The Commercial Activity Tax (CAT) Is Out of the Bag

Over the past several months, we have seen a substantial increase in notices sent to companies doing business in Ohio encouraging compliance with the Commercial Activity Tax (“CAT”). A logical explanation may be the recent surge in sales tax registrations in Ohio relating to the new economic nexus requirements resulting from the South Dakota v. Wayfair decision. Many companies are unaware of what the Ohio CAT is and if they are required to file and remit payments.

Welcome to OH CAT 101:

  • The CAT is a tax imposed on companies that do business in Ohio and is calculated using the taxable gross receipts received in the ordinary course of business. The tax is not a sales/use tax, but is substantially similar with far fewer exclusions and most notably, unlike a sales tax, cannot be passed on to the Company’s customers. The tax only applies to gross receipts situating in Ohio, therefore receipts received by purchasers located outside of Ohio are not considered part of the CAT.
  • The tax rate for gross receipts equaling $1 million or less is taxed at $150. The annual minimum tax becomes a tiered structure, and taxpayers will pay an amount that corresponds with their overall commercial activity. Please refer to the table below containing the various amounts due. All for the privilege of doing business in Ohio.

Taxable Gross Receipts

Annual Minimum Tax

CAT

$1 Million or less

$150

No Additional Tax

More than $1 Million but less than or equal to $2 Million

$800

0.26% x (Taxable Gross Receipts - $1 Million)

More than $2 Million but less than or equal to $4 Million

$2,100

0.26% x (Taxable Gross Receipts - $1 Million)

More than $4 Million

$2,600

0.26% x (Taxable Gross Receipts - $1 Million)

  • Most for-profit businesses with taxable gross receipts derived from sales to customers in Ohio over $150,000 in the calendar year are subject to the CAT. However, there are a few exclusions: Non-profit organizations, most governmental entities, public works, etc. are not subject to the tax.
  • A company may elect to register as a consolidated elected taxpayer. A consolidated elected taxpayer will file on behalf of a group of entities under the common owner as a single taxpayer. After electing to act as a consolidated elected taxpayer, the business must file in this manner for the next eight quarters (or two years). There is a major benefit to electing to register as a group as taxable gross receives between each entity are not subject to the commercial activity tax.
  • In computing the amount of gross receipts subject to tax, there is no exclusion for cost of goods sold, resale or manufacturing exemptions, and generally, intercompany sales to related parties in Ohio are also subject to tax, unless the consolidated group elects to file on a combined basis.
  • The filing frequency depends on the amount of taxable gross receipts:
    • If more than $1 million in taxable gross receipts within the calendar year, the filing frequency is quarterly
    • If less than $1 million in taxable gross receipts within the calendar year, the filing frequency will be annual
  • Record retention period is four years from the date the tax is due or the date the taxes were filed, whichever is later.

Additional information can be found on Ohio’s Taxation website here.

What happens if a company does not file the Ohio CAT? The Ohio Department of Taxation can initiate a CAT audit with a lookback period of 10 years that would include penalties and interest. However, the state also offers a reasonable anonymous voluntary disclosure program with a lookback period of only three years that eliminates the penalties and gives companies the opportunity to pay their CAT liabilities timely. One caveat of the voluntary disclosure program is the company must not have received a notice from the Ohio Department of Taxation; the company must come forward prior to receiving a notice.

Following in Ohio’s footsteps, on May 16, 2019, Oregon Governor Kate Brown (D) signed Enrolled H.B. 3427. The state’s proposal to initiate a Corporate Activity Tax (CAT) will go into effect on January 1, 2020. The Oregon CAT will incorporate the situsing of Oregon gross receipts with an apportioned 35% deduction of either “cost inputs” or “labor costs.”

For companies that want to avoid playing a game of “cat and mouse” with the Ohio Department of Taxation, the Duff & Phelps Sales and Use Tax team encourages a review of the status of sales to customers in Ohio, and if appropriate, consider entering into a Voluntary Disclosure Agreement with the state before receipt of a notice of non-compliance.

H.B. 3427, 80th Oregon Legislative Assembly, 2019 Regular Session. (OR. 2019).
Ohio Department of Taxation. (2018). Annual Report Fiscal Year 2018. Retrieved from
https://www.tax.ohio.gov/Portals/0/communications/publications/annual_reports/2018AnnualReport/AR2018.pdf

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