Rather than imposing an income tax on taxpayers’ business activities in Ohio, such as a corporate income tax, the State of Ohio levies the Commercial Activity Tax (CAT). The Ohio Commercial Activity Tax is an annual tax imposed on taxable gross receipts from business activities conducted in Ohio. Below are the top ten things you need to know when faced with a potential Ohio CAT issue.
- Who is a Taxpayer for Ohio CAT?
A taxpayer for Ohio CAT purposes includes all types of business entities, such as partnerships, joint ventures, limited liability companies, trusts, and corporations, as well as individuals/sole proprietors. Notably, however, there are some specific exclusions from CAT related to certain types of business entities, such as financial institutions, insurance companies, and some public utilities. An individual or entity does not need to be located in Ohio to be subject to CAT; whether an out-of-state individual or entity is subject to CAT depends on the amount and type of business contacts with the state, further discussed in the Nexus section. A person or entity who has sufficient contacts (nexus) with the state, and who generated more than $150,000 of taxable gross receipts for the calendar year will be a taxpayer for CAT purposes.
- What Constitutes Nexus for Ohio CAT?
An out-of-state taxpayer having more than $150,000 in Ohio taxable gross receipts during the calendar year is required to register for, file and pay CAT if the taxpayer has bright-line presence in Ohio. A taxpayer has bright-line presence if at any point during the calendar year any of the following are true:
- The taxpayer owns at least $50,000 of property in Ohio; or
- The taxpayer has payroll of at least $50,000 in Ohio; or
- The taxpayer has at least $500,000 of taxable gross receipts sitused to Ohio; or
- 25% of the taxpayer’s total property, payroll, or gross receipts is within Ohio; or
- The taxpayer is domiciled in Ohio.
- What are Taxable Gross Receipts for Ohio CAT?
Gross receipts potentially subject to CAT are defined broadly to include most types of revenues from sale of property or performance of services. Some types of gross receipts are excluded from CAT, such as: interest (other than from installment sales), dividends, capital gains, wages reported on a Form W-2, or gifts (this is not an all-encompassing list). If gross receipts are of a type that is potentially subject to CAT, the taxpayer must evaluate whether they are properly sitused to Ohio and therefore constitute “taxable gross receipts” that will be subject to CAT. Generally, gross receipts from sale of property are only considered taxable gross receipts subject to CAT if the property is delivered within Ohio. Conversely, gross receipts from the sale of services are generally sitused to Ohio in the proportion that the purchaser’s benefit in Ohio bears to the purchaser’s benefit everywhere. In making this determination, the physical location where the purchaser ultimately uses or benefits from the service is most important. Sourcing (situsing) services can be a complex, fact-intensive analysis, so it is important to consult an experienced Ohio tax attorney or Ohio tax consultant for a proper review.
- How do I Register to File and Pay Ohio CAT?
A taxpayer who has more than $150,000 of taxable gross receipts (gross receipts sitused to Ohio, as explained above) and is domiciled in Ohio or otherwise has bright-line nexus for the calendar year must register for CAT with the Ohio Department of Taxation. The taxpayer should register for CAT electronically through the Ohio Business Gateway. All taxpayers must file and pay CAT electronically through Ohio Business Gateway.
- When do I File and Pay Ohio CAT?
Ohio CAT recognizes two different types of filers: Annual CAT filers, and Quarterly CAT filers.
Annual CAT Taxpayers
Annual CAT filers are those with taxable gross receipts between $150,000 and $1 million in a calendar year. Annual CAT filers must file the annual return and pay the Annual Minimum Tax (AMT) by May 10th of the current tax year. The annual return reports taxable gross receipts for the taxpayer’s activity during the previous year and prepays the AMT for the current calendar year.
Quarterly CAT Taxpayers
Taxpayers with over $1 million of taxable gross receipts must file and pay returns quarterly, these are the Quarterly CAT filers. Quarterly CAT filers must pay AMT for their taxable gross receipts up to $1 million. Additionally, Quarterly CAT filers must pay tax at the current CAT rate on taxable gross receipts above $1 million. Quarterly CAT filers must file the first quarter return and pay the AMT by May 10th of the current year. Quarterly CAT filers then file the remaining returns and pay tax by August 10th, November 10th, and February 10th.
- What is a Combined Taxpayer Group, or Consolidated Elected Taxpayer Group for Ohio CAT?
Combined Taxpayer Group
A group of taxpayers having the required Ohio nexus/contacts, which are more than 50% commonly owned or controlled and do not elect to be consolidated, must file as a combined taxpayer group. There are a couple important points with regard to a combined taxpayer:
- Only members that have the required contacts/nexus with Ohio must be included in the combined CAT group; and
- A combined taxpayer group cannot eliminate/exclude receipts from intercompany transactions from taxable gross receipts for CAT.
Consolidated Elected Taxpayer Group
A group of commonly owned taxpayers may elect to be a consolidated elected CAT group under either an 80% or 50% consolidation test. Under the 80% test, the group elects to include all members of the group that have at least 80% of the value of their ownership interest owned by common owners during all or any portion of the tax period. Alternatively, for the 50% test, the group elects to include all members of the group that have at least 50% of the value of their ownership interest owned by common owners during all or any portion of the tax period. Additionally, the group can elect to include all entities that are not incorporated or formed under the laws of a State or of the United States and that meet the chosen ownership test (80% or 50%) as part of the consolidated CAT group.
A major benefit of the consolidated election for CAT is that the taxpayer may eliminate/exclude receipts between group members from taxable gross receipts. Conversely, when evaluating whether to make the consolidated election for CAT, a taxpayer will want to consider that:
- The group must agree to file as a consolidated elected group for at least the next two years (eight calendar quarters) following the election, so long as two or more of the members meet the requirements; and
- The election requires entities meeting the chosen 50% or 80% test to be included in the consolidated group even if those entities do not otherwise have enough Ohio contacts/nexus to be otherwise/independently subject to CAT.
It is important to note that some entities in a business organization’s overall structure may not be included in that organization’s 80% consolidated elected CAT group (for instance, because they don’t meet the 80% common ownership test). In that instance, those entities may (assuming they meet the taxable gross receipts threshold and have Ohio nexus) nonetheless be required to:
- File as separate CAT taxpayers; or
- File as a combined CAT group (if they are over 50% commonly owned or controlled).
- What is the Tax Rate for Ohio CAT?
For tax periods beginning after March 31, 2009, the Ohio CAT rate is 0.26%.
- How Much is the Annual Minimum Tax for Ohio CAT?
For tax periods beginning on January 1, 2014 and after, the AMT is a tiered fee corresponding to a taxpayer’s overall commercial activity. To determine the AMT, a taxpayer looks to its taxable gross receipts for the prior year, using the below table:
|Taxable Gross Receipts||Annual Minimum Tax||CAT|
|≤ $1 million||$150||No Additional Tax|
|> $1 million, ≤ $2 million||$800||0.26% x (TGR – $1 million)|
|> $2 million, ≤ $4 million||$2,100||0.26% x (TGR – $1 million)|
|> $4 million||$2,600||0.26% x (TGR – $1 million)
- What is the Annual $1 Million Exclusion?
Each taxpayer may exclude the first $1 million of taxable gross receipts for the calendar year (this began in calendar year 2013). Quarterly CAT filers must apply the full $1 million exclusion to the first calendar quarter return for that calendar year, and may carry forward and apply any unused portion to subsequent quarters in that year. In the event a taxpayer becomes subject to and registers for CAT after the first quarter return is due, the taxpayer should claim all taxable gross receipts for the calendar year-to-date, as well as the $1 million exclusion, on the second quarter return. Annual CAT filers claim the $1 million exclusion on the annual return.
- How Do I Resolve Prior Ohio CAT Filing and Payment Noncompliance?
The Ohio Department of Taxation offers a Voluntary Disclosure Program to resolve prior CAT noncompliance. By voluntarily disclosing liabilities and entering a Voluntary Disclosure Agreement (VDA) with the Department, a taxpayer may avoid failure to file and failure to pay penalties related to CAT. A taxpayer is eligible for the CAT Voluntary Disclosure Program if the taxpayer requests to enter a VDA prior to any contact from the Department through audit, compliance, or criminal investigation personnel.
As always, in considering your potential Ohio CAT reporting and payment obligations, as well as any planning, it is best to consult an experienced Ohio tax attorney or Ohio tax consultant. An Ohio tax lawyer or Ohio tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Ohio CAT compliance and planning needs.