Welcome to the Ohio State Tax Blog presented by Buckingham, Doolittle & Burroughs, LLP.  Our focus is on current developments in Ohio’s various state and local taxes, including Ohio sales and use tax, commercial activity tax (CAT), personal income tax and real property tax.  As court decisions are rendered, new legislation is enacted and the Ohio Department of Taxation announces new rules and policies, we will apprise you of those that are particularly significant and discuss their implications.  In addition, in light of the current aggressive multistate taxation climate, with United States Constitutional challenges and the Streamline Sales and Use Tax initiative, we will also update you on national developments that may have a material impact on Ohio taxpayers. 

The Ohio State Tax Blog is maintained by one of Ohio’s most recognized and respected state and local tax attorneys, Steven A. Dimengo, and his associate, Richard B. Fry III.  Over the past 23 years, Steve has been actively involved in numerous Ohio state tax disputes.  Click here for a list of Steve's most notable decisions. Rich is a graduate from The University of Akron with a Juris Doctor and Masters of Taxation, also specializing in state and local taxation. Steve and Rich’s practice involves three core areas:

1) Ohio sales and use tax- We handle all Ohio sales and use tax matters, from audits through appeals, as well as counseling businesses to ensure they are taking advantage of all exemptions to which they are entitled.  In light of Ohio’s struggling economy and the Department of Taxation’s recent addition of many new auditors, we anticipate enforcement to become even more aggressive in this area.  Steve has chaired the Ohio State Bar Association Sales/Use Tax Subcommittee for the last 15 years.  In this capacity, he has influenced legislation, Ohio Administrative Code Rules and Tax Commissioner policy.

2) Ohio’s other taxes- The fairly new Ohio CAT and R.C. 5747.212, which imposes Ohio’s personal income tax on a nonresident’s disposition of an interest in a pass-through entity with an Ohio presence, are sure to bring challenges in the coming years.  We have experience in handling disputes with respect to these taxes too, as well as planning to avoid them.

3) Multistate tax planning- In today’s cyber business environment, states are becoming more proactive in imposing tax obligations upon remote vendors, including those with sporadic physical presence or mere economic presence in the state.  We work with businesses to analyze their operations and implement a plan to isolate and minimize their overall multistate tax obligations.

Due to the overlap between state/local taxes and federal income tax rules, we also have a solid federal income tax practice and work closely with other attorneys at Buckingham who specialize almost exclusively with federal tax proceedings and disputes.

We look forward to bringing you updates and commentary through the Ohio State Tax Blog!

Steve & Rich

The Ohio Grocers Association sought a declaratory judgment that the Commercial Activity Tax (CAT) violated Ohio's constitutional prohibition against excise taxes levied or collected upon the sale or purchase of food for off-site consumption.  Commencing in 2005, Ohio's tax landscape changed substantially by phasing out the personal property and corporate franchise taxes, while phasing in the CAT.  Essentially, the CAT replaced these taxes by imposing a low rate/large base tax upon all businesses with Ohio gross receipts (with no tax being imposed upon businesses with less than $150,000 of gross receipts, and a flat $150 tax imposed on businesses with between $150,000 and $1 million of gross receipts).

The "measuring stick" for the CAT, as the Court phrased, includes as a factor, food sales, even though the Ohio Constitution prohibits an excise tax on the sale of food for off-premises consumption.  However, the Court dismissed the contention that because certain factors are used to measure one's tax base, that the tax is imposed upon sales of the subjects of those factors.  Furthermore, as a tax on the privilege of doing business, the Court respected the legislature’s choice to value the privilege, in part, by sales of food.  Giving it substantial deference, the Court concluded that the CAT was a permissible tax on the privilege of doing business, and that using food sales as one factor in valuing this privilege did not render the tax unconstitutional.

As evidenced by numerous associations urging the Court to uphold the CAT as applied to food sellers, this decision is good news for Ohio residents and businesses (other than food sellers).  If held unconstitutional, millions of dollars of tax revenue collected since the CAT’s inception would be refunded.  Additionally, the State, in a time where its budget is already tight, would need to find ways to fill the large gap of expected revenue from food sellers.  This would likely have resulted in additional burdens upon Ohio residents and other business through tax rate increases and/or re-instituting the personal property or corporate franchise taxes.  Instead, the burden imposed by the CAT, as intended, will continue to be borne by all businesses having Ohio gross receipts.

Otherwise taxable “employment services” are exempt if the personnel are assigned to the purchaser on a permanent basis under a one-year contract. This does not mean the individuals must work for the purchaser forever (or even continuously during the one-year term), but only that each leased employee is intended to be used for an indefinite period of time (i.e., no contemplated ending date).  Thus, the employee cannot be provided as a substitute for an individual on leave or for seasonal or project work.  This issue is particularly relevant in the construction industry since the Ohio Tax Commissioner assumes all construction work is seasonal, precluding permanent assignment of such employees.  However, there clearly is permanent assignment in the construction industry when the leased personnel are intended to move from project to project. 

In order to qualify for this exception, a written contract must reflects the necessary “permanent assignment” language.  The contract must have a one-year term, preferably with annual renewals.  However, the authorities have respected contracts as being one-year contracts even though they are terminable upon 30 days’ notice (and possibly even if they do not last for a year as long as the termination was not contemplated from the beginning of the arrangement). 

Additionally, performance under such contracts must be consistent with permanent assignment.  Manifestations of such an intent are typically illustrated with a graph of the total number of leased employees, reflecting a constant or increasing level of employment of leased employees during the relevant time period.  Each employee’s employment would also be charted to illustrate consistent assignment (with an allowance for natural turnover). 

Finally, if any leased employees are contemplated to be provided on a non-permanent basis, a separate contract can be used for their retention so as not to taint the exempt, permanently assigned employees.  The Ohio Tax Commissioner has taken the position that non-permanently assigned employees provided under a “permanent assignment” contract makes the entire contract taxable.  Although this position has been met with opposition, the issue has not been addressed by an Ohio court yet. Nonetheless, one can simply avoid the issue by having two separate contracts.