Ohio Sales & Use Tax – Are you certain your business is complying with its Direct Pay Permit? Stiff penalties and personal liability exist for failures to observe direct pay requirements.

The Department of Taxation recently updated its direct pay authority program to help ensure compliance amongst permit holders. Information Release ST 2003-01 (Updated March 2016). As part of the program, direct pay permit agreements will be reviewed and updated periodically, typically at least every four years.

Direct pay permit holders are regularly audited and generally are easy targets for significant liabilities. We have represented direct payment permit holders during audits and appeals who experienced substantial misfortunes due to the unawareness of their requirements or innocent mistakes as to nontaxability. For example, the Tax Commissioner does not give the direct pay permit holder credit for tax paid directly to vendors, since it agreed not to do so under the direct pay agreement. This requires the taxpayer to file a protective refund claim. Otherwise, if the taxpayer waits and the statute of limitations expires on its refund rights, the direct pay permit holder may be assessed tax on purchases which it already paid tax. Additionally, many direct pay permit holders operate under agreements that are decades old and do not reflect their current business operations. This makes it very difficult to show compliance during an audit.

Many employees who work for direct pay permit holders also don’t realize they have significant personal exposure if their company does not comply with the direct pay permit agreement. R.C. 5739.33. The employee may be held personally liable even if he/she is not an owner or officer, but merely has responsibility for filing returns or making payments. This can result in horror stories for these employees because responsible parties are unable to challenge the merits of whether the tax is actually owed – the individual is limited to challenging their status as a responsible party. So, if the company goes out of business without paying the liability, the responsible party will be personally liable with no way to challenge the liability.

The Ohio Tax Commissioner is authorized to issue direct pay permits to certain taxpayers. R.C. 5739.031. The Department of Taxation publishes the list of all direct pay permit holders online (tab 90 on the List of Active Vendors). Under a direct pay permit, the taxpayer agrees not to pay sales tax directly to vendors, but rather accrue and pay sales / use tax directly to the Department of Taxation. The direct pay permit holder must provide its direct pay permit number to its vendors make tax-free purchases, and then self-report the applicable tax on a separate return. Direct pay authority is not a tax savings, but rather an administrative convenience so the permit holder need not determine whether an exemption applies at the time of each purchase.

You should contact us if you need help understanding the requirements and ensuring compliance under your direct pay permit agreement with the Ohio Tax Commissioner.