January 6, 2021
Ohio legislature passes bill reducing Financial Institutions Tax for “de novo” banks and excluding mortgage bankers from Commercial Activity Tax
On December 22, 2020, the Ohio General Assembly passed House Bill 150 (HB 150), reducing the Financial Institutions Tax (FIT) for certain banks and excluding mortgage bankers from the Commercial Activity Tax (CAT). The legislation has been submitted to Governor Mike DeWine for his signature.
FIT reduction for de novo banks
The FIT applies to banks and other financial institutions. The tax applies to the portion of the financial institution’s equity capital attributable to Ohio operations, as measured by its gross receipts from activities in Ohio. The tax rate is tiered according to an institution’s Ohio equity capital: 0.8% on the first $200 million, 0.4% on the next $1.1 billion, and 0.25% for equity capital over $1.3 billion.1 The minimum tax is $1,000.2
HB 150, if enacted, would reduce the FIT by up to $1 million for “de novo” banks,3 which would be defined as any bank that has been operating for less than three years.4 A bank would not be de novo if (1) it was formed, acquired or converted by an existing or former FIT taxpayer or (2) it resulted from a merger with that taxpayer.
To qualify for the reduction, a de novo bank would have to have started its operations in the year in which HB 150 takes effect or in any future year. A bank would be considered to have started operations in the year the bank was issued a charter, certificate of authority or equivalent document authorizing its banking operations. Under HB 150, a de novo bank whose tax liability before the reduction equaled $1 million or less would not owe any FIT for that year, not even the minimum tax. A de novo bank whose tax liability before the reduction exceeded $1 million would owe the difference between its pre-reduction tax liability and $1 million. The reduction would apply for the 2021 tax year, which is the measurement period for returns filed for tax year 2022.
CAT exclusion for mortgage lenders5
Under existing law, the CAT law’s definition of “gross receipts” excludes certain gross receipts of mortgage brokers (which are distinct from mortgage lenders under the law) and thus excluded from the CAT.6 The exclusion for a mortgage broker’s gross receipts applies to the funds the broker uses to finance a table-funded loan7 or warehouse lending loan,8 other than money the broker receives as fees or other consideration for the transaction.
HB 150 would allow mortgage lenders to exclude, from their CAT base, gross receipts from the sale or transfer of mortgage loans and mortgage-backed securities.9 The exclusion would equal the receipts representing the principal balance of mortgage loans. Under HB 150, a mortgage lender would include any lender registered as such with the Ohio Superintendent of Financial Institutions. This change would apply to tax periods beginning on or after HB 150’s effective date. Tax legislation is effective on the 91st day after its filing with the Secretary of State. Assuming Governor DeWine signs HB 150 in early January, this exclusion would be effective July 1, 2021.
If enacted, financial institutions subject to the FIT and mortgage lenders subject to the CAT will need to take these new provisions into consideration in filing required returns.
1 See Ohio Rev. Code Section 5726.04(A)(1)(b).
2 See Ohio Rev. Code Section 5726.04(A)(1)(a).
3 See HB 150, Section 1 (amending Ohio Rev. Code Section 5726.04 by adding new paragraph (A)(2).
4 See id. (amending Ohio Rev. Code Section 5726.01 by adding new subsection (W) defining “de novo bank organization”).
5 Before 2014, certain mortgage lenders were subject to the Ohio Dealer in Intangibles Tax (DIT). The DIT was repealed after 2013 and mortgage lenders that are not financial institutions subject to the FIT are subject to the CAT.
6 See Ohio Rev. Code Section 5751.01(F)(2)(w) (excluding, from the CAT law’s definition of “gross receipts,” funds received or used by a mortgage broker under a table-funding mortgage loan or warehouse lending mortgage loan).
7 Table-funded loans involve a lender taking assignment of a loan from the broker originating the loan, effectively advancing the money for the closing.
8 Warehouse lending loans involve the loan originator providing funds for a mortgage through a line of credit the originator obtains from a lender, i.e., the warehouse, and repaying the debt once the originator sells the loan into a secondary market.
9 See HB 150, Section 1 (amending Ohio Rev. Code Section 5751.01(F)(2) by adding new section (mm)).