On June 30, 2013, Ohio Governor John Kasich signed Ohio House Bill 59 (H.B. 59) which makes significant changes to Ohio taxes. The legislation includes changes to the commercial activities tax (CAT), personal income tax, sales and use tax, real property tax, and a new tax on motor fuel receipts. The changes in the budget are designed to bring a $2.7 billion tax cut to Ohio businesses and individuals over the next three years. Highlights of the tax changes include:
Commercial Activity Tax
Effective for tax periods beginning on or after January 1, 2014, the minimum tax on a taxpayer’s first $1 million of gross receipts will change from a flat $150 tax to a variable tax tied to the level of business receipts. The CAT rate of 0.26% and the $1 million exclusion are unchanged. The CAT tax will be calculated as follows:
- Annual taxable gross receipts of $1,000,000 or less, equates to CAT tax of the $150 minimum only;
- Annual taxable gross receipts $1,000,001-$2,000,000, equates to a $800 minimum plus receipts over $1,000,000 multiplied by the 0.26% CAT rate;
- Annual taxable gross receipts greater $2,000,001-$4,000,000, equates to a $2,100 minimum plus receipts over $1,000,000 multiplied by the 0.26% CAT rate;
- Annual taxable gross receipts $4,000,001 or greater, equates to a $2,600 minimum plus receipts over $1,000,000 multiplied by the 0.26% CAT rate.
For example if a taxpayer had annual Ohio taxable gross receipts of $3,500,000 their total CAT tax liability for the year would be $8,600 ($2,100 minimum plus $6,500 (3,500,000-1,000,000=2,500,000 * 0.26%)).
Personal Income Tax
A 10% Ohio personal income tax cut will be phased in over the next three years. In 2013, rates are being reduced by 8.5%, 0.5% in 2014, and 1% in 2015 to achieve in total the 10% reduction. The $20 personal exemption credit will only be available to households with Ohio taxable income under $30,000.
Another change for taxable years beginning on or after January 1, 2013 is investors in a pass-through entity participating in an Ohio composite return can elect to also file an Ohio individual income tax return and claim the refundable credit. An investor could potentially benefit due to the rate differential between the composite return and the personal individual return.
For tax years beginning on or after January 1, 2013, H.B. 59 also provides a new personal income tax deduction equal to 50% of the taxpayer’s Ohio small business investor income. The deduction is limited to $125,000 per taxpayer. Pass-through entities may not claim this deduction and the deduction is not available to estates and trusts.
Sales and Use Tax
The state sales and use tax rate will increase from 5.5% to 5.75% on September 1, 2013. Effective January 1, 2014, digital produces, including books, music and videos delivered electronically, will be subject to tax just as they are if purchased or rented from a retail establishment.
Real Property Tax
The 10% and 2.5% property tax rollbacks will be eliminated for new and replacement levies pass in November 2013 and beyond. Existing levies and renewals are not impacted. These reductions are applicable to non-business real property. Also, the homestead exemption will again become subject to means testing which will limit eligibility to home owners 65 and older with income less than $30,000 beginning with applications for tax year 2014. Currently eligible participants will not be impacted.
Motor Fuel Receipts Tax
Effective July 1, 2014, the sale of motor fuels by suppliers are subject to the newly created motor fuel receipts tax in lieu of the CAT. The tax rate is 0.65% and levied only on the first sale of motor fuel in Ohio.