When it was introduced, H.B. 59, Ohio’s biennial budget bill, included sweeping tax reform measures that would have cut the personal income tax by 20 percent over three years and provided a significant deduction from income for the owners of pass-through businesses. This reduction was to be financed by an expansion of the sales tax to virtually all services and an increase in the severance tax on horizontal drilling operations for oil and gas.
In the face of opposition from a number of quarters, the House of Representatives introduced a substitute bill and added an omnibus amendment to the bill prior to passage. The substitute bill proposes a more modest seven percent reduction in personal income tax rates, eliminates the expansion of the sales tax to services and removes the severance tax increase. Other, smaller tax changes were also included in both the substitute bill and the omnibus amendment. Those changes are summarized in the following paragraphs.
Substitute Bill Changes:
Substantive provisions: New division (D) of R.C. 5709.17 enacts a real property tax exemption for property used for meetings and administrative functions of a fraternal organization. For purposes of this exemption, a “fraternal organization” is defined as one that (i) is a domestic fraternal society or order that operates under a lodge, council or grange system; (ii) qualifies for federal tax exemption under I.R.C. 501(c)(5, (8) or (10); (iii) that provides financial support for charitable purposes as defined in R.C. 5739.02(B)(12); and (iv) has been operating within Ohio for at least 100 years.
The exemption providing for qualified energy projects in R.C. 5727.75 was scheduled to sunset after 2013. The bill amends that section so that projects that begin construction through 2019 may qualify for the exemption.
The sales tax law is amended to provide that a “hotel intermediary” is required to charge and collect sales tax from its customers. For these purposes, a “hotel intermediary” is defined as a person, other than a hotel, that contracts with hotels to sell reservations for lodging to transient guests (examples include travel agents and online hotel booking sites like Travelocity® or Priceline®). If the hotel intermediary fails to collect the tax from the guest, the hotel is required to attempt to collect the tax.
The definition of “substantial nexus with this state” found in former R.C. 5741.01(I) is revised and renumbered as division (H)(2). With the revision, nexus is presumed to exist (previously there was no presumption) in a number of specific situations where the seller uses third parties to further its business activities in the state, aside from common carriers. Of note is a provision that presumes the existence of nexus where the seller enters into an agreement with a resident of this state where the resident refers potential customers to the seller by a link on a website, an in-person oral presentation, telemarketing, or otherwise, provided the gross receipts from sales to consumers referred to the seller exceed $10,000 for the preceding twelve months. A seller presumed to have a substantial connection under these provisions may rebut the presumption by showing that activities conducted by a resident on behalf of the seller are not significantly associated with the seller’s ability to establish or maintain a market in Ohio. An example of this is Amazon.com®. The online retailer carries ads and gets paid when consumers “click through” to a sponsored site through one of the ads.
For taxable years beginning in 2013, R.C. 5747.02 is amended to reduce all personal income tax rates by seven percent.
Administrative provisions: The substitute bill makes a number of administrative changes to the tax code. The interest provisions of most state taxes is revised to provide that if an assessment is not completely paid within 60 days of being issued, any unpaid portion of tax due bears interest until the earlier of the date it is fully paid, or the date the assessment is certified to the attorney general for collection. Once an assessment is certified to the attorney general for collection, the entire unpaid amount, including tax, penalty and interest, begins to bear interest until it is paid.
The substitute bill also enacts new section 5703.75, which provides that any tax liability or refund that does not exceed $1 does not need to be paid. Similarly, new section 5703.76 provides that any distribution made by the tax commissioner to a political subdivision must be made by electronic funds transfer.
The substitute bill retains the provision of the original bill, new section 5703.90, that imposes additional personal liability upon owners of pass-through entities and certain corporations.
Omnibus Amendment Changes:
The omnibus amendment contains six amendments of interest. R.C. 5735.012 and 5735.013 are amended and enacted to provide that liquid natural gas used as a motor fuel and subject to the tax shall be measured in “gallon equivalents.” “Gallon equivalents” means the gallon equivalent standard for diesel fuel adopted by the National Conference on Weights and Measures. If no standard has been adopted, 6.06 pounds of liquid natural gas shall be the equivalent of one gallon of motor fuel.
The amendment contains language requiring the transfer of use tax collected and remitted by “remote sellers” to the income tax reduction fund to be used to fund annual reductions in the personal income tax. “Remote sellers” is defined as a seller who makes remote sales to one or more consumers. “Remote sales” are sales for which the seller could not be legally required to pay, collect or remit the use tax. This might occur, for example, where a seller that does not have substantial nexus with the state nevertheless registers as a seller and collects and remits use tax. The amendment also provides that a remote seller is not required to collect and remit use tax if the remote seller has $1 million or less in annual sales.
The amendment provides that in the case of a person who applies for, but does not receive, a certificate as a qualified distribution center for commercial activity tax purposes, and then appeals that determination, a qualifying certificate shall be issued pending the appeal. If the appeal is finally determined against the issuance of the certificate, the taxpayer is required to pay the “supplier tax liability.” The “supplier tax liability” is the difference between the commercial activity tax that was paid by suppliers while the appeal was pending, and the amount of tax that would have been paid but for the issuance of the qualifying certificate while the appeal was pending. “Supplier tax liability” does not include any penalty or interest.
The amendment also exempts from the commercial activity tax (CAT) all receipts from the sale of agricultural commodities by an agricultural commodity handler that is licensed by the director of agriculture to handle agricultural commodities.
For municipal income tax purposes, the amendment excludes supplemental executive retirement plans, known as “SERPs,” from the definition of “qualifying wages.” As a result, SERP contributions are not subject to municipal income tax.
The amendment revises the community reinvestment area law to clarify the changes that may be made to a community reinvestment area created before July 21, 1994, without rendering the area subject to the many enforcement provisions enacted on or after that date. Any revision that extends, expands, increases or otherwise broadens the availability of tax exemption under the area counts as one of the two amendments that are permitted. Any other revision does not count.
Finally, the amendment calls for the creation of a Commercial Activity Tax Review Committee. The purpose of the committee is “to review and make recommendations for reforming and improving” the CAT. The provision details the make-up of the committee and mandates a report of recommendations to the governor and the leaders of both houses of the general assembly by October 31, 2013.