Ohio’s Commercial Activity Tax

ORIGINS OF OHIO’S CAT

Ohio’s commercial activity tax (“CAT”) is an annual tax imposed on the privilege of doing business in Ohio, measured by gross receipts from business activities in Ohio. Businesses with Ohio taxable gross receipts of more than $150,000 per calendar year must register for the CAT, file all the applicable returns, and make all corresponding payments.

CAT was enacted in 2005 via House Bill (HB) 66 following a series of tax reform recommendations in the 2003 legislative committee’s study of Ohio’s state and local tax structure. Businesses pay the CAT, which measures taxable gross receipts and acts as a business privilege tax. CAT’s payment frequency is based on either quarterly or annually depending on meeting certain total taxable gross receipt thresholds. Ohio’s CAT replaced the tangible personal property tax and corporate franchise tax, with a broad-base low tax rate.

Commercial Activity Tax Explained

As mentioned above, CAT is an annual privilege tax measured by gross receipts on business activities in Ohio. It fully replaced Ohio’s corporate franchise tax in the beginning of 2010 for most businesses (except for financial institutions, insurance and securitization companies, non-profit organizations, and most governmental entities). A company subject to CAT must levy the tax on itself because it isn’t a sales or use tax that can be passed on to its customers directly.

Ohio companies with $150K+ taxable gross receipts/year must register and pay CAT to the state’s department of taxation. Taxpayers’ filing frequency for CAT is dependent on total gross receipts. If they exceed the $1 million threshold in a calendar year, they must file quarterly. However, if they are less than $1 million, then they would file annually.

CAT taxpayers earning $150K-$1M in a year pay only an Annual Minimum Tax (AMT), without any additional taxes. Gross receipts above $1M pay 0.26% * Taxable Gross Receipts; others pay only the Annual Minimum Tax. The AMT is due on May 10th with the filing of the annual or first quarter tax return.

AMT is a hierarchy since January of 2014 where companies pay proportionate to their commercial activity.

CAT For Out-of-State Sellers

CAT applies regardless of business location, as long as the taxpayer has enough Ohio business contacts. The tax has a wide reach since it affects any company that owns or uses capital in Ohio, or has a permit to operate in the state, has bright line presence or can or can be reached by Ohio for taxation under the U.S constitution (Boesen, 2021).

Ohio does not require physical presence to establish nexus for CAT purposes. CAT applies to out-of-state companies with ‘bright-line presence‘ in Ohio for any part of a reporting period or calendar year. A company meets the “bright-line presence” criteria if it satisfies at least one of the following conditions:

How Many Lives Does Ohio’s CAT Have Left?

State Representatives Jennifer Gross and Riordan McClain proposed HB 234 during Ohio’s 134th General Assembly (2020-2021) to have the CAT tax phased out incrementally over five years. The first year, the tax base would be lowered to 80 percent, the following year to 60 percent, and by 2026, the tax would be fully repealed. Since its referral to the House Ways & Means Committee on April 14, 2021, the bill has not gained traction. One can only speculate that with a rise in economic nexus following South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), and the dramatic rise in e-commerce business post-COVID 19, this bill may need to be readdressed to eliminate or reform CAT to be more applicable in the modern era.