Companies Doing Business in Ohio Face Major Decisions Regarding New Commercial Activity Tax

Bright-line Nexus Standard, “Combined” or “Consolidated” Election, Can Have Major Impact on State Tax Liability.

Companies doing business in Ohio should carefully consider how they will approach complying with the state’s new Commercial Activity Tax (CAT). The Ohio Legislature created the CAT as part of a major tax reform package in 2005.

The CAT is a gross receipts tax levied on companies doing business in the state. Pursuant to the Ohio Revenue Code, a company has thirty days to register with the tax commissioner after it has more than one hundred fifty thousand dollars in taxable gross receipts in a calendar year.

According to Nick Longo, a Principal at Ryan & Company, the complex nature of the CAT requires companies to thoroughly analyze their financial situation and potential tax liability.

“Every company first must determine whether it is subject to the CAT as measured by a ‘bright-line’ nexus test,” said Longo. “The bright-line test of tax liability is based on the percentage of payroll, sales, and property a company has within Ohio. It differs from the Quill nexus standard used to determine sales tax liability in interstate commerce.”

The State of Ohio created the CAT as part of a major tax overhaul that will eliminate the franchise tax and personal property tax levied on most companies doing business in the state. The state is phasing in the CAT over five years, until it reaches the maximum rate of 0.26 percent. Some companies filed their first CAT returns in February of this year.

Certain types of companies will face particularly complicated decisions regarding the CAT.

“Services companies that have clients with operations both in Ohio and other states will have to determine whether the services they are providing benefit the client in Ohio or elsewhere,” said Longo. “This will affect their Ohio tax liability.”

Companies with multiple operations in Ohio such as subsidiaries, partnerships, and affiliated companies will have to decide whether those operations are “consolidated” or “combined” with respect to the CAT.

Under the consolidated standard, intercompany transactions are eliminated from the CAT. However, every company within a corporate group is subject to the tax, regardless of whether it meets the bright-line test.

Using the combined standard, intercompany transactions between groups are taxable. However, other groups within the company that are outside of Ohio may not be subject to the tax based on the bright-line standard.

“A key factor in deciding how to file is whether your company has a lot of intercompany transactions within Ohio. If so, and most of the companies in your group meet the bright-line test, then consolidated is probably the better way to go,” said Longo. “On the other hand, if you have few or no intercompany transactions in Ohio and you believe that certain of your entities do not meet the bright-line test, then filing combined is probably preferable. You need to analyze the situation carefully to determine what’s best for you.”