Ohio’s Budget Bill: Eliminating taxpayer rights, expanding nexus and another amnesty program

Ohio’s Biennial Budget Bill (Am. Sub. H.B. 49) was signed into law by Governor Kasich on June 30, 2017, undoubtedly with much effort and compromise from Ohio’s legislatures who bridged a massive budget deficit, estimated to be as much as $1 billion. Many of the headlines have focused on the Medicaid limitations –which remain up in the air as we wait for the Senate to vote on whether to override the Governor’s line-item vetoes, an action the House already approved – and increased funding to fight Ohio’s opioid epidemic. This post, however, focuses on the significant changes to Ohio’s tax laws.

Elimination of Ohio taxpayer rights

In an unexpected move, the Budget Bill eliminated Ohio taxpayer’s right to appeal a decision from the Board of Tax Appeals directly to the Ohio Supreme Court. This is an unfortunate setback to taxpayers’ rights. This provision was first included in the bill only 2 weeks before the budget deadline at the behest of the Supreme Court. It is a shame that this right enjoyed by Ohio taxpayers for over 75 years was eliminated without any public hearings or meaningful discussion with practitioners and affected state agencies. Now, a taxpayer, the Tax Commissioner or a political subdivision must appeal a Board of Tax Appeals decision to the appropriate Court of Appeals. Then, the appellant may petition the Supreme Court to take the appeal directly, with the Court having discretion whether to accept this request. This will have an adverse effect on Ohio taxpayers and the Tax Commissioner, including increasing the cost of tax appeals, requiring the Attorney General’s tax division to travel throughout Ohio to defend tax determinations, delaying tax collections as appeals are prolonged, and facilitating inconsistent interpretations of tax law amongst Ohio’s Courts of Appeal. This is certainly a misfortune for Ohio taxpayers and tax collectors alike.

Ohio Sales Tax Nexus Expanded for Remote Sellers

Out-of-state sellers with greater than $500,000 of Ohio sales will now be required by statute to collect sales tax if the seller uses in-state software (e.g., cookies) to facilitate Ohio sales, or enters into a content distribution agreement to boost access to the seller’s website for Ohio consumers. This follows the trend of several other states, pioneered by Alabama and South Dakota, to challenge the U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota which requires an in-state physical presence to require sales tax collection. While Quill Corp. remains good law– and presumably the Ohio Tax Commissioner will not enforce this unconstitutional provision – there is clearly growing efforts from the states to contest the existing physical presence requirement.

Additionally, the General Assembly continued Ohio’s sales tax holidays for 2018. This will allow consumers to purchase school supplies and instructional materials under $20 and clothes under $75 per item tax free for three days in August. The 2017 sales tax holiday will take place August 4th through the 6th.

A new exemption was enacted for digital jukebox purchases. Now, purchases of digital multimedia, or songs, will be exempt from tax when played from a single-play music machine, or jukebox.

Simplifying Ohio Municipal Tax

Ohio has one of the most, if not the most, cumbersome and inefficient municipal income tax system in the nation. Businesses often spend more on complying with the many different local jurisdictions’ tax laws than their actual tax liability. Beginning in 2018, business taxpayers may elect centralized filing with the Ohio Department of Taxation. If the taxpayer does opt for centralized filing, the Department is also responsible for auditing the combined net profit tax returns. The Department will collect tax on behalf of the municipalities and pay out the tax monthly, retaining a 0.5% fee for administering the centralized filing system – much less of a cost than municipalities incur to administer the tax themselves. The Budget Bill also eliminated the municipal tax throwback rule beginning in 2018.

Both of these changes, contained in Chapter 718 of the Ohio Revised Code, were much needed and should be welcomed by Ohio businesses.


Ohio Tax Amnesty

For the second time under the Kasich Administration, Ohio will offer taxpayers the opportunity to resolve unpaid tax liabilities through an amnesty program. The program will run from January 1 to February 15, 2018. Taxpayers who participate can resolve delinquent state taxes (as well as certain local taxes) due as of May 1, 2017 by paying the tax plus half interest, while having all penalties and the remaining interest waived. Taxpayers considering this program should also check whether they qualify for Ohio’s voluntary disclosure programs which may offer more favorable terms due to the limited lookback period.

Ohio Income Tax – Small business tax breaks survive, for now.

The Kasich Administration has prioritized lowering taxes on small business owners who now enjoy a $250,000 deduction and flat 3% income tax rate on business income. These benefits came under fire during this budget cycle as Democrats pushed to eliminate these tax breaks. Proposed as a way to boost Ohio’s job growth and economy, many have questioned their effectiveness. Lucky for small business owners, these tax breaks survived this Budget Bill, although the General Assembly created reporting requirements which will allow the legislature to gauge the effectiveness of the tax incentives for small businesses.

Additionally, the two bottom individual income tax brackets were eliminated, meaning individuals earning less than $10,500 will not owe any Ohio tax. The low income tax credit was also eliminated since these taxpayers will no longer be paying taxes.

More to come…

The Budget Bill included several other important tax law changes that we will cover in subsequent posts (and some not so important changes, but who doesn’t want to try boozy ice cream?). In the meantime, do not hesitate to contact us if you have questions regarding the Budget Bill or any other Ohio tax issues.