How will Governor Kasich’s budget proposal affect your business? It may directly and indirectly increase your taxes. In order to figure it out you will have some reading to do. Start at page 1,894 for the tax proposals.
Ohio House Bill 64 was introduced on February 11, 2015. It is currently with the House Finance Committee. Your action is needed by March 23rd. With the Ohio House of Representatives expected to vote on this bill in April, you must contact your state representatives now to voice your concerns. The entire process must be wrapped up and the final bill signed by July 1 which is the start of Ohio’s next fiscal year.
Ohio Budget Proposal Highlights
Some highlights of the pending legislation include the following:
- Personal income tax rate reductions with the top rate being reduced to 4.1%
- Businesses with gross receipts under $2 million will pay a flat $150 for Commercial Activities Tax (CAT) taxes
- The 50% reduction on up to $250,000 of Ohio business income will be made permanent
- Pass through entities with gross receipts under $2 million will pay no income tax on business income
- CAT tax rate increased from 0.26% to 0.32%
- State sales tax rate increased from 5.75% to 6.25%
- Sales tax base broadened to include management consulting
- Sales tax vendor discount capped at $1,000 per month
As you review this summarized list, it starts on a positive note with the “what’s in it for me” individual tax reductions. It quickly progresses to the tax increases for mid-size and large businesses in Ohio. These businesses will shoulder the tax cuts for the smallest businesses through increased CAT taxes.
Consulting Service Taxation
The most significant part of this legislation, however, is the taxation of management consulting services. CPA firms like Barnes Dennig, will be directly affected. This will create a competitive disadvantage for us when working with clients who have out-of-state and foreign operations and offices. Clients could use a different service provider that doesn’t have to charge them sales tax. Most states, 46 of them, do not tax professional services. Some states have attempted to do this and have quickly changed the legislation as the implementation of the tax was arduous. You may be thinking, “Why do I care if management consulting services are subject to sales tax in Ohio?” Ohio has a broad definition of management consulting. It includes some of the following items:
- Advice and assistance on business issues
- Financial planning and budgeting
- Records management
- Strategic and organizational planning
- New business start up
- Business process and operations improvement
- Human resource management
- Marketing issues, pricing and planning including new product development
- Franchise planning
- Quality assurance and control, and
- Miscellaneous other operations and management activities
Small businesses are more likely to use outside professionals for these activities so they will indirectly pay for their tax cuts. Mid-size and large Ohio businesses will also pay a significant additional tax if management consulting services in the broad sense of Ohio’s definition are subjected to sales taxes. Also included in the taxable management consulting services will be all related party transactions.
With this potentially broad sweeping change on the horizon will this budget proposal drive economic development, growth, and job creation, as it was intended, or will it hurt Ohio’s business climate? I think it will result in additional taxes for all businesses.
Your action is needed by March 23rd. Please contact your state representative and let them know you oppose several parts of this legislation. To keep up to date on this legislation you can follow this link maintained by the Ohio Society of CPAS at http://www.ohiocpa.com/advocacy/ohio-budget-reform.