Earlier this summer we reported to you that the Ohio General Assembly enacted a special use tax amnesty that could substantially reduce potential Ohio use tax liability for companies -- especially companies not registered to self-assess Ohio consumer use tax. The Ohio Tax Department has now announced its response to the new statute and the announcement has filled in some of the details about how the amnesty will proceed. Important questions remain, however, even after the Tax Department’s announcement.
THE STATUTORY AMENDMENT
The recent Ohio Budget, Amended Substitute House Bill 153 (2011) (the "Act"), provides a special amnesty 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 register for use tax payment authority and to begin to self-assess when vendors do not collect the tax. This consumer use tax amnesty begins on October 1, 2011, and ends May 1, 2013. 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, accrued prior to January 1, 2009, along with penalties and interest. 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 in the tax amnesty, then the Tax Department may audit the consumer for delinquent tax accrued but only for purchases made on and after January 1, 2008. Any consumer that fails to make the required payment, or that falls behind on its payment plan will be 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, then that consumer is ineligible to participate in the amnesty. We understand that the Tax Department will refrain from issuing assessments during the interim. The Ohio Tax Department still has not publicly 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 interest. This provision was inserted to reflect the aim of the amnesty to address unregistered taxpayers. It appears from the statute that registered taxpayers nevertheless benefit from the new law in that no assessment can be made for the period before January 1, 2008.
TAX DEPARTMENT INTERPRETATION
On August 24, 2011, the Ohio Tax Department issued its explanation of how the Consumer Use Tax Amnesty Program will be implemented (the "Directive"). See a copy of the Directive. Some of the issues addressed in the Directive follow:
- The Tax Department states that if a taxpayer has "been issued an assessment for consumer use tax due for any period [the taxpayer] is not eligible for amnesty." The Tax Department does not expand on that statement but it is understood that the Tax Department takes the position that any prior assessment no matter when issued, including assessments for earlier periods, disqualifies the taxpayer from claiming amnesty.
- The taxpayer seeking amnesty will report for the period beginning January 1, 2009, and ending the month before the taxpayer seeks amnesty.
- The Tax Department Directive provides that those who do not qualify for amnesty may qualify for voluntary disclosure. Voluntary disclosure is not a substitute for amnesty because (1) the voluntary disclosure would not be available if the taxpayer had been contacted by the Tax Department, and (2) the voluntary disclosure would require payment of interest.
- The Tax Department confirms that any taxpayer that was registered before January 11, 2011, must pay interest even if otherwise qualifying for amnesty.
- The Tax Department confirms that the taxpayer’s amnesty filing is subject to audit but does not describe the process or whether penalty or interest would be applicable if the Tax Department asserts a liability that exceeds that disclosed in the amnesty filing.
- The Tax Department asserts that if a taxpayer applies for amnesty but that taxpayer does not qualify for amnesty, then the taxpayer is subject to assessment of tax and interest. The Tax Department does not mention the application of penalty in this circumstance. The amount paid with the amnesty filing will be applied against the assessment.
- The Tax Department added additional requirements in order to qualify for a payment plan to be made available by the Tax Department for the payment of the use tax under amnesty.
- That payment plan by statute cannot exceed seven years. The additions by the Tax Department make the installment option much less desirable. The payment plan is available only for obligations exceeding $1,000. Also, the minimum monthly payment is $1,000 when the liability exceeds $1,000.
- Moreover, the taxpayer seeking a payment plan must find two individuals to personally guarantee the payments. Those individuals must accept personal liability and provide their social security numbers to the Tax Department.
- Any taxpayer seeking a payment plan must agree to waive the statute of limitations for assessment during the period of the payment plan.
- The Tax Department details the steps for complying with amnesty in the Directive.
The Directive leaves several questions unanswered.
- What is the impact of an outstanding audit in which the taxpayer executed a waiver of the statute of limitations? Does the existence of such a waiver allow the Tax Department to assess for prior periods kept open by the waiver? We understand that the Tax Department currently asserts that a taxpayer can be assessed for taxes prior to January 1, 2008, when the earlier period is open on audit under a waiver. The language of the Act does not appear to support the Tax Department’s position.
- What is the effect of a taxpayer subject to amnesty that has made purchases after January 1, 2009, that are in "gray areas" of taxability? That is, what happens when the taxpayer concludes that purchases are not taxable and does not include the tax for those purchases in the amnesty application but the Tax Department determines that the purchases are taxable? We expect that the taxpayer will be able to participate in amnesty but will be subject to audit and assessment for disputed items. The taxpayer can appeal the contested items without jeopardizing the benefits of amnesty for those items that are not contested.
- Is there any disadvantage for taxpayers to wait until later, perhaps 2013, to participate in this amnesty to obtain maximum benefit of the waiver of interest? The law does not contain an obvious incentive for an early participation in amnesty unless the taxpayer wants to resolve the back taxes. Any taxpayer that intends to participate in the amnesty but decides to wait to comply should carefully monitor developments.
Undoubtedly, additional issues will arise in the course of the administration of the use tax amnesty.