Ohio Commercial Activity Tax: The Agency Exclusion can provide significant tax reductions with proper planning.
Ohio Commercial Activity Tax includes a significant exclusion from gross receipts for amounts received by a taxpayer acting in an agency capacity. R.C. 5751.01(F)(2)(I) excludes “property, money, and other amounts received or acquired by an agent on behalf of another in excess of the agent’s commission fee or other reimbursement….” from the definition of taxable gross receipts. The agent exclusion prevents double taxation of the same gross receipts – first, when received by the agent, and again when paid by the agent to the principal. With proper planning, this exclusion can significantly reduce your commercial activity tax base.
The Ohio Department of Taxation has provided several examples as to how the agent exclusion applies. O.A.C. § 5703-29-13. Some common examples include: (1) a lottery sales agent who remits the majority of the lottery ticket price to the state lottery commission; (2) a restaurant accepting gratuities that it pays through to its servers; and (3) a general contractor, when required to act in the property owner’s best interest, under a cost-plus contract. On the other hand, a landlord collecting common area maintenance fees from its tenants for expenses incurred in maintaining the property is not entitled to the exclusion.
The Ohio Board of Tax Appeals recently ruled that a Sunoco gasoline distributor did not qualify as an agent of Sunoco so as to exclude amounts it received on the resale of such gasoline. The Board held that the taxpayer/distributor was clearly acting as an independent contractor and could not make commitments or incur expenses on behalf of Sunoco. Moreover, Sunoco was not responsible to the taxpayer for any losses, damages, claims or actions of any kind. (Willoughby Hills Dev. and Distr., Inc. v. Testa, BTA No. 2015-1069, July 5, 2016).
Two factors critical in determining whether an agency relationship is present is whether the taxpayer (agent) has authority to bind the principal and owes the principal fiduciary duties. Contact us to determine if your business may be able to take advantage of this commercial activity tax exclusion, without increasing your general business risks through such an arrangement.