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Does the Ohio CAT Have You in Its Claws?

What is the Ohio CAT?

Enacted on July 1, 2005, the Ohio Commercial Activity Tax (CAT) is an annual privilege tax measured by gross receipts from business activities in Ohio. If you have customers in Ohio, read the CAT rules carefully to determine whether or not you are required to pay the CAT tax, especially if you deliver over $150,000 of sales to Ohio.

Who is liable for the Ohio CAT?

An in-state business has "substantial nexus" in Ohio and is required to register and pay the CAT if the business has over $150,000 of gross receipts sourced to Ohio.

An out-of-state business has "substantial nexus" in Ohio and is required to register and pay the CAT if the business meets any of the following criteria:

• Taxable gross receipts sourced to Ohio are at least $500,000, even if the out-of-state business does not have a physical presence on Ohio
• Property in Ohio is at least $50,000
• Payroll in Ohio is at least $50,000
• The out-of-state business had, at any time during the calendar year, at least 25% of its total property, payroll or sales in Ohio
• The business is required to be part of an elected consolidated taxpayer group in Ohio

What businesses are exempt from the CAT?

The CAT applies to most businesses including, but not limited to, retail, wholesale, service, manufacturing and other general businesses.

The following types of businesses are excluded from the CAT:

• Not-for-profit organizations
• Most government entities
• Some public utilities
• Dealers in intangibles
• Financial institutions
• Insurance companies
• Certain affiliates of financial institutions and insurance companies
• Businesses with less than $150,000 of taxable gross receipts (unless they are part of a "consolidated elected taxpayer" or "combined taxpayer" filing in Ohio)

How are gross receipts sourced to Ohio?

If a taxpayer sells tangible personal property, the receipts are sourced to Ohio if the goods are delivered to Ohio. If a taxpayer sells services, the receipts are sourced to Ohio to the extent that the benefits of the services are received in Ohio.

How is the CAT calculated?

CAT taxpayers with taxable gross receipts of more than $150,000 but less than $1 million must pay an annual minimum tax of $150 per year.

CAT taxpayers with taxable gross receipts over $1 million are required to file quarterly returns. Quarterly taxpayers owe the $150 annual minimum tax for receipts up to $1 million and pay a rate component (equal to .26% when fully phased in) for taxable gross receipts in excess of $1 million. The CAT will continue to be phased in through 2009.

What happens if I fail to file my return or pay the CAT?

There are penalties for failing to file and pay the tax on time including proceedings to revoke a taxpayer's privilege or franchise to conduct business in Ohio. For example, a return filed late is subject to a penalty of up to 10% of the tax due or $50, whichever is greater.

Does the Ohio Department of Revenue offer a voluntary disclosure program for failure to pay the Ohio CAT?

Per a recent Ohio Department of Tax (ODT) information release, since the CAT was recently enacted, the ODT does not offer a voluntary disclosure program. However, under current ODT policy, penalties will be waived for taxpayers who come forward to register, file and pay the CAT if the ODT has not previously contacted the taxpayer, and the taxpayer is not under investigation.

In order to comply with the CAT, taxpayers must:

• Register,
• File all outstanding returns, and
• Pay any CAT liability plus interest from July 1, 2005 (or their liability start date) forward

Conclusion

We recommend reviewing your business activity in Ohio to see if you are liable for the CAT and to be sure your business is set up in the most efficient manner. This is a complex undertaking and you should consult with your Blackman Kallick tax advisor to make sure your business is structured and filing as efficiently as possible.

For more information, please contact Jason Parish at jparish@BlackmanKallick.com or 312-980-2959, or your Blackman Kallick representative. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.