Legislation pending in Ohio would dramatically alter the state’s sales tax system, and could have a significant impact on entities involved in the real estate industry in the state. Ohio House Bill 59 would extend sales tax to virtually all services. For the real estate industry, which deals extensively with services and intangible property, this proposal has broad implications.


Governor Kasich’s budget bill includes sweeping tax changes that will mean a fundamental shift in how state government is funded. The proposed extension of the sales tax base to include services and transactions involving intangibles has implications for almost every person, business, and organization located, or doing business, in Ohio. The changes in the personal income and severance taxes likewise will impact a wide swath of individuals and the business community.

Currently in Ohio, the sales tax applies to sales of most tangible goods, but to only a limited list of services specifically identified by statute. Most services routinely purchased by participants in the real estate industry, such as appraisal, professional, and management services, are not currently subject to the sales tax.

The Proposed Expansion of the Tax Base

H.B. 59 expands the definition of a “sale” to include all transactions by which a service is, or is to be, provided. The term “service” means any act performed for another person for any type of consideration. Thus, virtually any activity for which a fee is paid will become subject to sales tax.

The bill specifically excludes from the tax a few services, most notably services rendered by employees to employers. However, all other services will be taxable. This includes services such as financial consulting, marketing, debt collection, legal and accounting, and all other services for which any payment is made. The exclusion of residential rental transactions implies that commercial real estate rental transactions will also be subject to tax.

In addition to services, the bill also expands the sales tax to transactions involving digital goods and the sale and licensing of intangible property. In addition, payments for the right to use intangible property, including investments, will also be subject to tax.

Related Parties

Under the current law, there is an exclusion from the sales tax for certain taxable services, such as electronic information services and employment services that are provided to other members within a related group. This language is stricken from the bill. Combined with the provision rendering all services subject to taxation, it appears that all service transactions between the members of a related group are subject to the tax. Thus, the members of a family of businesses that use a common service company to provide payroll, accounting, legal or other centralized services, and that use a cost allocation or a charge-back system, will have to pay sales tax on those transactions within the group. Similarly, if intangible property is owned by one member of a related group and licensed to other members of the group, those transactions will be subject to the tax.

As a result, real estate owners or managers that have created separate legal entities to provide services to other entities within the organization will be required to pay sales tax on those services. For example, a management company may create a related entity for all its administrative functions, such as accounting or legal. It may create a separate entity to clean, repair, or otherwise maintain its properties, or to acquire supplies for its properties. If there is any sort of inter-entity charge for these items or services, sales tax will apply. Similarly, an investment group may create separate single-purpose entities to own various properties, and provide management and other services to those entities. If there is any inter-company charge or expense recorded for those transactions, then sales tax will be due.

Cash Management Functions:

Another significant change involves the proposed expansion of the sales tax to sales and licenses of intangible property. Excluded from the definition of intangible property are “interest, gains, or dividends received from the sale or exchange of a financial instrument” (broadly defined as stocks, notes, bonds, debentures, money market funds, mutual funds, negotiable securities and mortgages). HB 59 appears to levy sales tax on the acquisition and liquidation of financial investments. In fact, other than gain it appears the tax applies to the price paid for the instruments themselves, as well as any service associated with the acquisition or disposition. This might extend to the transfer of interests in partnership, limited liability companies, and other real estate investment vehicles.

Acquisition- or Finance-Related Services:

A number of services are involved with the acquisition or financing of property. For example, there may be inspection fees, appraisal fees, and underwriting fees, to name a few of the more common expenses. These services will all be taxable. However, other fees, such as flood certification, credit report, tax service and escrow fees will also be subject to tax. Listing fees and agent or broker commissions will be taxable. These are in addition to the professional fees, such as legal and accounting services, that will be taxed as well.

Primary Residence and Other Properties

Under the bill, rental payments for an individual’s primary residence will not be subject to tax, nor will residential trash removal services for one-, two- or three-family dwellings. However, the specification that services related to residential properties are excluded from the tax raises the specter that similar services provided to multi-family or commercial properties may be subject to tax. Thus, rental charges for vacation or second homes and commercial properties, as well as charges for trash removal, utilities, and common area maintenance, may all be subject to tax.

Expanding the sales tax to services, together with the presumption that all services are taxable unless otherwise provided, profoundly changes the way businesses will have to account or pay for services. Businesses should examine their operations carefully to consider the full extent of the change on their operations.