Ohio Construction Tax Policy Considerations for Contractors
Presented to Tax Commissioner Testa for 2017 State Budget Proposal
By Barnes Dennig & Co., Ltd., Jason P. Rammes, CPA and Cheryl A. Ganim, CPA
October 20, 2016
Definition of Agency Relationship with regard to Commercial Activity Tax (CAT)
- Issue – Gross receipts received by a person acting as an “agent” are excluded from the definition of “gross receipts” and therefore the CAT tax. However, many contractors and subcontractors will not agree to this fiduciary relationship because of other legal ramifications. Thus, CAT tax is being paid twice on the same gross receipts, once at the subcontractor level, and again at the general contractor’s level.
- Caused by – Fitting into the narrow definition of agent can result in separate undesirable legal ramifications for contractors. Final Rule 5703-29-13(b)(1)(5) Commercial activity tax definition of “agent” says, “in determining whether an agency relationship exists, the facts must be determined under a strict, narrow reading of the definition. Absent proof of an agency relationship, the entire gross receipt must be reported by the person receiving the gross receipt for purposes of the commercial activity.”
- Suggested resolution – The Agent definition be expanded/relaxed to allow contractors to avoid paying another level of CAT on revenue collected from owners that is used to pay subcontractors.
Multiple (882) Ohio Municipalities with Different Tax Rates and Different Forms
- Issue – The Ohio local tax compliance burden is onerous for contractors who work across the state in multiple jurisdictions that may change from year to year. The Ohio local tax compliance is unnecessarily burdensome in its volume and is a barrier for businesses coming to Ohio.
- Issue – Most states do not have hundreds of localities collecting taxes. Businesses, especially contractors, who have jobs in multiple and changing areas see this compliance as a prohibitive barrier to doing business in Ohio.
- Issue – Taxpayer resources are used on (many times immaterial) extensions, estimates, and local returns.
- Most tax software products do not contain all the municipal tax forms so much of the reporting is done manually.
- Caused by – Hundreds of Ohio municipalities with different tax rates, and different forms, generating expensive tax compliance costs for the taxpayers and the state.
- Suggested resolutions –
- A centralized collection and distribution system would relieve the administrative burden for taxpayers and local authorities who may only have 1-2 staff to manage the taxes.
- A single form with all jurisdictions, tax rates, and an allocation system would eliminate most of the unnecessary paperwork.
- Simplify overpayments/underpayments on one municipal tax form by using a bucket for all payments. E.g. on the RITA return, payments to municipalities are viewed separately. An overpayment to one locality and an underpayment to a different locality cannot currently be resolved on the form.
- One local return to be filed (similar to the RITA or CCA return) that had all the same add-backs, deductions, and NOL rules but different allocations for each locality, would greatly reduce the headaches for Ohio businesses. This would allow them to file one extension and one set of estimated tax payments rather than 20-40 or more. Change the allocation to be simply based off of revenue rather than the more complex allocation of sales, payroll, property, and rent.
- Some businesses would like to file the local returns in-house, however it’s not feasible because the software with this capability is very expensive. Enable filing/paying over the Ohio Business Gateway.
- Note – same issues for Payroll Withholding as above.
Ohio Nonresident Tax Forms Causing Unintended Refunds for Owners of Pass-Through Entities
- Issue – Unintended and unavoidable refunds to nonresident shareholders drain business of cash, and can cause federal taxable income for shareholders. The tax rate disparity between the corporate and individual returns often generates $10,000 – $100,000 refunds for each nonresident shareholder.
- Caused by – Disparity in corporate tax form IT-1140 withholding rates for nonresident individuals and investors (5% and 8.5%, respectively), vs. individual income tax rates (3% on business income net of Ohio Small Business Investor Income Deduction (SBD)). (Current SBD is up to $187,500 on the first $250,000 of business income).
- Suggested resolution – Reflect adjusted business income rate at the pass-thru entity return level (IT-1140) or allow for an adjustment for the SBD deductions at the corporate level.
Administrative Difficulty in Taxpayer’s Ability to Obtain Overpaid Sales and Use Tax Refunds
- Issue – Taxpayers must provide significant documentation to recover overpaid sales tax in Ohio, e.g., front and back copies of cancelled checks, copies of every invoice involved, line item spreadsheet, etc., to auditors by mail (auditors will not accept emailed documentation; but certified mail receipt is not sufficient proof of sending documentation to Ohio Department of Taxation). Agent’s discretion in accepting taxpayer’s supporting documentation results in denials of refunds of overpaid taxes.
- Caused by – Inefficient methods to request refunds of overpaid sales and use taxes. Email correspondence not accepted. Discretion of auditors is not uniformly applied to all taxpayers. Certified Mail receipt insufficient evidence of mailing date.
- Suggested resolution – Encourage agents to use common sense, especially in refunding overpaid tax. Further, the State should evolve its internal processes to adapt to modern technological standards (i.e. accepting excel, pdf and zip files of required documentation), as well as accepting samples of required documentation. Ohio has collected tax once and should not keep tax paid twice, and agents should be encouraged to assist Ohio taxpayers in recovering their money, without creating barriers.