Challenges Businesses Face with Ohio State and Local Taxes

From understanding how businesses are taxed to navigating changes in Ohio tax regulations, it’s important to be aware of potential tax hurdles and how to proactively avoid them. This article from Buckingham, Doolittle & Burroughs discusses the intricate landscape of state and local tax regulations in Ohio, shedding light on potential challenges businesses may encounter.

The Basics of Ohio State and Local Tax

Ohio imposes various taxes, including income, property, sales and use tax, commercial activity tax, and pass-through entity tax, each with its own set of rules and implications. Businesses that grasp the fundamentals of these taxes and ensure compliance can optimize their financial strategies and operations in Ohio. We’ve previously written about navigating business tax audits, while maximizing exemptions and deductions for Ohio businesses. This article addresses Ohio’s basic tax framework and planning opportunities to help businesses comply with their legal obligations and take advantage of opportunities.

How Do Local Taxes Work in Ohio?

Municipalities impose tax on wages, salaries, and other compensation earned by residents and nonresidents who work within that municipality. The tax also applies to net profits a business earns within the municipality, along with the net profits from rental activities. Localities impose taxes on real property and set their own incremental sales tax rates (in addition to state sales tax).

How Do State Taxes Work in Ohio?

State taxes consist of income, sales, and property taxes, among others. In addition to these major taxes, Ohio also imposes other taxes and fees, such as the Commercial Activity Tax, and various excise taxes on specific goods and services.[1] Simply having knowledge of these various taxes businesses are subject to is the first step toward strategic financial planning.

Potential Tax Challenges

Here are a few potential challenges and good-to-know bits of information:

Complex Tax Code

Ohio tax law can be complicated, especially when businesses are juggling multiple obligations like sales tax, income tax, property tax, etc. It’s critical for businesses to be aware of taxes they must pay to the state to avoid penalties and audits. Below are a few key concepts that taxpayers can use to comply with their tax obligations and possibly reduce their liabilities.

• Sales tax generally applies to all sales of tangible personal property (unless an exemption exists) and generally does not apply to services (unless it is specifically enumerated as taxable). Although it may be challenging for a business to analyze its sales and purchases to determine their taxability, it is well worth being proactive to avoid being hit with a sales tax audit and assessment including penalties and interest. Common sales tax compliance issues include:

• Filing a sales tax return without filing a use tax return;
  • Collecting tax without remitting it to the state;
  • Failing to collect tax on taxable personal property (i.e., no exemption exists).
  • Failing to maintain exemption certificates and other sales records supporting sales tax liability; and
  • Ignoring notices from the Ohio Department of Taxation.

• Ohio’s Commercial Activity Tax is imposed on those who exceed a minimum number of taxable gross receipts sourced to Ohio. Effective for 2024, only taxpayers who exceed $3,000,000 in Ohio receipts are subject to the tax. For 2025, that number increases to $6,000,000.[2] Common CAT audit issues include:
  • Sourcing sales of property and services. Sales of tangible property are generally sourced to Ohio if they are received in this state after all transportation is completed, and services are sourced to Ohio if the purchaser receives the benefit of the service in this state.
  • Is it a gross receipt? In some cases, businesses collect money from a customer and is obligated to remit it to a third-party. In these cases, only the fee or commission received in excess of the amount passed to the third party is taxable.
• Property tax complexities, including valuation methods, may require a closer look when filing yearly taxes, financial planning, and buying/selling a business.
  • Businesses may be able to challenge the value of property once in every three-year triennial period.[3]
  • Taxpayers can prevail if he or she can produce evidence of a lower value through an appraisal, recent sale price, sales comparisons, changes made to the property, or other evidence to demonstrate the real property’s true value.

Tax Incentives and Credits

Ohio taxes don’t just create challenges, however. Ohio has many opportunities for businesses to claim tax benefits based upon the work they do. Ohio offers several tax incentives and credits to businesses to encourage economic growth and investment. Some of the key incentives and credits include:

1. Job Creation Tax Credit: This credit provides a refundable tax credit to businesses that create new jobs in Ohio for Ohio’s Commercial Activity Tax of up to 75%. The credit is based on a percentage of the state income tax withheld from the new employees’ paychecks.[4]
2. Ohio Motion Picture Tax Credit: Businesses involved in motion picture production, including film, television, and commercial production, may qualify for tax credits based on eligible production expenses incurred in Ohio. Qualifying for this credit may entitle a taxpayer to a 30% refundable tax credit on the cost of production case and crew wages and other in-state spending.[5]
3. Research and Development (R&D) Investment Tax Credit: Ohio offers a tax credit for qualified research and development expenses incurred by businesses in the state. This credit incentivizes businesses to invest in innovation and technology development. If applicable, a taxpayer may receive a non-refundable tax credit equal to 7% of Qualified Research Expenditures.[6]
4. Ohio Historic Preservation Tax Credit: Businesses that invest in the rehabilitation of historic buildings in Ohio may be eligible for a tax credit based on a percentage of the qualified rehabilitation expenses. A taxpayer may receive up to 25% of qualified rehabilitation expenditures for up to $5 million in credits.[7]
5. Job Retention Tax Credit: Businesses that commit to retaining jobs in Ohio may qualify for a tax credit based on a percentage of the state income tax withheld from the retained employees’ paychecks. This credit, with the consideration of the tax credit authority, is refundable and may be used to offset various Ohio taxes such as the Commercial Activity Tax. [8]
6. Manufacturing Machinery and Equipment Sales Tax Exemption: Ohio offers a sales tax exemption for purchases of machinery and equipment used primarily in manufacturing operations, reducing the cost burden for businesses in the manufacturing sector.[9]

These are just a few examples of the tax incentives and credits available to businesses in Ohio.[10] Eligibility requirements and application processes vary for each incentive, so businesses should consult with tax professionals before they attempt to obtain them. The lawyers at Buckingham, Doolittle & Burroughs are experienced in these matters and may be contacted for more information. Our attorneys have helped many taxpayers navigate audits, refund claims, planning and litigation all the way to the Ohio Supreme Court to resolve their Ohio state and local tax issues.

If you have questions regarding your Ohio State & Local tax obligations and opportunities, contact the SALT attorneys at Buckingham, Doolittle & Burroughs to discuss your matter. Steven A. Dimengo, Richard B. Fry III, Nathan M. Fulmer, and Noah Veres are ready to assist you.

[1] Annual Report Fiscal Year 2023, Ohio Dept. of Taxation, pp. 8-11; See Ohio’s Taxes, Ohio Dept. of Taxation (https://tax.ohio.gov/professional/ohtaxalert/ohio-taxes) (last visited Nov. 1, 2024) .

[2] Commercial Activity Tax¸ Ohio Dept. of Taxation (https://tax.ohio.gov/help-center/faqs/commercial-activity-tax-cat) (last visited Nov. 1, 2024).

[3] Merwine, Andrew, Ohio’s System for Challenging Property Values and Taxes, Ohio Bar (Mar. 26, 2023); See e.g. Board of Revisions, Hamilton County Auditor Online (https://www.hamiltoncountyauditor.org/bor.asp) (last visited Nov. 1, 2024).

[4] O.R.C. §122.17.

[5] Ohio Motion Picture Tax Credit, Ohio Dept. of Development, https://development.ohio.gov/business/ohio-film-office/ohio-film-program (last visited, Nov. 1, 2024); O.R.C. §122.85.

[6] O.R.C. §5726.56.

[7]  Ohio Historic Preservation Tax Credit Program, Ohio Dept. of Development https://development.ohio.gov/community/redevelopment/ohio-historic-preservation-tax-credit-program (last visited Nov. 1, 2024); See O.R.C. § 149.311.

[8] O.R.C. §122.171.

[9] O.A.C. 5703-9-21.

[10] See Annual Report Fiscal Year 2023, Ohio Dept. of Taxation, pp. 148-149.