United States

Ohio enacts broad tax changes in FY18 budget bill

TAX ALERT  | 

On June 30, 2017, Ohio Gov. John Kasich signed House Bill 49, the state’s fiscal year 2018 budget bill, providing for numerous changes to the income tax, sales and use tax, credits and incentives and administrative procedures. A summary of the tax provisions are highlighted below.

Tax amnesty program

House Bill 49 establishes a tax amnesty program scheduled to begin on Jan. 1, 2018, and run through Feb. 15, 2018. Eligible taxpayers that pay the full amount of qualifying delinquent taxes owed will receive half interest and full penalty abatement on the qualifying taxes. Most state taxes which were due and payable by May 1, 2017, and were unreported or underreported, and remain unpaid, are eligible for the program. Taxes for which a notice of assessment or audit was issued, for which a bill has been issued, which relates to a tax period that ends after the effective date of this section, or for which an audit has been conducted or is currently being conducted, are not eligible. Additional instructions and rules will be promulgated by the Tax Commissioner. Ohio becomes the third state to enact a tax amnesty program in fiscal year 2018, following Oklahoma and Virginia.

Personal income tax

House Bill 49 repeals the first two income tax brackets in their entirety. Those brackets imposed a tax on incomes under $5,000 and incomes between $5,000 and $10,000. The bill now imposes a tax on incomes more than $10,500, making various minor changes to the remaining tax brackets. Incomes of $10,500 and below are no longer subject to the tax. According to those changes, the low-income taxpayer credit is also repealed.

In addition, the due date by which municipal income taxpayers that are individuals must make their fourth-quarter estimated tax payment is extended by one month, to Jan. 15, beginning in 2018.

Municipal income tax

For tax years beginning on or after Jan. 1, 2018, the throw-back rule used to determine business income subject to tax in a municipal corporation is repealed. Prior to the enactment of House Bill 49, sales of tangible personal property were sitused to the municipal corporation if the property was shipped from a place within the municipal corporation to purchasers outside the municipal corporation if the taxpayer was not, through its own employees, regularly engaged in the solicitation or promotion of sales at the place of delivery.

Beginning in 2018, businesses may elect for the Ohio Department of Taxation to administer the municipal income taxes imposed on their businesses instead of each municipal corporation administering the taxes. This could ease the administrative burden of filing multiple municipal income tax returns for some taxpayers.

Expanded sales and use tax nexus

House Bill 49 establishes an expanded sales and use tax nexus provision, establishing substantial nexus with Ohio for remote sellers when the seller:

  • Uses in-state software to sell or lease taxable tangible personal property or services to consumers, provided the seller has gross receipts in excess of $500,000 in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in this state or from providing services the benefit of which is realized in this state
  • Provides or enters into an agreement with another person to provide a content distribution network in this state to accelerate or enhance the delivery of the seller's web site to consumers, provided the seller has gross receipts in excess of $500,000 in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in this state or from providing services the benefit of which is realized in this state.

Rather than directly challenging physical presence nexus, which has been seen recently in a number of other states, these provisions aim to expand nexus by focusing on in-state software use and website distribution agreements made with in-state parties.

Miscellaneous sales and use tax changes

House Bill 49 makes a number of other sales and use tax changes. A few of the changes are highlighted below:

  • Establishes a sales tax holiday over a three-day period in August 2018 for clothing, school supplies, and instructor materials
  • Provides authority for counties and transit authorities to increase local sales and use tax rates in increments of 0.01 percent, rather than 0.25 percent, beginning July 1, 2018
  • Exempts certain digital music purchased from, and electronically delivered by a jukebox or other single-play commercial music machine beginning Oct. 1, 2017
  • Modifies rules for situsing of direct mail and distinguishes between advertising and promotional direct mail and other direct mail

Credits and incentives

  • Allows employers that apply for a job creation tax credit (JCTC) to count compensation paid to qualifying "work-from-home" employees not designated as a “home-based” employee for the purposes of qualifying and complying with the terms of the JCTC agreement
  • Provides minor changes to the motion picture tax credit by allowing for any fiscal year in which the amount of tax credits allowed is less than the $40 million maximum amount, the amount not allowed for that fiscal year shall be added to the maximum annual amount that may be allowed for the following year, in addition to other changes to the credit
  • Increases from five to six the number of years that some operators of computer data centers have to meet the capital investment requirement associated with an existing sales and use tax exemption
  • Extends the authority of a county or municipal corporation to enter into an Enterprise Zone Agreement with businesses (this was scheduled to sunset on Oct. 15, 2017)
  • Requires taxpayers to automatically submit any tax credit certificate to the tax commissioner when claiming a tax credit (previously certificates were submitted at the tax commissioner’s request)

Takeaways

Ohio’s budget bill makes a number of significant changes to all taxes and tax administration, including excise, lodging and severance taxes. Noteworthy, no significant changes were made to the Ohio commercial activity tax. Ohio taxpayers should speak to their tax advisors with questions. 

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