House Bill 5, comprehensive municipal tax reform, passed the Ohio House of Representatives in November of 2013. Since then, the bill has been lingering in the Ohio Senate without any legislative hearings. The Ohio Senate Finance Committee finally held a proponent hearing on the bill.
House Bill 5 is a top legislative priority for NFIB/Ohio for several reasons. Ohio is the only state in the nation that permits its municipalities to create a varying set of rules for how they tax their businesses, employees working within their jurisdiction and their residents. This creates a patchwork of rules that make it confusing, time-consuming and costly to comply. For those businesses and individuals working in multiple jurisdictions, cost of compliance many times far exceeds the liability. Establishing uniformity ensures a business and individual are operating by the same set of rules regardless of where they may be located. NFIB/Ohio, on behalf of our 25,000 members, is interested in the following provisions of HB 5 and Chris Ferruso, NFIB/Ohio legislative director, offered testimony on June 3 on their behalf.
Occasional Entrant Rule
NFIB believes the occasional entrant rule, or 12 day/20 day rule, is a crucial component of the bill. Currently, there is no clear-cut direction on what constitutes a “day” within a municipality. HB 5 addresses this issue by limiting an employee to one municipality per calendar day for purposes of tracking and counting.
HB 5 further updates the casual entrant rule by increasing from 12 to 20 the number of days an employee/individual has to work in a municipality before withholding liability occurs. Under current law, once day 13 is reached the withholding obligation reverts back to day one. This change will help reduce the number of filings some employees currently experience and pare back on the tracking done by employers to comply with the current system, reducing cost of compliance and administration.
An additional component of the occasional entrant rule is a small-employer exemption. Small employers, defined as those with less than $500,000 in gross receipts, need only withhold tax at their fixed location.
Net-Operating Loss Carry Forward
Another key provision is the uniform, five-year net operating loss carry forward (NOL). HB 5 permits a uniform, five-year NOL that will fully phase in over six years. The bill stipulates that 50 percent of the NOL may be utilized for the first five years. In the sixth year, 100 percent of the NOL may be utilized. Further, the bill delays the beginning of the phase-in until calendar year 2017.
The bill also creates a committee comprised of legislators, municipal representatives and taxpayer representatives. This committee is charged with studying real data from municipalities to come to a better understanding of what impact the NOL provision actually has.
Not every business recognizes a steady profit stream. An example would be a snow removal company. A few years ago, central Ohio in particular saw very little snow and had warmer than normal temperatures. This business may have incurred significant expense to keep operations functional and when the weather did not turn, it generated a loss. We believe it is appropriate to allow that business to carry forward that loss to offset future income. Remember the company maintained its operations and continued to remit withholding on behalf of employees.
Uniform Pass Through Entity and Offset Treatment
Most of the business members of NFIB are formed as pass-through entities (PTE), which include sole proprietors, S corporations, partnerships, and limited liability corporations (LLCs). For federal and state tax purposes, the income of a PTE is generally taxed only at the owner level. However in Ohio, under current practice two types of municipal income taxes are generally imposed on a PTE, a tax on the business with respect to the net profits of the business, and a tax on the owner with respect to the income of the business.
HB 5 goes a long way to simplify this very complicated portion of Ohio’s municipal tax system. First, it provides for substantially uniform treatment of PTEs across all of Ohio by defining their tax treatment. Second, it provides for PTE owners to be treated uniformly in their city of residence by establishing a single uniform treatment of business gains and losses. Third, it greatly simplifies the recordkeeping necessary for tracking the carryover of NOLs generated by PTEs by permitting NOL carryovers to reduce profit before the profit is apportionment to each city—benefiting both taxpayers and cities.
Some cities argue that allowing a current year offset and permitting the carryover of NOLs will result in double use of business losses. This is not accurate. The offset provision only applies to the tax imposed at the individual owner level by the resident city. The NOL carryover provision only applies to the tax imposed at the PTE level by any city.
The bill only permits business income to be offset by real economic losses, not by paper losses. However, under current practice, most cities that permit some form of offset do permit paper losses to be utilized against business income. As a result, the Bill’s limitation is a revenue enhancement for most cities.
NFIB/Ohio is supportive of simplifying and creating uniformity in the municipal tax system in Ohio. We believe that Amended Substitute House Bill 5 improves upon our existing system. Municipal tax reform is a top priority of NFIB/Ohio this General Assembly.