Ohio Enacts New Exclusion from the
Commercial Activity Tax

Mark Engel
Bricker & Eckler LLP
March 2006

Am. Sub. H.B. 530 made several, mostly minor and technical, changes to the commercial activity tax. However, one significant change made by the bill involves a new exclusion for “qualified distribution center receipts” from the tax base. This lengthy but targeted provision provides an exclusion from the tax for suppliers located outside Ohio with respect to receipts from goods shipped into the qualified distribution center and later shipped outside Ohio.

The legislation provides a process for certification of qualifying distribution centers and the calculation of that portion of the receipts that may be excluded, and imposes an annual fee of $100,000 for each qualified distribution center. The exclusion does not apply to receipts for goods shipped to the qualifying distribution center that are later shipped to locations inside Ohio, or to receipts from goods that are manufactured or processed at the facility. The bill also repeals the temporary exclusion for receipts from property shipped to or from a “qualified foreign trade zone.”

“Qualified Distribution Center Receipts”

The new exclusion applies to “qualified distribution center receipts.” “Qualified distribution center receipts” are receipts of a supplier of “qualifying property” delivered to a “qualifying distribution center,” multiplied by one minus the “Ohio delivery percentage.”

“Qualifying property” is tangible personal property delivered to a qualifying distribution center solely for shipment to another location inside or outside Ohio. “Shipment to another location” includes storage and repackaging of the property, but does not include manufacturing or processing.

A “qualifying distribution center” (“QDC”) is a warehouse or other facility in Ohio that, for a “qualifying year”, is operated by a person that is not a member of a combined taxpayer group and has a “qualifying certificate”. All facilities operated by the same consolidated taxpayer group and located within one mile of each other constitute a single qualifying distribution center.

A “qualifying year” is the calendar year for which a “qualifying certificate” applies. The “qualifying period” is the fiscal year ending the June 30 prior to the qualifying year.

The Application Process

A “qualifying certificate” is an annual application approved by the tax commissioner, provided the annual fee is paid by September 1 prior to the qualifying year or within 45 days after the distribution center begins operations. Each separate QDC must have a separate certificate. In the application, the operator of the QDC must certify that (i) 50% of the cost of all qualifying property is shipped from the QDC to locations that are outside Ohio; and (ii) costs from suppliers during the qualifying period are equal to or greater than $500 million. The tax commissioner may require these amounts to be certified by an independent certified public accountant.

The qualifying certificate must be issued or denied within 60 days of making the application. If the certificate is denied, the action may be appealed to the board of tax appeals and a certificate is issued to the QDC pending a final decision on the appeal. If the denial is upheld, the certificate is revoked and the QDC is liable for the tax, penalty and interest that were otherwise due but for the validity of the certificate.

The “Ohio distribution percentage” is a fraction. The numerator is the receipts from goods shipped from the facility to Ohio destinations. The denominator is the receipts from goods shipped everywhere. The facility must provide information sufficient to permit the tax commissioner to make this determination. If a facility is new, it may estimate the percentage, which estimate is subject to later revision. By the due date of the next annual application, the QDC must determine the actual Ohio distribution percentage for the estimated period and notify its suppliers of any change. The suppliers must file amended reports and pay any additional tax within 60 days of receipt of the notice.

The annual fee is $100,000 for each QDC. If the fee is paid and the qualifying certificate is not issued, the fee is to be refunded to the applicant.

Qualifying certificates and Ohio delivery percentages “shall” be open to public inspection and “shall” be timely published by the tax commissioner. A supplier may rely in good faith on a certificate and shall not be liable for tax on its qualifying distribution center receipts as computed under the certificate. However, the operator of the QDC is liable for tax that should have been paid if it is later determined the qualifying certificate should not have been issued.

Effective Dates

This provision takes effect January 1, 2007.

Section 557.09.09 of Am. Sub. H.B. 66 (the bill that enacted the commercial activity tax) contained a temporary exclusion from the tax for receipts from goods shipped into, or out of, a qualified foreign trade zone. This temporary provision was scheduled to expire June 30, 2007. Under the bill, this provision is repealed effective December 31, 2006.