Ohio State Tax Blog

Current developments, commentary and helpful resources regarding Ohio state and multistate taxes from attorneys Steven A. Dimengo and Richard Fry. We concentrate on all aspects of Ohio state taxation, including sales/use tax, income tax and commercial activity tax, from audits to appeals before the Ohio Board of Tax Appeals and Ohio Supreme Court, and have significant experience in multistate tax planning. Contact us.

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Ohio Department of Taxation Targeting Quick Service Restaurants PDF Print E-mail
Friday, 29 June 2012 12:27

The Ohio Department of Taxation (the “Department”) has a new initiative to audit quick service (or fast food) restaurants (“QSR”) throughout the state premised on the Department’s perception that QSRs fail to properly record taxable dine in sales.

Article XII, Section 3(C) of the Ohio Constitution prohibits a sales tax on food purchased for off premises consumption. Therefore, a consumer’s response to whether an order is “for here or to go” should determine the vendor’s obligation to collect tax on that transaction. However, sales tax must always be collected on certain items excluded from the definition of “food”, such as soft drinks and alcoholic beverages.  

The Department’s initiative is designed to crack down on QSRs who consistently fail to ask customers whether their orders are for dine in or carry out. Soon after being notified that an audit is being conducted, the QSR is pressured to enter into an agreement with the Department setting forth the guidelines for a sample audit or test check, even before the QSR has retained a professional to represent it. The Department may offer incentives, such as agreeing to waive penalties, or indicate the results from the test check will be used to determine a statewide baseline for QSRs. But, in our experience, these items are not always included in the Department’s initially proposed sample agreement. Before entering into an agreement, the QSR must be aware of the significant rights being given up – such as the ability to challenge the sample as being representative or the statistical calculation used to extrapolate the results from the sample period for the entire audit period. See e.g., Shugarman Surgical Supply, Inc. v. Zaino, 97 Ohio St.3d 183, 2002-Ohio-5809, at ¶19 (“When [taxpayer] signed the test check agreement it waived any objection covering the test-check period.”); and Akron Home Medical Services, Inc. v. Lindley, 25 Ohio St.3d 107 (1986) (taxpayer “waived any objection by entering into an enforceable, written agreement with the commissioner expressly permitting a test check …”).

The initially proposed sample agreement is typically very one-sided for the Department’s benefit. Unrepresented QSRs are often shocked by the results of a sample audit or test check as being substantially higher than anticipated. However, by this time, the QSR’s ability to challenge the resulting assessment is severely limited. Therefore, the QSR should give careful and due attention to the parameters of the proposed sample audit or test check to ensure it is conducted in a manner representative of the QSR’s business and does not inflate an otherwise insignificant liability, as many provisions can often be negotiated to produce a fair, more representative result.

If you are a QSR in need of help with respect to an Ohio sales tax audit or negotiating a sample agreement with the Department, please feel free to contact us.

 
Low Tax Rates and Incentives Give Ohio a Business-Friendly Landscape, Spurring Economic Recovery and Growth PDF Print E-mail
Tuesday, 05 June 2012 15:35

This article appears in and is reproduced with the permission of the Journal of Multistate Taxation and Incentives, Vol. 22, No. 3, June 2012. Published by Warren, Gorham & Lamont, an imprint of Thomson Reuters. Copyright (c) 2012 Thomson Reuters/WG&L. All rights reserved.

By: STEVEN A. DIMENGO AND RICHARD B. FRY III

After years of seeing jobs and businesses leave the state for friendlier pastures, Ohio began to substantially reform its tax structure to create its own business-friendly environment.

Upon taking office in January 2011, Ohio Governor John Kasich's primary goal has been clear. "We're working to create an environment where we're job-friendly" Gov. Kasich told the Cincinnati Enquirer. 1 Although undoubtedly one of the states most decimated by the recession, Ohio's recovery looks promising thanks to a more business-friendly climate providing the incentive for businesses to stay in, or relocate to, Ohio.

The transition to a more business-friendly tax climate commenced a few years ago with the elimination of Ohio's personal property and corporate franchise taxes, which had imposed an especially heavy burden on C corporations with significant in-state presence, and replacing these taxes with a commercial activity tax described below. In addition, JobsOhio—a private, nonprofit corporation created by the Kasich administration to attract jobs to Ohio (see http://jobs-ohio.com)—has recently struck deals with several large corporations to keep and/or bring jobs to the state, including Ford, American Greetings, Chrysler, Timken, Abercrombie & Fitch, General Motors, Lincoln Electric, and Wendy's, with many of these companies also making significant investments in new or updated facilities.

The positive outlook for Ohio's economic recovery is supported by various recent reports. The U.S. Department of Labor recently reported that Ohio added more than 32,000 jobs in January 2012, the third highest increase for the month, behind only Texas and New York. 2 This capped a 1.3% decrease in the state's unemployment rate during Gov. Kasich's first year in office. 3 Further, a recent Tax Foundation study ranked Ohio as the fifth least burdensome state with regard to local tax costs for established business and the third least burdensome for new business—the only state ranking in the top five for each category, and far better than surrounding Midwestern states with which Ohio often competes for business. 4 The Tax Foundation's analysis recognized Ohio's low effective tax rates for businesses with significant in-state presence, especially for C corporations that now pay no Ohio tax on their net income or tangible personal property located in Ohio. 5 Again, Ohio laid the foundation for its business-friendly landscape several years earlier, when the state's taxing scheme was significantly overhauled.

Needing to reform its out-of-date tax system reflecting early 20th century concepts, starting in 2005 Ohio began phasing out its corporate franchise and personal property taxes, which imposed the largest burden on C corporations with substantial property or workforce in the state, in favor of a new, low-rate, broad-based commercial activity tax (CAT). Ohio's new tax scheme recognizes how doing business has evolved, focusing on a taxpayer's participation in Ohio's economic market instead of the taxpayer's physical presence (i.e., property and employees) in the state, and thereby substantially reducing the tax burden on Ohio-based businesses whose customers are predominantly outside Ohio. This has given Ohio a significant advantage in attracting businesses and jobs to Ohio, allowing the state to more quickly bounce back from the nation's worst recession in decades. The following discussion examines the aspects of the new Ohio tax structure that has created an environment attractive for business, making Ohio sort of a "tax haven."

The Commercial Activity Tax

Fully phased-in on 4/1/09, the CAT is a broad-based, low-rate tax imposed on receipts from Ohio sources. Switching from the traditional net-income based tax scheme, where income is apportioned to states based upon the typical three-factor (property, payroll, and sales) formula, the CAT situses to Ohio the taxpayer's gross receipts from the sale of products or services if the customer receives the property or the benefit of the service in Ohio. 6 Taxpayers then pay a minimum tax of $150 on their Ohio gross receipts up to $1 million and a tax rate of 0.26% on Ohio gross receipts in excess of $1 million. 7 Accordingly, focusing solely on the taxpayer's sales to Ohio customers, rather that its physical presence in the state, Ohio now taxes business activities based upon market participation.

Moreover, the CAT employs the Multistate Tax Commission's (MTC's) model factor-presence nexus standard, intending to reach a broader base of taxpayers, including companies that make substantial sales into the state, even if lacking a physical presence. 8 Under the CAT's "bright-line presence" standard, all businesses with at least $500,000 of Ohio taxable gross receipts (or 25% of their total sales) during the calendar year are subject to the CAT even if they have no property or employees in the state. 9 The rationale is to spread the tax amongst all those benefiting from Ohio's market—even online or remote sellers without an Ohio physical presence that traditionally did not pay Ohio state taxes—while reducing the burden on businesses with in-state facilities and workforce.

As a result, Ohio is now a "tax haven" for businesses, especially large C corporations with substantial sales outside Ohio. For example, a company with a $100 million facility and 500 employees in Ohio would only pay tax on its receipts from sales to Ohio customers; no business activity tax would be imposed based upon the company's property or employees in Ohio. This scheme has created an advantageous environment for businesses to locate their corporate headquarters, online retail operations, distribution centers and capital-intensive manufacturing operations in Ohio. 10

Tax Incentives for Job Creation and Retention

As one of only 14 states offering tax credits based upon employer income tax withholding, Ohio provides Job Creation Tax Credits (JCTCs) and Job Retention Tax Credits (JRTCs). 11 Although ultimately granted by the Ohio Department of Development, these credits are one of the arrows in JobsOhio's quiver, offered by the organization to entice new business to Ohio and/or existing businesses to undertake new investments in Ohio. The rationale for the JCTC and JRTC is that increasing and maintaining payroll is the most effective way to bring wealth to Ohio.

JCTC. The refundable JCTC is available to all businesses that: (1) demonstrate that receipt of the credit is a "major factor" in moving forward with the proposed Ohio project; (2) maintain operations at the project location for at least the greater of (a) seven years or (b) the term of the JCTC plus three years; and (3) maintain a minimum of ten new full-time equivalent employees with an average hourly wage of at least 150% of the federal minimum wage and a total annual Ohio payroll of at least $660,000. 12 The credit may be applied against the CAT or the Ohio income or corporate franchise tax (still imposed upon financial institutions and other limited industries), and is based on the increase in Ohio income tax withholdings from the project site over a baseline income tax amount (increased annually for inflation). The JCTC is calculated by multiplying that increase by the tax credit percentage specified in the agreement with the Ohio Department of Development. 13 Taxpayers must file an annual report with the Ohio Department of Development disclosing full-time equivalent employees, and payroll withholding and investment information. 14 Finally, to claim the JCTC, the Department of Development issues to the taxpayer a Certificate of Verification, which the taxpayer submits with its tax report or within 60 days after the taxing authority requests it. 15

JCTC. The JRTC is generally nonrefundable, unless a business meets certain statutory conditions. 16 In contrast to the JCTC, the JRTC is essentially limited to larger companies, as recipients generally are required to: (1) retain at least 500 full-time equivalent employees or maintain an annual payroll of at least $35 million at the project site, 17 and (2) invest at least $50 million in a manufacturing facility or $20 million in an administrative facility (e.g., corporate headquarters). 18 In addition, the tax credit percentage used in computing the JCTC and the JRTC may not exceed 75%. 19 JRTCs are awarded through a competitive process based upon the anticipated benefit to Ohio's economy.

Generally, the JCTC and JRTC are available for up to 15 years, although the term may differ at the discretion of the Ohio Department of Development. 20 Recipients must be careful, however, as the state is permitted to reclaim, or "clawback," all or a portion of the claimed credits if the taxpayer fails to fulfill its commitments for the project, such as if the project is abandoned prior to the end of the credit term or the required number of jobs is not created or maintained. 21

In addition to the JCTC and JRTC, other tax incentives are available to Ohio businesses, including research and development credits 22; real property tax abatements; and sales tax exemptions specifically for certain distribution centers and qualifying computer data center equipment. 23 JobsOhio has successfully used these tools, in combination with the JCTC and JRTC, to attract business to Ohio.

InvestOhio—Incentives for Small Businesses

While the incentives discussed above primarily benefit "big" business, Ohio recently enacted tax incentives for small business owners as well. InvestOhio, a new program administered by the Ohio Department of Development in collaboration with the Ohio Department of Taxation, provides a nonrefundable personal income tax credit of 10% of the taxpayer's equity investment, made after June 2011, in a qualifying Ohio small business enterprise. 24 It is hoped that the InvestOhio program will generate $1 billion of new investments in Ohio small businesses by mid-2013. The small business investor must be an individual, estate, or trust, or a pass-through entity in which an individual, estate, or trust holds an ownership interest. The credit is capped at $1 million per investor, per biennium.

To qualify for the credit, the taxpayer must make an investment in an eligible "small business enterprise," which is a corporation, pass-through entity, or other person having: (1) no more than (a) $50 million in total assets, or (b) $10 million in annual sales; and (2) employing in Ohio (a) at least 50 full-time equivalent employees, or (b) more than half of all its U.S. full-time employees. 25 Within six months of the qualifying investment, the small business enterprise must expend all the invested funds to purchase certain business property, including tangible personal property used in Ohio, real property located in Ohio, certain motor vehicles, and/or intangible property used primarily in Ohio, or as compensation to employees (excluding increased compensation for owners, officers, or managers) who are subject to Ohio income tax withholding. The purchases must be used in business in Ohio from the time of acquisition by the enterprise until the end of the investor's holding period. 26 The taxpayer must continue to hold its investment in the small business enterprise for the "holding period," which is two years for investments made after June 2011 but before July 2013 and five years for investments made after June 2013. 27 The InvestOhio tax credit is claimed by the investor in the year during which the holding period ends. 28

The Ohio Department of Development may award up to a total of $100 million of credits to qualified small business investors per fiscal biennium on a first-come, first-served basis. 29 As of the writing of this article, approximately $50 million of InvestOhio credits remains available for the current biennium, which runs through June 2013.

Lower tax rates. In addition to the InvestOhio personal income tax credit, Ohio has been reducing its personal income tax rate in conjunction with reforming its tax scheme, i.e., phasing in the CAT and phasing out the corporate franchise and personal property taxes. The top personal income tax rate is currently 5.925% (tax years beginning after 2010) for income over $200,000, having been reduced by more than 20% from the top rate of 7.5% prior to 2005. 30 Moreover, the Ohio estate tax has been repealed effective 1/1/13. 31 These efforts to reduce individual tax burdens were aimed, at least in part, at influencing small business owners and other wealthy individuals to continue residing in Ohio, rather than relocating later in life to states such as Florida, which has minimal tax burdens—and better weather.

Tax Amnesty

Not only has Ohio minimized prospective tax burdens for business, the state also is providing an opportunity to resolve past delinquencies on favorable terms, in order to get more taxpayers on the tax rolls and increase future collections.

Use taxes. First, in response to the Ohio Tax Commissioner's initiative to pursue businesses for unpaid consumer's use tax (incurred on property purchased out-of-state and brought into Ohio, or where no sales tax is collected), the Ohio General Assembly prohibited the Commissioner from making an assessment of consumer's use tax that was due (1) prior to January 2008 (thereby taking away the Commissioner's threat of a seven-year audit for businesses that failed to file returns under the initiative), and (2) for any period after the expiration of seven years (thus codifying the Commissioner's informal policy limiting audits to seven years even where taxpayers did not file returns). 32

Moreover, delinquent taxpayers can further reduce their past liability by participating in Ohio's consumer's use tax amnesty program running from 10/1/11 through 5/1/13. 33 Under this program, for consumer-taxpayers that pay in full their outstanding delinquent use tax liabilities accruing after 2008, the Commissioner will waive or abate all delinquent use tax owed by the consumer before 2009, and all applicable penalties and interest accrued before and after 1/1/09. Interest and penalties will not be waived under the amnesty program, however, for consumers that registered with the Commissioner for the use tax on or before 6/1/11. 34 The consumer's use tax amnesty program is also available to taxpayers already contacted by the Tax Commissioner, even if in the midst of an audit, as long as the taxpayer has not been assessed for consumer's use tax on or before 9/29/11, the effective date of the amnesty provisions. 35

(The Ohio Department of Taxation has adopted a final regulation detailing the use tax amnesty program. That regulation, Ohio Admin. Code §5703-9-60 (consumer's use tax amnesty payment plan), is reproduced in its entirety in the sidebar accompanying this article.)

General amnesty. Second, Ohio is offering a general tax amnesty program for essentially all other Ohio taxes beginning 5/1/12 through 6/15/12. 36 Although the look-back period for this program is unlimited, if a taxpayer pays the full amount of qualifying delinquent taxes owed, plus one-half of any interest that has accrued, the other half of the interest and all penalties are waived. 37 In contrast to the use tax amnesty program, taxpayers previously contacted by the Tax Commissioner concerning a delinquent liability are not eligible for the general tax amnesty program. 38 Nevertheless, these amnesty programs are appealing for both taxpayers and the state; while taxpayers can resolve their liability on favorable terms, they must register and pay Ohio taxes going forward, creating an increased future revenue stream for the state. 39

Conclusion

After years of seeing jobs and businesses leave the state for friendlier pastures, Ohio began to substantially reform its tax structure to create its own business-friendly landscape. The seeds were planted to attract businesses and jobs to Ohio. Although this substantial overhaul began several years ago, before anyone knew the 2008-2009 recession was on the horizon, Ohio's new-age tax climate has greatly helped the state in its recovery. Now, Ohio is a "tax haven" for businesses due to the elimination of tax burdens based on property and workforce in the state, and focusing instead on market participation. By being ahead of most states in modernizing its tax structure, Ohio has created a more business-friendly tax environment and is starting to reap the benefits by showing signs of a quicker recovery from the nationwide recession and substantial job growth across the state. []

Sidebar

Practice Note: Regulation Details Ohio Use Tax Amnesty

Ohio's use tax amnesty program runs from 10/1/11 through 5/1/13. Ohio Admin. Code §5703-9-60 (consumer's use tax amnesty payment plan) was adopted effective 2/13/12 and is reproduced below.

(A) House Bill ("H.B.") 153, 129th General Assembly, (uncodified section 757.42) authorizes the Tax Commissioner to enter into a no-interest payment plan with a qualifying taxpayer who elects to participate in the consumer's use tax amnesty established by H.B. 153.

(B) The Tax Commissioner may enter into a consumer's use tax amnesty payment plan if the taxpayer satisfies the following conditions:

(1) The taxpayer cannot have previously held or currently hold a consumer's use tax account as of June 1, 2011.

(2) The amount of consumer's use tax due under the taxpayer's amnesty application must exceed $500.

(3) At least one (1) corporate officer, LLC member, general partner or other person authorized to execute contracts on behalf of the taxpayer must agree to the terms of the payment plan on behalf of the taxpayer.

(4) The taxpayer must agree to extend the time limit for the Tax Commissioner to assess unpaid consumer's use tax due under amnesty until six (6) months after the end of the payment plan.

(C) The consumer's use tax amnesty payment plan terms are as follows:

(1) The minimum monthly payment is $500. The initial monthly payment must be submitted with the amnesty application.

(2) The maximum term of a consumer's use tax amnesty payment plan is seven (7) years (84 months).

(3) The taxpayer must return the fully executed consumer's use tax amnesty payment plan agreement to the Tax Commissioner within 15 days after receipt.

(4) The taxpayer must make each payment due under the consumer's use tax amnesty payment plan on or before the first business day of each month.

(D) If the taxpayer misses a monthly payment, fails to return a fully executed copy of the consumer's use tax payment plan agreement, or fails to remain current with all of its Ohio tax obligations, the Tax Commissioner will notify the taxpayer of such default ("Default Notice") via U.S. Mail or a similar method of delivery. The taxpayer will have 15 days from the date of the Default Notice to provide documentation supporting that the disputed payment was made, the fully executed Agreement has been returned, or that the taxpayer is current with all of its Ohio tax obligations. If within the 15-day period the taxpayer fails to provide such documentation, the Tax Commissioner may assess the taxpayer for the entire outstanding consumer's use tax balance, including interest. Interest will be calculated from the date the tax was required to be paid. Any assessment issued for amounts due under consumer's use tax amnesty will be immediately certified to the Ohio Attorney General for collection and may be subject to any and all costs and additional fees assessed by the Attorney General.

_________________________________________________________________________

END NOTES


1

  Holthaus, "Omnicare Leaving Covington [Ky.], Moving to Cincinnati," Cincinnati Enquirer, 9/20/11, available online via the paper's website at http://news.cincinnati.com/apps/pbcs.dll/article?AID=/20110919/BIZ01/309190041/Omnicare-leaving-Covington-moving-Cincinnati.


2

  "Regional and State Employment and Unemployment—January 2012" (U.S. Dept. of Labor, Bureau of Labor Statistics, USDL-12-0448, 3/13/12), available online via the Bureau's website at www.bls.gov/news.release/archives/laus_03132012.htm.


3

  Id., Table C: "States with statistically significant unemployment rate changes from January 2011 to January 2012, seasonally adjusted."


4

  Location Matters: A Comparative Analysis of State Tax Costs on Business (Tax Foundation in collaboration with KPMG LLP, 2012), available online via the Foundation's website at http://taxfoundation.org/files/location%20matters.pdf.


5

  As noted herein, Ohio's tangible personal property tax has been repealed for all businesses.


6

  Ohio Rev. Code §5751.033.


7

  Ohio Rev. Code §5751.03.


8

  See "Factor Presence Nexus Standard for Business Activity Taxes" (Multistate Tax Commission, 10/17/02), adopted as part of an amendment to MTC Policy Statement 02-02, "Ensuring the Equity, Integrity and Viability of State Income Tax Systems," and available online via the MTC website at www.mtc.gov (click on "Uniformity" and "Adopted Uniformity Recommendations").


9

  Ohio Rev. Code §5751.01(I).


10

  For more on the CAT, see Sutton, Yesnowitz, Ford, Zins, and Conley, "Ohio's New Commercial Activity Tax: What It Means for Business," 15 J. Multistate Tax’n 8 (February 2006).


11

  Location Matters, supra note 4, page 51. For more on this type of tax credit generally, see Bowman and Weiss, "Credits Based on Withholding Taxes—Useful Incentives in a Challenging Business Environment," 20 J. Multistate Tax’n 18 (Nov/Dec 2010).


12

  Ohio Rev. Code §§122.17(B), (C), and (D); Ohio Admin. Code §122:7-1-05(A).


13

  Ohio Rev. Code §122.17(B).


14

  Ohio Rev. Code §122.17(D)(6); Ohio Admin. Code §122:7-1-05(D).


15

  Ohio Rev. Code §122.17(H).


16

  Ohio Rev. Code §122.171(B).


17

  Ohio Rev. Code §122.171(E)(4).


18

  Ohio Rev. Code §122.171(A)(2)(b).


19

  Ohio Rev. Code §122.171(B) (flush language following (B)(3)); Ohio Admin. Code §122:7-1-06(A).


20

  Ohio Rev. Code §§122.17(D)(2) and 122.171(B) (flush language following (B)(3)).


21

  Ohio Rev. Code §§122.17(K) and 122.171(J).


22

  Ohio Rev. Code §§5751.51 (research expenses credit) and 5751.52 (research loan payment credit).


23

  Ohio Rev. Code §§5739.02(B)(42)(j) (distribution centers) and 122.175 (computer data centers).


24

  Ohio Rev. Code §5747.81 (the "small business investment certificate tax credit"). Also see the InvestOhio website at www.development.ohio.gov/InvestOhio/InvestOhio.htm.


25

  Ohio Rev. Code §§122.86(A)(1)(a) and (b).


26

  Ohio Rev. Code §122.86(A)(1)(c).


27

  Ohio Rev. Code §122.86(A)(4).


28

  Ohio Rev. Code §122.86(E).


29

  Ohio Rev. Code §§122.86(B) and (C)(3).


30

  Ohio Rev. Code §5747.02.


31

  Ohio Rev. Code §§5731.02(A) (resident estate tax) and 5731.19(A) (nonresident estate tax).


32

  Ohio Rev. Code §5703.58(B). The bar on assessments does not apply to taxes collected by a vendor or in cases of fraud. Id., §5703.58(C).


33

  Ohio H.B. 153, 6/30/11, Session Law No. 2011-28, §757.42 (uncodified).


34

  Id., §§757.42(C) and (F).


35

  Id., §757.42(E).


36

  Id., §757.40 (uncodified).


37

  Id., §757.40(C).


38

  Id., §757.40(A)(2).


39

  More information regarding Ohio's Consumer's Use Tax Amnesty Program and General Tax Amnesty Program is available on the Ohio Department of Taxation website at http://tax.ohio.gov.
END OF DOCUMENT -
© 2012 Thomson Reuters/RIA. All rights reserved.

 

Last Updated on Tuesday, 05 June 2012 15:51
 
Ohio General Tax Amnesty - May 1 through June 15, 2012 PDF Print E-mail
Tuesday, 01 May 2012 13:23

Ohio's General Tax Amnesty program begins today and runs through June 15, 2012. The program allows deliquent taxpayers to self-report essentially all Ohio taxes (except consumer's use tax) that were due on or before May 1, 2011, including sales tax, personal income tax, commercial activity tax, pass-through entity tax and employer withholding tax. Taxes for which an audit has been commenced, or for which an assessment or bill has been issued, do not qualify. 

In exchange for self-reporting, all penalties and one-half of the interest which would otherwise be charged to the taxpayer are waived. To participate in the amnesty program, the taxpayer must complete an application, file returns for the periods being reported and make full payment of the deliquent taxes. Additionally, if the taxpayer is not already registered with the Ohio Department of Taxation, it must register through the Ohio Business Gateway or by calling the Tax Commissioner's office. After submitting the required information and payment to the Tax Commissioner, the taxpayer will be informed within 30 days of whether participation in the program has been approved. 

During the amnesty program, however, taxpayers may still resolve past Ohio tax liabilities through voluntary disclosure, which has a limited look-back period unlike the amnesty program which requires all delinquent taxes to be paid since the taxpayer began doing business in Ohio. Therefore, a taxpayer considering participation in the amnesty program should also consider a voluntary disclosure, which may be more beneficial depending upon the taxpayer's particular situation even though the taxpayer would have to pay the entire interest on the liability being reported. 

More information concerning Ohio's General Tax Amnesty program can be found in our previous post and on the Tax Commissioner's website at http://ohiotaxamnesty.gov/businesses/faq

Last Updated on Tuesday, 01 May 2012 15:48
 
Ohio: Taxpayer Permitted to Present Newly Prepared Valuation at the Board of Tax Appeals PDF Print E-mail
Thursday, 26 April 2012 13:42

By: STEVEN A. DIMENGO, DAVID W. HILKERT, AND RICHARD B. FRY III

Buckingham, Doolittle & Burroughs, LLP

Akron, Ohio

Messrs. Dimengo and Hilkert represented the taxpayer in the case that is the subject of this article. This article appears in and is reproduced with the permission of the Journal of Multistate Taxation and Incentives, Vol. 21, No. 9, January 2012. Published by Warren, Gorham & Lamont, an imprint of Thomson Reuters. Copyright (c) 2011 Thomson Reuters/WG&L. All rights reserved.

In WCI Steel, Inc. v. Testa, 129 Ohio St. 3d 256, 951 NE2d 421 (2011), the Ohio Supreme Court clarified the standard for specifying errors in an appeal from an Ohio Tax Commissioner's Final Determination to the Ohio Board of Tax Appeals (BTA). In Ohio, after the initial administrative appeal before the Tax Commissioner, the first level of appeal is to the BTA, a quasi-judicial agency. The purpose for requiring a taxpayer to specify its errors is to notify the BTA and the Commissioner of the nature and extent of the claimed objections. In determining whether the notice of appeal is sufficient to confer jurisdiction upon the BTA, the court recognized that the specified errors must be read in conjunction with the objections previously presented at the administrative level before the Tax Commissioner.

Just as important, the court held that, consistent with the BTA's authority to conduct a de novo hearing, a new property valuation not previously presented to the Tax Commissioner may be presented at the BTA, when valuation is at issue. In this case, the taxpayer, WCI Steel, Inc., challenged the Tax Commissioner's valuation of its personal property under the prescribed, and presumptively valid, "302 computation" (described below). At the BTA, WCI presented a new appraisal of the property to support the lower value previously reported to the Tax Commissioner. After being dismissed on jurisdictional grounds, the Ohio Supreme Court reversed the BTA's decision and held that the BTA must consider the new appraisal, even though it had not been presented to the Tax Commissioner during the administrative appeal.

Factual and procedural background. The steel industry suffered horribly during 2001 and 2002, resulting in significant losses realized by steelmakers, and WCI in particular. For its tax years ending 10/31/00 and 10/31/01, WCI reported and paid Ohio personal property tax on its manufacturing machinery and equipment ("M&E") pursuant to the method prescribed by the Tax Commissioner, referred to as the "302 computation," which employs industry-specific valuation tables based on composite annual allowances by which categories of business assets are depreciated from cost. Although Ohio may tax personal property based only upon its true value, the 302 computation has been determined to be a reasonable and lawful method for the Tax Commissioner to value property, depreciating the cost thereof based on the property's expected useful life.

For the 2003 tax year, WCI appraised its M&E at a much lower value, based on a study it conducted analyzing comparable sales, production, and obsolescence. Additionally, WCI retroactively adjusted the M&E's value for the 2001 and 2002 tax years based on its study, and filed refund claims reciting the updated values.

In rejecting WCI's value of the M&E for the 2001, 2002 and 2003 tax years, the Tax Commissioner issued final-assessment certificates pursuant to Ohio Rev. Code Ann. §5711.26 without specifying the grounds for rejecting WCI's valuation. WCI appealed the Tax Commissioner's determination and filed a notice of the appeal with the BTA: (1) specifying the categories of the property at issue; (2) specifying that the value previously asserted by WCI was correct; (3) specifying that the Tax Commissioner's valuation based on the 302 computation was overstated; and (4) citing the statutes and administrative rules upon which the appeal was premised.

At the evidentiary hearing before the BTA, WCI presented a new appraisal of the M&E prepared by AccuVal Associates, Inc. The new appraisal, prepared specifically for the BTA appeal, retrospectively determined the M&E's value for the tax years at issue based on a replacement cost value, adjusted for physical deterioration, functional and economic obsolescence, and a sales-comparison analysis. The Tax Commissioner objected to the introduction of the new appraisal, contending that the BTA did not have jurisdiction to consider such evidence since it had not been introduced earlier at the administrative appeal before the Tax Commissioner.

Additionally, after the evidentiary hearing had closed, the BTA raised another jurisdictional issue, sua sponte (i.e., on its own), based upon its reading of the Ohio Supreme Court's recent decision in Ohio Bell Telephone Co. v. Levin, 124 Ohio St. 3d 211, 921 NE2d 212 (2009). Ultimately, after receiving briefs on the issue, the BTA dismissed the taxpayer's appeal on jurisdictional grounds for failing to sufficiently specify any error (WCI Steel, Inc. v. Wilkins, Ohio Bd. of Tax App., No. 2005-V-1565, 5/18/10).

Applicable standard for specifying error in an appeal to the BTA. A stated error fails to confer jurisdiction on the BTA if it is so broad and vague that it may be advanced in nearly any case or fails to alert the BTA of the specific determinations of the Tax Commissioner being challenged. See, e.g., Queen City Valves, Inc. v. Peck, 161 Ohio St. 579, 120 NE2d 310 (1954); and General Motors Corp. v. Wilkins, 102 Ohio St. 3d 33, 806 NE2d 517 (2004). For instance, simply challenging the Tax Commissioner's determination as "utiliz[ing] a method that does not reasonably reflect true value" (quoting from the petition for reassessment at issue in Ohio Bell) will generally not suffice as such an objection could be raised in any property tax dispute and does not narrow the potential issues in any manner. Rather, "a notice of appeal is sufficient to give notice of a particular error when it has ‘specified the commissioner's action that it questioned, cited the statute under which it objected, and asserted the treatment that it believed the commissioner should have applied.’" (WCI Steel, quoting General Motors Corp.)

The basic purpose of the specification of error standard is still notice. Further, the notice of appeal must be read in context with the specific objections previously raised with, and evidence presented to, the Tax Commissioner. In this case, WCI undisputedly challenged the Tax Commissioner's valuation of the M&E pursuant to the 302 computation and presented its study supporting a significantly lower value. Then, in its notice of appeal, WCI again objected to the Tax Commissioner's valuation, asserted a specific value as to the M&E's true value, and identified statutes and administrative rules supporting its claim.

Clearly, both the BTA and the Tax Commissioner were on notice of WCI's objection to the Commissioner's determination and the action the Commissioner should have taken. Thus, in WCI Steel, the court found that the BTA's jurisdiction was invoked "to consider a claim for reduced value, at least to the extent of the evidence, arguments, and considerations that formed part of the tax commissioner's review of that claim."

The BTA must consider additional evidence encompassed in the taxpayer's specified error. After determining that the BTA had jurisdiction over WCI's appeal because an error had been sufficiently specified, the court then reviewed whether WCI's new appraisal could be considered. The Tax Commissioner argued that, based on the court's decision in Ohio Bell, the BTA was without jurisdiction to consider an alternative valuation method not presented during the initial administrative appeal before the Tax Commissioner. The court, however, distinguished Ohio Bell since that dispute related to a different taxing statute (utility tax, as opposed to general personal property tax) and because the taxpayer in that case presented a completely different valuation method (unit-appraisal valuation, which the court found bore a "fundamental dissimilarity" to the cost-less-depreciation approach presented during the administrative appeal before the Tax Commissioner) that fell outside the purview of the errors specified to the BTA. Ohio Bell attempted to present for the first time at the BTA a unit appraisal—an alternative method allowing all taxable property of a public utility to be valued as one unit, as opposed to valued on an item-by-item basis—which constituted an objection completely distinct from that raised in the taxpayer's notice of appeal. Accordingly, the court's holding in Ohio Bell was narrowly construed, with the "alternative valuation method" language applicable only in utility tax cases.

Conversely, WCI simply sought to present additional evidence, in the form of a newly prepared appraisal, to support the M&E's significantly lower value previously asserted to the Tax Commissioner. This new appraisal—the AccuVal appraisal—began by determining the M&E's replacement cost and then made adjustments based on the M&E's production and obsolescence, and a sales-comparison analysis. The court found this appraisal was not a completely new objection, as was the case in Ohio Bell, but rather probative evidence presented to dispute the Tax Commissioner's determined value pursuant to the 302 computation. Because the new appraisal presented "no such ‘fundamental dissimilarity’" from the valuation previously presented to the Tax Commissioner, based upon WCI's initial study of the M&E's value, the court held that the BTA did have jurisdiction to consider the new appraisal consistent with its express authority to conduct a de novo hearing and accept "additional evidence" (see Ohio Rev. Code Ann. §5717.02).

Practical effect of WCI Steel decision. First, the Ohio Supreme Court re-emphasized that the primary purpose of the specification error standard is notice, and that a taxpayer's asserted errors must be read in light of the objections and evidence previously presented to the Tax Commissioner. Recently, the Tax Commissioner has been successful in getting a large number of BTA appeals dismissed on jurisdictional grounds. WCI Steel reaffirms that a notice standard is applicable to specifying errors to the BTA and does not require taxpayers to identify additional evidence to be presented in support thereof. In raising errors before the BTA, however, taxpayers must always identify the Tax Commissioner's specific actions to which they are objecting and the action the Tax Commissioner should have taken.

Second, this decision allows a taxpayer to present a new valuation to the BTA, consistent with the taxpayer's error specified in the notice of appeal and objections previously raised with the Tax Commissioner. Although WCI Steel involved Ohio personal property tax, which has since been repealed, this holding will apply also to Ohio real property valuation appeals, which have become increasingly prevalent in light of decreasing real property values. Therefore, provided property valuation has been placed at issue, taxpayers with pending real property valuation appeals may wish to consider having a new property appraisal performed to support an asserted value.

(Ohio's "commercial activity tax" (CAT) (H.B. 66, 6/30/05; Sess. Law No. 28), codified at Ohio Rev. Code §5751.01 et seq., replaced the state's corporate franchise (income) tax and the personal property tax. See Sutton, Yesnowitz, Ford, Zins, and Conley, "Ohio's New Commercial Activity Tax: What It Means for Business," 15 J. Multistate Tax’n 8 (February 2006).) []

END OF DOCUMENT - © 2012 Thomson Reuters/RIA. All rights reserved.

Last Updated on Thursday, 26 April 2012 13:45
 
Multistate Sales/Use Tax - Benefits of Voluntary Disclosure for Construction Contractors PDF Print E-mail
Thursday, 19 April 2012 16:47

Construction contractors that discover a delinquent sales/use tax liability from failing to collect tax on taxable sales can typically minimize their liability by participating in a state voluntary disclosure program (or amnesty program). In Ohio, and in the majority of states, construction contractors are deemed to be consumers of their materials incorporated into the constructed improvements that become real property. As a result, the contractor pays sales/use tax on its building material purchases, as well as equipment and supplies, but does not collect sales tax from the customer/property owner. However, a construction contractor may be required to collect sales tax on sales related to personal property, even if the contractor paid tax on the purchased materials.

In Ohio, for example, the sale, repair or installation of business fixtures, which retain their character as personal property even after permanently attached to real property, are taxable. Likewise, certain states treat real property services as taxable – for instance, real property repair and maintenance services are subject to sales/use tax in New York and New Jersey, while real property repair, remodeling and restoration services (but not regularly scheduled maintenance) are subject to Texas tax. Washington taxes all construction, repairs and improvements to real property. In addition, for a time and materials contract, certain states treat the contractor as the retailer of building materials that are separately itemized in the contract or invoice, meaning the contractor is required to collect the applicable sales tax on the price charged for the materials.

When a contractor fails to collect required tax on taxable sales, but rather pays sales/use tax on its building material purchases, the contractor’s liability resulting from an audit may be greatly inflated. The contractor’s net liability – sales tax that should have been collected from the customer less sales tax erroneously paid on purchased materials – may seem relatively small. However, if the contractor has not filed sales tax returns, there is no statute of limitations on an assessment, which means a state may assess uncollected sales tax for prior periods now closed for a refund. This results in the contractor being whipsawed by being assessed for uncollected sales tax without receiving a credit/offset for the sales/use tax it erroneously paid on building materials used in providing the taxable service, thereby greatly increasing its liability (including interest and penalties). Although this seems like a harsh result, several states only allow an offset/credit for tax erroneously paid on building materials through the filing of a separate and timely refund claim (e.g., New Jersey and Washington, in our experience).

In these situations, it is very beneficial for the contractor to pursue a voluntary disclosure agreement to resolve its delinquent liability. Due to the limited look-back period associated with a voluntary disclosure (typically 3 to 4 years), the contractor will be ensured a credit for tax erroneously paid on its materials through a properly filed refund claim. So, this added benefit from a voluntary disclosure – ensuring credit for tax erroneously paid on purchases during the same period during which an assessment on sales can be made –eliminates the liability for the pre-disclosure period, while minimizing the liability for the look-back period subject to the disclosure. It also enables the contractor to quietly commence prospective tax compliance.

Information on Ohio’s sales tax voluntary disclosure program can be found here. However, if a delinquency is discovered for multiple states, the contractor may wish to consider participating in the MTC’s Multi-State Voluntary Disclosure Program. Further, by working with a professional, the contractor requesting a voluntary disclosure agreement may keep its anonymity through the initial steps of the voluntary disclosure process. If you need help determining whether a voluntary disclosure is appropriate for you or need a professional to initiate a voluntary disclosure request on your behalf, please do not hesitate to contact us.

 
Colorado’s Sales Tax Notice and Reporting Law found Unconstitutional PDF Print E-mail
Monday, 09 April 2012 19:48

U.S. District Court Judge Robert E. Blackburn recently ruled that Colorado’s notice and reporting law applicable to non-collecting retailers violated the Commerce Clause of the U.S. Constitution. Direct Marketing Assoc. v. Huber, Case No. 1:10-CV-01545-REB-CBS (D. Colo., March 30, 2012). The Colorado law (C.R.S. § 39-21-112(3.5)) was intended to increase sales/use tax collection by requiring retailers who did not collect Colorado sales tax to notify the customer, at the time of the transaction and annually for customers who purchased more than $500 of merchandise from the retailer during the year, that it may be obligated to self-report and pay Colorado use tax on the purchase. Additionally, the non-collecting retailer was required to provide annual reports to the Colorado Department of Revenue providing information regarding the customer and nature of purchases. This left the retailer with the choice of either collecting Colorado sales tax or complying with these burdensome notification and reporting obligations.

Although recognizing differences from the sales tax collection burden at issue in Quill v. North Dakota, the Court nonetheless found that the reporting and notification obligations were “related in kind and purpose to the burdens condemned in Quill.” Therefore, the notification and reporting obligations, burdening solely out-of-state companies, were found to violate the Commerce Clause, and the Colorado Department of Revenue was permanently enjoined from enforcing the law. This follows the Court’s preliminary injunction issued last year prohibiting enforcement of the law. 

Click here to view Justice Blackburn’s Order. 

Last Updated on Monday, 09 April 2012 19:52
 
Gift Cards Distributed as part of an Award, Loyalty or Promotional Program are not subject to Ohio Sales and Use Tax PDF Print E-mail
Saturday, 03 March 2012 00:25

Prior to the enactment of Am. Sub. H.B. 153 last year, the Ohio Department of Taxation (Department) had taken the controversial position that the full face value of a gift card distributed to customers without additional charge, as a part of a promotional program, was included in the “price” when redeemed subject to Ohio sales tax. For example, when a vendor rewarded customers spending a certain amount with a $20 gift card for use on future purchases, the Department asserted the vendor must collect sales tax on the price before applying the promotional gift card. So when the customer returns to purchase $100 of goods, for instance, and uses the $20 promotional gift and pays $80 cash, the Department would require sales tax to be collected on $100, even though the $20 gift card was effectively a vendor discount provided to valued customers.

Now, the gift card amount is specifically excluded from the definition of “price” as long as (1) the gift card is not sold by the vendor or purchased by the consumer; (2) the card is distributed pursuant to a vendor’s award, loyalty or promotional program; and (3) the vendor does not receive reimbursement or compensation from a third part for any portion of the card’s value. R.C. 5739.01(H)(1)(c)(v). Further, “gift card” is defined broadly to include both tangible and intangible documents, cards, certificate or records, meaning that digital gift cards provided electronically are also excluded from the “price” when redeemed. R.C. 5739.01(PPP).

However, an issue still exists for online deals offered by third-parties, such as Groupon or Living Social, where customers can purchase a gift card or certificate to use at a store or restaurant for a fraction of the value. For example, when a customer purchases a $50 “gift card” to use at a store or restaurant for $25, the Department would still require the merchant to collect sales tax on the full value of the gift card upon redemption - $50 in this situation – instead of the $25 that the customer actually paid. Although strong contrary arguments exist, Ohio is not the only state to take this aggressive position, as the taxability of these social coupons is gaining more attention nationwide. (See Social Confusion: How do Sales Taxes Apply to a Groupon? (Forbes) and Groupon users paying too much in sales tax says tax man (WKYC). We expect this issue to be an area of contention in future Ohio sales tax audits.

Please contact us if you need help addressing issues regarding promotional gift cards or social coupons, as planning opportunities exist to help avoid adverse sales tax collection obligations.  

Last Updated on Saturday, 03 March 2012 00:32
 
Update to Consumer Use Tax Amnesty Program Payment Plan PDF Print E-mail
Thursday, 02 February 2012 19:03

As originally proposed, the Ohio Department of Taxation’s administrative rule (O.A.C. § 5703-9-60) required taxpayers wishing to take advantage of the payment plan under the Ohio use tax amnesty program to make $1,000 minimum monthly payments and obtain two personal guarantors, or a surety bond, to secure the amount owed under the payment plan. However, in January, the Department proposed a new, more taxpayer friendly version of this rule reducing the minimum monthly payment to $500 and no longer requiring any personal guarantors. (Click here for the most current version). This updated rule is expected to become effective shortly.

We routinely work with our clients to minimize delinquent state tax liabilities by self-reporting through amnesty and voluntary disclosure programs. Please contact us if you need help in determining whether Ohio’s use tax or general amnesty program may be beneficial to you or your business.  

 
Ohio State Bar Association Sales/Use Tax Subcommittee Report for January 20, 2012 PDF Print E-mail
Tuesday, 24 January 2012 20:17
Click here to view Steve's January 20, 2012 report presented to the Taxation Section of the Ohio State Bar Association as Chair of the Sales/Use Tax Subcommittee.
Last Updated on Wednesday, 25 January 2012 15:22
 
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Ohio State Tax Attorney, Steven A. Dimengo

Steve Dimengo is recognized as one of the leading tax attorneys in Ohio, where he has been serving clients for over twenty-five years. Full Profile. Cases. Email.

 

Ohio State Tax Attorney, Richard B. Fry III

Richard Fry is an Associate focusing on business law, specifically taxation. He holds a J.D. and Masters of Taxation from the University of Akron. Full Profile. Email.

News

Steve will be speaking at the Lorman Sales and Use Tax in Ohio Seminar to be held in Akron on January 21, 2014.  He will be discussing Manufacturing Exemptions, Transfer of Business and Personal Liability for Sales tax.  Click here to see more (and register).

 

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Steven Dimengo has been named the Best Lawyers' 2012 Akron Tax Law Lawyer of the Year