Basic Information on the Ohio Commercial Activity Tax (CAT)

The annual minimum Commercial Activity Tax (CAT) is due May 12, 2014 for annual and quarterly filers. Annual CAT taxpayers (taxpayers with annual gross receipts between $150,000 and $1,000,000 in a calendar year) pay the annual minimum tax with the filing of the annual return. Quarterly CAT taxpayers (taxpayers with annual gross receipts greater than $1,000,000) pay the annual minimum tax with the filing of the first quarter return.

Quarterly CAT returns and Annual CAT returns filed on or after January 1, 2014 are required to be filed electronically. Taxpayers may file and pay electronically through the Ohio Business Gateway at business.ohio.gov. Alternatively, annual taxpayers may utilize TeleFile to file and pay the annual CAT return by using the telephone.

The CAT is a tax imposed on the privilege of doing business in Ohio, measured by taxable gross receipts from business activities in Ohio. The CAT rate of .26% plus the annual minimum tax applies to business entities with taxable gross receipts over $1,000,000. Business entities with annual taxable gross receipts between $150,000 and $1,000,000 are only subject to the $150 annual minimum tax.

Most receipts, including the receipts from the sale of property or performance of a service, generated in the ordinary course of business in Ohio are subject to the CAT. Gross receipts from sales to out-of-state purchasers or the portion of the services received outside of Ohio are not subject to the CAT.

The CAT applies to most forms of entities with taxable gross receipts of more than $150,000 in the calendar year, including individuals, pass-through entities and federally disregarded entities. Non-profit organizations, most governmental entities, certain receipts of public utilities subject to the public utility excise tax, financial institutions that pay the financial institution tax, insurance companies that pay the insurance premiums tax, certain affiliates of financial institutions, and businesses with less than $150,000 of taxable gross receipts are generally excluded from the CAT.

An out-of-state business or person is only required to register and pay the CAT if that business or person meets the bright-line presence test in Ohio. The bright-line presence test is satisfied if any one (1) of the following applies at any time during the calendar year:

1. Property in Ohio is at least $50,000; or
2. Payroll in Ohio is at least $50,000; or
3. Taxable gross receipts sourced to Ohio are at least $500,000; or
4. 25% of total property or total payroll or total gross receipts is in Ohio; or
5. The person/entity is domiciled in this state.

Taxpayers will utilize the previous calendar year’s taxable gross receipts to determine the current year’s annual minimum tax. For tax periods beginning on and after January 1, 2014, the annual minimum tax will become a tiered structure. See chart below.

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)

Penalties may apply for the failure to timely file and pay the tax, including proceedings to revoke a person or business’ privilege to conduct business in this state. A late filed return is subject to a penalty of up to 10% of the tax due or $50, whichever is greater.

For questions or more information on the Ohio CAT go to http://www.tax.ohio.gov/commercial_activities

New Idaho House Bill 598 Exempts Cloud Computing From Sales and Use Tax

Motivated by a desire to attract new “high-tech” businesses and add higher quality jobs to their economy, Idaho has enacted House Bill 598. Effective July 1, 2014 cloud computing services will no longer be subject to sales or use tax.

During the signing ceremony, the Governor explained the purpose of the bill, saying “services are not taxed in Idaho” and that the bill was intended to recognize that “services delivered through the internet are no different.” Thus, the law is intended to clarify that internet based software services are considered services, not tangible personal property and as such are exempt from sales and use tax.

As written, the bill exempts the following software services from sales and use tax:

• Computer software that is delivered electronically;

• Remotely accessed computer software (what is commonly referred to as “software as a service” or SaaS); and

• Computer software that is delivered by the load and leave method where the vendor or its agent loads the software at the user’s location but does not transfer any tangible personal property containing the software to the user.

However, digital music, books, videos (unless live streaming) and games are not exempt from sales tax under the new law. Although level of uncertainty still exists regarding the Idaho Department of Revenue’s interpretation and enforcement of the new law, the law still represents a significant step in Idaho’s tax reform process.

SB 1413 Could Create Large AZ Transaction Privilege Tax Savings for Manufacturers

Recently the Arizona Legislature passed a series of tax reform laws and incentive programs (predominantly aimed at enticing Apple to build a manufacturing facility in this state). The manufacturing sector of Arizona is a beneficiary of the tax reform package and is billed as a way to diversify the Arizona economy. On April 8th Senate Bill 1413 was passed by the House and sent on its way to Governor Brewer to be signed in to law. S.B. 1413 is designed to take the tax burden off certain manufacturers operating in Arizona. According to Chad Heinrich, the Vice President of the Greater Phoenix Chamber of Commerce and an advocate for S.B. 1413, the law is premised on the belief that lowering the tax burden on manufacturers will attract more manufacturers to Arizona and help diversify our economy. The law includes three distinct provisions that may substantially affect the tax liability of our manufacturing clients. S.B. 1413:

1. Exempts from the Arizona Transaction Privilege Tax (TPT) sales of electricity or natural gas to a business that is principally engaged in manufacturing or smelting operations AND that uses at least 51% of the electricity or natural gas in the manufacturing or smelting operations.

2. Exempts the purchase price of electricity or natural gas by a business that is principally engaged in manufacturing or smelting operations that uses at least 51% of the electricity or natural gas in manufacturing or smelting operations from use tax.

3. Provides that municipalities must either adopt S.B. 1413 in its entirety or not, they may not change definitions or otherwise alter the law.

Basically, any of our clients that purchase electricity and/or natural gas of which over half is used in their manufacturing process should not be charged AZ TPT by their vendor. Also, they will be relieved from self-assessing any use tax for electricity and/or natural gas used in the same manner — if they purchase those materials from an out-of-state vendor. However, it is unclear how manufacturers are going to prove their eligibility to take advantage of S.B. 1413, but it will likely require purchasers to use some sort of exemption certificate. Furthermore, our clients should be on the look-out for whether the jurisdictions in which they operate have chosen to follow or deviate from S.B. 1413. But, in either event, manufacturing clients who fit the use threshold, should see fairly significant tax savings once S.B. 1413 becomes effective, which at this point is still up in the air.

State and Local Tax Burdens

The Tax Foundation released a report outlining the state and local tax burdens of the residents of each state. Some of the key findings of the report are below:

•During the 2011 fiscal year, state-local tax burdens as a share of state incomes decreased on average. This trend was largely driven by the growth of income in all states.
•In 2011, the residents of New York, New Jersey, and Connecticut had the highest state-local tax burdens as a share of income in the nation. In these states, residents have forgone over 11.9 percent of income due to state and local taxes.
•Residents of Wyoming paid the lowest percentage of income in 2011 at just 6.9 percent. They replaced Alaska, which had previously been the least-taxed for multiple decades, as the lowest-burdened state in the nation. After Wyoming and Alaska, the next lowest-taxed states were South Dakota, Texas, and Louisiana.
•State-local tax burdens are very close to one another and slight changes in taxes or income can translate to seemingly dramatic shifts in rank. For example, the twenty mid-ranked states, ranging from Oregon (16th) to Georgia (35th), only differ in burden by just over one percentage point.
•On average, taxpayers pay more to their own state and local governments (73 percent of total burden). Taxes paid within states of residence decreased on average in 2011, while taxes paid to other states increased, leading to a slight decrease in total burden. Some states deviated from these national trends, however.

For the full report, visit:
http://taxfoundation.org/article/annual-state-local-tax-burden-ranking-fy-2011

Minnesotta Tax Cuts

On March 21, 2014 Minnesota Governor Mark Dayton signed and approved $508 million in tax cuts.

The bill included cuts for:
Married Couples
Families
Parents
Students
Employers
Business Sales Taxes

It also included changes such as:
Tax Credits for Innovation and Jobs
Angel Investor Tax Credit
Simplifying the Estate Tax
Eliminating the Gift Tax

For more detail visit:
Tax Breaks Now Law, What Minn. Taxpayers Need to Know

State and Local Income Tax Bracket Updates

The Tax Foundation has listed an updated list of state and local tax brackets.
Some key changes that they found for this year include:

  • State income tax systems have significant variation in structure, rates, deductions, and exemptions, including 9 states with no income tax on wages and 8 with flat income taxes.
  • North Carolina became a flat tax state, moving from three brackets to just one.
  • Massachusetts, another flat tax state, reduced its rate slightly.
  • Kansas, North Dakota, Ohio, and Wisconsin all made across-the-board income tax rate reductions relative to 2013 rates.
  • Minnesota added a high-earner tax bracket of 9.85 percent on income over $152,540 for single filers.

For a full list of changes visit:
State Tax Income Brackets for 2014 Update

March 31st Deadline for Montana Water’s Edge Election

The deadline to make or renew a Montana Water’s Edge Election for calendar year corporations is March 31, 2014. See below for specifics on election periods and requirements.

Montana’s corporate income tax regime requires members of a unitary business to report on a worldwide combined basis, unless a water’s-edge election is made. Under Montana law, taxpayers who elect water’s-edge reporting may exclude certain foreign affiliates from the combined return, in exchange for paying a higher tax rate. A water’s-edge group pays the tax at a rate of 7% on all taxable income for the taxable period as opposed to the regular rate of 6.75%.

A water’s-edge election made by a taxpayer is effective only if every affiliated corporation subject to Montana taxes consents to the election. Consent by the common parent of an affiliated group constitutes consent by all members of the group. An “affiliated corporation” is defined as a United States parent corporation and any subsidiary if more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent or by another subsidiary of the parent whose income and apportionment factors must be included in a return under a water’s-edge election. An affiliated corporation also includes any corporation that is unitary with the taxpayer and that is incorporated in a tax haven. The following are considered tax haven countries under current Montana law:

Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Grenada, Guernsey-Sark-Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, Luxembourg, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Panama, Samoa, San Marino, Seychelles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos Islands, U.S. Virgin Islands, and Vanuatu.

Other affiliated corporations which may be included are DISCs and FSCs, export trade corporations, foreign corporations which derive gain or loss from real property interests in the U.S., and corporations incorporated outside the U.S. but which have 50% of their stock owned directly or indirectly by the taxpayer and more than 20% of their average payroll and property assignable to a location inside the U.S.

A taxpayer must file a Form WE – ELECT in order to make or renew a water’s-edge election. The filing of returns and paying of tax under the water’s-edge election method without the filing of a Form WE – ELECT will not be accepted as a valid election. Furthermore, the election must disclose the taxpayer’s identity and a complete listing of all domestic and foreign affiliates owned in excess of 50%. The taxpayer must also provide detailed explanations of affiliates excluded from the water’s edge group.

Currently, a corporate entity may make a water’s-edge election for a three-year period. Form WE – ELECT must be filed within the first 90 days of the first tax year for which the election is to become effective. Thus, if a calendar year taxpayer files an election by March 31, 2014, tax year 2014 will be the first year of the three year election. If the first tax period for which the election is to become effective is less than 90 days, the taxpayer will have until the end of the tax period to file the election. Retroactive elections are not permissible. The election is binding for the entire three-year period unless the taxpayer obtains permission from the Montana Department of Revenue to change its election.

Upon receipt of the Form WE- ELECT, the Department will either approve or deny the election request by marking the appropriate box on the face of the form. The form will be sent back with a letter from the Department either providing additional information regarding a valid water’s edge election or an explanation as to why the water’s edge election request was denied. If confirmation is not received within two weeks of submitting the request or by the deadline to make a valid election, the Department recommends taxpayers contact them as there may be a problem with the request.