In Focus: Commercial Activity Tax FAQ

In Focus: Commercial Activity Tax FAQ

By now, you may be aware of Ohio's major tax changes, but you probably have many questions about how they will apply to you. Here are some frequently asked questions and answers as provided by the Ohio State Department of Taxation:

1. What is the Commercial Activity Tax (CAT)?

The CAT is an annual privilege tax measured by taxable gross receipts from most business activities. Most receipts generated in the ordinary course of business are subject to the CAT. The CAT only applies to those gross receipts that are sourced to Ohio.

2. When is the first CAT return due?

The first return is for a semi-annual period (July 1, 2005 to Dec. 31, 2005) for both annual and quarterly taxpayers and is due Feb. 10, 2006. A fee (or minimum tax) for taxpayers with at least
$150,000 in taxable gross receipts for the semi-annual period of $75 will be due with that return (less any registration fees paid). In addition, a tax rate of .06 percent (0.0006) is applied to taxable gross receipts over $500,000 (the first $500,000 in taxable gross receipts is excluded). The method you use for federal tax purposes controls what receipts you have to report for each tax period.

3. Who is subject to the CAT?

The CAT applies to most businesses including (but not limited to) retail, wholesale, service, manufacturing and In Focus Commercial Activity Tax FAQ other general businesses regardless of how the business is organized. For example, sole proprietorships, partnerships, LLCs, S corporations, C corporations, disregarded entities (SMLLC, QSSS, etc.), trusts and all other type of associations with taxable gross receipts of more than $150,000 in the calendar year (privilege year) are subject to the CAT.

4. Who is not subject to the CAT?

• Non-profit organizations
• Most governmental 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 a "combined taxpayer")

5. What is a Consolidated Elected Taxpayer?

A consolidated elected taxpayer is a group of entities owned by a common owner. Consolidated elected taxpayers must meet and agree to all of the following requirements:

• This group elects to include all members of the group having at least 80 percent, or all members having more than 50 percent, of the value of their ownership interest owned by common owners during all or any portion of the tax period.

• Additionally, an election must be made to either include or exclude all foreign (non-US) corporations meeting the selected ownership test (80 percent or 50 percent). This election must be made during the filing of the initial registration.

As a consolidated elected taxpayer, the group must agree to file as a single taxpayer for at least the next eight calendar quarters following the election as long as two or more of the members meet the requirements. Such election also requires entities in the group that may not have enough contacts to also be included as part of the elected consolidated taxpayer group. A major benefit of this election is that for most taxpayers, taxable gross receipts between members of the group are not subject to the CAT.

6. What is a Combined Taxpayer?

A group of entities, that has more than 50 percent owned or controlled by a common owner, and chooses not to be a consolidated elected taxpayer must register as a combined taxpayer. A major difference between a consolidated elected taxpayer and a combined taxpayer is that a combined taxpayer only has to register all members that have the required contacts to be required to be a taxpayer for this tax in Ohio.

Cautionary note: A combined taxpayer cannot exclude taxable gross receipts between its members nor exclude taxable gross receipts from others that are not members. A consolidated election must be made to obtain that exclusion. In addition, if the 80 percent common ownership test or election to exclude non-US corporations is made under the consolidated provision, such taxpayers with more than 50 percent ownership that have the requisite contacts are required to file as a combined taxpayer.

Similar to a consolidated elected taxpayer, a combined taxpayer must register, file returns and pay the CAT as a single taxpayer.

7. What are gross receipts?

• All amounts received from the sale, exchange or disposition of property
• All amounts received from the performance of a service
• All amounts received from rents or another's use or possession of property or capital
• Any combination of the above

Gross receipts reflect the total amount realized, without deduction for the cost of goods sold or other expenses incurred, in a transaction or transactions that contribute to the production of gross income including the fair market value of any property and services received and any debt transferred or forgiven.

8. Are there any deductions from gross receipts?

Yes. The following may be deducted from gross receipts:
• Cash discounts allowed and taken
• Returns and allowances
• Bad debts from receipts upon which the tax imposed by this chapter was previously paid. Bad debts include any debts that have become worthless or uncollectible, have been uncollected for at least six months and may be claimed as a deduction under the Internal Revenue Code or that could be claimed as such if the taxpayer kept its accounts on the accrual basis. The term "bad debts" does not include uncollectible amounts on property that remain in the possession of the taxpayer until the full purchase price is paid, expenses in attempting to collect any account receivable or for any portion of the debt recovered, or repossessed property.
• Any amount realized from the sale of an account receivable to the extent the receipts from the underlying transaction giving rise to the account receivable were included in the gross receipts of the taxpayer

Before You Act

The most important thing to know is that you should not register until you have guidance from your accountant. There are three ways a taxpayer can register: as a consolidated elected group, as a mandatory combined group or as a separate taxpayer. There are differing benefits and costs associated with each. Rea & Associates will perform a careful analysis to see which status applies and benefits you most.