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Ohio Commercial Activity Tax ("CAT") Audits

09/29/2014

We are seeing an increasing number of Ohio CAT audits among our clients. Ohio has an aggressive audit program to seek companies doing business in the state, and they aggressively pursue tax, penalty and interest to the inception date of the tax.

If you need assistance with this issue, please contact one of our state tax specialists. 

General Overview of Ohio CAT Audits

If you are unfamiliar with the tax, the Ohio CAT is a gross receipts tax that replaced the Ohio Franchise tax. The phased-in implementation of the tax began July 1, 2005. The tax is somewhat unusual in that Ohio’s position is that a company will have “nexus” and have to file/pay the tax if the company meets one of the following “bright-line” nexus standards:

  • The company has $500,000 in Ohio sales, or
  • $50,000 in Ohio payroll, or
  • $50,000 in property in Ohio.

Ohio also asserts that companies have nexus for the CAT if:

  • They are authorized to do business in the state, or
  • If they otherwise have nexus to the extent that the person can be required to remit the CAT under the Constitution of the United States.

The Ohio CAT is also somewhat unusual in that there are combined/consolidated reporting rules in place, even though it is a gross receipts tax and not an income tax. Also, the CAT applies to all types of businesses, including retailers, service providers, manufacturers and other types of businesses. There is a $1,000,000 per year deduction before CAT tax is due. However, businesses with $150,000 to $1,000,000 in gross receipts are expected to file and pay the minimum tax ($150). The rate is .26% and returns are generally filed quarterly.

Example:

Ohio Annual Gross Receipts: $3,000,000
Less Deduction:  (1,000,000)
Taxable receipts:    2,000,000
Tax due: 

2,000,000 X .0026=$5,200 + $150 annual fee = $5,350 (total tax amount)

Nexus Considerations

Ohio’s position on nexus for the CAT does not require physical presence. On its face, there are issues surrounding this position, and L. L. Bean (the major catalog and internet retailer) has challenged the Ohio Department of Taxation on the grounds that the CAT tax is a violation of the Commerce Clause of the U.S. Constitution. The L. L. Bean case went to hearing before the Ohio Board of Tax Appeals in August 2013 and the Board of Tax Appeals upheld the Tax Commissioner’s position on nexus in an opinion that was issued earlier this year. Even if the case is appealed to the Ohio Supreme Court, it may be YEARS before there is a final outcome, and there is no guarantee the outcome will be “taxpayer favorable”. In addition, a company that has established some type of physical presence in Ohio, in addition to meeting one of the “bright-line” nexus standards discussed earlier, would be unlikely to win a “no-nexus” argument.

Many companies that we are working with have so far chosen to file/pay the tax, although others may not choose this route. It is important to note that Ohio has a voluntary disclosure program with a 3-4 year look-back. This voluntary disclosure program could be of tremendous benefit for companies that have tax exposure in the state of Ohio.

If you need assistance with this issue please contact one of our state tax specialists.