Using New Sourcing Rules to Minimize Ohio Sales Tax

As explained in a previous post, Ohio changed its sourcing rules effective January 1. Now, intrastate sales of tangible personal property (“TPP”) are generally sourced by origin (vendor’s location where order is received), and interstate sales are sourced generally by destination (consumer’s location).  More importantly, incremental use tax is not owed to the Ohio County of storage, use or consumption when the sourcing rules are followed.  The following two examples illustrate the potential for a sales tax savings based upon these new sourcing rules. Both examples use Cuyahoga County as the business’s location, which has a combined sales tax rate of 7.75% – the highest in Ohio.

1) An Ohio business located in a high tax rate county can obtain an advantage by purchasing taxable TPP from an in-state vendor instead of an out-of-state vendor.  Lets assume a Cleveland based company is purchasing $500,000 of taxable TPP.  If the business purchases the TPP from a vendor located outside Ohio, the Cuyahoga County rate of 7.75% will apply, resulting in sales tax of $38,750.  However, if the same business purchases from a Lake County vendor and the order is received by said vendor in Lake County, the transaction is taxed at 6.25%, resulting in sales tax of $31,250 – a savings of $7,500.

2) An Ohio business located in a high tax rate county could reduce the effective tax rate borne by its Ohio customers by receiving orders in a lower rate county.  Lets assume a Cleveland based business is concerned that it may lose purchases from Ohio customers due to the higher tax rate in Cuyahoga County.  Instead of having the 7.75% Cuyahoga County rate apply, the business could receive orders at a different location in Lake County, where the lower 6.25% rate would apply – effectively giving its customer a 1.5% savings.  Further, since the determining factor for origin based sourcing is where the order is received, the product could still be shipped from the vendor’s Cleveland location.

As you can see, the new sourcing rules for Ohio sales tax have created a situation where a consumer can gain an advantage (or disadvantage) by choosing to purchase TPP from an Ohio vendor over a non-Ohio vendor (or even amongst different Ohio vendor).  This result could be the basis for a claim that Ohio’s sourcing rules discriminate against interstate commerce and, therefore, are unconstitutional.  Nonetheless, until such a determination is made, planning opportunities exist for Ohio based businesses, especially those located in Cuyahoga County, to minimize Ohio sales tax owed on its purchases or sales to Ohio customers.

Click here for a map of Ohio’s Combined Sales Tax Rates effective January, 2010.