The Senate has passed and has accepted a number of amendments to House Bill 59, the budget bill for the 2014-2015 fiscal years. While many of the provisions originally contained in the bill and eliminated in the House remain out of the bill, a number of other revisions were retained or added. Several of the more significant provisions are outlined in this bulletin.

Commercial Activity Tax (CAT)

An exclusion from taxable receipts is provided to taxpayers that are licensed agricultural commodity handlers. This provision is intended to place for-profit entities on the same footing as grain cooperatives, which are exempt from the CAT because they are organized on a non-profit basis.

The refundable tax credit for renovations to a historic structure currently applies to the financial institutions, franchise, personal income and insurance company taxes. An amendment extends the credit against the CAT beginning with tax years 2013.

Receipts associated with the shipment of goods to a “qualified distribution center” are excluded from the CAT to the extent the goods are ultimately shipped outside Ohio. A qualified distribution center may claim the benefit of this reduction while its application is pending. Under current law, if the application is ultimately denied, the distribution center is subject to a penalty of $500,000. The bill changes the penalty to an amount equal to the CAT that would have been paid if receipts from all shipments to the center were subject to the tax.

The bill broadens the authority of the tax commissioner to require taxpayers to file returns and to pay tax electronically. The bill retains a provision calling for a committee to review and recommend reforms and improvements in the CAT before October 31, 2013.

Motor Fuel Tax

As a result of the decision in Beaver Excavating Co. v. Testa, 134 Ohio St. 3d 565 2012-Ohio-5776, the CAT on receipts from transactions involving motor fuel must be devoted to highway purposes and may not be diverted to the general revenue fund. In response, a new “motor fuel excise tax” is imposed when the motor fuel is sold either at the terminal, or the refinery, for transportation other than through a pipeline or vessel for sale in Ohio; or when it is first brought into Ohio for sale.

The rate at which the tax is imposed on such transactions is 0.65 percent of the gross receipts associated with the transaction. The bill also provides that receipts from transactions involving motor fuel are no longer gross receipts for purposes of the CAT. Consequently, subsequent transactions involving the sale of motor fuel are not subject to either the CAT, or the new excise tax.

Personal Income Tax

As noted in previous bulletins, the across-the-board 20 percent reduction in personal income tax rates that was removed by the House remains out of the bill. The seven percent reduction in rates proposed by the House was removed by the Senate. However, the “small business deduction,” which had been removed by the House, was added back in by the committee. This provision provides a deduction of one-half of the first $750,000 earned by the owners of a pass-through entity. In the case of married individuals filing separately, each spouse may deduct up to $187,500.

Under current law, an individual that may be claimed as a dependent on the return of another may also claim the personal exemption and personal credit on the individual’s own return. The bill amends this provision so that an individual that may be claimed as a dependent on another return may not claim these exclusions. However, the Senate committee version of the bill delays the effective date of this provision from January 1, 2013 (as proposed) to January 1, 2014.

Under the bill, investors in a pass-through entity that file a composite return on behalf of its nonresident investors may file an individual return and claim a refundable credit for the tax paid by the entity on behalf of its owners. Under current law, nonresident individuals with no other Ohio net income may not file such a return and claim the credit. This provision permits such taxpayers to take advantage of personal exemptions and exclusions, as well as the graduated tax rates (taxes paid with respect to a composite return are calculated on the highest marginal rate only and no exclusions or exemptions are permitted).

Sales & Use Taxes

The expansion of the sales and use tax bases to services that was proposed by the governor and was eliminated by the House remains out of the bill.

The bill contains a “click-through nexus” provision for sellers located outside Ohio who use residents inside Ohio to refer potential customers and promote their business operations, whether personally or through websites. These sellers are required to collect and remit taxes if gross sales by the seller to Ohio customers exceed $10,000 during the preceding 12 months.

The bill also removes from the list of activities resulting in “substantial nexus” with Ohio, situations where at least one member of a related group has nexus with Ohio, or where sellers are registered with the secretary of state to do business in Ohio.

The bill also provides that vendors located outside Ohio that have annual sales of $1 million or less do not have to collect use tax from customers in Ohio. Use tax collections from sellers who are not required to register for use tax collections, but who voluntarily do so, are ear-marked for the income tax rate reduction fund and are used to reduce income tax rates for a given year if certain conditions are met.

Several minor sales tax exemptions have been added, including those for purchases relating to aerospace vehicle research and development and nonprofit entities operating certain recreational facilities.

Miscellaneous Provisions

A “qualified energy project” (a project that produces electricity through wind, solar, or other renewable resource means) may receive an exemption from personal property taxes, but must make annual payments in lieu of taxes of up to $9,000 per megawatt of nameplate capacity. This provision was limited to projects placed in service by January 1, 2014. The bill extends the program by five years, so that projects must be placed in service by January 1, 2019.

Under current law, boards of education (as well as municipalities and townships) have authority to file original valuation complaints against parcels of property located within their jurisdictions. The Senate committee had added a provision that removed this authority, but still retain the authority to file counter-complaints when notified that an original complaint has been filed. This change was stricken by the full Senate so that the existing law remains unchanged in the bill.

Language that would have extended responsible party liability to any person, who might be liable for the taxes of an entity, including the owners of certain pass-through entities, was dropped from the bill.

The bill contains a general provision that the tax commissioner need not refund, and taxpayers need not pay, amounts less than $1. Currently, this provision applies only to the personal income tax. There is also a change in the manner in which interest is calculated for all refunds.

A number of other, relatively minor revisions are also contained in the bill.

Summary

As originally proposed, the major provisions of the bill

  • Expanded the sales tax base to virtually all services and digital goods and products, and reduced the state sales tax rate from 5.5 percent to 5 percent;
  • Increased the severance tax on oil and gas extracted by means of horizontal drilling, or “fracking”;
  • Reduced all personal income tax rates by 20 percent; and
  • Provided a small business income tax deduction of one-half of the first $750,000 of net income from business activities to owners of pass-through entities.

As noted previously, the first three items were all removed from the bill by the House and remain out of the bill currently before the Senate. The House had also removed the fourth item, but this was restored by the Senate committee.

A conference committee has been named to reconcile the differences between the versions of the bill passed by the House and the Senate. Once the differences are ironed out, both chambers must agree to them before the bill is sent to the governor for his signature.

The Ohio constitution requires that a budget be enacted by July 1, 2013.