Substitute H.B. 1 is the State budget for the next two years. While it contains a number of tax and tax-related provisions, those of particular interest fall into three categories. The first category relates to the modification of existing, or the enactment of new, tax credits. The second relates to some modifications relating to the Commercial Activity Tax (CAT). The third relates to some changes in miscellaneous notice provisions. In addition to these items, there are a number of other changes that, while not major, may be of some interest to taxpayers and others.
Sub. H.B. 1 expands three existing credits and creates two additional credits.
Requirements for the Jobs Creation Tax Credit in R.C. 122.17 are eased. Under prior law, the credit is based on income tax withholdings from new full-time employment positions. Under the bill, R.C. 122.17(A) and (B) are amended so that the credit base is the incremental increase in withholding from all employees employed at the project. The credit will equal a percentage of the growth in tax withholding from the base year to the year of the credit. The base year is the 12-month period immediately preceding the date the credit is granted. That amount is adjusted annually by a payroll increase factor that is intended to eliminate the effect of an assumed rate of payroll growth due to pay increases.
R.C. 122.17(D) and (K) are amended to eliminate the explicit job creation condition for agreements and to substitute a requirement that the tax credit authority determine whether a project will increase payroll and income tax revenue. The term of the agreement is reduced from twice the period of the credit to the greater of seven years, or the term of the credit plus three years. The prohibition against relocating existing jobs to the project has been relaxed. A taxpayer may now transfer an “insubstantial” number of employment positions without seeking approval of the director of development. In addition, the requirement that an existing facility be inadequate for growth as a condition for a relocation waiver has been eliminated.
Division (E) provides that in the case of non-compliance with the agreement, the credit may be reduced or revoked beginning with the tax year or taxable year in which the taxpayer is notified of the action; under prior law, the change did not take effect until the subsequent year. In addition, the agreement may provide for a “claw-back” of up to 75 percent of the credit if the taxpayer fails to retain the jobs for the required term.
Similar changes are made to the Jobs Retention Tax Credit of R.C. 122.171. In addition to the changes regarding the focus on withholding taxes and the relocation provisions, however, many of the threshold levels for the credit contained in R.C. 122.171(A)(2) have been dramatically altered. First, the investment threshold has been reduced from $200 million to $50 million for manufacturing facilities, and to $20 million for headquarters facilities, over the prior three years. In addition, the employment threshold has been reduced from 1,000 full time positions to 500 full-time equivalent employees, thereby permitting part-time positions to be considered.
The credit is extended to domestic and foreign insurance companies.
The annual limit to the amount of tax credits that may be allowed in R.C. 122.171(M) is scheduled to increase. For tax year 2010, the limit is $13 million. For tax years 2011 through 2023, the limit increases by $13 million each year. For tax years 2024 and after, the limit is $195 million.
Like the jobs creation tax credit, the claw-back provision creases to up to 75 percent of the credit claimed.
The Research and Development Investment Credit provides a credit for persons who invest in small businesses engaged in research and development or other technology development. Currently the total amount of credits that may be claimed each year is capped at $30 million. R.C. 122.151(D)(1) is amended to increase the total amount of credits available each year to $45 million.
One of two new credits is the New Markets Tax Credit. Existing federal law provides an income tax credit totaling 39 percent of the cost of investment at original issue in investment vehicles associated with providing investment capital for low-income communities or persons. Under R.C. 5725.33, Ohio’s credit is 39 percent on the portion of the investment that relates to projects in Ohio. Beginning in 2010, the credit may be claimed over seven years. No credit can be claimed during the first two years; 7 percent may be claimed in the third year; and 8 percent may be claimed in each of the last four years. There is an aggregate annual limit of $10 million in credits. The credit applies against the insurance or financial institutions franchise tax and against the personal income tax.
The second new credit is the Movie and Television Production Tax Credit, found in R.C. 122.85. The bill authorizes a refundable credit against either the corporation franchise or personal income tax for a motion picture company that produces at least part of a motion picture or television show in Ohio. The credit equals the lesser of 25 percent of the budgeted eligible production expenditures, or the actual expenditures, provided that at least $1.2 million dollars in expenditures is incurred. The credit is 35 percent with respect to payroll expenditures on behalf of resident cast and crew wages.
The bill limits the amount of credit to $100 million annually and $25 million per production; however, the aggregate limit is $30 million for fiscal years 2010-2011.
Qualifying productions include feature-length films; documentaries; television series, miniseries, or specials; and interactive web sites. It excludes sexually explicit productions, and television news, sports, weather, market reports, award shows and galas, fundraisers, “infomercials” and in-house advertising. A person wishing to claim the credit must apply for a certificate from the director of development. Expenditures are subject to verification by an independent certified public accountant. The director then determines the expenditures that are eligible production expenditures and issues a certificate in that amount.
The Senate committee voted to extend the Enterprise Zone Program to September 2010, which was set to expire in September 2009.
Commercial Activity Tax Changes
Currently, there is a laundry list of receipts that are excluded from the definition of gross receipts that is found in R.C. 5751.01(F). There is a new exclusion in division (F)(aa) for receipts of an employer from payroll deductions relating to the reimbursement of the employer for advancing moneys to unrelated third parties on an employee’s behalf. The existing exclusion for insurance proceeds is expanded to all kinds of insurance, unless the insurance reimburses for business revenue losses. Additionally, the exclusion for membership dues is narrowed to include only membership in a trade, professional, homeowners’ or condominium association.
A number of “housekeeping” types of revisions are enacted. Taxpayers must register for the tax within 30 days after first becoming subject to the tax. However, R.C. 5751.04(C) excludes from registration a taxpayer that first engages in business after November 30, or that first generates $150,000 in taxable gross receipts after December 1. This exclusion is eliminated by the bill.
R.C. 5751.051(A)(1) is amended so that all tax returns are due on the 10th day of the second month following the end of each calendar quarter; previously, the returns were due on the 40th day following each calendar quarter. Division (A)(5) is amended so that with respect to calendar year taxpayers, the annual report is due May 10, instead of February 9, annually.
R.C. 5751.012 is amended so that a consolidated elected taxpayer group that initially elected to consolidate at the 80 percent level may change that election to the 50 percent level. In order to request the change, the group must not have included any member that satisfied only the 50 percent test at the time of the election; a member of the group must have acquired another entity at the 50 percent level; and the acquired person otherwise qualifies for inclusion in the group.
A consolidated elected and a combined group both must now designate a “reporting person” that can legally bind the group for CAT filing and tax liabilities and to receive all CAT-related notices.
In addition, the bill provides a limited refund for taxpayers that registered and paid the tax in 2005 and 2006 but later determined they didn’t have nexus with Ohio or that their taxable gross receipts was less than $150,000. Uncodified section 399.20 permits a refund where the taxpayer failed to cancel a registration before May 10, 2006, but did cancel prior to February 10, 2007, and was not required to file returns due February 9, 2007 or 2008, or to pay annual minimum taxes for 2007 or 2008.
The bill also reorganized some provisions of Chapter 5751 regarding the CAT. It also added new division (I) to R.C. 5751.07 to provide that if a taxpayer has billed or invoiced another person for the CAT, the tax commissioner shall notify the taxpayer of the violation and may impose a penalty of $500. If a taxpayer bills or invoices another person after receiving the notice, the tax commissioner shall impose a penalty of $500. There is an exception to this provision in the case of a lessor who bills a lessee for the tax pursuant to the express terms of the lease.
In addition, the conference committee voted to amend R.C. 5751.20 and R.C. 5751.22 to earmark 30 percent of all CAT revenue for distribution to local jurisdictions. Under current law, 70 percent of all CAT revenue is reserved for distribution to school districts. These provisions were deleted by the governor, who exercised his prerogative of line-item veto over this provision. The earmarking and reimbursement of revenue continues through fiscal year 2011.
Under current law, various notices must be “certified” by the tax commissioner and sent to the taxpayer by certified mail. Current law also frequently requires recipients of the notice to give notice to the tax commissioner whether they intend to follow the order or determination. R.C. 5703.37 is amended to eliminate the requirement that notices be “certified” by the tax commissioner; it is now sufficient that notices are sent by certified mail or personal delivery. In addition, the tax commissioner can enter into an agreement with taxpayers permitting the use of alternative means of delivery in lieu of certified mail. It also eliminates the requirement of a response by the person to whom the notice was sent.
The section also contains a lengthy process for service in the event the certified mail is returned due to an undeliverable address. The tax commissioner is required to attempt to determine the last known address of the recipient. Notwithstanding that effort, the notice becomes final within 60 days and the matter may be certified to the attorney general for collection. However, if actual contact with the recipient is subsequently made, the person has a new period of 60 days in which to petition for reassessment.
If the notice is returned for reasons other than a bad address, then it is to be sent by ordinary mail with the legend that the notice is deemed served within 10 days of the postmark. If the mailing is returned due to an undeliverable address, the tax commissioner shall proceed in the same manner as in the case of certified mail that is undeliverable to the address.
Other Changes of Interest
Beginning October 1, 2009, medical services provided or arranged by a Medicaid health-insuring corporation will be subject to sales tax, unless the tax is determined to be an “impermissible health-care related tax” for federal Medicaid purposes. This means that the cost of the tax is a reimbursable expense under Medicaid. The bill designates the companies as the consumers of the services and allows for direct payment of the tax through direct payment permits. The “price” for the service is the amount of the monthly managed care premiums the corporation receives. These changes are found in R.C. 5739.01, 5739.03, 5739.033 and R.C. 5739.051.
R.C. 5747.13(E) is amended so that a person challenging a personal income tax assessment no longer has to pre-pay any portion of the assessment, except where the taxpayer is, essentially, a tax protester. R.C. 5747.75 is amended to provide that taxpayers organized as a pass-through entity may allocate the historic preservation tax credit among owners in proportions other than according to their respective ownership interests.
R.C. 5727.81 is amended to modify the computation of the tax liability for kilowatt hour tax by a self-assessing purchaser, beginning January 1, 2011, to one based solely on a per-kilowatt hour rate, eliminating the existing price component.
R.C. 5727.881 is amended to increase from 50,000 to 70,000 the number of customer that a natural gas distribution company may have and still compute its tax by aggregating all customers.
Uncodified section 757.10 authorizes the exemption and remittance of taxes paid on airport property leased by a port authority that was precluded from exemption under prior law because the property was not owned by the port authority at the time the application for exemption was filed.
R.C. 5739.09 is amended so that the definition of a “hotel” that is subject to local lodging taxes includes establishments at which rooms may be located in several structures and accessible by separately keyed entries.
And finally, various changes are proposed to Ohio’s tax levy law, R.C. Chapter 5705, that will permit a school district to enact a “conversion” levy that will permit some if its taxes to grow with inflation. Recognizing the short-term reduction in revenue that this will create, there is a reimbursement provision that applies until either the levy loss is reduced to zero or until 2026.