller's items for sale on their platforms, (ii) set prices, (iii) take orders, (iv) brand sales as those of the marketplace facilitator, or (iv) offer payment collection and/or processing services, or fulfillment or storage services. A marketplace facilitator that collects tax must situs sales as follows:
A marketplace facilitator generally has the same rights and obligations as any other seller under Ohio law. For example, marketplace facilitators and marketplace sellers remain personally liable for failing to remit tax that they collect. However, a marketplace facilitator is relieved of liability for incorrectly collected tax from an unaffiliated marketplace seller when the marketplace facilitator receives incorrect or insufficient information from the marketplace seller to determine the correct amount of tax and the marketplace facilitator makes a reasonable effort to collect such information. Moreover, no class actions may be brought in any Ohio court on behalf of any consumers against a marketplace facilitator arising from an overpayment of the tax. Finally, the Ohio Department of Taxation (Department) may only audit the marketplace facilitator if (i) the facilitator is treated as the seller, and (ii) the Department may not audit the marketplace seller. The Department, upon receiving an application from a marketplace seller, must waive the requirement for the marketplace facilitator to collect and remit sales tax made on behalf of that marketplace seller if certain conditions are met. New limitations on Ohio's business income deduction Effective January 1, 2020, HB 166 provides that income from certain trades or businesses is not eligible for Ohio's business income deduction (BID). The BID was enacted in 20153 and was intended as an economic development tool. Current law provides sole proprietors and investors in pass-through entities a BID up to the first $250,000 in business income ($125,000 for married individuals filing separately). In addition, a flat 3% rate applies to any business income over $250,000. The Ohio House, in response to testimony suggesting the BID was merely a tax-avoidance provision, proposed reducing the maximum deduction from $250,000 to $100,000. The House proposal also would have eliminated the 3% flat rate, thus subjecting any business income above the allowable deduction to tax at the marginal rates applicable to all other individuals. The Ohio Senate proposed retaining the BID which, in part, led to the impasse that delayed the enactment of the overall budget legislation. The final version of HB 166 retains the existing BID for most taxpayers but adopts a definition of "eligible business income," which will apply for purposes of determining entitlement to the $250,000 deduction and the 3% flat rate. New Ohio Rev. Code Section 5747.01(B)(2) defines "eligible business income" as business income,4 excluding income from a trade or business that performs either or both of the following:
The definitions governing these new BID limitations seem very broad and will raise many complicated questions as taxpayers and the Department attempt to apply them. These provisions may be ripe for technical corrections legislation in the future. Individual income tax bracket modifications, rate reductions, and repeal of certain credits HB 166 eliminates the bottom two individual income tax brackets by reducing the number of brackets from seven to five, effective January 1, 2019. The elimination of the bottom two brackets effectively exempts from Ohio individual income tax any individual with annual income of $21,750 or less. The indexing of brackets and exemptions is frozen for tax years 2019 and 2020 at 2018 levels with indexing resuming in tax year 2021. HB 166 also reduces tax rates for the remaining brackets by 4% for tax year 2019. An additional 4% rate reduction had been proposed for tax year 2020 but was not included in the final version of the legislation. The credits for campaign contributions and for a pass-through entity investor's share of the Ohio Financial Institution Tax are repealed effective for 2019 and forward. HB 166 also requires taxpayers to include income subject to the BID for purposes of determining eligibility for certain means-tested income tax credits and the homestead exemption for real estate taxes. Sales tax on peer-to-peer car-sharing programs The House version of HB 166 provided for sales/use tax to apply to peer-to-peer car-sharing services. The intent was to tax services provided through Uber and Lyft. The House version imposed the obligation to collect and remit the tax on the peer-to-peer platform and not on the car owner. The Senate version broadened the House version by specifying that any "technology platform" facilitating taxable services would be considered a vendor. Governor DeWine line-item vetoed the "technology platform" language, generally reverting to the House version. This provision is effective October 1, 2019. Other sales/use tax changes HB 166 enacted several other changes to Ohio's sales/use tax law, including the following:
These provisions take effect on October 1, 2019. The House version of HB 166 had proposed repealing certain exemptions related to the aviation industry, including fractional aircraft ownership programs. Those exemptions were retained in the final version of HB 166. Financial institution tax base limitations adopted Starting with tax years beginning on or after January 1, 2020, Ohio Rev. Code Section 5726.04(C)(1) limits the tax base upon which the financial institution tax is computed. Equity capital exceeding 14% of a financial institution's total assets will not be included in the tax base. The definition of "total assets" is also clarified to reference total consolidated assets as shown on a Form FR Y-9 or call report as of the end of the tax year. Ohio city income tax — pensions defined Before 2016, Ohio city ordinances typically provided an exemption for "income from pensions." The term was usually not defined in the city ordinance and controversies resulted over the treatment of certain retirement income, including supplemental executive retirement programs, or SERPs. The Ohio Supreme Court eventually held that SERPs were pensions for purposes of the city income taxes in McDonald v. Cleveland Income Tax Board of Review, Slip Opinion No. 2017-Ohio-7798. In 2016, Ohio adopted a model ordinance for Ohio cities, which also provided for an exemption from city income tax for pensions. However, the model ordinance did not define pensions. Effective in 2016, several Ohio cities modified the model ordinance to define a pension as effectively including only amounts reported on an IRS Form 1099-R, which resurrected the issue of whether SERPs qualified as pensions. Effective for tax years starting in 2020, HB 166 adds definitions of a pension and retirement benefit plan to the model ordinance. A pension is defined as a retirement benefit plan, which is further defined as an arrangement under which an entity provides benefits to individuals either on or after their termination of service because of retirement or disability. A retirement plan does not include wage continuation payments, severance payments, or payments for accrued personal or vacation time. The exemption does not depend on whether the retirement plan satisfied the requirements of IRC Section 401(a). Exempt amounts do not include elective employee contributions or deferrals. Taxation of vapor products HB 166 expands Ohio cigarette and tobacco taxes to levy a tax of $0.10 per milliliter5 of vapor product, to be paid by distributors, beginning October 1, 2019. A vapor product is defined as any liquid solution or other substance that contains nicotine and is depleted as it is used in an electronic smoking product. A vapor product does not include any product classified as a drug, device, or combination product by the federal Food and Drug Administration. A commercial activity tax exclusion for federal and state excise taxes paid by a wholesale dealer, retail dealer, distributor, manufacturer, or seller of cigarettes and tobacco products is modified, effective October 1, 2019, to include vapor products. Opportunity zone tax credit created HB 166 created a new Opportunity Zone investment tax credit equal to 10% of an investment in an Ohio Opportunity Zone6 investment fund, up to $1 million per biennium. Individuals, certain trusts, estates and taxpayers investing through a pass-through entity are eligible for the credit. The credit is nonrefundable but may be transferred. Job retention credit modified HB 166 modified the qualification for manufacturers and corporations to qualify for a nonrefundable job retention tax credit allowed by Ohio Rev. Code Section 122.171. A corporate headquarters may qualify for the credit if it is located in a foreign trade zone, regardless of whether certain payroll or employment requirements are met, so long as it continues to meet minimum capital investment requirements. A manufacturer may qualify for the credit if it makes a capital investment over three years of the lesser of $50 million or 5% of the net book value of tangible personal property used at the project at the end of the three-year period. Motion picture credit modified The House version of HB 166 would have repealed the refundable motion picture production credit. The final version of the legislation retained the credit, extended eligibility to certain live theater productions, and added post-production advertising and promotional expenses as credit-eligible expenditures. A provision granting a production company the right to award its certificate to a third party has been repealed. Federal partnership-level audits HB 166 prescribes procedures for how pass-through entities and their investors can amend Ohio income tax returns in response to changes necessitated by IRS audits conducted at the entity level and how those entities or investors will pay deficiencies or obtain refunds resulting from IRS adjustments. Ohio's provisions are based on the Multistate Tax Commission's "Model Uniform Statute for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments." These provisions apply to IRS adjustments made on or after October 1, 2019. Requirements for certain tax preparers HB 166 provides new requirements and prohibitions for tax return preparers. For these purposes, Ohio Rev. Code Section 5703.263(A)(1) defines a "tax return preparer" as any person, other than an accountant7 or an attorney,8 that operates a business that prepares, or directly or indirectly employs another person to prepare, a tax return for a taxpayer for consideration from the taxpayer or a taxpayer's related member. HB 166 also authorizes the Department to require, beginning in 2020, tax return preparers to include their federal tax identification numbers on any state form they prepare. In addition, a tax return preparer, as previously defined, may not engage in the following activities:
Penalties are applicable to any violations of the foregoing subject to abatement for good cause shown. ———————————————
——————————————— 1 Newly added Ohio Rev. Code Section 5741.01(V) defines an "electronic marketplace" to include digital distribution services, digital distribution platforms, online portals, application stores, computer software applications, in-app purchase mechanisms, or other digital products. 2 Newly added Ohio Rev. Code Section 5741.01(U) defines a "marketplace seller" as a person on behalf of which a marketplace facilitator facilitates the sale of tangible personal property or taxable services where the benefit is received in Ohio without regard to whether the marketplace seller has nexus with Ohio. 3 A different version of this deduction was enacted in 2013, but enhanced in 2015. 4 Defined in Ohio Rev. Code Section 5747.01(B)(1). 5 If the vapor product is sold in nonliquid form the tax is levied on each gram. 6 An "Ohio opportunity zone" is a federally designated qualified opportunity zone under 26 U.S.C. 1400A-1. 7 Defined as an individual who either holds an Ohio CPA permit, holds a certificate from another state, or is employed by a public accounting firm. 8 Defined as an individual admitted to the Ohio Bar. | |||||
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