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July 2, 2021

Ohio enacts tax changes, including individual rate reductions, excluding certain capital gains from income

On June 30, 2021, Governor Mike DeWine signed 2021 Ohio Substitute House Bill 110 (HB 110), which is Ohio's biennial budget legislation. HB 110 includes numerous tax changes, such as (1) reducing individual income tax rates, (2) extending a temporary rule allowing employers to withhold municipal income tax for certain remote workers based on their principal place of work through December 31, 2021, and (3) repealing the sales/use tax on providing employment services. The tax changes affecting income taxes, sales/use taxes, the Commercial Activity Tax (CAT) and certain Ohio incentives programs are discussed next.

Individual income tax changes

HB 110 reduces Ohio's individual income tax rates by 3% for 2021. HB 110 also eliminates the top income tax bracket for Ohio adjusted gross income (AGI) over $217,000 and reduces the tax rate for Ohio AGI over $110,650 to 3.99% for 2021. HB 110 also eliminates individual income tax for anyone with $25,000 or less in Ohio AGI.

HB 110 adds new Ohio Rev. Code (ORC) 5747.79(B), which allows taxpayers to deduct, in computing Ohio AGI, a qualifying capital gain during tax years beginning on or after January 1, 2026. The deduction equals the lesser of the qualifying capital gain1 or the deductible payroll.2 If a taxpayer has multiple capital gains from sales of different entities during the tax year, each capital gain must meet the requirements to be classified as a qualifying capital gain. The deduction will equal the lesser of (1) the taxpayer's qualifying capital gain from the sale of each entity, or (2) deductible payroll attributable to that entity. The deductions for each entity are aggregated to determine the total deduction.

Other changes include:

  • Extending the deadline by which resident taxpayers must report changes to their resident credit from 60 days to 90 days of any correction to their income tax liability in another state or the District of Columbia
  • Delaying by one year, until January 1, 2023, the date by which individuals must elect to have state income tax withheld from their Ohio unemployment benefits
  • Eliminating, for tax years beginning on or after January 1, 2021, a requirement to report, on the annual return, the NAICS code of each business from which income is derived if a taxpayer is claiming the business income deduction

Extension of temporary relief for employee withholding and related provisions

In March 2020, the Ohio enacted 2020 Ohio HB 197 (HB 197), providing emergency relief to Ohioans during the COVID-19 pandemic. Section 29 of HB 197 (Section 29) temporarily allowed employers to continue withholding Ohio municipal income taxes based on the employee's principal place of work, even though they were working from their homes due to the COVID-19 emergency restrictions. This provision was intended to relieve employers of the administrative burden of withholding and remitting Ohio municipal taxes during the COVID-19 emergency based on each employee's place of residence instead of their office location. This relief was tied to Executive Order (EO) 2020-01D, which was issued in March 2020.

On June 18, 2021, Governor DeWine lifted the restrictions under EO 2020-01D. As provided in HB 197, the temporary withholding provision in Section 29 would have expired 30 days after the restrictions under EO 2020-01D were lifted.

HB 110 amends3 Section 29 to decouple the temporary municipal income tax withholding rule from EO 2020-01D and extends that relief through December 31, 2021. HB 110 also contains a statement of legislative intent that the temporary provisions apply only to the employer's municipal income tax withholding obligations and to the apportionment and situsing of an employer's net profit. The legislative intent statement also indicates that the temporary provisions were not intended to apply for determining the location where an employee worked for the purposes of determining the employee's municipal income tax liability. In other words, the legislature attempted to clarify that the relief under Section 29 was intended to govern the employer's withholding obligations only and employees (and municipalities) might still retain the right to situs municipal income taxes based upon where the work was actually performed.

Certain provisions of HB 110 address the nuances of this possibility by:

  • Clarifying that an employer may assign an employee to a new and different work location during the period the temporary relief is in place
  • Providing that the temporary withholding provisions do not apply for purposes of determining the employee's municipal income tax liability on or after January 1, 2021
  • Clarifying that the resident municipality may treat the employee's wages as taxable only to the extent of the incremental tax due because of the higher tax rate if (1) the employee does not claim a refund for taxes withheld based on the employee's principal place of work and (2) the employee's resident municipality has a higher tax rate than the principal-place-of-work municipality
  • Allowing, for 2021, an employee's municipality of residence to treat the employee's wages as non-exempt income solely for the purpose of determining the amount of tax owed to that municipality if the municipality grants a credit of less than 100% of taxes paid to another municipality
  • Prohibiting, for 2021, a municipality from assessing a penalty or interest against an employer for failing to withhold municipal income tax from an employee's wages to the extent the employer withheld taxes to the employee's principal place of work during the time the temporary withholding rule is in effect
  • Prohibiting the municipal tax administrator from requiring any documentation from the employer to process an employee request for a refund of municipal taxes withheld under the temporary rule, other than a statement verifying that the employer has not refunded any withholding to the employee and the number of days the employee worked at the employee's principal place of work

These provisions extend the time for employers to implement processes to track where employees work, subject to an existing 20-day safe harbor, after December 31, 2021. Businesses will also need to consider whether the presence of employees working remotely subjects the business to a net profits tax obligation in the municipalities where those employees work. The clarification in the legislative intent statement that Section 29 was not intended to affect an employee's municipal income tax liability on or after 2021 will likely give rise to refund claims, which will result in a revenue loss for certain municipalities. For some of these municipalities, those revenue losses may be significant. The question of whether employees are entitled to refunds for 2020 is still an open one and is the subject of litigation discussed in Tax Alerts 2021-1011, 2021-0912 and 2021-1235.

Repeal of sales/use tax on employment and employment placement services and other changes

Ohio law currently imposes sales/use tax on receipts derived from providing employment services (i.e., providing personnel to work under the purchaser's supervision and control). This provision has been the subject of significant and frequent controversy over the years as to the scope of what's taxable and the application of statutory exemptions. Ohio law also imposes sales/use tax on employment placement services (i.e., locating employees for an employer or employment for a jobseeker). HB 110 repeals the sales/use tax on these services.

HB 110 also restores a sales/use tax exemption for sales of investment metal bullion and coins (a similar exemption had been repealed as of October 1, 2019).

These sales/use tax provisions will be effective October 1, 2021.4

CAT changes

In March 2021, Ohio enacted a temporary exclusion from CAT gross receipts for "dividends" paid to employers in 2020 and 2021 by the Ohio Bureau of Workers Compensation (OH BWC) (see Tax Alert 2021-0672). HB 110 makes this exclusion permanent.5

HB 110 also changes the computation of the annual minimum fee applicable to the first $1 million in taxable gross receipts for CAT purposes. Current law imposes an annual minimum fee on the first $1 million in taxable gross receipts based on the following graduated schedule:

Taxable gross receipts

Annual minimum tax


$1 million or less


No additional tax

More than $1 million but less than or equal to $2 million


0.26% x (taxable gross receipts - $1 million)

More than $2 million but less than or equal to $4 million


0.26% x (taxable gross receipts - $1 million)

More than $4 million


0.26% x (taxable gross receipts - $1 million)

The annual minimum tax is computed under current law by reference to taxable gross receipts for the current year and is paid on the return for the first quarter of that calendar year. This required taxpayers to estimate future gross receipts for this purpose and resulted in reconciling tax paid with what was actually owed. HB 110 changes this calculation to require this determination to be made based on the previous year's taxable gross receipts. This provision is effective immediately.6

Refund procedures

ORC 5703.70 describes general refund application and processing procedures for most Ohio taxes. Current law requires the Ohio Tax Commissioner to notify a refund applicant if the amount of the refund is determined to be less than that requested. The applicant then has 60 days to provide additional information in support of the refund claim, request a hearing, or both. After the receipt of the additional information or the hearing, the Ohio Tax Commissioner must issue a final determination on the refund claim, which is subject to appeal to the Ohio Board of Tax Appeals. HB 110 amends ORC 5703.70 to allow the Ohio Tax Commissioner to adjust the amount of a state tax refund multiple times before issuing a final refund determination.

Ohio megaproject incentives

HB 110 authorizes various tax incentives7 for operators and certain suppliers of a "megaproject," which is defined as a development project8 by the megaproject operator that includes at least $1 billion in investment or creates $75 million in Ohio payroll.9 Megaproject suppliers10 may exclude, for Ohio CAT purposes, the gross receipts from the sale of tangible personal property to a megaproject operator. Operators and suppliers can apply for these incentives to the Ohio Director of Development Services in a manner similar to the existing application procedures for the Ohio Job Creation Tax Credit.


Businesses having Ohio employees working remotely in Ohio municipalities now have additional time (until December 31, 2021), to implement processes and systems to track the municipal locations where those employees are actually working for municipal income tax purposes. Employees working remotely will want to consider filing municipal income tax refund claims to the extent taxes were withheld based on principal place of work for 2021, and possibly 2020, instead of where they actually performed the work.

Ohio individual income taxpayers contemplating disposing of interests in entities that they own may want to consider whether they might qualify for the capital gain exclusion that begins in 2026.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Bill Nolan (
   • Chris Futscher (
Workforce Tax Services – Employment Tax Advisory Services
   • Fred Branditz (


1 Defined in new ORC 5747.79(A)(1) as a capital gain from the sale of an entity not otherwise deducted or excluded from federal or Ohio AGI for the tax year if all of the following apply: (1) the taxpayer that sold the entity either materially participated in the entity's activities for the five years immediately preceding the sale (determined by reference to Treas. Reg. Section 1.469-5T(a)(1), (2), (3), (4), or (7)) or directly or indirectly made a venture capital investment (defined by reference to Treas. Reg. Section 2510.3-101) of at least $1 million in the entity; (2) the entity is incorporated, registered or organized in Ohio during the five years immediately preceding the sale; and (3) the entity is headquartered in Ohio during the five years immediately preceding the sale.

2 Defined in new ORC 5747.79(A)(3) as the amount of compensation used to determine employer withholding obligations and paid by the entity generating the gain over one of the following periods: (1) the five calendar years immediately preceding the sale of the entity by the taxpayer; or (2) the investment period, not to exceed the five calendar years immediately preceding the sale of a taxpayer making a venture capital investment described in ORC 5747.79(A)(1)(a)(i). Qualifying payroll will not include any amounts paid to the taxpayer, the taxpayer's spouse, parents, grandparents, children or grandchildren.

3 These provisions are found in sections 660.115, 660.116 and 757.40 of the uncodified portions of HB 110.

4 Section 803.93 of the uncodified portions of HB 110.

5 Section 803.170 of the uncodified portions of HB 110.

6 Section 812.20 of the uncodified portions of HB 110.

7 These incentives would apply for Ohio CAT and real property taxes. The real property tax changes are adopted in ORC 5709.61, 5709.62, 5709.63, 5709.631 and 5709.632.

8 ORC 122.17(A)(11)(a) defines a development project as one requiring a unique site, extremely robust utility service and a technically skilled workforce.

9 Employees must be compensated at an average hourly wage of at least 300% of the federal minimum wage. ORC 122.17(A)(11)(b).

10 ORC 122.17(A)(13) defines a megaproject supplier as a person that sells tangible personal property directly to a megaproject operator and meets certain other requirements.