CAT SCAN: an update on Ohio's Commercial Activities Tax.

• Author: Corrigan, Julie A.
• Position: UPDATE

Little more than a year ago, Ohio lawmakers enacted the Commercial Activity Tax (CAT) in hopes of making Ohio more attractive to businesses by replacing the corporate franchise tax and tangible personal property tax with a broad-based, low rate tax. With the largest reform to Ohio's tax structure in 40 years, there has been much confusion, frustration, questions and concerns from taxpayers and practitioners alike. How did the CAT perform in its first year of existence? How has it changed since its inception?

Revenue and Compliance:

"As a whole, things are going well with the implementation of the CAT. The revenue is coming in and we feel we have a fair level of compliance. We will have a better measurement of how well taxpayers are complying once the first round of the CAT delinquent program is completed," remarks Fred Nicely, deputy Tax Commissioner of Ohio.

Overall statistics related to the Ohio CAT:

* There are almost 200,000 registered "primary" taxpayers. Many of those registered are consolidated/combined filers that have multiple entities included in their return. The total CAT taxpayer population exceeds 287,000 entities.

* There are approximately 18,000 consolidated elected taxpayers, 6,000 combined taxpayers, and 158,000 single taxpayers.

* The largest taxpayer types by industry are manufacturers (29 percent), retailers (17 percent), and wholesalers (11 percent)

* Total tax collections through May 31 were almost $270 million. Roughly 70 percent of taxpayers are paying the minimum fee of $150. The rest are paying based on Ohio taxable gross receipts in excess of $1 million, in addition to the minimum fee.

The Ohio Department of Taxation (ODT) estimated that CAT collections through May 31 would be $212 million. CAT collection has exceeded the projections by more than $50 million. However, it is too soon to draw any conclusions related to the long-term revenue generated from the CAT. Taxpayers may have overstated and overpaid the first-quarter estimate and are able to reconcile by year's end.

Nonetheless, the preliminary results are encouraging. Meeting revenue projections is critical in order to replace the funds previously generated by the corporate franchise tax and tangible personal property tax. CAT revenue is especially vital to school and local government budgets once supplemented by revenue from the tangible personal property tax.

The ODT is in the process of the initial CAT delinquent program, an enforcement effort to identify non-complying taxpayers. Once the first cycle is complete, the ODT will be able to evaluate the degree of compliance.

The ODT has also established an audit team to develop an audit manual and procedures. Taxpayers can also participate in Voluntary Compliance Reviews (VCRs) in which no penalty is imposed if a taxpayer comes forward to register and file...