Ohio Budget Bill Tax Law Changes

July 9, 2013
Legal Updates

On June 30, 2013, Governor Kasich signed Ohio's biennial budget bill, Am. Sub. H. B. No. 59 (the Bill). The Bill, effective July 1, 2013, impacts numerous tax provisions under Ohio law. Highlights of the changes to Ohio's tax laws include:

Rates Reduced. Income tax rates for all tax brackets will be reduced by 10% over a three-year period. The reduction is 8.5% in 2013, .5% in 2014 and 1% in 2015. For example, the top rate (for Ohio AGI over $200,000) is reduced from 5.925% in 2012 to 5.333% in 2015.

Tax Brackets Maintained. The Bill freezes the income tax brackets for 2013, 2014 and 2015. Previously, the income tax brackets were indexed for inflation.

Rates Increased. The state portions of the Ohio sales and use taxes were increased from 5.5% to 5.75%. The rate increases are effective September 1, 2013.

Digital Products. The Bill expanded the imposition of the sales tax to transactions involving a "specified digital product" provided for permanent use or less than permanent use. Specified digital products include digital audiovisual works, digital audio works and digital books.

Click-Through Nexus. Governor Kasich line-item vetoed language that would have expanded the activities that create a presumption of "substantial nexus" for out-of-state sellers. The vetoed language included a provision on "click-through nexus." With respect to "click-through nexus," an out-of-state retailer would have been presumed to have substantial nexus with Ohio if it had an agreement with an Ohio affiliate to refer potential customers to the out-of-state retailer in exchange for consideration (so long as the retailer's sales to Ohio residents through such agreements exceeded $10,000 in the past 12 months).

Owners of sole proprietorships or pass-through entities will be able to deduct 50% of their Ohio business income from these businesses with the deduction capped at $62,500 for married individuals filing separately and $125,000 for all other individual taxpayers. This deduction is not available at the pass-through entity level.

Under prior law, the Commercial Activity Tax (CAT) was $150 for a taxpayer's first $1,000,000 in annual gross receipts regardless of the taxpayer's total annual gross receipts. Under the Bill, the amount of CAT tax on a taxpayer's first $1,000,000 in gross receipts will vary depending on the taxpayer's total annual gross receipts. Specifically, taxpayers (that are otherwise not excluded from the CAT) will owe CAT taxes on their first $1MM in annual gross receipts as follows:

(1) $1MM or less in annual gross receipts – $150;

(2) Greater than $1MM to $2MM in annual gross receipts – $800;

(3) Greater than $2MM to $4MM in annual gross receipts – $2,100; and

(4) Greater than $4MM in annual gross receipts – $2,600.

Note that these minimum rates only apply to the taxpayer's first $1MM in gross receipts. Taxpayer gross receipts over the $1MM threshold will be taxed as before at the .26% rate.

Rollback. The Bill eliminates property tax rollbacks of 10% or 12.5% for residential property owners on new levies and replacement levies. The rollbacks are generally reimbursements from the state to the local governments for a portion of a taxpayer's property tax bill.

Homestead Exemption. The Bill provides that a person eligible for the $25,000 homestead exemption (e.g., an individual 65 years or older) will receive the exemption only if the person's total income does not exceed $30,000.