CAT scan: the ins and outs of the new Ohio commercial activity tax.

• Author: Szabo, Magda B.

The state tax revisions signed into law on June 30 dramatically changed Ohio tax reporting as we knew it.

As a component of an omnibus tax reform package, a gross receipts tax on Ohio business activity called the Commercial Activity Tax (CAT) was enacted. Effective July 1, it is a tax assessed for the privilege of doing business in Ohio.

Birth of the CAT

Reacting to criticism that high corporate tax rates were a deterrent to Ohio business growth, Ohio lawmakers sought to make Ohio more attractive to businesses by replacing the existing corporate franchise tax and tangible personal property tax with a broad-based, low-rate excise tax on Ohio gross receipts. The personal property tax on inventory was already slated to be repealed, although at a more protracted schedule.

The new CAT applies to gross receipts, not net income, in Ohio for:

* Sales, exchanges or dispositions of property used in Ohio, including goods or property shipped in from an out-of-state vendor and used in the state. Permissible deductions for gross receipts are cash discounts allowed and taken, returns and allowances, and bad debts from receipts upon which CAT was paid in a prior period.

* Services rendered to the extent the benefit is received in Ohio or the use is in Ohio, other than in an employee capacity.

* Rentals, leases or other permissible uses of a taxpayer's property or capital to the extent the foregoing is used by a taxpayer in the state.

The tax does not apply to:

* Nonprofit organizations, other than a for-profit subsidiary, or other than a for-profit disregarded entity

* Insurance companies that pay insurance premium tax--captive insurance companies that do not pay the Ohio insurance premium tax because there is no risk-shifting or there is a lack of risk diversification are subject to the CAT.

* Banks, financial institutions, dealers in intangibles, savings and loans and most financial services companies

* Public utilities that pay the public utility excise tax

* Receipts from assets for which capital gain treatment is given as well as 1221 or 1231 assets

* Interest income except on credit sales

* Dividends and distributions from corporations

* Damages from certain litigation or certain life insurance proceeds

* Services that are performed in the state for use outside Ohio or goods shipped out of state even though the company selling the goods is located in Ohio.

Many issues regarding situsing of receipts and what constitutes a receipt are still in the process of being interpreted by the Department of Taxation. These are issues that are being clarified pending future information releases.

A Shift in Burden

Previously, only corporations were subject to a business tax. Pass-through entities such as S corporations, LLCs, trusts or sole proprietorships were taxed only at the individual taxpayer level. The new CAT applies to all business activity regardless of form, if any. Federal tax rules are disregarded.

As a result, now partnerships, LLCs, S corps, associations, joint ventures, clubs, societies, disregarded entities, trusts and even individuals engaged in business activity singularly or as a group are liable for this tax. Individuals holding pass-through interests, such as partnerships, will now pay tax at the entity level and again at the individual income tax level.

Registration for the new CAT must be completed by the appropriate taxpayer no later than Nov. 15 or 30 days after reaching $150,000 in Ohio gross receipts in any calendar year, whichever comes later.

If completed online at obg.ohio.gov, the registration fee is $15, otherwise it is $20 per business. For businesses in a combined or consolidated group, each entity requires registration and designation as a member of the group. The registration fee cannot...