Ohio enacts fiscal year 2020 budget adopts Wayfair threshold

On July 17, 2019, Ohio Gov. Mike DeWine signed House Bill 166, establishing the state’s operating budget for FY 2020-2021 and modifying numerous tax code provisions following extensive deliberations between the statehouse and senate. The budget addresses the state’s income tax, Ohio’s interpretation of the Wayfair decision – including imposition upon marketplace facilitators, and various tax credits and incentives. A high-level summary of the changes follows below.

Income tax

A key point that captured the attention of business owners and tax practitioners alike was Ohio’s business income deduction for pass-through entities and its 3% tax rate on business income. The compromise reached in the legislature succeeded in keeping Ohio’s business income deduction at $250,000 and retained the 3% tax rate on business income. However, the compromise eliminated the deduction and the 3% flat tax rate on business income for lawyers and lobbyists.

Effective for the 2019 tax year, House Bill 166 modifies the state’s individual income tax by eliminating the two lowest income tax brackets. Taxpayers with an adjusted gross income of $21,750 or less will be exempt from the tax. The five remaining tax brackets also receive minor reductions. The new individual income tax brackets are as follows:

House Bill 166 also increases the time that an individual taxpayer has to file an amended Ohio return after a federal adjustment to 90 days, from 60 days. Applications for refunds must be filed within the 90-day period. These provisions are effective for final determinations occurring on Oct. 1, 2019, or later.

Finally, the legislation repeals the pass-through entity financial institution's credit.

Sales and use tax

Economic nexus

House Bill 166 amends the state’s so-called “cookie nexus” provisions, previously effective on Jan. 1, 2018. Those provisions established nexus for certain retailers who licensed software in the state or maintained a website on a server or similar electronic equipment in the state and exceeded $500,000 in sales.  

Effective Aug. 1, 2019, House Bill 166 eliminates the “cookie nexus” provisions in favor of an economic sales tax nexus provision establishing nexus for remote retailers exceeding $100,000 in gross receipts or 200 or more separate sales transactions. Ohio was one of two states that had adopted cookie nexus, but not an economic sales tax nexus provision following the South Dakota v. Wayfair decision.

Ohio also joins almost three-dozen other states in imposing sales tax collection requirements on marketplace facilitators. The Ohio Department of Taxation recently provided guidance on the application of the revised economic sales tax nexus law and the new marketplace facilitator provisions.   

Miscellaneous provisions – effective Oct. 1, 2019

The sales tax exemption for equipment and supplies used to clean processing equipment that is part of a continuous manufacturing operation is expanded to include food produced for human consumption

• County governments are authorized to increase local sales and use tax rates by .05%, a smaller increment than previously allowed
• Amended the definition of “vendor” to include the operator of any peer-to-peer car-sharing program
• The sales tax exemption for certain sales to professional motor-vehicle racing teams is eliminated
• The sales tax exemption for investment bullion and coins is repealed

Tax credits and incentives

House Bill 166 modifies the requirements for manufacturers and corporate headquarters to qualify for a nonrefundable job retention tax credit (JRTC).  Manufacturers can qualify for the credit if they make a capital investment over three years equal to the lesser of $50 million or 5% of the net book value of tangible personal property used at the project at the end of that three-year period. Corporate headquarters can qualify for the JRTC if it is located in a foreign trade zone, regardless of whether it meets payroll or employment requirements, but continues to require it to meet minimum capital investment requirements.

House Bill 166 creates a new Opportunity Zone Investment tax credit equal to 10% of an individual's investment in an Opportunity Zone investment fund, up to $1 million every two years. 

The motion picture tax credit is extended and expanded to allow additional expenses to be claimed as part of the credit.

Takeaways

Ohio joins over 40 other states in adopting an economic nexus standard based upon either a sales or transaction threshold and almost three dozen states in enacting marketplace facilitator provisions. Taxpayers making sales into Ohio should consider the new thresholds in the context of the elimination of the previous $500,000 “cookie nexus” threshold, and that the new sales tax thresholds are considerably lower than the thresholds and minimum tax requirements of the commercial activity tax.

Most business owners welcome the preservation of the business income deduction and 3% tax rate on business income as both provisions were proposed to be eliminated in the budget bill. Taxpayers with questions about the extent and impact of the tax changes in Ohio should consult with their tax adviser.