Enacted as part of Ohio’s comprehensive tax reform law in 2005, the Commercial Activity Tax (CAT) is imposed upon the privilege of doing business in Ohio. It is measured by the gross receipts from most commercial activity in Ohio. Phased in over five years, the full 0.26 percent rate applies for periods beginning April 1, 2009.
One of the controversial provisions of the tax is the “bright line presence” standard for nexus. Under the law, a taxpayer has “bright-line presence” in Ohio, and thus nexus, if at any time during the year it has:
(i) property in Ohio with an aggregate value of at least $50,000;
(ii) payroll in Ohio of at least $50,000;
(iii) taxable gross receipts in Ohio of at least $500,000; or
(iv) at least 25 percent of its total property, payroll or gross receipts in Ohio.
It is the third element of taxable gross receipts in Ohio of at least $500,000 that may catch out-of-state taxpayers by surprise. This economic nexus standard does not require any physical presence in the state.
The department of taxation is actively searching for taxpayers that are making sales of goods or services into Ohio and that may not be registered for, or paying, the CAT. In particular, taxpayers not having a physical presence in Ohio may not be aware that they may have CAT responsibilities. Out-of-state sellers may be discovered through a number of means, including information obtained through audits of taxpayers located in Ohio.
When the department discovers a taxpayer that may owe the CAT, it first sends out a letter asking the taxpayer to register for the tax, file returns for all past periods, and pay the tax and interest. If this approach does not work, estimated assessments will be issued. These assessments typically grossly exceed the amount of actual tax liability. In addition to interest, a penalty of the greater of $50 or 10 percent of the tax due may be imposed. If a taxpayer fails to register within 60 days of being instructed to do so, a penalty of 35 percent of the tax due may be imposed.
If a taxpayer ignores the assessment, it may become final and be certified to the attorney general’s office for collection.
While interest cannot be waived, it may be possible to reduce the estimated tax liability and have the penalties reduced. This becomes more difficult the longer a taxpayer waits to respond to inquiries from the department of taxation.
In addition, Ohio has a voluntary disclosure program under which taxpayers that have not registered to pay the tax and have not been contacted by the state may come forward, pay tax and interest for a specified back period (the “look-back”) and avoid all penalties and tax for periods prior to the look-back.