Ohio Commercial Activity Tax and Insurance Companies, Financial Institutions, and Dealers in Intangibles

Mark A. Engel
July 2005

See also Analysis of Non-Tax Provisions of Am. Sub. H.B. 66 Affecting the Insurance, Banking & Financial Services Industry

On June 30, 2005, Governor Taft signed Amended Substitute House Bill 66, the biennial budget bill. This bill contains the governor’s plan to reform Ohio’s taxes to improve Ohio’s economic climate for business.

The plan phases out the tax on tangible personal property over four years, and the corporation franchise tax over five years. It also reduces all personal income tax rates by 21% over five years. Various excise taxes are increased and the 10% rollback on real estate taxes for most commercial and industrial property is eliminated. However, the centerpiece of the plan is a commercial activity tax (“CAT”). The CAT is essentially a tax on gross receipts from commercial activities. It is imposed at a rate of 2.6 mills (.0026) on the taxable gross receipts of virtually all commercial activity in Ohio.

“Taxpayers” are all persons who are required to file returns or pay the tax. Financial institutions, public utilities, insurance companies, and dealers in intangibles that are subject to special taxes for the entire tax measurement period are considered “excluded persons.” Persons with no more than $150,000 in gross receipts are also excluded unless they are part of a “consolidated elect taxpayer” or “combined taxpayer”. “Person” is broadly defined and means all individuals, joint ventures, and entities, including corporations, pass-through entities, and disregarded entities.

Dealers in Intangibles. A “dealer in intangibles” is every person who keeps a place of business in Ohio and engages in a business that consists primarily of lending money, or discounting, buying, or selling bills of exchange, drafts, acceptances, notes, mortgages, or other evidences of indebtedness, or in buying or selling investment securities. Thus, a person who engages in any of these activities, but who does not maintain a place of business in Ohio, is not a dealer in intangibles.

In addition, the person cannot be a financial institution.

Dealers in intangibles are required to file special tax returns and to pay the special tax imposed upon dealer under Revised Code Chapter 5725. HB 66 made no changes in the current taxation of dealers. Only a dealer that actually pays the dealers in intangibles tax is excused from the CAT; otherwise, the person is required to pay the CAT on its gross receipts.

Financial Institution. A “financial institution” includes (i) a national bank, federal savings association or bank, branch of a foreign depository, small business investment company, or chartered farm credit company, all as defined or chartered under federal law; or (ii) a banking institution organized under the laws of any state. If a person is a financial institution, it cannot be a dealer in intangibles.

Financial institutions are required to file a franchise tax report under Revised Code Chapter 5733 and pay the franchise tax based upon their net worth. HB 66 made no changes in the current taxation of financials institutions; they remain subject to the franchise tax. Only a financial institution that actually pays the franchise tax is excused from the CAT; otherwise, the person is required to pay the CAT on its gross receipts.

Bank, financial, and savings and loan holding companies are also excluded persons and are not subject to the CAT.

Insurance Companies. An insurance company is any person engaged in the business of insurance of any character, engaging in the business of entering into contracts substantially amounting to insurance, or indemnifying or guaranteeing against loss or damage or acting as a surety. A domestic insurance company is an insurance company organized under the laws of this state, while a foreign insurance company is organized under the laws of any other state or territory, or of the United States.

Insurance companies pay special taxes based upon their premiums. HB 66 did not change the current premiums tax on insurance companies. Only an insurance company that actually pays the premiums tax is excused from the CAT; otherwise, the person is required to pay the CAT on its gross receipts.

Insurance holding companies are not excluded from the CAT. However, interest, dividends and distributions, and capital gains are generally excluded receipts under the CAT and will not be taxed to the insurance holding company.

Subsidiaries. Persons that are 50% or more owned by an insurance company or financial institution are also excluded from the CAT. If the person is owned by a financial institution, its activities must be limited to those permitted for a financial holding company under federal law. If the person is owned by an insurance company, the insurance company must be authorized to do the business of insurance in Ohio. These subsidiaries will continue to be taxed as they have in the past.

Combined Filing Under the CAT There is mandatory combined reporting for two or more entities having at least 50% of the value of their ownership interests owned or controlled, directly or constructively through related interests, by common owners. A group of two or more persons may elect to be treated as a “consolidated elected taxpayer”. In that case, all persons meeting the ownership requirements must be included, whether they have nexus with Ohio or not. Receipts from all transactions made among members of the group shall be eliminated, including members that are not subject to the CAT. The entity is treated as a single taxpayer and members have joint and several liability for the tax.

Dealers, insurance companies, and financial institutions that are excluded from the CAT must still be included in a consolidated elected taxpayer that is elected by a related entity subject to the CAT, provided the 50% ownership requirement is met. All receipts from transactions between the members of the group are excluded, as are receipts from third parties that are received by financial institutions, insurance companies, and ”qualifying dealers in intangibles.” A “qualifying dealer in intangibles” is one that is a member of a consolidated group that includes a financial institution or an insurance company. Thus, if a dealer is a member of a consolidated elected taxpayer and neither a financial institution, nor an insurance company, are members of the group, the receipts of the dealer are included in the tax base of the consolidated elected taxpayer.

All groups of taxpayers that meet these ownership requirements, but that do not elect to be consolidated elected taxpayers, must file as “combined taxpayers.” Insurance companies, financial institutions, and dealers are excluded from the combined taxpayer. However, in the case of a combined taxpayer, there is no elimination of receipts from transactions between members of the group.