Ohio tax planning

What is the Ohio Financial Institutions Tax (FIT)? The Top 10 Things You Need to Know.

Nick Eusanio, Esq., LL.M. Leave a comment

Effective January 1, 2014 forward, all for profit financial institutions doing business in Ohio or otherwise having nexus with Ohio under the U.S. Constitution must report and pay the Ohio Financial Institutions Tax. The Ohio FIT is a tax on the privilege of doing business, similar to the Ohio Commercial Activity Tax (CAT), but is focused directly on financial institutions. Below are the top ten things you should know when considering a potential Ohio FIT issue.

  1. How Did the Ohio FIT Originate and Did the Ohio FIT Change Any Other Ohio Tax?

Amended Substitute House Bill 510 (the Bill) made the Ohio FIT effective January 1, 2014. Interestingly, the Bill repealed both the former Ohio Dealer in Intangibles Tax (DIT) and Corporation Franchise Tax (CFT) for tax years beginning January 1, 2014 and continuing. Now, taxpayers that qualify as dealers in intangibles (stockbrokers, mortgage lenders, securities dealers, finance and loan companies) are subject to the Ohio FIT, provided they fall under the FIT’s definition of a taxpayer. If such a taxpayer does not meet the FIT definition, that taxpayer is likely subject to the Ohio CAT.

  1. Who is Subject to the Ohio FIT?

There are three types of taxpayers that are generally subject to the Ohio FIT:

  • Bank Organizations;
  • Holding Companies of Bank Organizations; and
  • Nonbank Financial Organizations.

Under the FIT, a Bank Organization includes: (i) a national bank organized and operating under the National Bank Act; (ii) a federal savings association or federal savings bank chartered under 12 U.S.C. 1464; (iii) a bank, banking association, trust company, savings and loan association, savings bank, or other banking institution organized or incorporated under the laws of the U.S., any state, or a foreign country; (iv) any corporation organized and operating under 12 U.S.C. 611 (and following provisions); (v) any agency or branch of a foreign bank, as defined in 12 U.S.C. 3101; or (vi) an entity licensed as a small business investment company under the Small Business Investment Act of 1958.

The Ohio FIT defines Nonbank Financial Organizations as persons or entities, other than bank organizations or holding companies, which are engaged in business primarily as Small Dollar Lenders. A Small Dollar Lender is a person or entity that: (i) primarily loans to individuals; (ii) loans amounts of $5,000 or less; (iii) issues loans with terms of 12 months or less; and (iv) is not a Bank Organization, credit union, or captive finance company.

  1. Who is Not Subject to the Ohio FIT?

The following is a list of taxpayers that are generally not subject to Ohio FIT:

  • Insurance companies;
  • Captive finance companies;
  • Credit unions;
  • Institutions organized exclusively for charitable purposes;
  • Diversified savings and loan holding companies;
  • Grandfathered unitary savings and loan holding companies, any entity that was a grandfathered unitary savings and loan company on January 1, 2012, or any entity that is not a Bank Organization or owned by a Bank Organization and that is owned directly or indirectly by an entity that was a grandfathered unitary savings and loan holding company on January 1, 2012;
  • Institutions organized under the Federal Farm Loan Act or a successor of such an institution;
  • Companies chartered under the Farm Credit Act of 1933 or a successor of such a company;
  • Associations formed pursuant to 12 U.S.C. 2279c-1.
  1. What is the Tax Base for the Ohio FIT?

The Ohio FIT is imposed upon a taxpayer’s Ohio Equity Capital. Ohio Equity Capital is the taxpayer’s Total Equity Capital in proportion to the taxpayer’s gross receipts sitused in Ohio. A taxpayer’s Total Equity Capital is the sum of the following items for the taxable year: (i) common stock at par value; (ii) perpetual preferred stock and related surplus; (iii) other surplus not related to perpetual preferred stock; (iv) retained earnings; (v) accumulated other comprehensive income; (vi) treasury stock; (vii) unearned employee stock ownership plan shares; (viii) other equity components.

Biz&TaxHax Tip: For Ohio FIT purposes, a taxpayer may obtain its Total Equity Capital from the FR Y-9 (a financial statement that a financial institution holding company must file with the Federal Reserve Board) or from its Call Report (a consolidated report of condition and income that a bank organization must file with its federal regulatory agency). Alternatively, if the taxpayer does not have a FR Y-9 or Call Report, it must calculate its Total Equity Capital in accordance with GAAP.

Once a taxpayer has identified or calculated its Total Equity Capital for the taxable year, it multiplies that amount by its Ohio FIT Apportionment Factor for the taxable year to calculate Ohio Equity Capital. The Apportionment Factor for Ohio FIT is equal to the ratio of Ohio Gross Receipts for the tax year to Gross Receipts Everywhere for the tax year.

  1. How Does the Ohio FIT Situs/Source Gross Receipts?

The Ohio FIT situses/sources Gross Receipts based on the:

  • Location of benefit to the customer; or
  • Location of the taxpayer’s regular place of business.

So, Gross Receipts become Ohio Gross Receipts for purposes of Ohio FIT if either: (i) the taxpayer’s customer receives the benefit of the taxpayer’s services or funds provided in Ohio; or (ii) the taxpayer’s regular place of business is located in Ohio. The taxpayer’s Ohio Gross Receipts identified under this situsing/sourcing method are used as the numerator for the Apportionment Factor.

  1. What is the Tax Rate for the Ohio FIT?

Ohio FIT is imposed at the following rates, by Ohio Equity Capital:

  • First $200 million of Ohio Equity Capital: 0.008 (0.8%);
  • Ohio Equity Capital > $200 million, but < $1.3 billion: 0.004 (0.4%);
  • Ohio Equity Capital > $1.3 billion: 0.0025 (0.25%).
  1. Is there a Minimum Tax Amount for Ohio FIT?

Yes. Ohio FIT taxpayers must pay a minimum tax of $1,000.

  1. How Does an Ohio FIT Taxpayer File a Return and Pay the Tax?

Before filing any Annual Report or Estimated FIT Report, a taxpayer must register as a FIT taxpayer by:

  • Registering under the reporting person/entity and listing all of the consolidated members; and
  • If two or more entities are consolidated for purposes of filing a FR Y-9 or Call Report, the financial institution for FIT consists of all entities included in the FRY-9 or Call Report.

Taxpayers are required to file any Ohio FIT Annual Report or Estimated FIT Report and make any payment electronically through the Ohio Business Gateway (OBG).

  1. When are Ohio FIT Returns and Payments Due?

The Ohio FIT Annual Report is due October 15th of the tax year, with no available extension. The Tax Year is the Annual Report year in and for which the tax is paid. The Taxable Year is the calendar year preceding the year in which the Annual Report is filed and the tax paid. The taxpayer’s tax base (Total Equity Capital, Ohio Equity Capital, Apportionment Factor) is calculated from the activity/capital existing during the Taxable Year.

An Ohio FIT taxpayer must make estimated quarterly payments on the dates listed below, and as follows:

  • January 31st – 1/3 of the tax or minimum tax of $1,000, whichever is greater;
  • March 31st – 1/2 of the remaining balance of tax due;
  • May 31st – second 1/2 of the remaining balance of tax due.
  1. How Can a Taxpayer Obtain a Refund for Overpayment of Ohio FIT?

To claim a refund for Ohio FIT, file Form FIT REF Application for Financial Institutions Tax Refund.

Biz&TaxHax Tip: A taxpayer does not need to file Form FIT REF if the original Annual Report reflects the overpayment of tax. But, if a taxpayer must file an Amended Annual Report and it shows a refund due, the taxpayer must file Form FIT REF also to claim the refund.

Based on the above, there are a couple other important considerations relating to Ohio FIT: (1) Ohio FIT has a broader nexus standard (it looks a lot like economic nexus) than the predecessor Corporation Franchise Tax, meaning it will likely apply to more taxpayers; and (2) some entities (such as small dollar lenders or community banks) may be mistakenly paying Ohio CAT instead of Ohio FIT.

As always, in considering your potential Ohio FIT 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 FIT compliance and planning needs.

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What is the Ohio Commercial Activity Tax (CAT)? The Top 10 Things You Need to Know.

Nick Eusanio, Esq., LL.M. 1 Comment

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.

  1. 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.

  1. 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:

  1. The taxpayer owns at least $50,000 of property in Ohio; or
  2. The taxpayer has payroll of at least $50,000 in Ohio; or
  3. The taxpayer has at least $500,000 of taxable gross receipts sitused to Ohio; or
  4. 25% of the taxpayer’s total property, payroll, or gross receipts is within Ohio; or
  5. The taxpayer is domiciled in Ohio. 
  1. 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. 

  1. 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.

  1. 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. 

  1. 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:

  1. Only members that have the required contacts/nexus with Ohio must be included in the combined CAT group; and
  2. 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:

  1. 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
  2. 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.

Biz&TaxHax Tip

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:

  1. File as separate CAT taxpayers; or
  2. File as a combined CAT group (if they are over 50% commonly owned or controlled). 
  1. What is the Tax Rate for Ohio CAT?

For tax periods beginning after March 31, 2009, the Ohio CAT rate is 0.26%.

  1. 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)

 
  1. 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.

  1. 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.