Ohio Budget Bill for FY 2016-2017 Enacted: Significant expansion of sales/use tax nexus, including click-through nexus; further personal income tax reductions, including for small business owners.
Ohio’s biennium budget bill for FY 2016-2017 provides for expanded sales/use tax nexus and further income tax reductions. (Am. Sub. H.B. 64). Gov. Kasich made extensive use of his line-item veto ahead of the signing, striking 44 provisions from the bill. Several vetoes removed targeted benefits the legislature included for large businesses or industries, such as power plants, big box retailers, and nursing homes. Highlights of the budget bill are discussed below.
Sales / Use Tax: Significant nexus expansion, including adopting click-through and affiliate nexus presumptions.
Ohio joins several states who have enacted “click-through” nexus mandating sales tax collection for certain online, remote vendors. Click-through nexus presumes that a seller has substantial nexus with Ohio if it enters into agreements with Ohio residents to refer sales, including via web link. However, Ohio’s law has two interesting distinctions from those enacted by other states: (1) it specifically applies to sales referred by telemarketers, which may put Ohio telemarketers at a disadvantage when seeking business from retailers who are not already collecting Ohio sales tax; and (2) the applicable threshold for raising the presumption is significantly lower than other states – Ohio’s nexus presumption is raised if the referrals from Ohio residents results in at least $10,000 of sales, whereas other states require $10,000 in commissions to be paid to the in-state residents referring sales to raise the presumption. Generally, click-through nexus has been interpreted to exclude advertisements or other agreements where consideration is not based upon completed sales. Gov. Kasich line-item vetoed click-through nexus from the previous budget bill two years ago.
Nexus is also presumed to exist if an out-of-state retailer uses an Ohio company (other than a common carrier) to: (1) receive orders; (2) advertise, promote, or facilitate sales; (3) delver, install, assemble, or perform maintenance for the retailer’s customers; (4) facilitate delivery of products sold; or (5) sell the same product lines or use the same trademarks, service marks, or trade names as the out-of-state retailer. These nexus-creating activities are similar to those provided for in affiliate nexus statutes enacted in other states. But Ohio’s law is not limited to such activities being carried on through common-owned affiliates of the out-of-state retailer.
Instead, out-of-state retailers are now presumed to have nexus for Ohio sales tax collection purposes if any commonly-owned business has substantial nexus with Ohio, regardless of whether the affiliate’s operations are related in any manner or otherwise contribute to the retailer’s ability to establish or maintain an Ohio market.
Lastly, an out-of-state seller must register to collect Ohio use tax before it provides property or services to any Ohio state agency.
These provisions could provide for significant expansion of Ohio sales / use tax nexus, but their effect ultimately depends upon the Ohio Tax Commissioner’s interpretation and enforcement thereof. We will continue to monitor any guidance published by the Tax Commissioner.
Despite significant nexus expansion, thankfully Gov. Kasich’s original proposal to expand sales tax to a bevy of new, poorly-defined services was not adopted.
Individual Income Tax: Further rate reductions.
The budget cuts personal income tax rates for all taxpayers by an additional 6.3%. Beginning with the 2015 tax year, the individual income tax rates will top out at 4.997% for the highest income bracket. Further, the legislation continues the current small business deduction allowing owners to deduct 75% of their business income up $250,000 in 2015. Starting with the 2016 tax year, small business owners will entirely exclude their first $250,000 of business income, with business income in excess thereof being taxed at a flat 3% rate.
These tax reductions for small-business owners are extremely broad and apply to any income reported on the individual’s return (i.e., from a pass-through entity or sole proprietorship) “arising from transactions, activities, and sources in the regular course of a trade or business.” R.C. 5747.01(B) (business income definition). This could include income from rental real estate or from licensing intellectual property – if such activities are an integral part of your business. Additionally, since business income includes the gain from a complete or partial liquidation of a business, including that resulting from goodwill, Ohio small-business owners will be entitled to the reduced 3% rate on the sale of their business.
Cleveland.com raised an issue that certain small businesses or self-employed taxpayers will actually pay more in taxes for 2015. This is true for a small minority of business owners earning approximately $270,000 of business income resulting in a tax increase of less than $200. The vast majority of small-business owners, however, will experience a tax cut.
Commercial Activity Tax: Can lobbying trump the Constitution?
An exclusion from taxable gross receipts was enacted for receipts received from certain qualified integrated supply chain vendors engaged in manufacturing personal care, health, beauty and aromatic products. However, the exclusion is significantly limited and appears applicable to a single operation – The New Albany International Beauty Campus operated by Bocchi Laboratories in the Columbus region. The exclusion is so specific that it only applies to 400-700 acre sites located in a city with population between 7,500 and 8,000 and a county with population between 165,000 – 170,000. Further, uncodified Section 803.310 of the bill provides that the exclusion applies retroactively to July 1, 2011, meaning these select taxpayers operating at this one site will be able to apply for refunds for tax paid in prior years.
This exclusion reeks of an unconstitutional, discriminatory tax incentive.
Cigarette tax increased
The budget bill increases the excise tax on cigarettes from $1.25 to $1.60 per pack.
Local hotel / tourism tax increases authorized
Certain counties are authorized to increase their hotel / lodging taxes. Additionally, municipalities may levy a tax on businesses making sales in a tourism development district, whether wholesale or resale. The tax is paid by the person making the sales and is imposed at a rate of 0.5%, 1.5%, or 2% of the person’s gross receipts derived from making the sales in the tourism development district.
Tax amnesty vetoed
The budget bill originally included a tax amnesty program to be conducted from January 1, 2016 through February 16, 2016. Gov. Kasich vetoed this program due to the recent 2012 amnesty program explaining that “[w]aiting longer between amnesty programs will encourage greater tax compliance … and generate higher revenues when programs are held.”