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Christopher J. Garman
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Jamie C. Yesnowitz
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On July 18, 2019, Ohio Gov. Mike DeWine signed fiscal year 2020-21 budget legislation modifying several tax provisions, including generally reducing the economic nexus threshold for remote sellers and marketplace facilitators from $500,000 to $100,000 in a 12-month period, effective Aug. 1, 2019.1
Other enacted changes include a decrease in personal income tax rates and changes to several available credits and incentives.
Sales tax provisions
With varying effective dates, the legislation makes changes to several sales tax provisions.
Beginning Aug. 1, 2019, an out-of-state retailer will have substantial nexus with Ohio if in the current or previous calendar year: (i) it has gross receipts exceeding $100,000 from sales in Ohio; or (ii) has 200 or more separate sales transactions in Ohio.2
The previous threshold for substantial nexus of $500,000 from sales into Ohio is eliminated (from direct sales or through content distribution networks), as well as the presumption of substantial nexus for retailers with a click-through agreement that referred more than $10,000 in Ohio sales in the prior year.3
Effective Aug. 1, 2019, marketplace facilitators that meet the same economic nexus thresholds as for remote sellers are deemed to have nexus within the state and are thus required to collect and remit use tax for sales to Ohio customers.4
A "marketplace facilitator" is defined as a person that owns, operates, or controls a physical or electronic marketplace through which retail sales are facilitated on behalf of one or more marketplace sellers, or an affiliate of such a person. A person that provides specific advertising services is excluded.5
For collection and remittance purposes, a marketplace facilitator is treated as the seller for all sales it facilitates.6
A marketplace seller with substantial nexus must collect and remit use tax in Ohio for all sales other than those that the marketplace facilitator is considered the seller.7
Waivers from the requirement that the marketplace facilitator collect and remit use tax on the seller's behalf are available for certain marketplace sellers.8
Finally, under certain good-faith circumstances, marketplace facilitators may be absolved of liability for failure to collect the tax.9
Taxable products / services
Beginning Oct. 1, 2019, car-sharing services will be included in the definition of vendor, and subject to sales/use tax.10
Also effective Oct. 1, 2019, an excise tax is imposed on the distribution, sale, or use of nicotine vapor products.11
A corresponding use tax applies for vapor products purchased outside of Ohio by a distributor. Effective July 2020, manufacturers and importers of vapor products must register and begin filing monthly reports with the state.12
Effective upon passage, tax exemptions previously available for sales to qualified motor racing teams and of investment metal bullion and coins are repealed.13
Further, the exemption for equipment and supplies used to clean qualified manufacturing equipment is expanded to include all equipment used as part of a continuous manufacturing operation used to produce food for human consumption.14
Other sales and use tax updates
Effective Oct. 1, 2019, both counties and transit authorities may increase their sales and use tax rates in increments of .05%.15
Also, an additional lodging tax of up to 3% is permitted for new convention facility authorities created between July 1, 2019, and Dec. 31, 2019.16
Individual income tax
The legislation makes some important modifications to individual income tax provisions.
Streamlined tax brackets
Effective Jan. 1, 2019, the bottom two individual income tax brackets are eliminated, making Ohio adjusted gross income of up to $21,750 exempt from income tax. The tax rates in the remaining five tax brackets are slightly reduced by 4%, with new rates ranging from 2.85% to 4.797% in 2019, and potential further adjustments on an annual basis based on inflation.17
Business income deduction
Currently, individuals are permitted a $250,000 deduction from taxable income for business income ($125,000 for married filing separately individuals).18
Any amount in excess of the business income deduction allowed is subject to tax at a 3% rate.19
Effective Jan. 1, 2020, the definition of “eligible business income” is modified to exclude income from a trade or business providing legal or lobbying services, thus preventing owners of these businesses from receiving preferential tax treatment.20
Credits and incentives
The legislation made significant changes to several available tax credits and incentives, including the Job Retention and the Opportunity Zone Credits.
Job retention tax credit
The Ohio Job Retention Tax Credit currently provides a credit against Ohio Commercial Activity Tax (CAT) to employers as an incentive to retain jobs in the state. Specifically, to qualify for the credit, an employer must meet an employment or payroll threshold of at least 500 full-time equivalent employees or $35 million in annual payroll and a minimum qualifying capital investment of at least $50 million for non-manufacturers or $25 million for a manufacturer.21
The new legislation expands the term “eligible business” for purposes of the credit by eliminating the payroll qualifier for businesses primarily engaged in manufacturing activities. Consequently, the single test for eligible manufacturers becomes a capital investment that exceeds the lesser of $50 million or 5% of net book value of all tangible property used at the site over a three-year term. For taxpayers engaged in significant corporate administrative functions, two requirements generally must be satisfied: (i) the original 500 full-time equivalent employees or a minimum $35 million in annual payroll threshold must be met and (ii) a $25 million capital investment must be made over a three-year period.
Opportunity Zone tax credit
The legislation creates a transferable Opportunity Zone Tax Credit against personal income tax equal to 10% of a taxpayer’s investment into a qualified fund during the preceding calendar year.22
To be eligible for the credit, a fund must hold 100% of its invested assets in a qualified opportunity zone property located in Ohio.23
The credit will be capped at $1 million per taxpayer (maximum $10 million investment), and $50 million in the aggregate for all taxpayers in a fiscal biennium, and the credit can be carried forward for five years.24
For tax years beginning in 2019, the credit for campaign contributions and the credit for a pass-through entity’s share of the financial institutions tax are repealed.25
Further, a new tax credit of up to $10,000 for lead abatement expenses incurred on Ohio residences constructed before 1978 is created.26
Significant modifications to the Motion Picture Tax Credit were also made. Generally, the credit has been expanded to encompass live theatre productions as well as include certain promotion expenses as eligible expenditures. 27
Owners of a historic rehabilitation tax credit certificate who are unable to use the credit against another Ohio tax may now claim the credit against the CAT.28
Qualifying certificate owners who are not liable for the CAT may file a CAT return to claim the credit.
The Bill makes other significant changes, including:
- Authorizes new taxes at the municipal level to encourage tourism29 and provides eligible townships and municipal corporations an additional two years to adopt gross receipts taxes designed to foster and develop tourism, if certain conditions are met30
- Extends the time period within which an individual must report changes due to a federal audit from 60 days to 90 days31
- Adopts new procedures for partnerships to report federal changes and pay any additional tax at the entity level (as opposed to notifying its partners and submitting applicable non-resident returns)32
- Adopts a definition for “pension income” that is exempt from municipal taxation for tax years beginning on or after Jan. 1, 2020. Specifically, SERPs and nonqualified retirement plans are included in the definition33
- Repeals, beginning Jan. 1, 2019, the refundable credit for financial institution taxes paid by a pass-through entity34
- Adopts new requirements and exclusions for tax return preparers including new definitions for the role 35
Ohio’s legislative budgetary process extended beyond its traditional June 30 deadline as lawmakers wrestled with several issues, including whether to retain the valuable $250,000 business income deduction available to individual pass-through entity owners. The end result included a retainer of the benefit for all but owners of lobbying and law firms. Further, with the passage of its budget legislation, Ohio becomes the latest in a string of states to statutorily codify relatively consistent economic nexus standards in the wake of Wayfair. Although several states have adopted similar $100,000 or 200 transaction thresholds, taxpayers should be aware that definitional and other statutory differences exist. However, we expect to see this general trend continue as states weigh the benefits of an increased sales tax base against the potential administrative burden to the taxpayers and the state.
The creation of the Opportunity Zone tax credit is intended to increase investment in economically-disadvantaged areas of Ohio. It will be interesting to see whether its creation results in an increase in Ohio-focused investment funds designed to take advantage of both the Federal Opportunity Zone benefit and the new Ohio credit.
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