Although not discussed in this item, Section 5751 provides for a select number of exceptions and exemptions - including the annual exclusion for the first $1 million of Ohio receipts - whereby the gross receipts are not subject to the CAT. Ohio calculates gross receipts as total consideration received, affording no deductions for cost of goods sold or related selling expenses. The CAT applies to the gross receipts of sales sourced to the state (Ohio Rev. Getting ahead of these issues can help reduce the prospect of undesirable tax consequences. Methods exist to mitigate exposure by proactively managing the integrity of incoming data combined with application of the Ohio CAT regulations. Fortunately, Ohio's R&D credit system operates in a fairly straightforward manner and provides taxpayers a direct method for both realizing an immediate offset of CAT liability and reconciling prior periods within the statute of limitation.Ĭumulatively, these three items - although not an all- inclusive summary of potential pitfalls surrounding the Ohio CAT - represent aspects of compliance commonly encountered by taxpayers and frequently scrutinized by examiners in the course of an audit. Often, these credits are claimed under the federal tax provisions, but taxpayers may neglect to realize the qualified activities entitle the organization to receive a benefit on their quarterly Ohio CAT return, too. Third, consistent with other state taxing authorities, Ohio provides taxpayers a research and development (R&D) credit for qualified activities conducted within the state. Considering the four- year statute of limitation on CAT filings, the presence of an improper filing structure may not derail a transaction entirely but could present an unpleasant blemish on the due- diligence report, prompting further discussion and a potential reduction in sales price. Second, with the continued proliferation of private- equity group investments and frequent portfolio modifications (i.e., mergers, acquisitions, and disposals), proper treatment of these transactions for purposes of the Ohio CAT becomes paramount to reducing the likelihood of later discovering additional tax liability. Accurate tracing of revenue carries particular importance when applied to gross- receipts taxes, as improperly apportioned revenue may lead to unfavorable tax liability increases upon audit of the taxpayer's CAT fillings. State taxing authorities may require sourcing based on where a majority of the performance costs were incurred (cost of performance), mandate apportionment according to the location where the customer receives a benefit ( market- based sourcing), or impose a standard dependent upon whether the company sells tangible personal property or renders a service. This item discusses three key considerations requiring attention during CAT return preparation, offering insight into methods for mitigating the unintended and disconcerting consequences of noncompliance.įirst, state and local tax return preparation necessitates analysis of the taxpayer's sales apportionment data as relevant to the jurisdiction's current receipts- sourcing methodology. Regardless, taxpayers often experience compliance challenges - whether caused by incorrect interpretation and execution of the regulations or simple misunderstanding of the requirements applicable to their industry. Code Section 5751 provides guidance on the taxability or exempt nature of various types of revenue. The Ohio commercial activity tax (CAT), a state- level tax imposed on certain gross receipts in lieu of a state income tax, presents its own set of intricacies and regulatory requirements.
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