Ohio Tax Commissioner Talks Tax Issues for Construction Firms
On October 20, 2016, Jay Rammes and Cheryl Ganim of Barnes Dennig joined Associated Builders and Contractors in a meeting with Commissioner Testa to discuss areas of Ohio taxation that are particularly challenging to the construction industry. The Commissioner requested the meeting as he begins his preparation of the upcoming State budget, and genuinely seems concerned and interested in making impactful changes that may mitigate the challenges contractors face.
After discussions with our clients, Cheryl and I presented on four topics that we felt were of most importance to the industry. While this blog contains a brief summary of the issues addressed, a link to a more thorough outline of issues addressed is provided at the end of the blog.
Layering effect of the Commercial Activity Tax (CAT)
When the CAT was enacted as part of a far reaching Ohio tax overhaul which included eliminating the Corporate Franchise Tax and the Ohio Personal Property Tax. The hope was to create a broad revenue based tax that was easy to enforce and comply with. From the onset, this was of concern to the Construction Industry who argued that for any construction project, there could be layer after layer of taxation on the suppliers, to the subcontractors, and to the general contractors. For each construction project, there would be a compounding effect of the taxation at each stage of a project, resulting in increased cost to the owners and in turn place Ohio based projects at a cost disadvantage. At the time, an agency was lobbied for and ultimately provided some relief that allowed generals in certain strictly defined situations the ability to in essence carve out revenue that they simply collected and then remitted to the subcontractors. In practice however, the requirements of actually having the term “agent” in the commercial contracts and other restrictions have mitigated the benefit of this provision.
We have requested that we would like to see clarity to, and an expanded definition of, the “agency” relationship for the construction industry. We will be submitting language to the Commissioner in the coming weeks.
Municipal Income Tax Filing
Approximately 800 local taxing districts in the State make local tax compliance overly burdensome for contractors who perform work across the State. The Commissioner recognizes this is a long-standing issue that for decades no one has been able to overcome. A State wide collection process with one form, has been met with resistance historically from municipalities who would more than likely need to reduce local staff and a fear that the State will not collect and remit the taxes as effectively as they do. A permissive, rather than requisite, single form system was discussed. The hope is that if the State maintained this, that over time, municipalities would see that it was effective, and encourage others to participate.
Sales and Use Tax Issues
Currently the State uses two different forms of audit evidence when dealing with an audit (sampling with extrapolation) and then when taxpayers request refunds, (full and complete documentation of all refund items requested must be provided). Supporting documentation must be presented on a disk delivered to the Columbus office rather than more contemporary methods (i.e. via email, pdf, etc.). We asked the State to modernize the methods used and make the process for refunds on a level playing field as to that of the audit process.
Two other issues discussed were that of exempting non-union construction temporary labor from sales tax (the issue was raised by a construction labor leasing firm in northern Ohio) as well as changing the requirements for withholding Ohio income tax for out of state shareholders. The Commissioner did seem to acknowledge the disparity in having to pay sales tax on leased contractors but no such sales tax on union labor. Exemptions based upon the construction class codes used by the Bureau of Workers compensation were recommended as a possible solution. For more information on the changes in the withholding requirements, see the link below.
If you’re wondering about the impact of the upcoming State budget or any of the issues addressed please have a member of the Barnes Dennig team contact you here, or call 513-241-8313.
For a more thorough outline of issues addressed, click here for the full outline.