Ohio Gov. John Kasich recently proposed a dramatic change in the state’s tax base. While much of the coverage of Kasich’s plan centers on which services will become taxed, the key issue going forward is which services will be exempt from sales tax.
Similar proposals arise every few years. Ohio already applies a sales tax to certain enumerated services. Most of those services are personal services (performed at the customer’s location) rather than professional services that can be performed almost in a virtual sense.
Historically, services in Ohio have been exempted from state sales tax unless explicitly made taxable. Contrast that with tangible personal property, which is always taxable unless made exempt. Thus, the sales tax on services will render virtually all commerce in Ohio to the state’s sales tax unless the item is specifically exempted. This makes the Governor’s proposal resemble a European-style value added tax (VAT).
The proposal excludes major categories of services that one may consider to be essentials for modern life: Health care, construction services, rental of residential property, and education services would all be exempt. The proposal would also exempt social assistance services, day care services, insurance premiums, residential trash removal, and oil and gas drilling services.
There are significant questions that have not yet been answered – and how they are eventually answered will go a long way to determining if this proposal becomes a law and how much impact the law will have.
Whether by law or by regulation, there must be a clearer definition of what services will be exempt. Among the issues that must be resolved are:
Multi-state service providers: How will services be taxed for a customer that has multiple locations, for whom certain services are rendered for the benefit of the Ohio location and certain services for another location outside Ohio? Will service fees be apportioned to determine the correct Ohio tax when the same service benefits more than one location for a client/customer, one in Ohio and one not in Ohio?
Mixed transactions: How will services be taxed in a mixed transaction, where exempt tangible personal property is a component of the transaction?
Competing states: Will customers simply cross the bridge to engage services from non-Ohio businesses and thus avoid paying 5 percent in sales tax? For the most part, Indiana, Kentucky, Michigan, Pennsylvania and West Virginia do not impose a sales tax on services.
Ohio use taxes: Businesses that provide primarily professional services might be able to render services to clients in Ohio and not be obliged to collect and remit Ohio sales tax from their clients. Whether this will raise an Ohio use tax for the Ohio-based recipient of such out-of-state services would need to be explored in the legislative process.
If the sales tax base is increased so significantly, the compliance burden will fall on the service provider, but the financial burden will fall on consumers and in turn will impact Ohio businesses. The total cost of providing service in Ohio will increase.