Low Tax Rates and Incentives Give Ohio a Business-Friendly Landscape, Spurring Economic Recovery and Growth
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.
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END NOTES
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.
“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.
Id., Table C: “States with statistically significant unemployment rate changes from January 2011 to January 2012, seasonally adjusted.”
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.
As noted herein, Ohio’s tangible personal property tax has been repealed for all businesses.
Ohio Rev. Code §5751.033.
Ohio Rev. Code §5751.03.
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”).
Ohio Rev. Code §5751.01(I).
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).
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).
Ohio Rev. Code §§122.17(B), (C), and (D); Ohio Admin. Code §122:7-1-05(A).
Ohio Rev. Code §122.17(B).
Ohio Rev. Code §122.17(D)(6); Ohio Admin. Code §122:7-1-05(D).
Ohio Rev. Code §122.17(H).
Ohio Rev. Code §122.171(B).
Ohio Rev. Code §122.171(E)(4).
Ohio Rev. Code §122.171(A)(2)(b).
Ohio Rev. Code §122.171(B) (flush language following (B)(3)); Ohio Admin. Code §122:7-1-06(A).
Ohio Rev. Code §§122.17(D)(2) and 122.171(B) (flush language following (B)(3)).
Ohio Rev. Code §§122.17(K) and 122.171(J).
Ohio Rev. Code §§5751.51 (research expenses credit) and 5751.52 (research loan payment credit).
Ohio Rev. Code §§5739.02(B)(42)(j) (distribution centers) and 122.175 (computer data centers).
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.
Ohio Rev. Code §§122.86(A)(1)(a) and (b).
Ohio Rev. Code §122.86(A)(1)(c).
Ohio Rev. Code §122.86(A)(4).
Ohio Rev. Code §122.86(E).
Ohio Rev. Code §§122.86(B) and (C)(3).
Ohio Rev. Code §5747.02.
Ohio Rev. Code §§5731.02(A) (resident estate tax) and 5731.19(A) (nonresident estate tax).
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).
Ohio H.B. 153, 6/30/11, Session Law No. 2011-28, §757.42 (uncodified).
Id., §§757.42(C) and (F).
Id., §757.42(E).
Id., §757.40 (uncodified).
Id., §757.40(C).
Id., §757.40(A)(2).
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.
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