Commercial Activities Tax (CAT), Sales & Use Tax, VDAs & Amnesty
The State of Ohio and its state and local tax (SALT) policies are currently generating a variety of questions from our clients as well as with others we are speaking with. Since OH is generating so much attention we thought it might be beneficial to share with our readers the subjects that are most frequently arising and provide you with some information as well as our thoughts.
These subjects include OH’s requirement that companies register, file and remit use tax, and the State’s push to go after the 380,000 business who don’t have use tax accounts. We will also take a look at the OH sales tax amnesty that forgives not only all principle and interest but all back sales taxes as well. Finally, we will take a look at the CAT and how you can have nexus without a physical presence.
OH USE TAX
The State of OH has come to the conclusion that most companies that do business in OH are either totally unaware of their responsibility to remit use tax or are unaware of the full extent to which use tax applies to their purchases. The State pronounced that audit statistics show 96% of their purchase audits result in taxpayers owing tax. In addition only a few of the more than 380,000 registered OH businesses actually have a use tax account. Therefore, OH, in an effort capture these “lost” revenues, is now going to launch a campaign to aggressively pursue virtually every one of those business already registered in addition to tracking down unregistered businesses.
It’s not all bad news though, in addition to OH giving you plenty of notice that they are coming, they are giving you options to reduce the amount of tax due and offering to waive the 15% penalty. However, you must take action. The first step is to determine what your liability is. Based on the statistics presented by the State and their plan to pursue everyone, we do not believe it is safe to assume you don’t owe anything or to do nothing.
The OH use tax is imposed on the storage, use or consumption of tangible personable property and certain taxable services in OH. Some, but not all, of the services covered are: installation, repair, employment, lawn care, exterminating, automatic data processing, snow removal, janitorial, maintenance and motor vehicle towing. If you are not registered, the statute of limitations the state can go back is 10 years, although they usually stop at 7 years. Either way, the taxes, penalties of 15% and interest can start to add up quickly. If you are not sure of what your exposure is we can help.
Once you understand what your exposure is, your best bet may be to seek a Voluntary Disclosure Agreement (VDA). A VDA is going to give you two advantages. The first is to eliminate the 15% penalty and the second is to limit the look back period to 3 years. You have at least until July 31st, 2011 to take advantage of this option. On August 1, 2011 the state plans on beginning to send out letters. Once you receive a letter you are no longer eligible for the VDA. You can however participate in the Use Tax Education Program (UTEP). UTEP is similar to a VDA, except the look back period is extended to 4 years. If you fail to respond to a letter from the state, or fail to come forward even without a letter, the state will either perform a full audit and/or assess use tax going back at least 7 years.
If you have questions or need help with use tax, VDAs or UTEP in OH or any other state please contact us at 800-940-9433 ext. 716.
OH SALES TAX AMNESTY
OH is an associate member of the Streamlined Sales Tax Project (SSTP) and as such must offer full amnesty for all past due sales taxes, penalties and interest for any company that wishes to register through the SSTP. The amnesty period must be offered until 1 year after the state becomes a full member of the SSTP. It is important to note that the amnesty is for uncollected taxes only and does not include taxes collected but not remitted. Registering through the SSTP has some significant drawbacks and there is enough significant risk that you should only proceed with extreme caution or with someone familiar with the process. One of the biggest drawbacks is that you must register with all the members of the SSTP. There are currently 20 full members and 4 associate members. So, potentially, you would reap some benefits in OH, but you’d be immediately registered in these other states where there is no amnesty offered. On the plus side though is that the other 3 associate members are also offering full amnesties. Those states are GA, TN and UT. If your liability is great enough in any one of those 4 states it may make sense to take advantage of this opportunity. Some of our clients have literally saved millions with this approach. All of this must be handled very carefully, or the tax impact could be very detrimental. There are many factors to address, but the bottom line is there are ways to minimize the damage and take advantage of the opportunities.
OH COMMERCIAL ACTIVITIES TAX (CAT)
The commercial activity tax (CAT) is an annual tax imposed on the privilege of doing business in Ohio. It is one of those taxes which we call “Neither/Nor” because it is neither a sales tax nor an income tax. Arguably, neither/nor taxes are not subject to the nexus constraints placed on states in the sales and use tax Supreme Court cases (such as Quill). Under Quill and the other sales/use tax cases, a company must have “substantial nexus” (which means something more than the “slightest physical presence”) before they can be forced to collect a state’s use tax. Neither/Nor taxes can be imposed (it is argued) on companies who don’t have any physical presence at all. The OH CAT follows this approach, using an economic nexus standard they call “Factor Presence Nexus”. Once you have over $500K in sales in OH, you have nexus for the CAT --There is no physical presence required.
The tax applies for all businesses that either:
- have at least $500,000 in taxable gross receipts in Ohio;
- have at least $50,000 in property in Ohio;
- expend at least $50,000 in payroll for work in Ohio;
- have at least 25 percent of their total property, payroll, or gross receipts in Ohio; or
- are domiciled in Ohio.
A company also has nexus if it holds a certificate of compliance with the laws of Ohio authorizing the person to do business in this state. Businesses with annual taxable receipts of less than $150,000 are generally not subject to the CAT.
According to the State, “The CAT is paid by any person with taxable gross receipts of $150,000 or more in a calendar year. The term “person” includes sole proprietors, partnerships and corporations. It also applies to service providers such as medical professionals, attorneys, and accountants, as well as persons engaged in the sale or rental of most types of real property.”
The CAT is a gross receipts tax which means it is based on the total gross receipts attributable to OH without any deductions for cost of goods sold or other expenses incurred. Examples include sales, performance of services, rentals and leases.
Per the State, "All businesses liable for the CAT must register prior to filing a return. All taxpayers are subject to the annual minimum tax of $150, which is due by May 10 of each year. Taxpayers with taxable gross receipts greater than $1 million must file quarterly returns. Quarterly returns must be filed electronically through the Ohio Business Gateway. Quarterly returns are due on the tenth day of the second month after the end of each calendar quarter (May 10, Aug. 10, Nov.10, and Feb. 10). Taxpayers with taxable gross receipts less than $1 million may file annual returns. The annual return may also be filed electronically but electronic filing is not mandatory as it is with the quarterly return. The annual return is due on or before May 10 of each year. The annual return reports the prior year’s taxable gross receipts and pays the annual minimum tax for the current (privilege) year."