Ohio Enacts Multiple Tax Changes in Budget Bill
On Sunday, June 30, Governor Kasich signed Amended Substitute House Bill 59, the budget bill for the 2014-2015 biennium. While a few minor items were deleted from the bill through the exercise of his line item veto, significant tax changes remain the bill.
Under the bill, all personal income tax rates are reduced by 10 percent over three years. For tax years beginning in 2013, rates are reduced 8.5 percent. For tax years beginning in 2014, the reduction in rates is 9 percent compared to existing rates. For tax years beginning in 2015 and thereafter, the full reduction of 10 percent is in place. The adjustment in rates due to inflation is suspended for those three years.
In addition, the so-called small business tax deduction for the owners of pass-through entities is capped at one-half of the first $250,000 in business income. This deduction may not be claimed by pass-through entities that file composite returns on behalf of nonresident owners. This deduction is also effective for the 2013 tax year.
Beginning January 1, 2013, new R.C. 5747.71 provides for a nonrefundable earned income tax credit equal to 5 percent of the federal earned income credit. If the taxpayer’s annual income exceeds $20,000 after applicable exemptions, the credit may not exceed 50 percent of the tax due. The $20 per person tax credit is eliminated for persons earning more than $30,000 annually and the low income tax credit that effectively provides an exemption for the first $10,000 of earned income is repealed.
Formerly, a person who could be claimed as a dependent on the tax return of another could also claim the personal exemption on their own return. That provision is eliminated effective January 2014.
Under continuing law, a pass-through entity may elect to file a tax return on behalf of all investors and to pay the tax on behalf of the investors. Investors included in the return pay tax at the highest marginal rate, may not claim personal exemptions or credits, and may not claim any business-related credits. The bill expressly permits investors to file individual returns in order to take advantage of all these benefits.
The income tax deduction for gambling losses is eliminated.
Commercial Activity Tax (CAT)
Currently, all taxpayers with annual taxable gross receipts of less than $1 million pay only the $150 minimum tax. Taxpayers with taxable gross receipts in excess of $1 million are subject to tax at the 0.26 percent rate on those receipts, plus the $150 minimum tax. The bill establishes a graduated minimum tax based upon the total gross receipts of the taxpayer:
- Taxpayers with taxable gross receipts of $1 million or less will continue to pay the $150 minimum tax.
- Taxpayers with taxable gross receipts greater than $1 million, but less than or equal to $2 million, will pay a minimum tax of $800.
- Taxpayers with taxable gross receipts greater than $2 million, but less than or equal to $4 million will pay a minimum tax of $2,100.
- Taxpayers with taxable gross receipts greater than $4 million will pay a minimum tax of $2,600.
This change effectively phases out the exclusion for the first $1 million of taxable gross receipts each year, depending on the taxpayer’s annual taxable gross receipts. The minimum tax is also graduated as taxpayers have annual taxable gross receipts between $1 million and $4 million. For taxpayers with taxable gross receipts in excess of $4 million, this will result in a tax increase of $2,450 annually.
There also appears to be a compliance glitch in the bill that may create problems. As noted, the proposal phases out the $1 million exemption and graduates the minimum tax based on the annual taxable gross receipts of the taxpayer. However, the bill requires the taxpayer to pay the minimum tax annually by May 10 of the calendar year. At that point, a taxpayer may not know what its annual taxable gross receipts will be, and may not be able to determine accurately its minimum tax liability.
The bill provides that in the case of a person who applies for, but does not receive, a certificate as a qualified distribution center, and then appeals that determination, a qualifying certificate shall be issued pending the appeal. If the appeal is finally determined against the issuance of the certificate, the taxpayer is required to pay the “supplier tax liability.” The “supplier tax liability” is the difference between the commercial activity tax that was paid by suppliers while the appeal was pending, and the amount of tax that would have been paid but for the issuance of the qualifying certificate while the appeal was pending. “Supplier tax liability” does not include any penalty or interest.
New exclusions added to the CAT include the gross receipts of grain handlers and receipts derived from sales of motor fuel.
Motor Fuel Excise Tax
Last year, the Ohio Supreme Court ruled that to the extent the CAT applied to gross receipts from the sale of motor fuel, those tax revenues had to be devoted to highway construction, maintenance, and safety purposes in accordance with the Ohio constitution.1 In response, the bill provides that receipts from the sale of motor fuel are no longer considered gross receipts for purposes of the CAT and enacted a new tax, the motor fuel receipts tax, in R.C. Chapter 5736. The tax is imposed upon the first sale of motor fuel in Ohio by a motor fuel supplier. “Suppliers” include any person who either sells motor fuel from a bulk transfer or terminal system, or who imports motor fuel for sale outside such a system in Ohio. The tax is imposed at a rate of 0.65 percent of the selling price. Returns and tax payments are due quarterly by the tenth day of the second month following the end of each calendar quarter.
The tax is effective July 1, 2014.
Real Property Tax
Currently R.C. 323.152 provides a partial reduction in the value of owner-occupied residential property for owners who are totally disabled or at least 65 years old. This credit applies regardless of the owner’s income level. Persons who currently qualify for the reduction will be unaffected, but the bill changes the reduction so that persons who are not yet receiving the reduction will be means-tested when they attain age 65 or become disabled. Owners with annual incomes above $30,000 will not be eligible for the reduction. This threshold is indexed for inflation. Individuals applying for the reduction will also have to permit the county auditor to examine any financial records relating to income earned by the applicant.
With respect to new or replacement levies approved by voters after August 2013, the 10 percent property tax rollback for residential and agricultural property provided by R.C. 319.302 is eliminated. The additional 2.5 percent exemption for any owner-occupied residential property is also eliminated for such levies. Existing and renewal levies will not be affected by these two changes and remain subject to the 12.5 percent reduction; such levies are referred to as “qualifying levies” in the bill. Additionally, starting in the 2014 tax year, the $25,000 reduction in taxable value for certain elderly homeowners and homeowners with disabilities is being grandfathered out, with new reductions limited to property owners with total income less than or equal to $30,000. This figure will be adjusted for inflation annually by the State Tax Commissioner.
These changes are effective with the 2014 tax collection year.
The broad expansion of the sales tax to virtually all services and transactions involving intangible property that was proposed by the governor was not enacted. The accompanying proposal to reduce the state tax rate by 0.5 percent also was removed. Instead, the state sales and use tax rates will be increased by one-quarter of one percent, from 5.5 percent to 5.75 percent. The rate increase will be effective September 1, 2013.
Ohio will become a full member in the Streamlined Sales Tax Initiative so that it may be able to collect more use tax from remote sellers. This provision, which relates to tax that is currently due but is uncollected, is expected to generate roughly $20 million annually in new revenue. Revenue from this source will be placed in the income tax reduction fund and may be used to fund additional income tax reductions.
The sale of “specified digital products” will become taxable. Such products include digital audiovisual and audio works, and books delivered electronically. “Specified digital products” does not include cable service or video programming. The existing exemption for magazine subscriptions is repealed. Cable service providers are exempt from paying or collecting tax on transactions involving digital products, and an exemption is provided for sales to a nonprofit organization that leases a recreational facility used by a professional athletic team from an eligible county.
So-called little cigars will be taxed in the same manner as cigarettes. This will result in a slightly higher tax on these products. This change is effective January 1, 2014.
As introduced, the budget bill included a proposed increase in the severance tax on oil and natural gas produced by means of horizontal drilling, or “fracking.” This provision was removed by the House and remained out of the bill as signed by the governor.
The governor exercised his line-item veto authority over a number of provisions in the bill. Those tax provisions include the following:
- A proposed sales tax exemption for sales of investment metal bullion and coins
- Expanded authority to collect sales and use taxes on internet sales to customers in Ohio, including a “click-through” nexus provision
- A proposed increase in the historic building rehabilitation tax credit
- A proposal to de-couple the state New Market tax credit from the federal credit
- A proposed sales tax exemption for purchases associated with aerospace research and development activities
- A proposal to deduct the fair market value of services provided free of charge by dentists and dental hygienists under certain programs in computing Ohio taxable income
This bill continues the effort to move Ohio away from taxing income and towards taxing consumption. However, the impact on separate taxpayers will vary, depending on the specific provisions in question. The elimination of the real property tax roll-back and exclusion for owners of real property who reside in their homes purport to add an element of transparency to the taxation of real property and will likely result in a tax increase for the owners of the affected property. A number of the provisions, including the change in the CAT minimum tax payments, the increase in the state sales and use tax rates, and the earned income tax credit, were not included in the versions of the bill passed by either the House or the Senate, but were added by the conference committee. Finally, while the increase in the severance tax proposed by the governor was not included in the bill, it appears that the battle to increase the tax is not over.