November 3, 2021
Ohio legislature adopts streamlined filing processes for municipal net profits taxes
On October 27, 2021, the Ohio General Assembly passed House Bill 228 (HB 228), which, if enacted, would streamline certain processes associated with the elective centralized filing system for municipal net profits taxes, which the Ohio Department of Taxation (OH DoT) administers. Governor Mike DeWine is expected to sign the legislation in the coming days. The modifications that would be made by HB 228 would apply to municipal net profits tax years beginning on or after January 1, 2022.
The centralized filing system was adopted by the legislature in 2017 in Am. Sub. House Bill 49 (Ohio Laws 2017, ch. 14 (adding Ohio Rev. Code Sections 718.80 to 718.95)). Under this legislation, beginning in 2018, Ohio corporations and passthrough entities could elect to centralize all their filings for Ohio municipal business net profits tax through the OH DoT. The main advantage of this optional election is that a business would have to file only one municipal return on the Ohio Business Gateway instead of potentially numerous local filings with municipalities or their agents throughout Ohio.
HB 228 would address some of the challenges that have arisen in implementing the centralized system. One challenge is that businesses electing into the centralized system must notify each municipality in which they owe tax when they make the election. While the failure to notify the municipality does not nullify the business's election to centralize its filings with the OH DoT, it may require businesses to respond to notices from those municipalities for failing to file.
Once a business elects into the centralized system, the municipality must transfer certain taxpayer information, such as balances of tax credits, net operating loss carryforwards and overpayment carryforwards. The processes used to transfer this information are still somewhat manual, leading to delays in getting necessary information into the electing taxpayer's account. HB 228 includes several provisions that would address these and other challenges.
HB 228 would require the OH DoT to implement a web portal to securely exchange information with municipalities so the OH DoT could administer the numerous municipal net profits taxes and authorize the Commissioner of the OH DoT to adopt rules necessary to administer the portal. The portal would have to be usable by the provision's effective date. In addition, the OH DoT would be required to add functionality to the portal so it could handle the exchange of all information necessary to enable the OH DoT to administer the municipal net profits taxes.
Under existing law, once a municipal corporation is informed that a taxpayer has elected into the centralized system, the municipal corporation must submit to the OH DoT certain taxpayer information, including information regarding net operating loss carryforwards, credits, overpayments and any other relevant information with respect to the taxpayer. HB 228 would require this information to be reported to the OH DoT within the earlier of 90 days after the taxpayer files its final return directly with the municipality or 15 days after the end of the tax year for which the taxpayer made the initial election into the centralized filing system. HB 228 would authorize the OH DoT to withhold tax collections from a municipality that fails to comply with reporting requirements.
Under existing law, a taxpayer must register to elect into the centralized system by the first day of the third month of the taxpayer's tax year (e.g., March 1 for calendar-year filers). HB 228 would extend the deadline to the 15th day of the fourth month of that year. The election would continue to apply to the tax year for which it is made and would automatically renew for each ensuing tax year until terminated by the taxpayer. HB 228 also provided that the due date for a taxpayer to terminate election has been changed from the first day of the third month of the taxable year to the 15th day of the fourth month of the taxable year consistent with the changes to the initial election.
HB 228 also would require the OH DoT to notify municipalities, at least quarterly, of the taxpayers that have opted into or out of the centralized filing system. The OH DoT would have to provide to all municipalities that levy income tax on or after January 1, 2018, a list of the taxpayers that have elected into the centralized filing system and make that information available through the new web portal.
Under existing law, a taxpayer with multiple tax years beginning in one calendar year must aggregate the information necessary to compute the tax for all such years onto one annual return. HB 228 would remove this requirement and, as a result, require a taxpayer to file a single return for each tax year, as with the federal, state and locally administered municipal income taxes. HB 228 also would align the definition of "tax year" for businesses electing into the centralized filing system with the definition that applies to businesses not making that election (i.e., the taxpayer's tax year is the same year it uses for federal income tax purposes).
Refunds and collection costs
HB 228 would authorize the OH DoT to either refund any overpaid municipal net profits tax to a taxpayer or credit the amount against the taxpayer's future net profits tax liability, even if the taxpayer does not file a refund request. HB 228 also would require any refund of state-administered net profits taxes to be offset by an outstanding debt for such taxes that has been certified for collection.
Under existing law, any amount owed to the state that is more than 45 days past due must be certified for collection to the Ohio Attorney General, who then becomes responsible for its collection. To offset the costs of collecting past-due amounts, the Ohio Attorney General may charge collection costs. HB 228 would expressly authorize the Ohio Attorney General to charge the costs of collecting state-administered municipal net profits taxes, interest and penalties to a taxpayer that owes those amounts.
Deduction for pass-through entity retirement payments
Unrelated to the centralized filing system, HB 228 would allow a pass-through entity, in computing its municipal net profits tax liability, to deduct any pension or retirement benefits paid to a retired partner, retired shareholder or retired member. Under existing law, income from any pension or retirement benefit plan, including nonqualified plans, is exempt from municipal income tax in computing the individual's income tax liability. The pass-through entity's retirement payments deduction would apply to municipal tax years beginning on or after January 1, 2020.
The streamlined processes set forth in HB 228 would address some of the administrative challenges faced by taxpayers and the Ohio state and municipal taxing authorities. Among other administrative benefits, the new processes would result in fewer informational gaps and, therefore, fewer unnecessary notices requiring a response. EY will continue to monitor and report on developments in this area.