The Ohio General Assembly passed, and Governor Kasich signed into law, Amended Substitute House Bill 153 (the Act), the $56 billion biennium budget for 2012-2013. The Act provides a number of potential benefits to Ohio businesses including: (1) a new income tax credit to encourage increased investment and job creation in small businesses in the state; (2) a new refundable credit against the commercial activity tax (CAT); (3) two different amnesties for past taxes; (4) a phasing out of the Ohio estate tax; and (5) clarification of the sales tax exemption for purchases made under customer loyalty programs.
Governor Kasich and his director of job creation, Mark Kvamme, sought to encourage new capital investment in Ohio businesses. The original idea was to eliminate the tax on capital gains when an investor sold a business and reinvested in an Ohio business. This provision, however, ran into Constitutional problems as potentially discriminating against interstate commerce.
The InvestOhio program for small business enterprises thus evolved into a non-refundable credit against the Ohio income tax for investments in small Ohio businesses. The investment must meet certain criteria that focus on the size, duration and location of the investments in Ohio. If the stock or equity investment meets the criteria and is held for the required holding period for investments, the investor may qualify for a non-refundable credit equal to 10 percent of the qualifying investment. Two holding periods are established: (i) two years for investments made before July 1, 2013, and (ii) a longer five-year holding period for investments made after June 30, 2013. Any portion of the credit that is unused in the year that the holding period expires may be carried forward for seven years. Some of the more significant criteria are the following:
- The company in which the investment is made ("Investee") must be a "small business enterprise" with assets of $50 million or less or annual sales of $10 million or less;
- The Investee must have at least 50 full-time equivalent employees or more than one-half of its full-time equivalent employees in Ohio;
- The Investee must invest in Ohio real, tangible or intangible property or payroll equivalent to the investment within six months of the receipt of the investment;
- The investment must be held for two years for investments made before July 1, 2013, or five years for investments made after that date -- the investor receives no benefit if the investment is not held for the respective two- or five-year holding period;
- The credit requires an application for a certificate with the Department of Development (or its successor);
- The credit is limited to $1 million per investor or $2 million for a husband and wife filing jointly; and
- The total value of all non-refundable credits for the two-year period of the biennium is limited to $100 million representing a potential investment of $1 billion at a 10 percent rate -- so it is first come first served.
The Ohio Department of Development and the Ohio Tax Department are working on rules and procedures to implement the new small business enterprise credit.
Refundable Credit Against the CAT for Ohio Investments
A new refundable tax credit against the Ohio CAT is created for investments made during the period July 1, 2011, through December 31, 2014. The credit must be approved by the Ohio Tax Credit Authority. The aggregate amount of credit over the three-year period is $25 million. To qualify for the credit, the applicant must have $20 million in annual payroll and the applicant must invest at least $5 million over three years, and the investment must be made in the same local jurisdiction in which the applicant's principal place of business is located. The applicant must agree to retain at least 500 full-time equivalent employees at the project site in Ohio and must maintain an annual payroll of at least $20 million for the entire term of the credit or maintain an annual payroll of $35 million. Other requests that are carryovers from continuing law also must be met.
Investment in Computer Data Center
A company that invests at least $100 million over a three-year period in computer equipment at a computer data center and has $5 million in annual payroll may qualify for exemption from all or part of the sales and use tax on its qualifying purchases. The incentive requires entering into an agreement with the Ohio Tax Credit Authority.
General Tax Amnesty
A tax amnesty program is created for Ohio estate tax, franchise tax, motor fuel tax, sales tax, cigarette tax, income tax, school district income tax, commercial activity tax (CAT), dealers-in-intangibles tax, natural gas company gross receipts tax, pass-through entity tax, and pass-through entity and trust withholding taxes. The amnesty applies to sellers' use tax and use tax collection but not to consumer use tax owed by purchasers, which is the subject of a separate amnesty discussed below. The general amnesty applies to taxes that were due and payable as of May 1, 2011, and that remain unpaid as of the beginning of the amnesty on May 1, 2012. The amnesty applies during the period May 1, 2012, through June 15, 2012.
Taxpayers who participate in the program must pay the full amount of delinquent taxes owed, half of any interest due and may be required to file returns or reports for past periods. In exchange, Ohio will waive the remaining half of the interest and any penalties. Taxpayers will have until the amnesty ends on June 15, 2012, to evaluate whether to participate, although no person may participate if an audit has been conducted or is underway or if a bill or notice of assessment has been issued relating to the tax in question. If a person participates in the program and pays the full amount due, the state is barred from bringing any criminal prosecution or civil action with respect to that tax, and no assessments may be issued against that person with respect to that tax.
The Tax Department has not announced the procedures for taxpayers that wish to resolve tax deficiencies before May 1, 2012. Presumably, the Tax Department will accept voluntary disclosure agreements (VDAs) in advance of the commencement of the formal amnesty. It may be more advantageous to seek VDAs before the formal amnesty begins because, as noted, a taxpayer may be foreclosed from participation once an audit commences or a bill is rendered and the terms of the VDA may be better than under the amnesty.
Consumer Use Tax Amnesty
A separate amnesty exists for consumer use tax that is payable by the purchaser in contrast to sellers use tax that must be collected. Any Ohio business taxpayer that has not registered for consumer use tax authority and has not been self-assessing use tax, should seriously consider participating in this amnesty.
Prior to the enactment of the Budget, the Ohio Tax Department had begun the Use Tax Education Program (UTEP), designed to encourage business taxpayers to not rely solely on vendors to collect the sales and use tax but for the consumer to register for use tax payment authority and to begin to self-assess when vendors did not collect the tax. This separate consumer use tax amnesty begins on October 1, 2011. The consumer use tax amnesty requires consumers to pay any unpaid consumer use tax liabilities incurred on or after January 1, 2009, and in return the state will waive any consumer use tax liabilities, interest and penalties accrued before January 1, 2009. This enactment goes beyond a typical amnesty and prohibits imposition of tax for earlier years. These unpaid taxes for the open period may be paid to the state in a payment plan over as many as seven years.
If the consumer chooses to not participate, the Tax Department may audit the consumer for delinquent tax accrued but only for purchases made on and after January 1, 2008. For any consumer that fails to make the required payment, or that falls behind on its payment plan, the consumer is liable for interest on the amount of use tax owed under the payment plan, and the unpaid amount may be certified to the Ohio Attorney General for collection.
If an assessment is or was issued against a consumer prior to the effective date of the Act, which appears to be ninety days after the June 30, 2011, enactment, presumably September 28, 2011, then that consumer is ineligible for participation in the amnesty. Some indication exists that the Tax Department will refrain in some cases from issuing assessments during the interim. The Ohio Tax Department has not announced its intentions in this respect.
Any consumer that registered to self-assess use tax before June 1, 2011, is not eligible for forgiveness of penalty or interest. This provision was inserted to reflect the aim of the amnesty to address unregistered taxpayers. Even registered consumers presumably are no longer subject to assessment after the effective date of the Act for purchases made before January 1, 2008.
The Ohio Tax Department is developing procedures for this special amnesty.
ESTATE TAX REPEAL
The Ohio estate tax is repealed for decedents dying on or after January 1, 2013.
CUSTOMER LOYALTY OR PROMOTIONAL PROGRAMS ARE NOT SUBJECT TO SALES TAX
The value of gift cards or certificates redeemed by customers under loyalty or promotional programs are excluded from "price" for purposes of sales and use tax when the customer does not pay for the gift card or certificate and the vendor does not receive payment from a third party similar to the acceptance of a manufacturer's coupon.
REVIEW OF THE OPERATIONS OF THE OHIO BOARD OF TAX APPEALS
The length of time for review of cases at the Ohio Board of Tax Appeals (BTA) has become unacceptably long. Further, the BTAs operations need to be modernized. The Ohio Tax Commissioner is charged to work with practitioners and others to examine the operations of the BTA and to report suggested improvements to the Governor and the General Assembly by November 15, 2011.
The Ohio Departments of Taxation and Development will be implementing procedures for the incentives and the Department of Taxation will be establishing the ground rules for the amnesties. We will continue to monitor significant developments as they occur.