Ohio's Commercial Activity Tax: Don't Let the CAT Get Your Tongue
Over a decade ago, Ohio fully phased in the Commercial Activity Tax (“CAT”) which replaced the business franchise tax and the personal property tax. The CAT functions as a business privilege tax measured by gross receipts on commercial activities. Taxable Ohio gross receipts (“Receipts”) are the amounts realized on transactions that contribute to gross income, without considering expenses. In this way, the CAT operates a lot like a sales tax. But unlike the sales tax, the CAT has no exclusion for resale and cannot be passed on to customers. Most business types and forms may be subject to the CAT. However, the CAT does not apply to many governmental entities, non-profit organizations, public utilities, insurance companies, and financial institutions.
Of qualifying taxpayers, those that have a “substantial nexus” with Ohio and collect at least $150,000 in Receipts in a calendar year must pay the tax. A “substantial nexus” exists if a taxpayer either owns or uses a part or all of its capital or property in Ohio, holds an Ohio certificate authorizing it to do business in the state, has bright-line presence in Ohio, or otherwise has nexus with Ohio under the U.S. Constitution. At any time during the calendar year, a “bright-line presence” exists with taxpayers in Ohio who either have property in the state with an aggregate value of at least $50,000, payroll of at least $50,000, or Receipts of at least $500,000. As such, the CAT applies to most Ohio businesses. It also applies broadly to many businesses outside of Ohio, even those having no physical presence in the state.
Applicable taxpayers must register for a CAT account. All CAT taxpayers must make an annual minimum tax payment (“AMT”) of $150. Any taxpayer with Receipts over $1 million must pay the AMT, as well as .26% for each dollar over $1 million. These taxpayers must file quarterly. Any business or person subject to the CAT with Receipts less than $1 million only need to pay the AMT and file annually.
The Ohio Department of Taxation (“ODT”) regularly audits Ohio and non-Ohio taxpayers for CAT compliance. Taxpayers should consider whether the Ohio CAT applies to them. Proactively managing compliance ensures saving money in interest and fines.
ODT does offer a Voluntary Disclosure Program. If a taxpayer discovers non-compliance, they can enter the program. This limits any look-back period to three years and waives any applicable penalties. Eligibility for the disclosure program only exists if the voluntary disclosure occurs prior to any contact from the ODT. If the ODT otherwise determines a taxpayer is subject to the CAT, the look-back period is ten years with penalties. So if a business has significant Ohio Receipts but is not paying the CAT, it should promptly analyze its potential tax obligations.