On June 30, 2025, Ohio Governor Mike DeWine signed into law Amended Substitute House Bill 96 (HB 96), the state's biennial budget legislation for the fiscal period ending June 30, 2027. HB 96 contains several tax-related changes, including:

• Moving to a flat income tax rate
• Providing a tax credit to owners of pass-through entities taxed at the entity level
• Providing municipal income tax filing extensions in certain situations
• Repealing certain sales and use tax exemptions
• Modifying the casual sale definition
• Limiting the sales and use tax exemption available to port authorities
• Allowing a credit for unused Ohio Franchise Tax net operating losses
• Modifying certain assessment and notice requirements

The governor also exercised his line-item veto authority to strike certain provisions as indicated. Unless otherwise noted, these provisions become effective 90 days after the governor's signature.

Individual income taxes

Before HB 96's enactment, Ohio had graduated rates for individual income taxes. A 2.75% rate applied for nonbusiness income from $26,051 through $100,000, and a 3.5% applied for income exceeding $100,000. Income of $26,050 or less is not taxed.

HB 96 phases in a flat rate of 2.75% over two years. For tax year 2025, the top bracket rate decreases from 3.5% to 3.125%, while the 2.75% rate for nonbusiness income from $26,051 through $100,000 remains. For tax year 2026, a flat 2.75% rate applies to all nonbusiness income over $26,050.

HB 96 does not change the flat 3% rate for business income or the $250,000 business income deduction ($125,000 for married filing separately). HB 96 also clarifies that the resident and nonresident tax credits will be calculated after taking the business income deduction into account.

For tax years beginning on or after January 1, 2025, HB 96 allows the tax commissioner to abate penalties and interest charged for failure to pay sufficient estimated state, school district, or certain pass-through entity income taxes. Penalties still apply at the discretion of the tax commissioner.

Pass-through entities

Effective for tax years beginning on or after January 1, 2025, HB 96 allows pass-through entities electing to be taxed at the entity level under ORC 5747.38 to claim a refundable credit for state taxes paid (SALT deduction cap "workaround"). Prior law only allowed the owner(s) to claim the credits.

HB 96 also clarifies how a pass-through entity should calculate the tax credit allowed to its investor(s) if it elects to be taxed at the entity level or files a composite return. The credit should be calculated as the lesser of the investor's proportionate share of the tax paid by the entity or the proportionate share of the tax actually due.

Municipal income taxes

If the due date of a taxpayer's original (i.e., unextended) federal income tax return falls after the due date of its municipal income tax return, HB 96 aligns the due date of the municipal return with the federal return. This provision applies to returns required to be filed on or after January 1, 2026.

HB 96 also allows taxpayers who receives a valid extension of their tax return due date to file a refund claim within the later of three years after the date of the overpayment or the return's extended due date.

HB 96 also extends, from six to seven months, the extension period for filing a municipal net profits tax return for taxpayers that do not request an extension to file their federal income tax return.

Sales and use taxes

Repeal of certain sales-and-use-tax exemptions and modification of casual sale definition

Beginning January 1, 2026, HB 96 repeals sales-and-use-tax exemptions on:

• Rental payments for "loaner" motor vehicles provided to the owner of a vehicle being repaired or serviced
• Refrigerated food vending machines
• Advertising materials or catalogs that price and describe items available for sale
• Items used by direct marketers in printing advertising material
• Equipment primarily used by direct marketers to accept orders
• Digital audio on juke boxes or similar devices in commercial establishments
• Telecommunications services used by qualified call centers
• Tangible personal property used in acquiring, formatting, editing, storing, and disseminating data or information by electronic publishing

Current law also allows an exemption for certain items sold at a casual sale, which is generally a sale of used items sold by either the user or an auctioneer. HB 96 clarifies the definition of a casual sale by explicitly including both in-person and online sales and excluding sales by an auctioneer made at the auctioneers' physical permanent place of business.

Interest on certain refunds

HB 96 eliminates interest on refunds for sales tax and use tax paid by a direct-pay permit holder. In addition, interest on refunds of county sales and use tax is eliminated. Interest will continue to be allowed for refunds of state and transit authority taxes.

Port authorities

As political subdivisions, port authorities are exempt from sales/use tax on their purchases. Port authorities can use their tax-exempt status to reduce construction costs by leasing a building to a business during construction, which allows the business to benefit from the tax savings on materials incorporated into the project.

HB 96 prohibits port authorities from entering into agreements that allow a private party to benefit from the sales tax exemption on construction materials without first obtaining county commissioner approval, if the project is located outside the port authority's territorial jurisdiction.

HB 96 also prohibits a port authority from entering into a capital leaseback agreement for a project in its territorial jurisdiction without approval from the board of county commissioners in which the applicable property is located or, if the applicable property is located in more than one county, from each board of county commissioners of each county in which the development is located.

Vendor discounts

Effective for returns filed after January 1, 2026, the discount for vendors that promptly pay sales and use tax is capped at $750 per vendor's license per month covered by the return. Motor vehicle leases are exempt from the discount cap.

Commercial Activity Tax — net operating loss credit

ORC 5751.53 allows a credit against the Commercial Activity Tax for unused Ohio Franchise Tax net operating losses (NOLs). The credit applies to "qualifying taxpayers" who made an election before July 1, 2006. The credit is based on an "amortizable amount" derived from unused franchise tax NOLs and other factors.

The credit was originally enacted to be nonrefundable from 2010-29 with any portion not claimed by 2029 becoming refundable in 2030. HB 96 converts the credit to a nonrefundable credit after calendar year 2029.

Department of Taxation (Department) procedures

Under current law, a taxpayer generally may protest an assessment of tax by filing a Petition for Reassessment within 60 days of receiving the assessment. HB 96 removes the requirement that taxpayers submit a Petitions for Reassessment through personal service or certified mail. Taxpayers would still do well to file petitions via certified mail or through the Department's online platform to retain documentation of timely filing.

When a taxpayer files a refund claim, the tax commissioner will provide a notice of the amount of refund approved or denied. The taxpayer then has 60 days to either request a hearing or provide additional information supporting the denied portion of the refund. HB 96 permits the tax commissioner to electronically notify, as an alternative to ordinary mail notice, a person applying for a tax refund if the amount to be refunded is less than what the person requested, but only if the person consents to electronic notice. Business taxpayers should update their designated contact persons for such notices to ensure timely receipt.

Vetoed provisions

Governor DeWine exercised his line-item veto authority over the following tax-related provisions passed in HB 96.

Data centers

Current law provides the Ohio Tax Credit Authority (OTCA) to grant a full or partial sales/use tax exemption on purchases of eligible data center equipment. Projects must meet minimum investment and payroll thresholds to be eligible. HB 96 would have disallowed the OTCA from entering into exemption agreements beginning October 1, 2025.

Sales tax exemptions

HB 96 would have repealed several exemptions starting January 1, 2026. The governor vetoed the repeal of the following exemptions:

• Newspapers
• Transfer of copyrighted motion picture films (including those solely transferred for advertising purposes)
• Machinery, equipment and material used to produce printed matter for sale

Income tax garnishment for private judgment debts

HB 96 would have required the Department to withhold funds from income tax refunds in circumstances involving taxpayers who owe private judgement debts.

It is unknown at this time whether the legislature will seek to override any of Governor DeWine's vetoes. A 3/5th majority in each chamber is required to override a veto.

Implications

Ohio continues the trend among states to reduce individual income tax rates. In the last 10 years, the top rate has decreased from just under 5% to 2.75% starting in 2026. Funding for these rate-reductions focused on eliminating certain sales-and-use-tax exemptions. Taxpayers relying on the sales-and-use-tax provisions vetoed by Governor DeWine will want to monitor whether the legislature attempts to override those vetoes. Taxpayers relying on a refundable CAT NOL credit starting in 2030 will need to consider the conversion of that credit to a nonrefundable credit. Taxpayers will also want to take note of the administrative changes relating to the delivery of notices and ensure that their contact information is updated with the Department.