Ohio enacts biennial budget bill with tax changes


On June 30, 2021, Gov. Mike DeWine approved House Bill 110, Ohio’s 2022-2023 biennial budget legislation, which includes several significant Ohio tax changes.1 Specifically, the budget legislation extends temporary municipal income tax withholding rules through Dec. 31, 2021, reduces individual income tax rates and the number of tax brackets, repeals the applicability of sales and use tax to employment services and employment placement services, and changes the method of calculating the Commercial Activity Tax (CAT) minimum tax.




Municipal income tax withholding


In March 2020, Ohio enacted emergency legislation providing various tax relief measures in response to the COVID-19 pandemic.2 This law included temporary provisions that sourced the compensation of teleworking employees to the employee’s principal place of work, even if the employee was working at a location outside of the principal location, such as a remote worksite or the employee’s home.3 These temporary provisions were set to expire 30 days following the end of Gov. DeWine’s state of emergency declaration, first enacted on March 9, 2020. With the Gov. lifting that state of emergency on June 18, 2021, the temporary employer withholding rules were expected to expire on July 18, 2021, absent further legislation.

Under the budget legislation, the temporary municipal income tax withholding rules are extended through Dec. 31, 2021.4 In addition, an employer that withholds and remits tax based on an employee’s principal place of work for wages earned between March 9, 2020, and Dec. 31, 2021, cannot be assessed tax, penalty or interest by any other locality.5 It should be noted that the law allows employers to assign employees to other work locations, which could change the employee’s principal place of work during the period the temporary rules are in effect, and can begin withholding at the employee’s physical work location if they choose to do so.6 Importantly, the legislation provides withholding relief for the 2021 tax year by allowing employees working remotely to claim refunds of tax paid to localities for days that the employee worked elsewhere during the year.7 If an employee requests a refund of municipal income tax withheld under the temporary rule, the locality must approve the request and cannot require the employer to provide any documentation other than a statement that the employer did not refund any withholding to the employee and the number of days the employee worked at their principal place of work.8 However, the employee personal income tax refund provisions do not apply to the 2020 tax year.9

Additionally, the budget bill provides a clear distinction that the temporary provisions apply only to the employer’s municipal income tax withholding obligations and to the sourcing and apportionment of an employer’s net profit.10 The legislation clarifies that the temporary withholding rule does not apply for purposes of determining an employee’s income tax liability in the 2021 tax year.11




Individual income tax rate reductions


The budget law includes an estimated $1.6 billion in income tax cuts through the reduction of individual income tax rates. Retroactive to tax years beginning on or after Jan. 1, 2021, the top personal income tax rate is reduced from 4.797% to 3.99%, with the top income tax bracket now applying to income over $110,650.12 The tax rates for the three remaining income brackets are slightly reduced from tax rates that ranged from 2.85% to 3.802%, to tax rates now ranging from 2.765% to 3.688%.

Finally, H.B. 110 contains two capital gains carveouts for certain business owners that are effective beginning with the 2026 tax year. One deduction will allow taxpayers to deduct capital gains on the sale of an ownership interest in an Ohio business if the taxpayer was active in the trade or business.13 In order to be eligible for the deduction, the taxpayer must have (i) materially participated in the business for five years prior to the sale; or (ii) invested at least $1 million of capital in the business.14 The deduction will equal the lesser of the capital gain or a percentage of the business’s payroll over a specified period, based on the taxpayer’s proportionate interest in the business.15

The second deduction will provide a capital gains deduction on an investor’s sale of equity interests in certain state-certified Ohio-based venture capital operating companies (VCOC) as statutorily defined.16 The deduction will be equal to 100% of capital gains from VCOC investments in Ohio businesses and 50% of capital gains from other VCOC investments.17




Repeal of sales tax on employment and employment placement services


Since 1993, employment services and employment placement services have been subject to Ohio sales and use tax. Under Ohio law, an “employment service” is defined as providing or supplying personnel, on a temporary or long-term basis, to perform work or labor under the supervision or control of another, when the personnel provided or supplied receive their wages, salary, or other compensation from the provider of the service or from a third party that provided or supplied the personnel to the provider or supplier.18 Additionally, an “employment placement service” is defined as locating or finding employment for a person or finding or locating an employee to fill an available position.19

In an effort to encourage greater business activity and competitiveness in the state, the law removes “employment services” and “employment placement service” from the definition of a taxable sale, applicable to such sales taking place on or after Oct. 1, 2021.20




Ohio CAT changes


Finally, the budget legislation changes the calculation of the annual CAT minimum tax that is owed on the first $1 million in taxable gross receipts to be based on CAT gross receipts from the preceding year, rather than current year gross receipts.21 This change is effective as of the date of the bill’s approval on June 30, 2021.22

Historically, Bureau of Workers Compensation (BWC) dividend refunds that employers received were includable as taxable gross receipts for purposes of the CAT. Earlier this year, Ohio enacted legislation providing a temporary CAT exclusion for receipts from BWC dividends paid to employers in calendar years 2020 and 2021.23 H.B. 110 allows for a permanent exclusion on the payment of such receipts, effective January 1, 2022.24






To encourage business activity and economic growth in state, the Ohio Governor and the state legislature agreed on a budget that included several taxpayer friendly provisions, which are also attributable to the state’s estimated $3 billion budget surplus heading into the 2022 fiscal year.25 Ohio’s budget surplus is based in part on the receipt of funds from the American Rescue Plan Act (ARPA),26 the federal stimulus legislation that provided funding to state and local governments to combat the economic effects of the COVID-19 pandemic. Ohio joins a wave of states that also approved income tax reductions despite a spending restriction on the ARPA funds that prohibits states from using such funds to offset a reduction in state net tax revenue. In response to the spending restriction in ARPA, Ohio and five other states filed lawsuits in the federal courts challenging the tax mandate. A federal judge recently granted Ohio a permanent injunction from the spending restriction one day after the enactment of the state’s budget legislation.27

The partial reversal of Ohio’s temporary municipal income tax sourcing law provides more certainty for employers and additional relief for employees that continue to work remotely by allowing them to file refund claims if they are taxed in 2021 by jurisdictions in which they neither lived nor worked. This issue has been the subject of extensive litigation, prompted by lawsuits against several Ohio cities from non-profit groups, Ohio residents and even Pennsylvania residents.28 The litigation focuses on the ability of Ohio cities to tax the income of remote workers working outside these municipalities during the pandemic. The legislature has left this question to the courts in declining to extend employee withholding relief to the 2020 tax year in House Bill 110. Courts will need to weigh the constitutional concerns raised by the taxation of remote employees lacking a connection to their principal work location with a potentially significant loss in tax revenue if Ohio cities are required to pay out refunds for the 2020 tax year.

In the meantime, the legislation permits employers to voluntarily withhold municipal income tax according to an employee’s principal work location through the 2021 tax year. Since more widespread remote work is likely to continue beyond the pandemic, employers will likely focus greater attention on the tracking of employee locations for purposes of payroll tax reporting purposes, especially after the expiration of Ohio’s temporary municipal tax withholding rule. Without the proper systems and processes in place, smaller companies face greater administrative burdens in monitoring remote employees especially as businesses consider changing their polices to accommodate hybrid or even full remote work arrangements.29 The detailed reporting of work locations and payroll processing by internal resources will be an important consideration for accurate payroll tax reporting and the avoidance of additional state filing obligations. Ohio’s controversial municipal income tax sourcing rule provides Ohio companies a preview of the challenges in establishing flexible remote work models looking ahead.

The reduction of Ohio’s individual income tax brackets continues a recent trend over the past six years in which the number of brackets has been reduced from nine to four. This allows for a simpler individual income tax regime and an overall tax reduction for Ohio residents and non-residents with Ohio source income. Finally, the repeal of the sales tax on employment services and employment placement services is a welcome development for businesses that utilize these services frequently, particularly those in the manufacturing and distribution industries. The taxation of such services has been a source of controversy given that it has placed a heavier tax burden on Ohio businesses, in addition to the fact that these types of services are often not subject to tax in most states.



1 H.B. 110, Laws 2021.
2 H.B. 197, Laws 2020.
3 H.B. 197, § 29.
4 H.B. 110, § 610.115, amending H.B. 197, § 29.
5 H.B. 110, § 757.40(B).
6 H.B. 110, § 610.115, adding H.B. 197, § 29(B), (C).
7 H.B. 110, § 757.40.
8 H.B. 110, § 757.40(D).
9 H.B. 110, § 757.40(C).
10 H.B. 110, § 610.115, adding H.B. 197, § 29(D).
11 Id.
12 H.B. 110, § 101.01, amending OHIO REV. CODE § 5747.02(A)(3). Previously, the highest tax bracket applied to individuals with Ohio adjusted gross income (AGI) of over $217,400. The highest bracket now applies to individuals with Ohio AGI of over $110,650.
13 H.B. 110, § 101.01, adding OHIO REV. CODE § 5747.79.
14 H.B. 110, § 101.01, adding OHIO REV. CODE § 5747.79(A)(1)(a).
15 H.B. 110, § 101.01, adding OHIO REV. CODE § 5747.79(B).
16 H.B. 110, § 101.01, adding OHIO REV. CODE §§ 122.851; 5747.01(A)(35).
17 H.B. 110, § 101.01, adding OHIO REV. CODE § 5747.01(A)(35)(a).
18 OHIO REV. CODE § 5739.01(B)(3)(JJ).
19 OHIO REV. CODE § 5739.01(B)(3)(KK).
20 H.B. 110, § 101.01, amending OHIO REV. CODE § 5739.01(B)(3).
21 H.B. 110, § 101.01, amending OHIO REV. CODE § 5751.03(B).
22 H.B. 110, § 812.20.
23 S.B. 18, Laws 2021.
24 H.B. 110, § 101.01, amending OHIO REV. CODE § 5751.01(F)(2)(nn).
25 Karen Kasler, Ohio Budget Director Expects $3 Billion Surplus Over the Next Two Years, STATEHOUSE, June 17, 2021.
26 P.L. 117-2 (2021).
27 Ohio v. Yellen, U.S. District Court for the Southern District of Ohio, Western Division, No. 1:21-cv-18, July 1, 2021. For further discussion of this decision, see GT SALT Alert: Ohio grants injunction from ARPA tax cut prohibition.
28 See The Buckeye Institute v. Kilgore, No. 20-CV-4301, Franklin County Court of Common Pleas, filed July 2, 2020; Denison v. Kilgore, No. 21-CV-00848, Franklin County Court of Common Pleas, filed Feb. 2021; Schaad v. Alder, No. A-2100517, Hamilton County Court of Common Pleas, filed Feb. 2021; Curico v. Hufford, Lucas County Court of Common Pleas, filed Mar. 11, 2021; Morsy v. Dumas, No. CV-21-946057, Cuyahoga County Court of Common Pleas, filed Apr. 8, 2021.
29 For an in-depth discussion of the state tax challenges facing employers with the expected continuation of remote work beyond the pandemic, see GT SALT Alert: Tax challenges expected from widespread remote work.





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