Changes In Ohio Taxes Beginning In 2013

Ohio Governor John Kasich on June 30, 2013 signed Ohio House Bill 59, which made significant changes to Ohio taxes.  

Individual Income Tax Decrease

 Individual income tax rates will be cut 10% over three years.

The $20 personal exemption credit will be available only to taxpayers with Ohio taxable income under $30,000.

Sales Tax Increase

Effective September 1, 2013 Ohio’s sales and use tax rate will increase to 5.75% (from 5.5%)

Minimum Commercial Activities Tax (CAT) Increase

The Commercial Activity Tax (CAT) was previously $150 on the first $1 million in annual gross receipts, regardless of total annual gross receipts. The CAT tax on the first $1 million will now vary depending on the taxpayer’s total annual gross receipts. The new minimums are as follows:

• $1 million or less in annual gross receipts – $150
• From  $1 million to $2 million in annual gross receipts – $800
• From $2 million to $4 million in annual gross receipts – $2,100
• More than $4 million in annual gross receipts – $2,600

Please note that the above apply only to first $1 million in annual gross receipts. Receipts over $1 million will continue to be taxed at a 0.26 percent rate.

 Small Business Income Deduction

There is a new tax deduction for small business income starting in 2013. The deduction will be the lesser of $125,000 ($62,500 per spouse if filing separately) or 50% of the small business income includable in federal adjusted gross income.

 The deduction will apply to sole proprietors as well as to investors in passthrough entities.

The deduction will not be available to trusts and restates.

 New Ohio Earned Income Tax Credit

New for 2013, the new credit will be equal to 5% of the federal tax credit.

New Sales Tax on Downloads

Beginning in 2014, sales tax will apply on downloads of music, books and videos.

Ohio Offers Two Tax Amnesties

As part of the 2012/2013 budget bill, Ohio has authorized a general amnesty for selected state taxes, including personal income, school district, sales and commercial activity taxes.

This is an attractive amnesty program, although it does have one significant drawback. Under the program Ohio will abate all penalties and one-half the interest. Taxes eligible for the amnesty must have been due and payable as of May 1, 2011. This means that a 2010 individual income tax will be eligible (as it was due April 15, 2011), but a May 2011 sales tax return would not (as it was due June 23, 2011). In addition, you cannot have been previously contacted by Ohio.

Ohio expects full payment when you file these tax returns. Remember – this is a revenue raiser for the state.

The significant drawback? The general amnesty window is very brief: from May 1 to June 15, 2012.

There is a separate use tax amnesty that runs from October 1, 2011 to May 1, 2013.

Note: Use tax applies to purchases of taxable products or taxable services where the seller did not collect the Ohio sales tax. The use tax applies both to individuals and businesses. The use tax is the cousin to the Ohio sales tax. It serves to prohibit one from avoiding Ohio sales tax by purchasing items from another state (free of sales tax) and then bringing them into Ohio.

If one pays all use tax due on or after January 1, 2009, Ohio will waive or abate use tax owed for prior periods. There is also a non-interest payment program available for businesses not previously registered for use tax, although this option requires an officer to personally guarantee the tax debt. On the plus side, Ohio will allow the business up to seven years to pay the back taxes. Once again, you cannot have been previously contacted by Ohio.

Governor Signs Ohio Estate Tax Repeal

Governor Kasich signed the repeal of the Ohio estate tax into law on Thursday, June 30. As is common with contemporary tax bills, the law’s effective date is delayed until January 1, 2013 – approximately one and one-half years away.

There are different ways of looking at this issue. Ohio exempts the first $338,000 of the estate’s value and maxes-out at 7% on estates over a half-million. Ohio’s argument has been that it exempts the vast majority of estates in the state. In fact, over three-quarters of the tax raised is on estates over $1 million. The Ohio estate tax is peculiar because Ohio shares the estate tax with the localities in which the deceased resided. In Cincinnati, for example, this sharing amounts to almost $13 million per year. Cincinnati will, of course, face budgetary pressures.

 An alternate perspective was provided in a study from Duquesne University which estimated that state and local governments lose approximately $3 in non-estate tax revenues for every $1 increase in federal estate tax.

My perspective?

I have been in Cincinnati for over 20 years. I grew up in Florida. I can tell you that we have moved clients to Florida, but we have never moved clients to Ohio - or to Kentucky. Do taxes override all? Of course not. I would not be working in Cincinnati - where we have both state and local taxes - if that were the case.  But let's not be silly by arguing that taxes do not have an impact.