- Ohio Commercial Activity Tax
- November 2, 2005 | Authors: Michael A. Cullers; William H. Conner; Terrence G. Perris; Terence L. Thomas
- Law Firms: Squire, Sanders & Dempsey L.L.P. - Cleveland Office ; Squire, Sanders & Dempsey L.L.P. - Cleveland Office; Squire, Sanders & Dempsey L.L.P. - Cleveland Office
Effective July 1, 2005, with some limited exceptions, persons doing business in Ohio will be subject to the commercial activity tax (CAT) on their Ohio taxable gross receipts. For purposes of the CAT, a person includes, but is not limited to, individuals, general and limited partnerships, limited liability companies, limited liability partnerships, corporations (including S corporations), and entities that are disregarded for federal income tax purposes that conduct business in Ohio. Doing business in Ohio includes the rental, as lessor, of real and tangible personal property located in Ohio. Rental payments attributable to such property are considered Ohio taxable gross receipts and are subject to the CAT. Accordingly, each person who rents real or tangible personal property in Ohio as lessor is subject to the CAT and must file a CAT return if that person has sufficient taxable gross receipts, as discussed below.
Entities that are subject to 50 percent or more direct or indirect common ownership may elect to file one consolidated CAT return rather than each member of the group filing separate CAT returns. If entities that are subject to more than 50 percent direct or indirect common ownership do not elect to form a consolidated group, they must file a single CAT return as a combined group. The primary distinction between consolidated and combined groups is that gross receipts from transactions between members of a consolidated group are excluded from the CAT, while gross receipts from transactions between members of a combined group remain subject to the CAT.
The CAT is being phased in over five years and ultimately will be levied at a rate of 0.26 percent of a taxpayer's Ohio taxable gross receipts for a calendar year in excess of US$1 million. The initial rate for the balance of 2005 is 0.06 percent, and the rate from January 1 to March 31, 2006 is 0.0598 percent. The rate increases to: (i) 0.1040 percent for April 1, 2006 to March 31, 2007; (ii) 0.1560 percent for April 1, 2007 to March 31, 2008; (iii) 0.2080 percent for April 1, 2008 to March 31, 2009; and (iv) 0.26 percent for April 1, 2009 and thereafter. Businesses (including lessors) with Ohio taxable gross receipts of US$150,000 to US$1 million for a given calendar year will pay a minimum tax of US$150 for that year. Businesses with Ohio taxable gross receipts of less than US$150,000 in a given calendar year will not be subject to the CAT for that year. Finally, if the CAT that applies to rental payments is separately stated and invoiced to a lessee, the Ohio taxable gross receipts of the lessor are increased by the amount of CAT charged to the lessee. This same rule applies to other expenses that are the legal obligation of the lessor and that are separately stated and invoiced to the lessee, the reimbursement or payment of which by the lessee would constitute gross receipts of the lessor under the lessor's method of accounting for federal income tax purposes.
Lessors of real or tangible personal property who have more than US$150,000 of Ohio taxable gross receipts for the period July 1 to December 31, 2005 must register for the CAT with the Ohio Department of Taxation by November 15, 2005. Lessors who will not have more than US$150,000 of Ohio taxable gross receipts for this period must register with the Ohio Department of Taxation within 30 days of having more than US$150,000 of Ohio taxable gross receipts in a subsequent calendar year. A lessor having less than US$1 million of Ohio taxable gross receipts in 2006 may elect to file an annual CAT return for 2006 and thereafter. The annual CAT return is due within 40 days after the end of each calendar year. A lessor who has Ohio taxable gross receipts in excess of US$1 million in a calendar year will become a calendar quarter taxpayer starting with the following calendar year. Quarterly CAT returns are due within 40 days after the close of each calendar quarter.
Certain entities, such as financial institutions subject to the Ohio corporation franchise tax and insurance companies subject to the Ohio excise tax on premiums, are exempt from the CAT. Such entities must properly structure their real estate holdings to avoid the CAT on Ohio taxable gross rental receipts.