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Overview of the Commercial Activity Tax (CAT). Sarah E. O’Leary, Administrator, Commercial Activity Tax Division Ohio Department of Taxation. Hudson, Ohio November 14, 2009. Agenda. Brief Overview of the CAT Auditing and Compliance Filing Tips CAT Statistics Recent Court Cases

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Overview of the commercial activity tax cat

Overview of the Commercial Activity Tax (CAT)

Sarah E. O’Leary, Administrator, Commercial Activity Tax Division

Ohio Department of Taxation

Hudson, Ohio

November 14, 2009


Agenda
Agenda

Brief Overview of the CAT

Auditing and Compliance

Filing Tips

CAT Statistics

Recent Court Cases

List of Information Releases and Rules

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Commercial activity tax a few things to keep in mind
Commercial Activity Tax:A few things to keep in mind…

A broad-based, low rate tax (0.26%) on gross receipts from business activity in Ohio

Generally, taxpayers with less than $150,000 in taxable gross receipts are not subject to the CAT

Rate structure of the tax:

Pay $150 minimum tax on first $1 million in taxable gross receipts

Receipts above $1 million, pay $150 plus 0.26% on amount in excess of $1 million

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Nature of the cat r c 5751 02
Nature of the CATR.C. 5751.02

Tax is imposed annually for the privilege of doing business in Ohio

“Doing business” means any activity for gain, profit, or income (legal or illegal)

Not a transactional tax (important for Ohio’s Constitution)

Not a tax on or measured by income – P.L. 86-272

Tax may not be billed or invoiced to another

Tax may be passed on as part of price

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Cat taxpayers r c 5751 01 d
CAT TaxpayersR.C. 5751.01(D)

Taxpayers are all persons or groups of persons required to file returns or to pay the tax

“Person” includes corporations, pass-through entities, individuals, joint ventures, clubs, trusts, and disregarded entities

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Excluded persons r c 5751 01 e
Excluded PersonsR.C. 5751.01(E)

“Excluded persons” include the following entities:

Public utilities, dealers in intangibles, financial institutions and insurance companies that are subject to other taxes imposed by the state

Certain subsidiaries of entities listed above

Certain irrevocable trusts created pre-1972 (before Ohio’s income tax)

Nonprofit organizations

Most governmental agencies

Persons with receipts <$150,000

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Mandatory combined reporting
Mandatory Combined Reporting

Groups of persons meeting certain ownership thresholds must file as a group

Two options:

Consolidated Elected Taxpayer Group – An election

Combined Taxpayer Group – Mandatory if no election

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Commercial activity tax cat
Commercial Activity Tax (CAT)

Consolidated Elected Taxpayer

At least 50% or 80% common ownership

Option to include or exclude non-US entities

Must include all entities regardless of nexus in Ohio

Gross receipts between members are excluded

Combined Taxpayer

More than 50% common ownership

Combined only required to include entities with nexus in Ohio

Gross receipts resulting from payments between members are subject to the CAT

Consolidated Elected vs. Combined Taxpayer

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Common ownership
Common Ownership

Value of ownership is owned or controlled, directly or constructively through related interests, by common owners

It is for all or any portion of a tax period

ODT has issued rule to further clarify common ownership:

Rule uses a “vertical control” test focused on voting rights

Family attribution rules do not apply (e.g., IRC provisions addressing owners of S corporations)

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Bright line presence r c 5751 01 i
“Bright-line Presence”R.C. 5751.01(I)

MTC Factor Presence Nexus Used:

Person has “bright-line presence” for quarter and remainder of year if any of the following applies:

Property of at least $50,000 within state

Payroll of at least $50,000 within state

Annual taxable gross receipts of at least $500,000

At least 25% of total property, payroll, or gross receipts in this state

Is domiciled in this state (commercially or legally)

Economic presence standard to fairly apply the tax to both instate and out-of-state businesses that benefit from receiving gross receipts from purchasers located in Ohio

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Gross Receipts Definition

Broad Gross Receipts Base

Exclusions

e.g., interest, capital gains, wages (received), bad debt, cash discounts

Situsing Rules – i.e., Taxable Gross Receipts

Limited Credits Applicable to CAT

What is Subject to the CAT?

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What is subject to the cat situsing rule services

Gross receipts from the sale of services are sitused to Ohio in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

The physical location where the purchaser ultimately uses or receives the benefit of what was purchased shall be taken into consideration when determining the proportion of the benefit

Reasonable test can be used – must be applied in uniform and consistent manner

What is Subject to the CAT?Situsing Rule - Services

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What is subject to the cat situsing rule everything else
What is Subject to the CAT? in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere. Situsing Rule – Everything else

  • TPP: Ultimate delivery location

  • Rents/royalties from real property: Property location

  • Rents/royalties from TPP: Location/Use of TPP

  • Electricity/Electric transmission distribution: Miles

  • Sale of real property: Property location

  • Sale/exchange/distribution/use of IP (e.g., trade names):

    • Amount of use: Apportion to state(s) of use

    • Right to use: Apportion to state(s) where right to use

  • Transportation: Miles

  • Dividends/interest/financial income: R.C. 5733.056(F)


Tax returns
Tax Returns in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

Filing a tax return:

Taxpayers with taxable (Ohio) gross receipts in excess of $150,000, but less than $1 million pay an annual flat tax of $150 (May. 10th each year)

Taxpayers with taxable (Ohio) gross receipts in excess of $1 million pay $150 on the first $1 million ($250K per quarter) and remit the tax on the remainderquarterly

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Tax returns1
Tax Returns in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

Example – 1st QTR 2010 Return

$ 150 payment of 2010 tax minimum due May 10, 2010

First Quarter Tax Calculation

$ 1,500,000 in taxable (Ohio) gross receipts

$ - 250,000 exclusion amount for 4th quarter

$ 1,250,000 x .0026 = $3,250

Total payment of $3,400 Due May 10, 2010

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Tax returns2
Tax Returns in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

Deadlines for filing a quarterly return:

4th Qtr 2009: February 10, 2010

1st Qtr 2010 & Annual Return: May 10, 2010

2nd Qtr 2010: August 10, 2010

3rd Qtr 2010: November 10, 2010

4th Qtr 2010: February 10, 2011

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Commercial activity tax cat1
Commercial Activity Tax (CAT) in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

Statute provides three rate adjustments so that the tax does not generate too much revenue

The 2007 and 2009 measurement periods did not trigger a rate adjustment

There is one additional rate adjustment –after FY 2011

These adjustments are made by the Tax Commissioner using a prescribed formula

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Auditing and compliance

Auditing and Compliance in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.


Auditing
Auditing in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

ODT established an audit team to develop audit procedures and an audit manual. This is an ongoing process as additional audits are completed.

Part of the process included Voluntary Compliance Reviews (VCRs)

No penalties imposed

ODT conducted 10 VCRs

ODT is now conducting normal audits which will, if applicable, include penalties

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Identifying potential taxpayers
Identifying Potential Taxpayers in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

New Nexus Unit

Ohio Department of Taxation is looking for leads from the following:

Other taxes

- Over 400,000 notices sent

Leads from audits of other taxpayers

- Approximately 750 notices sent

Third party information to locate out-of-state businesses

90,000 mailings made thus far

Various other sources

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Compliance
Compliance in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

ODT has issued estimated assessments against entities with apparent bright-line presence. These assessments include:

10% of tax late filing penalty

15% of tax late payment penalty

35% of tax failure to register penalty

(Total potential penalty of 60%)

$100/month, maximum $1,000, penalty for failure to register

Assessments will continue to be issued as additional information is received.

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Voluntary disclosure agreements vdas
Voluntary Disclosure Agreements (VDAs) in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • Information Release CAT 2008-01 – Revised May 2009

  • Allows VDA for CAT

    • Interest only – no penalties (as long as taxpayer never contacted via audit or compliance program)

  • Steps for VDA:

    • Send request for VDA in writing to CAT Division

    • ODT sends letter, contract, and returns/regis.

    • Register, file returns, pay tax

    • ODT bills for interest


Commercial activity tax

Commercial Activity Tax in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

Filing Tips


Tips for successful filing
Tips for Successful Filing in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • Identify all documents with account #

  • Do not copy forms and reuse

  • Only primary entity is required to file

  • Quarterly taxpayers must file regardless of taxable gross receipts

  • Reporting multiple periods on one return

    • New taxpayer

    • Delinquent taxpayer


Tips for successful filing1
Tips for Successful Filing in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • Estimated Returns

    • Check the proper estimation box on return/OBG

      • Rule estimate must file reconciliation quarterly

      • Statutory must file reconciliation yearly

    • Cannot file an estimate after billing received for that period

    • No estimates in first Qtr 2007, 2009 or 2011

  • If filing estimate returns, taxpayer must reconcile


Tips for successful filing2
Tips for Successful Filing in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • Amended Returns

    • Include total TGR for the reporting period, not just difference from original filing

  • Payments

    • Identify with CAT account # and period-end date

    • Mail separately to each tax division

    • Watch for payment from checking

      • If electronic, determine why account blocked


Commercial activity tax1

Commercial Activity Tax in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

Statistics*

*Information as of November 2, 2009


Commercial activity tax cat2
Commercial Activity Tax (CAT) in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

Types of filers:

Approximately 118,676 taxpayers pay only the $150 annual minimum tax

Another 59,880 taxpayers pay $150 annual minimum tax, plus the quarterly tax on their taxable gross receipts in excess of $1 million

CAT is expected to raise at least $1.3 billion by FY 2010 (with no rate adjustments)

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Taxpayer registration types
Taxpayer Registration Types in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

Active Taxpayers: 178,551

Single Entity: 154,600

Combined Taxpayer Groups: 6,010

Largest Group: 500 Members

Average Group: 3 Members

Consolidated Elected Taxpayer Group: 17,836

Largest Group: 3,020 Members

Average Group: 6 Members

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Cat revenue
CAT Revenue in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • Actual Collections – 1st Measurement Period:

    • FY 2006: $273.4M

    • FY 2007: $594.9M

      • Total: $868.3M (Target: $815M [+ 6.5%])

  • Actual Collections – 2nd Measurement Period:

    • FY 2009: $1.18B (Target: $1.19B [-1%])

  • Next measurement period: July 1, 2010 - June 30, 2010

    • Trigger: $1.61B

      • ODT projects collections will be far short of estimate


Cat taxpayer base by industry
CAT Taxpayer Base by Industry in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.


Case law update

Case Law Update in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.


Case law update1
Case Law Update in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • Ohio Grocers Assn. v. Wilkins

    • Decision by Ohio Supreme Court issued September 17, 2009

    • 28 amici groups supported position (7 briefs)

  • Beaver Excavating v. Levin

    • Status Conf. Scheduled later in November Re: Grocers’ decision

  • Ohio Farmers Foodservice v. Wilkins

    • September 29, 2009 case dismissed

  • Overstock.com v. Levin

    • Motion to Dismiss – Granted August 31, 2009 (Franklin Co.)


Administrative Rules and Information Releases in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.


Administrative rules and information releases
Administrative Rules and Information Releases in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • CAT 2005-02: CAT Nexus Standards

  • CAT 2005-03: Excluded Person

    • Adm. Rule 5703-29-04

  • CAT 2005-04: Electronic Filing

    • Adm. Rule 5703-29-05

  • CAT 2005-05: “Common Owners and Joint Ventures

    • Adm. Rule 5703-29-02

  • CAT 2005-06: Situsing of Services

    • Adm. Rule 5703-29-17

  • CAT 2005-07: Transfers of Property Into the State

    • Adm. Rule 5703-29-06


Administrative rules and information releases continued
Administrative Rules and Information Releases (Continued) in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • CAT 2005-08: I.R.C. Section 1221 and 1231 Assets Excluded from Gross Receipts

  • CAT 2005-09: Sampling

    • Adm. Rule 5703-29-03

  • CAT 2005-12: Request to File Separately

    • Adm. Rule 5703-29-08

  • CAT 2005-13: Estimated Payments for Quarterly Taxpayers

    • Adm. Rule 5703-29-09

  • CAT 2005-14: Nonprofit Organizations

    • Adm. Rule 5703-29-10

  • CAT 2005-18: Temporary Motor Fuel Exemptions

    • Adm. Rule 5703-29-12

  • CAT 2006-01: Applicable Excise Tax Rates for Purposes of the CAT


Administrative rules and information releases continued1
Administrative Rules and Information Releases (Continued) in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • CAT 2006-03: Agency, Defined

    • Adm. Rule 5703-29-13

  • CAT 2006-04: Cash Discounts, Defined

    • Adm. Rule 5703-29-14

  • CAT 2006-05: Highway Transportation Services: Bright-Line Presence and Situsing

    • Adm. Rule 5703-29-15

  • CAT 2006-07: Qualified Distribution Center

    • Adm. Rule 5703-29-16

  • CAT 2006-08: Situsing Receipts from Periodic Payment for Mobile Property

    • Adm. Rule 5703-29-20

  • CAT 2006-09: CAT Records Retention Requirements

    • Adm. Rule 5703-29-18


Administrative rules and information releases continued2
Administrative Rules and Information Releases (Continued) in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • CAT 2006-10: CAT Changes in Ownership

    • Adm. Rule 5703-29-17

  • CAT 2007-01: Rule Estimation and Statutory Estimation Procedures, Compared

  • CAT 2007-02: Pre-Income Tax Trusts, Explained With Revocation Procedures

    • Adm. Rule 5703-29-21

  • CAT 2007-03: Commercial Activity Tax Credits, Explained

    • Adm. Rule 5703-29-22

  • CAT 2008-01: Commercial Activity Tax: Voluntary Disclosure Agreements

  • CAT 2008-02: Commercial Activity Tax: Business as usual after Ohio Supreme Court decision in Ohio Grocers Association v. Levin

  • CAT 2009-01: Commercial Activity Tax: Change in Due Dates for the Annual Minimum Tax, Annual Returns, Quarterly Returns and Deadline for Cancellations of Accounts


Important cat contact numbers
Important CAT Contact Numbers in the proportion that the purchaser’s benefit received in Ohio bears to the purchaser’s benefit received everywhere.

  • Phone: 888-722-8829

  • Fax: 614-644-9641

  • Website: tax.ohio.gov

  • Address: Commercial Activity Tax Division

    P.O. Box 16158

    Columbus, OH 43216-6158

  • CAT E-mail: [email protected]


Subscribe to the Department’s tax practitioner e-mailing list.

Click on ODT web site at:Tax.Ohio.Gov

E-Mail Notifications

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