Ohio HB 610 proposes several changes to existing R.C. Chapter 718, which governs the imposition of income taxes by municipalities. The bill is an effort to reach additional consistency and uniformity among communities that impose an income tax. The culmination of several months of discussions between business and municipal stakeholders, the bill proposes some significant changes in existing law. Many of these changes are modeled on existing state law relating to the state personal income tax. This memorandum addresses a number of those changes as reflected in the bill as introduced.
Net Operating Loss: Under current law, each municipality decides whether to recognize net operating losses (NOLs) and how long to permit them to carry forward. Under the bill, beginning with taxable years ending in 2014 or thereafter, R.C. 718.01(E)(8) and (9) authorize unused net operating losses to be carried forward up to five years. The provision is phased in over five years in 20 percent increments, beginning with taxable years ending in 2015. NOLs under existing laws must be used prior to NOLs incurred beginning in 2014, and NOLs may not be used to offset qualifying wages.
Income apportionment: Current law provides for the apportionment of business income according to a three-factor formula that considers property, payroll, and sales and provides rules for determining when those items are within or without the municipality in question. Language does permit variation from this formula, but it is vague and its application varies from city to city. Under the bill, R.C. 718.02 is amended to provide more specific guidance regarding when and how a taxpayer, or the tax administrator, may request or require deviation from the standard three-factor apportionment formula. An election by a taxpayer to use separate accounting must be allowed if the taxpayer uses separate accounting in all municipalities in which it is subject to tax. The bill also changes the measure of the sales factor to mirror state income tax law, basing the location of receipts on the location where the customer receives the goods or services in question.
Pass-Through Entities: Under current law, municipalities may elect to tax pass-through entities and their owners either at the entity level or at the individual level. Under the bill, R.C. 718.01(L)(1) provides that except as provided in R.C. 718.43, the term “taxpayer” excludes pass-through entities, resulting in taxation at the individual owner level. Trusts, estates and grantor trusts are not included in the definition of a pass-through entity. Under R.C. 718.43, the law imposes a withholding tax upon pass-through entities with respect to owners who are not residents of the municipality that imposes the tax. Any tax paid by the entity on behalf of its owners is treated as tax paid by the owners for purposes of any credit that the owner may claim with respect to any other municipality in which the owner has a tax liability. R.C. 718.01(L)(2) provides that a single-member LLC that is a disregarded entity may be taxed as an entity separate from its single member under certain limited circumstances.
Consolidated Returns: Under current law, each municipality may determine whether to permit taxpayers to file consolidated returns and the terms under which such election may be made. Under the bill, R.C. 718.06 provides that beginning with taxable years beginning on or after January 1, 2014, a taxpayer who is a member of an affiliated group of corporations may elect to file a consolidated return if at least one member of the affiliated group is subject to municipal taxation and the group filed a consolidated return for federal income tax purposes for that taxable year. All members of the consolidated group must be included in the return, and all members are jointly and severally liable for any tax that is owed. Furthermore, once consolidated status is elected, the taxpayer must continue to file in that manner until written permission to file individually is obtained from the municipality.
Residency: Under current law, each municipality is free to determine whether a taxpayer is domiciled within the city, regardless of whether the individual is domiciled in Ohio for Ohio personal income tax purposes. Under the bill, R.C. 718.01(J) provides that “resident” means an individual who is both domiciled in Ohio for purposes of the personal income tax and within the municipality.
Transient Taxpayers: Under existing law, other than a professional athlete or entertainer, an individual may perform services within a municipality for up to 12 days before the individual’s employer is required to withhold tax for that municipality. There is no guidance as to what constitutes a day for these purposes. R.C. 718.011 is amended to extend that threshold to 20 days. Moreover, an employee is considered to have spent a day providing services within a municipality only if a majority of the employee’s time performing services for the employer was spent in that municipality; there are special rules relating to how travel time during the day is considered. There is a safe harbor if the employer withholds tax for the municipality in which the employee’s principle place of work is located.
Audit and Assessment Provisions: Under current law, there is no consistent period for assessment or refund purposes. Under the bill, R.C. 718.12(B) provides for a three-year statute of limitations for assessments, and R.C. 718.19 provides for a similar statute for refund claims. R.C. 718.12 also provides an absolute limitation of 10 years for any assessment not covered by the three-year statute, and provides for various safeguards and procedures to protest the assessment, similar to those found in state law. Uniform penalty and interest provisions are set forth in R.C. 718.27.
Under current law, assessment appeal procedures are largely undefined. Under the bill, R.C. 718.11 provides for the issuance of written assessments; appeals to the local board of review within 60 days of receipt of an assessment; a hearing before the local board of review within 45 days and representation by an attorney or other representative; and a written decision that must be issued within 90 days of the hearing and can be appealed to the state board of tax appeals.
Modeled on existing state law, the bill contains provisions regarding a taxpayer bill of rights (R.C. 718.12(D), 718.36); for a problem resolution officer for larger cities (R.C. 718.37); for formal tax opinions (R.C. 718.38); and for taxpayer suits for violation of various provisions (R.C. 718.39). There also is a provision for adjustments associated with federal or state income tax audits that result in changes to items of income or expense, with the requirement of an amended return to reflect the changes in R.C. 718.41. In a novel twist, R.C. 718.44 provides that the prevailing party in any assessment and appeal may recover attorney fees and litigation expenses from the other party. In the occurrence of a case where neither side is completely victorious, fees and expenses are to be equitably divided.
Powers & Duties: Under current law, the authority and duties of tax administrators are virtually undefined. Under the bill, R.C. 718.30 provides express authority to promulgate rules of procedure; R.C. 718. 31 provides authority to inspect records; R.C. 718.23 provides authority to issue subpoenas; R.C. 718.24 provides a laundry list of powers and duties similar to those found in existing law for the state tax commissioner; and R.C. 718.20 authorizes the issuance of jeopardy assessments in specified cases.
Municipal Tax Policy Board: Under the bill, R.C. 718.42 calls for the formation of a municipal tax policy board. The membership of the board consists of seven representatives of municipalities of varying sizes, each appointed by the governor for a term of three years. The board may adopt rules regarding the administration of municipal income tax laws that are binding upon all municipalities imposing a tax; may designate working committees; promulgate common forms, reports, schedules and attachments, and forms for signature and declarations by taxpayers; and provide instruction booklets. The board is required to meet at least quarterly.
Implementation: Under the bill, R.C. 718.04 provides that in the case of a tax that is first imposed after January 1, 2014, the ordinance or resolution levying the tax must include certain language, including that the tax is being levied in accordance with the limitations specified, and incorporates by reference the provisions of R.C. Chapter 718. In the case of municipality that currently imposes a tax — before January 1, 2014 — the municipality must either repeal the tax or amend the existing law to include the provisions required of a new tax, including the references to R.C. Chapter 718. If a municipality that currently levies a tax fails to take either action by January 1, 2014, its tax is repealed by operation of law. Other provisions relating to the imposition of a tax, including the rate, any credit provision and voter approval for rates in excess of one percent, remain the same as under existing law.