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Tax implications of Gov. Kasich’s new budget discussed
SHERRY KARABIN
Legal News Reporter
Published: August 18, 2015
More Ohio residents who do their shopping online will soon find themselves paying sales tax, while many of those who own small and medium-sized businesses will get a tax break. Those are just some of the changes contained in Gov. John Kasich’s 2016-2017 budget bill.
Signed into law by Gov. Kasich on June 30 after he used his line-item veto to eliminate 44 provisions, the $71.2 billion budget substantially expanded sales/use tax nexus, requiring an increasing number of out-of-state companies who sell their products online to collect taxes from customers.
“Nexus is the necessary connection a business must have before state taxes may be imposed under the Commerce Clause of the U.S. Constitution,” said Richard Fry III, a partner at Buckingham, Doolittle & Burroughs. “For sales tax, the U.S. Supreme Court has established a bright-line physical presence standard, meaning vendors do not need to collect sales tax if they do not have employees, representatives or property in the state.
“Ohio’s new nexus law specifically focuses on the presence of representatives referring sales over the Internet and that of commonly-owned affiliates to establish the Ohio physical presence required for sales tax collection,” said Fry.
“I have clients selling products on the Internet who are not required to collect and choose not to collect sales tax because of the administrative aspect,” said Terri Brunsdon, a certified public accountant and tax attorney at Brunsdon Law, an affiliate of Day Ketterer. “It is a major burden to stay abreast of the varying sales tax laws and rates from state to state. In Ohio, the rates are different in every county. Even registering to collect sales tax in some states is a hassle.
“However, what many consumers fail to realize is that when they are not paying a sales tax, they owe a use tax, which must be paid by them to the state of Ohio, ” said Brunsdon. “Ohio’s enactment of ‘click-through’ nexus will broaden the definition of substantial nexus and bring it in line with several other states. This means that the state can now require more online retailers to collect sales tax.”
Brunsdon said she has noticed Amazon.com, Inc. already collecting sales tax from Ohio customers after it recently announced plans to open several data centers in the Columbus area.
“Amazon’s nexus is because it will have a physical presence in the state,” said Brunsdon. “However, nexus can also be established when a company has telemarketers or independent contractors in the state, has a distribution center in the state, assembles products in the state or delivers its products by means other than through common carrier to residents in the state.”
According to Fry, Ohio’s law is different than those adopted by other states in two ways: It specifically applies to sales referred by telemarketers, which he said may discourage out-of-state companies from using Ohio telemarketers, and the threshold for establishing the connection is lower than that required by other states.
“Nexus is presumed to exist if referrals from Ohio representatives or telemarketers result in at least $10,000 of sales,” said Fry. “Other states require $10,000 in commissions to be paid to those referring sales before nexus exists.”
Fry said if a company sells the same product lines or uses the same trademarks, service marks or trade names as an the out-of-state retailer, Ohio now deems nexus to exist.
“Essentially out-of-state retailers are now presumed to have nexus if any commonly-owned business has substantial nexus with Ohio, regardless of whether the affiliate’s operations are related or contribute to the retailer’s ability to establish or maintain an Ohio market.
“General advertisements or other agreements do not apply,” said Fry. “The concept is that mere advertising does not create nexus. For instance, if a business purchases an ad on an Ohio TV or radio broadcast or an ad in an Ohio newspaper, that presence through advertising does not create nexus.”
In addition, out-of-state retailers must register to collect Ohio use tax before they provide property or services to any state agency.
While more residents may have to pay sales tax, the budget establishes a 6.3 percent across-the-board cut in state income taxes, reducing the top tax rate in 2015 from 5.33 percent to 4.997 percent.
Brunsdon said business owners of pass-through entities and sole proprietorships would not pay income tax on 75 percent of their business income, up to $250,000, in 2015. In 2016, these business owners will pay no income tax on the first $250,000 in income. Additionally, in 2015 and 2016, income that exceeds the first $250,000 will be taxed at a rate of three percent.
“This could include income from rental real estate or from licensing intellectual property, if such activities are integral to your business,” said Fry. “Small business owners will also be entitled to the reduced three percent tax rate on the sale of their business.”
“Pass-thru entities are usually small- to-mid-sized businesses,” said Brunsdon. “Many of these entities are the ones creating new jobs in the state so giving the owners a tax break may attract more businesses to the state, thus grow the state’s economy.”
A portion of the tax break is being paid for by increasing the cigarette tax by 35 cents to $1.60 a pack.
“This new budget fits Governor Kasich’s overall goal of reducing income tax on individuals, especially small business owners, while expanding the tax burden to more out-of-state companies,” said Fry.
Kasich’s budget increased basic state aid for K-12 schools by $955 million more than the last two-year period. No district will receive less than it did this year.
Further, Ohio colleges and universities must freeze tuition rates for the next two years and look for ways to reduce tuition costs.
“I think the tuition freeze is an important move,” said Brunsdon. “Something needs to be done to address the rising cost of education. Many students find themselves unable to pay back the significant debt they acquired in college. And let’s not forget that these loans are not dischargeable in bankruptcy. The next bubble we face in this country may be student loan debt.”
Fry said some counties have been authorized to increase their hotel/lodging taxes.
“Municipalities can also levy a tax on businesses making sales in a tourism development district, whether it’s wholesale or retail,” said Fry. “I believe this is partially geared toward Cuyahoga County, which will host the Republican National Convention.”